Legislature(2019 - 2020)ADAMS ROOM 519

02/21/2019 01:30 PM FINANCE

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Audio Topic
01:32:20 PM Start
01:33:41 PM House Finance Committee Orientation
01:39:43 PM Overview: Governor's Amended Fy 20 Budget
03:46:08 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview: Governor's Amended Budget by Donna TELECONFERENCED
Arduin, Director, Office of Management & Budget
                  HOUSE FINANCE COMMITTEE                                                                                       
                     February 21, 2019                                                                                          
                         1:32 p.m.                                                                                              
1:32:20 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Foster  called the House Finance  Committee meeting                                                                    
to order at 1:32 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Tammie Wilson, Co-Chair                                                                                          
Representative Jennifer Johnston, Vice-Chair                                                                                    
Representative Dan Ortiz, Vice-Chair                                                                                            
Representative Ben Carpenter                                                                                                    
Representative Andy Josephson                                                                                                   
Representative Gary Knopp                                                                                                       
Representative Bart LeBon (via teleconference)                                                                                  
Representative Kelly Merrick                                                                                                    
Representative Colleen Sullivan-Leonard                                                                                         
Representative Cathy Tilton                                                                                                     
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Helen   Phillips,   Committee   Assistant,   House   Finance                                                                    
Committee,  Legislative  Finance   Division;  Donna  Arduin,                                                                    
Director, Office  of Management  and Budget;  Lacey Sanders,                                                                    
Budget  Director,  Office  of Management  and  Budget;  Sana                                                                    
Efird,  Administrative  Services   Director,  Department  of                                                                    
Health  and  Social  Services,   Office  of  Management  and                                                                    
Budget;   Mike   Barnhill,   Policy  Director,   Office   of                                                                    
Management and Budget; Representative Steve Thompson.                                                                           
PRESENT VIA TELECONFERENCE                                                                                                    
Representative Bart LeBon                                                                                                       
HOUSE FINANCE COMMITTEE ORIENTATION                                                                                             
OVERVIEW: GOVERNOR'S AMENDED FY 20 BUDGET                                                                                       
Co-Chair Foster reviewed the meeting agenda.                                                                                    
^HOUSE FINANCE COMMITTEE ORIENTATION                                                                                          
1:33:41 PM                                                                                                                    
Co-Chair   Wilson  provided   information  about   committee                                                                    
procedures.  She  highlighted   that  electronics  including                                                                    
iPads  and cellphones  were allowed  at the  committee table                                                                    
for  business purposes.  She pointed  out a  hearing request                                                                    
procedure memorandum dated February  19, 2019 (copy on file)                                                                    
and  a House  Finance  Committee rules  memorandum (copy  on                                                                    
file) in members' files.                                                                                                        
Co-Chair Foster recognized  Representative Steve Thompson in                                                                    
the audience.  He asked members  to review the  documents in                                                                    
the packets.                                                                                                                    
1:35:09 PM                                                                                                                    
HELEN   PHILLIPS,   COMMITTEE   ASSISTANT,   HOUSE   FINANCE                                                                    
COMMITTEE,  LEGISLATIVE FINANCE  DIVISION, introduced  staff                                                                    
and  provided  information  about support  provided  to  the                                                                    
committee   including  hearing   preparation,  bill   files,                                                                    
minutes,  supplies, and  other.  She noted  that all  policy                                                                    
issues went  through the  co-chairs' offices.  She addressed                                                                    
committee  protocol  regarding   approaching  the  committee                                                                    
table.  She  asked  members  to   speak  directly  into  the                                                                    
microphones  for  recording  purposes  and  noted  the  mute                                                                    
button on the  microphones. She pointed to  resources in the                                                                    
committee room including  statutes, governor's detail books,                                                                    
and administrative  codes. She  relayed there  were governor                                                                    
subcommittee books in  the 5th floor copy  room. She pointed                                                                    
out members' file drawers. She  communicated that the use of                                                                    
the  room would  be  coordinated  through Co-Chair  Foster's                                                                    
1:39:09 PM                                                                                                                    
Co-Chair Foster reviewed the agenda for the meeting.                                                                            
^OVERVIEW: GOVERNOR'S AMENDED FY 20 BUDGET                                                                                    
1:39:43 PM                                                                                                                    
DONNA  ARDUIN, DIRECTOR,  OFFICE OF  MANAGEMENT AND  BUDGET,                                                                    
provided a  PowerPoint presentation titled "State  of Alaska                                                                    
Office of  Management and Budget: FY2020  Governor's Amended                                                                    
Budget"  dated  February  21,  2019   (copy  on  file).  She                                                                    
reported the  governor's budget had been  compiled beginning                                                                    
with his  core programs.  For example,  public safety  was a                                                                    
priority of  the governor's  and was one  of the  only areas                                                                    
where additional  money had been requested.  She highlighted                                                                    
management of the state's natural  resources as another high                                                                    
priority and  noted reductions  had not  been made  to those                                                                    
core  programs.   The  proposed   budget  also   focused  on                                                                    
preserving   maintenance  of   the  state's   transportation                                                                    
infrastructure  as   opposed  to   providing  transportation                                                                    
Co-Chair  Foster noted  the committee  would hold  questions                                                                    
until after the presentation.                                                                                                   
Ms.   Arduin  appreciated   holding  questions   during  the                                                                    
overview  portion  of  the  presentation  until  later.  She                                                                    
addressed  slide   3  and  relayed   the  budget   had  been                                                                    
structured  on the  governor's  guiding principles  starting                                                                    
with: expenditures  could not exceed existing  revenues. She                                                                    
reported that  the budget was  balanced. She pointed  to the                                                                    
third bullet point showing the  budget aimed to maintain and                                                                    
protect  the state's  reserves. She  stated that  the budget                                                                    
did  not  request  a draw  from  the  Constitutional  Budget                                                                    
Reserve (CBR).  She continued that  the budget was  built on                                                                    
core  functions  and  did not  take  additional  taxes  from                                                                    
Alaskans   or  through   Permanent  Fund   Dividends  (PFD).                                                                    
Additionally,  budget had  to  be sustainable,  predictable,                                                                    
and  affordable. She  remarked on  the necessity  of getting                                                                    
the state's  fiscal house in  order, which the  governor was                                                                    
determined to do  at present instead of  pushing the problem                                                                    
off into the future.                                                                                                            
1:42:09 PM                                                                                                                    
Ms. Arduin moved to a  historical lookback chart on slide 4.                                                                    
The blue  line represented revenues  over the past  10 years                                                                    
and  the  orange  line represented  expenditures.  She  drew                                                                    
attention  to the  left side  of  the chart  and noted  that                                                                    
normally  the  expectation was  for  revenues  to exceed  or                                                                    
equal expenditures as in FY  13; however, for many years [FY                                                                    
14 through FY 19] expenditures had exceeded revenues.                                                                           
Ms. Arduin moved to a chart  on slide 5 and highlighted that                                                                    
the  gulf  between revenues  and  expenditures  since FY  13                                                                    
exceeded $16  billion. She  explained that  consequently the                                                                    
state's  reserves had  been spent  down. The  bars reflected                                                                    
the  state's  budget reserves,  which  had  been drained  by                                                                    
about  $16 billion  as revenues  and  expenditures had  been                                                                    
mismatched.  The governor's  proposed  budget  would show  a                                                                    
balanced budget for the first time since FY 13.                                                                                 
Ms. Arduin  moved to a  chart on  slide 6 and  detailed that                                                                    
the  mismatch  in  revenues  and  expenditures  had  led  to                                                                    
economic consequences.  The line chart illustrated  that the                                                                    
state's gross domestic product (GDP)  had been exceeding the                                                                    
rest of the country but  had dropped below the national GDP.                                                                    
She remarked  that even as  the nation had seen  a recovery,                                                                    
Alaska's GDP had been dropping.                                                                                                 
Ms. Arduin advanced  to a bar chart on slide  7 and reported                                                                    
that since  the state's  budget had stopped  being balanced,                                                                    
Alaska had  started losing people  to other states.  The bar                                                                    
chart  showed  domestic migration  from  2007  to 2016.  She                                                                    
highlighted that  the number of  people who had  left Alaska                                                                    
for other  states exceeded  the number  of people  coming to                                                                    
1:44:22 PM                                                                                                                    
Ms. Arduin  turned to a  line chart  on slide 8  and relayed                                                                    
that  employment numbers  had  continued to  drop since  the                                                                    
state stopped balancing  its budget beginning in  FY 13. She                                                                    
detailed  that the  state's employment  numbers had  dropped                                                                    
below  the national  rate  and had  continued  to fall  even                                                                    
while the country had recovered.                                                                                                
Ms. Arduin  turned to slide  9 titled "Building  the Budget:                                                                    
Defining the  Problem." She reported that  when the governor                                                                    
had  submitted his  required budget  on December  15 [2018],                                                                    
his office had  put out a budget showing  an updated revenue                                                                    
schedule  from  the  previous  administration,  a  full  PFD                                                                    
payment,  and  the  expenditures proposed  by  the  outgoing                                                                    
administration on  November 30. When the  amounts were added                                                                    
together,  the Dunleavy  Administration  had identified  the                                                                    
deficit as $1.6  billion - a deficit  the administration had                                                                    
resolved to fix.                                                                                                                
1:45:47 PM                                                                                                                    
LACEY  SANDERS, BUDGET  DIRECTOR, OFFICE  OF MANAGEMENT  AND                                                                    
BUDGET,  addressed  slide 10  showing  a  high level  fiscal                                                                    
summary  prepared by  OMB.  The left  portion  of the  table                                                                    
showed   the  FY   19   management   plan,  which   included                                                                    
supplemental  requests  put   forward  to  the  legislature;                                                                    
therefore,  numbers may  differ slightly  from the  original                                                                    
fiscal  summary. Revenues  at  the  top encompassed  General                                                                    
Fund  revenues as  well as  fund  withdrawals including  the                                                                    
percent of market value (POMV)  draw from the Permanent Fund                                                                    
Earnings Reserve  Account (ERA),  as well  as a  proposal to                                                                    
use $172 million from the  Statutory Budget Reserve (SBR) as                                                                    
a  supplemental  item  in  the   operating  budget  for  the                                                                    
Department of Health and Social  Services (DHSS). The bottom                                                                    
of  the  table  included  appropriations  reflecting  agency                                                                    
operations  and statewide  operations such  as debt  service                                                                    
and  retirement  that  had   passed  [the  legislature]  the                                                                    
previous session  as well as  supplementals proposed  in the                                                                    
current  year. She  added  capital, including  supplementals                                                                    
were also included in the table.                                                                                                
Ms. Sanders  reported that the  total deficit for FY  19 was                                                                    
$282,600,000. The  deficit draw amount would  currently come                                                                    
from  the  CBR. The  right  side  of  the table  showed  the                                                                    
governor's proposed  amended budget for FY  20. The proposed                                                                    
budget resulted  in a  surplus of  $20.4 million.  The slide                                                                    
included an  overview of  the entire  budget. She  noted the                                                                    
intent to  focus primarily on operating  budget items during                                                                    
the meeting.                                                                                                                    
1:48:08 PM                                                                                                                    
Ms. Sanders addressed  two bar charts on slide  11 showing a                                                                    
statewide picture  of the FY  20 operating budget.  The left                                                                    
chart  showed   the  total  FY   19  management   plan  plus                                                                    
supplementals  totaling $10.3  billion  when accounting  for                                                                    
all  funds.  She  detailed that  the  amount  included  $2.8                                                                    
million  in federal  funding, $750  million  in other  funds                                                                    
(including  corporate receipts  or funding  with federal  or                                                                    
contractual restrictions), and $6.7  million GF (UGF and DGF                                                                    
combined).  She offered  to provide  a breakdown  if members                                                                    
were interested.                                                                                                                
Ms. Sanders moved to the right  bar in the chart on the left                                                                    
showing a  total proposed operating  budget of  $7.9 billion                                                                    
including  $2.2 billion  in federal  funds, $1.2  billion in                                                                    
other  funds, and  $4.4  billion in  GF.  She addressed  the                                                                    
budget position comparison chart on  the right. She noted an                                                                    
error in  the number of permanent  part-time positions shown                                                                    
in  the FY  19 management  plan bar  and corrected  that the                                                                    
number should  read 1,871,000 [1,871] instead  of $2,871,000                                                                    
[2,871].  She   stressed  that   the  number   of  part-time                                                                    
positions had  not declined  by 1,000.  The total  number of                                                                    
positions in the  FY 19 management plan  was 22,711 compared                                                                    
to 22,337 in the governor's FY 20 amended budget.                                                                               
1:50:13 PM                                                                                                                    
Co-Chair Foster recognized Representative LeBon online.                                                                         
Ms. Sanders moved  to slide 12 showing  a comparison between                                                                    
the FY 19  management plan and the governor's  FY 20 amended                                                                    
budget by department  (UGF and DGF). The  bar chart provided                                                                    
a  visualization of  where the  reductions were  proposed in                                                                    
the agencies'  budgets. She highlighted that  the Department                                                                    
of   Education  and   Early  Development   (DEED)  and   the                                                                    
Department  of Health  and Social  Services  (DHSS) had  the                                                                    
majority  of  funding.  She planned  to  highlight  proposed                                                                    
reductions. She turned  to slide 13 to provide  a high level                                                                    
overview of proposed changes for several agencies.                                                                              
Vice-Chair  Johnston  did  not  disagree  that  an  unstable                                                                    
government tended to have unstable  economies. She looked at                                                                    
slides 6 through  8 pertaining to GDP  and absolute domestic                                                                    
migration and observed  the changes were also a  result of a                                                                    
severe  drop in  the price  in  oil. She  remarked that  the                                                                    
state had been  a one-revenue state and  postulated that the                                                                    
drop probably significantly impacted the numbers.                                                                               
Ms.  Sanders turned  to slide  13 and  addressed significant                                                                    
budget  changes and  legislative proposals.  She began  with                                                                    
the state's  public protection  agencies, starting  with the                                                                    
Department of Corrections (DOC).  She first item was related                                                                    
to a  fiscal note for  the crime  bill repeal [SB  91 passed                                                                    
the  legislature in  2016].  The  department estimated  that                                                                    
based on  the governor's proposed legislation  an additional                                                                    
$37.6 million  would be needed  if adopted. She  pointed out                                                                    
that the  associated fiscal notes  were not included  in the                                                                    
operating  appropriations  bill  and were  attached  to  the                                                                    
crime  legislation.   She  elaborated  that  if   the  crime                                                                    
legislation   was  adopted,   the  fiscal   note  would   be                                                                    
incorporated into an appropriations bill.                                                                                       
Ms.  Sanders   continued  that   the  DOC   budget  proposed                                                                    
transferring 500 inmates to an  out-of-state facility with a                                                                    
savings of $12.8 million GF.  The transfer had been proposed                                                                    
in conjunction  with the proposed  closure of  the sentenced                                                                    
wing  of the  Wildwood Correctional  Center with  a proposed                                                                    
savings of  $6 million GF.  The Department of Law  (DOL) had                                                                    
one  significant item  related  to the  proposed crime  bill                                                                    
repeal with  a fiscal note  of $1.1 million [GF].  She added                                                                    
that the  increment was not  included in  the appropriations                                                                    
bill  but was  reflected  as part  of  the governor's  total                                                                    
package. The  fiscal summary included  a line  pertaining to                                                                    
fiscal notes, which were accounted for in the total budget.                                                                     
1:54:46 PM                                                                                                                    
Co-Chair Wilson  referenced the  proposed crime  bill repeal                                                                    
and noted  several other crime  bills had passed.  She asked                                                                    
for verification the  bill did not propose to  repeal all of                                                                    
SB 91.                                                                                                                          
Ms. Arduin answered  that the information [on  slide 13] was                                                                    
reflective of the  governor's anti-crime legislation package                                                                    
and associated fiscal notes.                                                                                                    
Co-Chair  Wilson asked  for  verification  that the  numbers                                                                    
were not based on a repeal  of SB 91, but on new legislation                                                                    
proposed by the governor.                                                                                                       
Ms. Arduin replied in the affirmative.                                                                                          
Ms. Sanders  reported that the  Judiciary budget  included a                                                                    
$3.1 million increment  with 15 new positions  to reopen the                                                                    
courts on  Friday afternoons.  She highlighted  two requests                                                                    
in  the Department  of  Public Safety  (DPS)  budget for  $9                                                                    
million  in  federal  receipt   authority  relating  to  the                                                                    
Council on Domestic Violence and  Sexual Assault (CDVSA) and                                                                    
the High Intensity Drug Trafficking Areas Program.                                                                              
1:56:09 PM                                                                                                                    
Representative Josephson noted that  slide 13 indicated that                                                                    
the sums  were contingent on the  repeal of SB 91.  He asked                                                                    
what would  change on the  PowerPoint pertaining to  the DOC                                                                    
and DOL  budgets if  the governor's bills  SB 32  through 36                                                                    
[35]  were not  passed [SB  32  through SB  35 were  various                                                                    
crime   bills  proposed   by   the   governor  during   2019                                                                    
legislative session].                                                                                                           
Ms.  Sanders answered  that DOC  would not  receive the  $37                                                                    
million  in additional  funding,  it  would continue  moving                                                                    
forward to  transfer 500  inmates out  of state  and closing                                                                    
the  sentencing wing  of the  Wildwood Correctional  Center.                                                                    
She  elaborated  that  DOL   would  not  receive  additional                                                                    
funding (the funding  was conditional on the  passage of the                                                                    
Representative Carpenter referenced a  net gain to the state                                                                    
of $6  million resulting  from the  proposed closure  of the                                                                    
[sentencing wing  of] the  Wildwood Correctional  Center. He                                                                    
asked if any analysis had been  done on how the change would                                                                    
impact the local economy.                                                                                                       
Ms. Arduin replied  the analysis done had been  based on the                                                                    
fiscal situation and vacancies  in the entire [correctional]                                                                    
system. She  explained that  having vacancies  spread around                                                                    
the system  was inefficient.  In order  to gain  savings, it                                                                    
was  necessary  to  close  a  building.  She  explained  the                                                                    
sentenced wing  of the Wildwood  Correctional Center  was an                                                                    
entire building that could be closed.                                                                                           
Co-Chair  Wilson asked  for  detail on  the  addition of  15                                                                    
positions  to  trial  courts versus  other  positions  where                                                                    
hours had been cut back to a regular work week.                                                                                 
Ms. Sanders responded there were  two pieces to the request.                                                                    
First,  the  trial  courts  would  need  added  support  for                                                                    
opening  back up  on Friday  afternoons. Second,  additional                                                                    
pay had  been required for  the existing positions  that had                                                                    
been working extra  hours. She noted the  court system could                                                                    
provide more details.                                                                                                           
1:59:12 PM                                                                                                                    
Ms.  Sanders turned  to slide  14 and  continued to  address                                                                    
significant  budget changes  and  legislative proposals  for                                                                    
various  departments. She  began  with the  DEED budget  and                                                                    
highlighted a  $270 million GF reduction  to K-12 foundation                                                                    
formula  funding. She  detailed it  was a  reduction to  the                                                                    
amount  that would  be allocated  to  school districts.  The                                                                    
budget included  a proposal to  repeal $30 million  that had                                                                    
been   appropriated  the   past  session   outside  of   the                                                                    
foundation  formula. The  budget would  also repeal  a $19.5                                                                    
million   appropriation  for   the   establishment  of   the                                                                    
Curriculum Fund with a FY 20 effective date.                                                                                    
Representative  Josephson   remarked  that   increments  had                                                                    
forward funded  education in  May of  the previous  year. He                                                                    
asked if the proposed changes reflected a reappropriation.                                                                      
Ms. Sanders  answered that the  proposal reflected  a repeal                                                                    
of  an appropriation  - the  funding  had not  yet left  the                                                                    
treasury because of the FY 20 effective date.                                                                                   
Representative Josephson  referenced litigation  against the                                                                    
state  in   the  past  decade  for   not  supporting  public                                                                    
education as it should. He  asked if OMB was concerned about                                                                    
potential litigation if the substantial cuts were made.                                                                         
Ms. Arduin believed the decision  in the past had been based                                                                    
on  a  directive by  the  governor  not to  fund  something.                                                                    
Whereas,  the  proposed  budget  asked  the  legislature  to                                                                    
appropriate the  funds in the specified  way. Therefore, she                                                                    
did not believe there would be the same legal issue.                                                                            
Representative Josephson asked Ms.  Arduin to expound on her                                                                    
Ms.  Arduin  replied  that  the   governor's  budget  was  a                                                                    
proposal  for the  legislature  to pass  in  some form.  She                                                                    
clarified that  the administration was not  directing anyone                                                                    
to fund or  not fund anything, it was  only making proposals                                                                    
to the legislature.                                                                                                             
Vice-Chair   Ortiz  referenced   Representative  Carpenter's                                                                    
earlier  question about  DOC. He  asked if  an analysis  had                                                                    
been done on the economic  impact to communities on the loss                                                                    
of teachers and other.                                                                                                          
2:03:01 PM                                                                                                                    
Ms. Arduin  answered that the  governor's office was  in the                                                                    
middle of  conducting an economic  impact statewide  for the                                                                    
governor's  proposals.  She  relayed OMB's  chief  economist                                                                    
would present the analysis to the committee when completed.                                                                     
Representative  Knopp wondered  how the  proposed reductions                                                                    
of $270 million  to K-12 and $154 million  to the University                                                                    
had been selected. He asked if the numbers were arbitrary.                                                                      
Ms.  Arduin answered  that the  analysis for  the University                                                                    
was based  on the  per student  expenditure. In  some cases,                                                                    
the  amount  spent  per  student   was  $17,000,  while  the                                                                    
national average  was slightly over $7,000  per student. The                                                                    
proposed  budget was  based on  about  $11,000 per  student.                                                                    
Regarding  K-12 education  formula,  OMB had  looked at  the                                                                    
formula  a  number of  ways  and  had determined  ways  they                                                                    
thought  perhaps districts  could save  money and  how much.                                                                    
She  noted that  the governor's  office did  not direct  the                                                                    
Representative  Knopp remarked  that the  committee had  not                                                                    
received a number per student  including the BSA, foundation                                                                    
formula, and  area differential. He was  concerned about the                                                                    
education  numbers and  noted the  broad difference  between                                                                    
districts  throughout   the  state.  His  district   had  45                                                                    
schools,  some  only accessible  by  plane,  boat, or  four-                                                                    
wheelers. He  asked if the administration's  decision making                                                                    
process had  considered the issue  or had been based  on the                                                                    
national per student average.                                                                                                   
Ms. Arduin replied there was  an equivalent BSA number - the                                                                    
reduction was  a little over  $1,000 per student.  She noted                                                                    
that  the   DEED  administrative  services   director  could                                                                    
provide a breakout  showing how the BSA  equivalent would be                                                                    
distributed by district.                                                                                                        
2:06:31 PM                                                                                                                    
Co-Chair  Wilson   asked  if  the  $1,000   less  took  into                                                                    
consideration smaller  rural schools with high  costs versus                                                                    
larger schools in Fairbanks or Anchorage.                                                                                       
Ms. Arduin  answered the governor  was proposing  a straight                                                                    
reduction to  the foundation  formula, but  not a  change in                                                                    
the formula.                                                                                                                    
Co-Chair Wilson stated that there  was not really a straight                                                                    
amount that could  be taken out because  there were numerous                                                                    
multipliers  in the  BSA. She  explained that  taking $1,000                                                                    
[per student]  out of  Fairbanks or  Anchorage was  not good                                                                    
but  more   factors  went  into   the  $1,000   for  smaller                                                                    
communities,  which had  more costs.  She asked  if OMB  had                                                                    
looked at  other states that  may have similar  obstacles to                                                                    
Alaska when it had decided  on the [reduction] of $1,000 per                                                                    
Ms. Arduin replied  that OMB had looked at  other states and                                                                    
Alaska still  exceeded other  states significantly  in costs                                                                    
and travel. She  detailed that OMB was concerned  by the low                                                                    
percentage  of  funding  spent on  instruction  compared  to                                                                    
other states.  She elaborated that  about 54 percent  of the                                                                    
funding was  spent on  instruction. When  OMB had  looked at                                                                    
ways  districts could  reduce expenditures,  reductions were                                                                    
in the administrative cost areas.                                                                                               
Co-Chair Wilson remarked that her  following question may be                                                                    
more  appropriate  for  the  budget  subcommittee  when  the                                                                    
commissioner  may  be  present.  She  asked  if  anyone  was                                                                    
looking   at  taking   regulation   and   things  that   the                                                                    
legislature  had put  in the  way that  cost districts  more                                                                    
money. She  wondered if the governor  was considering making                                                                    
changes to any  of the items to release money  to go towards                                                                    
Ms. Arduin  replied the governor's office  would welcome the                                                                    
conversations.  The  DEED  commissioner  and  administrative                                                                    
services director were continuing  to have the conversations                                                                    
with   myriad  stakeholders.   She  referenced   her  recent                                                                    
testimony  to  the  Senate   [Finance  Committee]  that  the                                                                    
administration  saw the  discussion  as the  beginning of  a                                                                    
process  to get  the state's  fiscal house  in order.  There                                                                    
were numerous  things the  administration believed  could be                                                                    
done to reform the state's education system.                                                                                    
2:09:10 PM                                                                                                                    
Vice-Chair Ortiz  spoke to the  proposed $1,000  per student                                                                    
reduction. He  asked for the  total BSA amount prior  to the                                                                    
proposed reductions.                                                                                                            
Ms.  Arduin replied  the current  BSA was  about $5,900  per                                                                    
student. The proposal would reduce the number to $4,880.                                                                        
Vice-Chair Ortiz asked if the  cut included the proposed $30                                                                    
million reduction [shown on slide 14].                                                                                          
Ms.  Sanders  replied  that  the  $30  million  outside  the                                                                    
foundation formula was a separate reduction.                                                                                    
Vice-Chair Ortiz asked for verification  that the $1,000 per                                                                    
student  reduction  did  not   include  the  additional  $30                                                                    
million reduction.                                                                                                              
Ms. Sanders answered in the affirmative.                                                                                        
Vice-Chair  Ortiz  asked  if OMB  and  the  administration's                                                                    
educational experts  had considered how the  reduction would                                                                    
potentially impact students when it had devised the number.                                                                     
Ms. Arduin stated  that the conversation was  straying a bit                                                                    
from the budget. She relayed  that looking at the budget and                                                                    
the  metrics compared  to other  states, the  administration                                                                    
was very  concerned about the  outcomes seen in  Alaska. She                                                                    
added that the  amount of money the state  had been spending                                                                    
had not improved the situation.                                                                                                 
Vice-Chair  Ortiz  asked  if  the  assessment  included  the                                                                    
concern and  OMB thought the  educational outcomes  would be                                                                    
improved by the reductions.                                                                                                     
Ms. Arduin  replied in the  negative. She remarked  that OMB                                                                    
was  responsible for  developing a  budget and  was not  the                                                                    
policy team.  With regard to  the metrics OMB  reviewed, the                                                                    
outcomes  in Alaska  were not  favorable  compared to  other                                                                    
states  or where  the governor's  office believed  the state                                                                    
should be.                                                                                                                      
2:11:51 PM                                                                                                                    
Ms. Sanders  continued with slide  14 and reported  that the                                                                    
University of Alaska's budget reflected  a reduction of $155                                                                    
million and  a fund  source change of  equal amount  to DGF.                                                                    
She moved to the DHSS  budget and relayed the governor would                                                                    
propose  legislation  along  with   the  reduction  of  $271                                                                    
million for  Medicaid cost containment measures  and reform.                                                                    
There would  be legislation  proposing to repeal  the Senior                                                                    
Benefits  Program  -  the   associated  reduction  of  $19.9                                                                    
million  was reflected  in the  governor's proposed  budget.                                                                    
She highlighted  a $14.7 million  reduction to  Adult Public                                                                    
Assistance  and  a  $16.9  million  reduction  to  Temporary                                                                    
Assistance for Needy Families (TANF) maintenance of effort.                                                                     
Co-Chair  Foster referenced  the proposed  reduction to  the                                                                    
University and  asked what  the vision was  in terms  of how                                                                    
the cuts would  be allocated. He had heard  the president of                                                                    
the  University  say  the reductions  could  result  in  the                                                                    
closure  of some  satellite campuses.  Additionally, he  had                                                                    
heard talk that  the Fairbanks campus would  be the research                                                                    
hub and the Anchorage campus would be the educational hub.                                                                      
Ms. Arduin replied that some  of the satellite campuses were                                                                    
the least expensive campuses and  their closure would not be                                                                    
the  administration's first  suggestion. The  administration                                                                    
saw  significant opportunity  to  provide quality  education                                                                    
and  access to  quality education.  She furthered  that with                                                                    
the amount of  money the University had been  able to spend,                                                                    
it may have numerous campuses  trying to provide all degrees                                                                    
to all people.  She thought the University may  want to make                                                                    
some reforms and consolidations  to change what degrees were                                                                    
offered  in different  places  and to  keep  the lower  cost                                                                    
campuses open in  order to be accessible to  people all over                                                                    
Representative    Sullivan-Leonard    remarked   that    the                                                                    
Washington,  Wyoming,  Alaska,  Montana, and  Idaho  (WWAMI)                                                                    
program  had been  removed from  the budget.  She referenced                                                                    
the significant  shortage of physicians in  Alaska and asked                                                                    
if  the administration  was considering  another program  or                                                                    
avenue   for   recruiting   and   retaining   doctors.   She                                                                    
highlighted  the  important  role   the  WWAMI  program  had                                                                    
played.  She  asked  whether there  had  been  consideration                                                                    
given to train Alaskans to be doctors in Alaska.                                                                                
Ms. Arduin replied  that there had not  been great successes                                                                    
seen the WWAMI program. She  detailed that the retention the                                                                    
program set out to accomplish had not been obtained.                                                                            
Representative  Sullivan-Leonard asked  for the  data to  be                                                                    
Ms. Arduin agreed. She noted  OMB welcomed an opportunity to                                                                    
work with the legislature on  the issue. She added that when                                                                    
programs were failing  it did not mean it  was impossible to                                                                    
come up with an idea for improvement.                                                                                           
Co-Chair Foster asked OMB to  provide the data to his office                                                                    
for distribution.                                                                                                               
2:16:25 PM                                                                                                                    
Representative   Josephson   returned  to   the   University                                                                    
discussion. He thought he heard  Ms. Arduin say that perhaps                                                                    
some of  the students  in the larger  campuses should  go to                                                                    
the satellite campuses.  He spoke to the  difficulty of that                                                                    
concept  and  explained  that urban  campuses  had  tens  of                                                                    
thousands of  students who  were not  likely to  relocate to                                                                    
areas that could  not house or teach them.  He asked whether                                                                    
it was something the administration had considered.                                                                             
Ms.  Arduin  replied it  was  her  understanding there  were                                                                    
satellite campuses  available. She  highlighted a  campus in                                                                    
Fairbanks as  an example. She  furthered that  satellite and                                                                    
community  campuses  seemed  to exist  in  a  geographically                                                                    
dispersed  manner.   She  stated   the  University   had  an                                                                    
opportunity to  rethink what  it could be  and should  be to                                                                    
best serve Alaskans because the  state could not afford what                                                                    
it had  been doing.  She added  that the  University metrics                                                                    
did not  show that  the University  had obtained  its goals.                                                                    
The proposal was a conversation  starter. She explained that                                                                    
OMB was not suggesting the closure of campuses.                                                                                 
Representative Josephson noted that  in the past four fiscal                                                                    
years the University's  grant had been cut  $200 million due                                                                    
to  a drop  in oil  prices.  He added  that under  strategic                                                                    
pathways the University was constantly looking at reform.                                                                       
Representative Sullivan-Leonard  asked for the  breakdown of                                                                    
cost per  student at  UAA [University  of Alaska-Anchorage],                                                                    
UAF  [University of  Alaska-Fairbanks], and  UAS [University                                                                    
of Alaska-Southeast].                                                                                                           
Ms. Arduin agreed to provide the information.                                                                                   
Co-Chair Foster recognized Representative  Josh Revak in the                                                                    
Vice-Chair  Ortiz  addressed   proposed  reductions  to  the                                                                    
University. He  asked if the UA  Scholars Program introduced                                                                    
several years  earlier under the Parnell  Administration had                                                                    
been removed from the budget.                                                                                                   
2:19:09 PM                                                                                                                    
Ms.  Sanders  answered the  increment  was  included in  the                                                                    
budget  under  DEED. She  noted  there  had been  a  funding                                                                    
source change to UGF.                                                                                                           
Co-Chair  Wilson referenced  the proposed  reduction of  $16                                                                    
million to  Temporary Assistance  for Needy  Families (TANF)                                                                    
maintenance of  effort under  DHSS. She  asked if  the state                                                                    
was required to put the  money forward in anticipation there                                                                    
was  a bigger  need than  the  state actually  had. She  was                                                                    
trying  to determine  whether  the  $16 million  represented                                                                    
real  dollars or  something the  state would  have to  go to                                                                    
Centers  for Medicare  and Medicaid  Services  (CMS) to  get                                                                    
Ms. Sanders deferred the question to the department.                                                                            
Co-Chair Wilson noted she did not  intend to get into a full                                                                    
discussion on the maintenance of  effort. She wanted to know                                                                    
whether the  reduction would be  a real dollar cut  to TANF.                                                                    
Alternatively, she  wondered if the reduction  represented a                                                                    
cleanup of money CMS required  the state to give that Alaska                                                                    
was not necessarily utilizing.                                                                                                  
SANA EFIRD, ADMINISTRATIVE  SERVICES DIRECTOR, DEPARTMENT OF                                                                    
HEALTH  AND  SOCIAL  SERVICES,   OFFICE  OF  MANAGEMENT  and                                                                    
BUDGET, answered that  the $16 million was GF  money used in                                                                    
the  TANF  program that  the  state  had  to match  for  its                                                                    
maintenance  of effort  to receive  federal TANF  funds. The                                                                    
department had  to receive permission  to change  the amount                                                                    
the state was currently required  to spend in maintenance of                                                                    
effort to realize the savings.                                                                                                  
Co-Chair Wilson noted  that the funds were UGF  and asked if                                                                    
the state  was currently  utilizing the  $16 million  in the                                                                    
TANF program.                                                                                                                   
2:21:48 PM                                                                                                                    
Ms. Efird  answered in the  affirmative. The funds  went out                                                                    
to  tribal   organizations  that  administered   their  TANF                                                                    
Co-Chair Foster asked for  verification that the maintenance                                                                    
of  effort  increment  leveraged federal  funds.  Ms.  Efird                                                                    
replied in the affirmative.                                                                                                     
Co-Chair  Foster asked  how much  federal funding  the state                                                                    
would  lose  if  it  did not  maintain  its  maintenance  of                                                                    
Ms. Efird replied  that if the state did not  meet the total                                                                    
maintenance  of effort  requirement  it would  be fined  the                                                                    
amount  it failed  to meet.  If  the state  did not  receive                                                                    
permission  to change  its  spending  requirement, it  would                                                                    
still have to  pay the $16 million in a  fine to the federal                                                                    
government in order to receive its federal funding.                                                                             
Vice-Chair Johnston  asked for  verification that  the funds                                                                    
were  used for  tribal partners.  Ms. Efird  replied in  the                                                                    
Vice-Chair  Johnston   surmised  that  if   tribal  partners                                                                    
discontinued    payments,   the    state   would    have   a                                                                    
responsibility to pay  or would be subject to a  fine by the                                                                    
federal government.  She asked  if the  state would  have to                                                                    
service the funds differently than tribal entities.                                                                             
Ms. Efird answered that currently  tribes received their own                                                                    
federal TANF  funds. She confirmed  that if a  tribe decided                                                                    
against administering  the program, the state  would receive                                                                    
the  federal  dollars  and  would  be  responsible  for  the                                                                    
administration of the program for eligible recipients.                                                                          
Vice-Chair  Johnston asked  if the  department had  analyzed                                                                    
the  difference  in the  state's  treatment  of the  program                                                                    
versus   tribal   entities'   treatment  of   the   program.                                                                    
Additionally,  she  asked  about   the  difference  in  cost                                                                    
between  the two.  She noted  that tribal  entities received                                                                    
federal  matching funds  and had  a broader  scope to  their                                                                    
services.  She continued  that the  state's  scope would  be                                                                    
more limited  and asked if there  would be a cost  the state                                                                    
had to assume.                                                                                                                  
Ms.  Efird  responded that  she  would  follow up  with  the                                                                    
Vice-Chair Johnston stated that in  the past the DHSS budget                                                                    
had varying degrees of federal  funding for most of its PCNs                                                                    
[position control  number] ranging  from 20 to  100 percent.                                                                    
She asked how  the reforms would impact PCNs  and the agency                                                                    
as a whole. She was interested in the cost to the state.                                                                        
2:25:12 PM                                                                                                                    
Ms. Efird replied  that DHSS was the  public assistance cost                                                                    
allocation department.  Many of  the department's  PCNs were                                                                    
impacted  by   federal  dollars  because  it   had  a  large                                                                    
percentage  of  incoming  federal monies  that  were  spread                                                                    
across all of its programs.                                                                                                     
Vice-Chair  Johnston  asked   about  [Medicaid]  containment                                                                    
measures  and  reform and  wondered  how  much of  the  $270                                                                    
million  [proposed   reduction]  required  changes   in  the                                                                    
state's relationship with the federal government.                                                                               
Ms. Efird replied that the  department was working on a full                                                                    
Medicaid  plan to  present during  the subcommittee  process                                                                    
outlining initiatives it was looking  at. The department had                                                                    
reached out  to CMS and  was looking at  other demonstration                                                                    
projects   and  at   all  cost   containment  measures   and                                                                    
initiatives  it believed  could  be attainable  in the  next                                                                    
year. She relayed the department  would have a more thorough                                                                    
plan to present to the committee.                                                                                               
Vice-Chair  Johnston  asked  if  the  committee  may  see  a                                                                    
revision  to  the  proposed  budget   as  far  as  what  was                                                                    
attainable and what may be attainable in future years.                                                                          
Ms. Efird replied  that the goal was to  fulfill the current                                                                    
budget.  She  relayed  it  was a  policy  decision  and  the                                                                    
department's goal  was to fulfill  the budget as  closely as                                                                    
possible,  while continuing  to provide  healthcare coverage                                                                    
for low income Alaskans.                                                                                                        
Ms. Sanders referenced a  supplemental appropriation of $172                                                                    
million from  the SBR. The  intent behind  the appropriation                                                                    
was  to allow  the  department additional  funding if  there                                                                    
were  any  delays  in  implementing  the  waivers  or  state                                                                    
amendment plans  with CMS as the  department transitioned to                                                                    
the full reform.                                                                                                                
2:27:58 PM                                                                                                                    
Representative Knopp  spoke to cost containment  measures of                                                                    
$271 million. He  questioned what would not  be provided and                                                                    
whether reimbursement rates would  be shortened. He wondered                                                                    
if  the information  would be  provided in  the subcommittee                                                                    
Ms. Efird replied in the affirmative.                                                                                           
Representative  Knopp  asked  what percentage  $271  million                                                                    
represented of  the money currently  paid out by  the state.                                                                    
Ms. Efird replied around 37 percent.                                                                                            
Representative   Josephson   spoke    about   the   previous                                                                    
administration's draw of  $172 million from the  SBR and the                                                                    
current   administration's  willingness   to   use  SBR   if                                                                    
necessary. He asked if it  reflected some flexibility within                                                                    
the administration to spend from reserves.                                                                                      
Ms.   Arduin  replied   that  the   Dunleavy  Administration                                                                    
proposed  to  use  the  SBR   as  a  backup  for  timing  of                                                                    
implementation of plans with CMS.  The administration had no                                                                    
plans or  proposal to request a  draw on the CBR,  which was                                                                    
down to  a balance of  about $2 billion.  The administration                                                                    
believed the  current balance  was needed  as a  cushion for                                                                    
cashflow purposes and potential disasters.                                                                                      
Representative Josephson  referenced a  presentation earlier                                                                    
in the day  by Alaska's U.S. Senator Dan  Sullivan where the                                                                    
senator had been asked about  the Federal Medical Assistance                                                                    
Percentage  (FMAP). He  reported that  Senator Sullivan  had                                                                    
relayed  he  was working  incredibly  hard  to increase  the                                                                    
state's  FMAP.  He  reasoned  that  although  the  senator's                                                                    
efforts  were still  wanted, perhaps  the senator  would not                                                                    
have to work as hard if  the state would not try to maximize                                                                    
the  FMAP  by  leveraging  the  state's  GF.  He  asked  for                                                                    
2:31:04 PM                                                                                                                    
Ms. Arduin  replied that  the department's  commissioner was                                                                    
having  those ongoing  discussions with  CMS. She  stated it                                                                    
would be a  wonderful result if the department  could get it                                                                    
done. The administration  was not reliant on it  as the only                                                                    
outcome, but they would welcome it.                                                                                             
Ms.  Sanders moved  to the  first bullet  point on  slide 15                                                                    
pertaining to  the Department  of Transportation  and Public                                                                    
Facilities  (DOT). She  highlighted a  funding reduction  of                                                                    
$78  million [$97.9  million] to  the Alaska  Marine Highway                                                                    
System (AMHS), which  would allow AMHS to  operate from July                                                                    
to the end  of September [2019]. She  referenced a directive                                                                    
by the governor  asking DOT to bring on  a marine consultant                                                                    
to work through the process  to determine what the future of                                                                    
AMHS would look like.                                                                                                           
Vice-Chair  Ortiz asked  how the  reduction meshed  with the                                                                    
intent    to   preserve    maintenance   of    the   state's                                                                    
transportation  infrastructure (slide  2). He  asked if  the                                                                    
administration did not believe AMHS  was part of the state's                                                                    
Ms.  Arduin  replied  that  all  of  the  department's  went                                                                    
through a  prioritization process, starting with  their core                                                                    
programs.  She reported  that transportation  infrastructure                                                                    
had been at the top  of the department's list, while running                                                                    
transportation   systems  was   not.  She   elaborated  that                                                                    
maintaining  highways fell  in  a  higher priority  category                                                                    
than  running the  ferry system.  The governor  had directed                                                                    
the department  to procure a marine  consultant to determine                                                                    
what  could be  done with  the ferries  - if  they could  be                                                                    
operated  without  losing  the  money they  were  losing  at                                                                    
present. She mentioned the potential  for a private operator                                                                    
to run  the system.  She continued  there were  changes that                                                                    
could  be made  and the  administration was  waiting to  see                                                                    
what  the  results  were. The  administration  had  proposed                                                                    
having  the money  to run  some of  the ferries  through the                                                                    
summer and  had asked  the department to  present a  plan by                                                                    
August in order to determine  what the future of the ferries                                                                    
may be.                                                                                                                         
Vice-Chair Ortiz asked  about the hiring of  a consultant to                                                                    
see what may transpire and  replace AMHS. He wondered if the                                                                    
administration was consulting current  studies that had been                                                                    
done  in relationship  to  AMHS by  the  McDowell Group  and                                                                    
Ms.  Arduin   replied  the  administration  was   aware  and                                                                    
familiar  with the  studies. She  believed the  direction to                                                                    
the consultant would be "no  more studying, let's figure out                                                                    
what a plan of action is."                                                                                                      
Vice-Chair Ortiz asked for  verification that the governor's                                                                    
proposal would  shut down AMHS  at the end of  September. He                                                                    
emphasized that AMHS was a highway system.                                                                                      
Ms. Arduin  replied that the administration  would work with                                                                    
a  consultant to  determine the  best possible  outcome. She                                                                    
reported that the  state could not afford to  run the system                                                                    
in its  current form. The  administration had hope  that the                                                                    
system  could  be  operated  in   a  better,  cheaper,  more                                                                    
efficient way. She stated it  would be necessary to wait and                                                                    
2:36:24 PM                                                                                                                    
Co-Chair  Foster remarked  that  the  budget considered  the                                                                    
possible closure  of some  rural airports.  He asked  if the                                                                    
administration  had identified  any specific  rural airports                                                                    
for closure.                                                                                                                    
Ms. Arduin replied that the  department had identified rural                                                                    
airports  maintained by  the  state that  had  a very  small                                                                    
population of  planes (some with  five or less and  one with                                                                    
one  plane). She  explained that  the designations  would be                                                                    
changed so the state would  not maintain those airports with                                                                    
very few people.                                                                                                                
Co-Chair  Foster remarked  there were  airports in  numerous                                                                    
villages  where no  one owned  an airplane.  He asked  if an                                                                    
airport would be  more likely to be closed if  there was not                                                                    
an airplane based there.                                                                                                        
Ms.  Sanders clarified  that she  did not  believe that  was                                                                    
what Ms. Arduin  was indicating. She explained  that DOT was                                                                    
looking  at   airport  maintenance  costs   associated  with                                                                    
maintaining  runways  where there  were  one  or two  people                                                                    
being serviced.  The department  was considering  whether or                                                                    
not it  could turn  the facility  maintenance costs  over to                                                                    
the community to maintain.                                                                                                      
Co-Chair Foster  asked if Ms.  Sanders was referring  to the                                                                    
population  of  a  community. Ms.  Sanders  replied  in  the                                                                    
Co-Chair Foster could  not imagine there were  many of those                                                                    
airports  in the  state.  He  asked if  DOT  was present  to                                                                    
answer the question. Ms. Sanders  replied that OMB would ask                                                                    
DOT to follow up with the information.                                                                                          
Co-Chair  Wilson asked  if the  proposed  budget used  zero-                                                                    
based budgeting.                                                                                                                
Ms.  Arduin   replied  that   the  budget   used  core-based                                                                    
budgeting.  She  explained  that  OMB  had  considered  core                                                                    
programs that  needed to be  maintained - in  some instances                                                                    
core programs could  be done more efficiently.  The items on                                                                    
the reduction  list included  things outside  a department's                                                                    
core  programs that  could be  distracting, time  consuming,                                                                    
and/or a lower priority.                                                                                                        
Co-Chair Wilson  stated that the  legislature had  tried the                                                                    
method  many times,  with little  success. She  gathered the                                                                    
administration had  asked the departments to  prioritize and                                                                    
also had a  matrix to measure whether a  program was meeting                                                                    
the needs spoken about earlier.                                                                                                 
Ms. Arduin  agreed and relayed  the administration  had also                                                                    
looked  at program  metrics to  determine whether  they were                                                                    
meeting their goals.                                                                                                            
2:39:37 PM                                                                                                                    
Co-Chair Wilson  thought it was  great. She had  listened to                                                                    
the budget  meetings in the  other body and thought  how OMB                                                                    
had  arrived that  the  numbers had  been  missing from  the                                                                    
conversation. She wanted to  better understand how something                                                                    
did or  did not make the  grade. She asked OMB  to share its                                                                    
priorities  for  the  departments.   She  wanted  to  better                                                                    
understand government's role  in some of the  work the state                                                                    
was  doing. She  believed numerous  things had  been started                                                                    
because  the  state  had  received  federal  funds  and  not                                                                    
because they  followed a  department's mission.  She thought                                                                    
it would  be helpful  to explain  to constituents  where the                                                                    
numbers came from.                                                                                                              
Ms.   Arduin   replied   that    OMB   would   provide   the                                                                    
prioritizations to the committee.                                                                                               
Representative  Sullivan-Leonard  remarked that  earlier  in                                                                    
the week  the Legislative Finance Division  had mentioned it                                                                    
had never  seen real success with  zero-based budgeting. She                                                                    
knew it  had been worked  on from the local  government side                                                                    
and  in other  areas.  She  asked for  an  example of  other                                                                    
states  that  had  found success  with  the  budget  method,                                                                    
especially in  light of limited  revenue coming  into Alaska                                                                    
and mismatched  expenditures and revenues. She  believed the                                                                    
method looked at a rebuilding  of the departments. She asked                                                                    
for  an  example  highlighting  the  success  of  zero-based                                                                    
2:41:31 PM                                                                                                                    
Ms. Arduin  clarified that OMB  was referring to  the budget                                                                    
method  as core-based  budgeting.  She  reported there  were                                                                    
states that  had great success with  core-based budgeting by                                                                    
looking  at their  core  programs and  tying  them to  their                                                                    
metrics. She highlighted Utah as an example.                                                                                    
Vice-Chair  Johnston  agreed  with other  members  that  the                                                                    
information would  be helpful.  She stated that  any changes                                                                    
in performance  measures in core  areas would be  helpful to                                                                    
know.  She  requested  information  about  how  the  changes                                                                    
incorporated into  the administration's modeling of  its 10-                                                                    
year fiscal plan.                                                                                                               
Ms. Arduin responded that OMB was planning to put out a 10-                                                                     
year  fiscal  plan  to   accompany  the  governor's  amended                                                                    
budget.  She believed  they would  wait to  submit the  plan                                                                    
until the  [Department of  Revenue] spring  revenue forecast                                                                    
had  been  published.  The information  would  be  available                                                                    
through LFD once the forecast had changed.                                                                                      
Vice-Chair  Ortiz  returned  to   AMHS.  He  referenced  Ms.                                                                    
Arduin's testimony  that the administration planned  to hire                                                                    
a  consultant. He  asked how  much the  consultant would  be                                                                    
paid and if a request for proposal (RFP) had gone out.                                                                          
Ms. Arduin  replied that an  RFP had  not yet gone  out. She                                                                    
relayed  the  department   could  provide  more  information                                                                    
regarding the potential timing.                                                                                                 
Representative  Josephson   asked  if  the   department  had                                                                    
directed  AMHS not  to collect  revenue or  schedule ferries                                                                    
for the coming  fall. He asked if it  was currently possible                                                                    
for  a  person to  book  and  pay  for  a ferry  ticket  for                                                                    
November 1.                                                                                                                     
Ms.  Arduin  believed  the  department  was  not  scheduling                                                                    
ferries  past  the  end  of September  of  next  year,  when                                                                    
proposed funding for the ferry would end.                                                                                       
Representative Josephson thought  the proposed suspension of                                                                    
AMHS would occur in 2019.                                                                                                       
Ms. Sanders clarified  that it [the suspension  of the ferry                                                                    
system] would take place in  FY 20, October 1, 2019. Through                                                                    
work with  a consultant, the department  would determine the                                                                    
best way to  move forward and whether there may  be a change                                                                    
after the October date.                                                                                                         
2:45:04 PM                                                                                                                    
Vice-Chair Ortiz  remarked that ultimately  the conversation                                                                    
was about  policy. He  asked if there  had been  an economic                                                                    
analysis conducted on  how the closure of  AMHS would impact                                                                    
coastal Alaska economies.                                                                                                       
Ms. Arduin  answered that  the administration  was proposing                                                                    
to bring  in a consultant  to determine the  various options                                                                    
that could  happen with AMHS.  The administration  would ask                                                                    
for  an economic  analysis  of  the plan  once  it had  been                                                                    
Vice-Chair  Ortiz  asked  if  there  had  been  no  economic                                                                    
analysis on the impact of  ending AMHS operations at the end                                                                    
of September.                                                                                                                   
Ms. Arduin replied that the  administration had directed DOT                                                                    
to hire  a consultant to  determine what could or  could not                                                                    
be done with  the system. The proposed  funding went through                                                                    
the   fall.  The   administration  expected   to  have   the                                                                    
consultant's results by August and  would know where to plan                                                                    
to go from there.                                                                                                               
Vice-Chair  Johnston asked  if the  economic analysis  would                                                                    
include the cost of not  having the legislature in Juneau in                                                                    
2020  because  of the  ferry  closure.  She considered  that                                                                    
perhaps the legislature would move fewer things.                                                                                
2:47:21 PM                                                                                                                    
MIKE  BARNHILL, POLICY  DIRECTOR, OFFICE  OF MANAGEMENT  AND                                                                    
BUDGET,  addressed  statewide  reductions on  slide  15.  He                                                                    
highlighted an executive branch  50 percent travel reduction                                                                    
of  approximately  $4.5 million  GF.  He  reported that  all                                                                    
departments had  come forward  indicating there  was certain                                                                    
travel that was essential. He  elaborated that OMB had spent                                                                    
the past  month working with  each department to  tailor the                                                                    
reduction to accommodate the essential travel.                                                                                  
Mr.  Barnhill spoke  to  the proposed  repeal  of the  local                                                                    
petroleum property tax,  which was accompanied by  SB 57. He                                                                    
characterized  the tax  as coordinated  and detailed  it had                                                                    
been  enacted in  1973  and  authorized municipalities  with                                                                    
petroleum property  within their  jurisdictions to  assess a                                                                    
tax. He  explained that the  state assessed the same  tax of                                                                    
20  mills or  2 percent.  The local  municipalities assessed                                                                    
the  tax  and when  petroleum  property  owners filed  their                                                                    
state  tax returns,  they received  a credit  for local  tax                                                                    
paid.  The   tax  currently  collected   approximately  $563                                                                    
million  total between  the municipalities  and the  state -                                                                    
the  municipalities collected  $440  million  of the  total,                                                                    
leaving $123  million for  the state.  The bill  proposed to                                                                    
eliminate the municipalities' authority  to collect the tax,                                                                    
meaning the entire amount would go to the state.                                                                                
Co-Chair Foster  asked which communities would  be affected.                                                                    
He thought the  North Slope Borough would  lose $370 million                                                                    
or more.  He mentioned  Fairbanks and  Valdez and  asked for                                                                    
the complete list.                                                                                                              
Mr.  Barnhill   answered  that   the  North   Slope  Borough                                                                    
collected  the most  tax  and would  lose  $370 million.  He                                                                    
expounded  that Valdez  would lose  $48  million and  Kenai,                                                                    
Fairbanks, and Anchorage also received money from the tax.                                                                      
Representative  Sullivan-Leonard  asked   where  the  [local                                                                    
petroleum property]  tax appeared  in statute.  She wondered                                                                    
if there  was a cap  the state had  related to how  it could                                                                    
change the tax structure.                                                                                                       
Mr.  Barnhill replied  that the  municipal component  of the                                                                    
coordinated tax was  under AS 29.45 and  the state component                                                                    
was under  AS 43.56.  He noted  that SB  57 could  be viewed                                                                    
online  to see  exactly how  the bill  would adjust  the two                                                                    
components.  Statutes provided  for a  tax cap  that limited                                                                    
the  amount,  in  certain situations,  that  local  boroughs                                                                    
could collect under the tax. The  total cap was 2 percent or                                                                    
20  mills  (each of  the  municipalities  receiving the  tax                                                                    
collected  different  amounts).  He   offered  to  read  the                                                                    
amounts if desired.                                                                                                             
Representative  Sullivan-Leonard   asked  Mr.   Barnhill  to                                                                    
follow up with  her at a later time to  discuss details. Mr.                                                                    
Barnhill agreed.                                                                                                                
Representative  Carpenter  asked  if there  was  information                                                                    
showing  [the repeal  of the  local  petroleum property  tax                                                                    
was] a net positive for the  state. He reasoned that the tax                                                                    
would have to be made up  by the boroughs. He understood the                                                                    
change benefitted the state but not municipalities.                                                                             
2:51:55 PM                                                                                                                    
Mr. Barnhill answered that the  fiscal notes accompanying SB                                                                    
57 showed  a net benefit  of revenues  to the state  of $398                                                                    
million.   The  municipalities   currently  collected   $440                                                                    
million.  He explained  the  delta between  the  two was  an                                                                    
offset  because  the  tax  was  built  into  the  foundation                                                                    
formula.  He elaborated  that  the  state's contribution  to                                                                    
municipalities  for  schools  under the  foundation  formula                                                                    
would increase because  their [municipalities'] contribution                                                                    
would come  down. He addressed the  impact to municipalities                                                                    
and explained  in the case  of the North Slope  Borough, the                                                                    
impact would be substantial and very disruptive.                                                                                
Representative  Carpenter  spoke  to  options  from  Kenai's                                                                    
perspective  and explained  there  would be  a  loss of  $15                                                                    
million to the  community. He wondered how  the change would                                                                    
be  a net  gain to  the state  if boroughs  had to  increase                                                                    
taxes as  a result.  He thought companies  would have  to be                                                                    
double  taxed to  make up  for the  loss to  communities. He                                                                    
wanted to see an analysis  showing the proposal was positive                                                                    
for the state as a whole.                                                                                                       
Mr. Barnhill answered that the  policy parameters around the                                                                    
budget were  the payment  of full  PFDs and  having revenues                                                                    
meet  expenditures  with no  new  revenues  assessed by  the                                                                    
state.  There were  impacts  to  every governmental  entity,                                                                    
department,  and  Alaskan.  There  was  no  way  to  do  the                                                                    
proposed budget exercise without everyone being impacted.                                                                       
2:54:14 PM                                                                                                                    
Representative  Knopp asked  if the  oil and  gas properties                                                                    
were also known  as the [AS] 43.56  properties. Mr. Barnhill                                                                    
replied in the affirmative.                                                                                                     
Representative  Knopp asked  for verification  that the  tax                                                                    
was a flat 20 mills  and local jurisdictions were reimbursed                                                                    
a percent of the mill rate.                                                                                                     
Mr. Barnhill clarified  that it was not  a reimbursement. He                                                                    
explained that municipalities (under  AS 29.45) assessed the                                                                    
tax directly up  to their cap and  petroleum property owners                                                                    
filed a  report with  the Department of  Revenue and  took a                                                                    
credit against what they paid to local municipalities.                                                                          
Representative  Knopp  discussed that  local  municipalities                                                                    
were charged  with assessing property at  fair market value.                                                                    
He  thought  it  seemed  ironic  that  the  budget  proposal                                                                    
indicated that  taxing the  properties would  be out  of the                                                                    
municipalities'  jurisdiction.  He  asked if  that  was  the                                                                    
policy direction the administration really wanted to go.                                                                        
2:55:50 PM                                                                                                                    
Mr.   Barnhill  responded   there  were   some  tremendously                                                                    
difficult  questions and  choices  posed by  the budget.  He                                                                    
explained  that  OMB's  goal  had been  to  achieve  a  $1.6                                                                    
billion reduction.  He elaborated  that to achieve  the goal                                                                    
entirely  through  cuts  to   existing  state  programs  was                                                                    
difficult.  He addressed  weighing the  proposal [to  repeal                                                                    
local  petroleum  property  tax] against  a  combination  of                                                                    
additional  proposals such  as a  $400 million  reduction in                                                                    
Medicaid  (which would  functionally  exit  Medicaid in  its                                                                    
entirety),   an  additional   $400   million  reduction   in                                                                    
foundation formula  funding, or  eliminating all of  the UGF                                                                    
from  11 departments.  All of  the  choices were  incredibly                                                                    
difficult. The administration had  determined that no matter                                                                    
what it  did, the  component of property  taxes would  be on                                                                    
the table  for discussion  in terms of  how the  revenue was                                                                    
collected, the  history of the  revenue, and whether  it was                                                                    
an optimal way of  assessing, collecting, and allocating the                                                                    
petroleum  property tax  in Alaska.  The administration  did                                                                    
not see  any way to  have the discussion about  $1.6 billion                                                                    
without  including   the  property  taxes.  He   stated  the                                                                    
legislation  was within  the discretion  and purview  of the                                                                    
legislature to  determine if  enacting the  legislation made                                                                    
policy sense.                                                                                                                   
Representative  Josephson highlighted  the $398  million the                                                                    
state  was projected  to  receive [from  the  repeal of  the                                                                    
local  petroleum property  tax]. He  asked for  verification                                                                    
that Mr. Barnhill had testified  the state would not receive                                                                    
the full  amount because it  would pay  more to make  up for                                                                    
lost taxation in local contribution to public schools.                                                                          
Mr. Barnhill  clarified that  when committee  members viewed                                                                    
the fiscal  notes, they would  see the projection for  FY 20                                                                    
revenue was $421  million with an offset  for the foundation                                                                    
formula that reduced the number to $398 million.                                                                                
Vice-Chair Ortiz agreed that the  $1.6 billion reduction was                                                                    
problematic no matter  how it was viewed. He  asked how much                                                                    
of filling the  $1.6 billion deficit was a  result of paying                                                                    
out a  full PFD as opposed  to the $1,600 PFD  received last                                                                    
Mr.  Barnhill replied  that  a  full PFD  would  be a  total                                                                    
payout of  $1.9 billion. He noted  he could not do  the math                                                                    
quickly  enough to  come up  with  the amount  when using  a                                                                    
$1,600 PFD.                                                                                                                     
2:59:36 PM                                                                                                                    
Vice-Chair Ortiz  considered it  would be  a nice  thing for                                                                    
individuals  to receive  $3,000  PFDs, but  he  asked if  an                                                                    
assessment had determined the overall  greater good would be                                                                    
achieved  by paying  out  a full  PFD,  which would  require                                                                    
massive cuts to education, AMHS, and other items.                                                                               
Ms. Arduin  replied that it  was the governor's  belief that                                                                    
payment of the  PFD was not optional and should  not be part                                                                    
of  the budget,  which  was  the reason  he  had proposed  a                                                                    
constitutional  amendment to  pay a  full PFD  annually. She                                                                    
detailed that  OMB's chief economist  was doing  an analysis                                                                    
of the overall budget and would include dividends.                                                                              
Co-Chair  Wilson asked  if the  actual  reduction was  about                                                                    
$1.2 billion  because the proposals [on  slide 15] reflected                                                                    
additional revenue.                                                                                                             
Mr. Barnhill replied in the affirmative.                                                                                        
Co-Chair  Wilson  asked  for   verification  that  the  $1.2                                                                    
billion  was  from  the  December 15  FY  20  budget,  which                                                                    
included increases  that had  not yet  been approved  by the                                                                    
current legislature.                                                                                                            
Mr. Barnhill replied in the affirmative.                                                                                        
Co-Chair  Wilson  commented  it  would be  helpful  to  have                                                                    
better figures  based on  the FY 19  budget approved  by the                                                                    
legislature versus  a budget  that was  never really  on the                                                                    
table.  She  remarked they  were  throwing  big numbers  out                                                                    
there and  some of the  numbers were not true  numbers based                                                                    
on the last budget.                                                                                                             
3:01:44 PM                                                                                                                    
Ms.  Arduin  replied  that the  governor  had  released  his                                                                    
[initial]  budget  in  December  and  OMB  believed  it  was                                                                    
necessary  to give  the legislature  the information  on it.                                                                    
The reduction from the FY  19 management plan was about $1.1                                                                    
Mr. Barnhill  continued to address  slide 15  beginning with                                                                    
reductions  to  two  statutory debt  reimbursement  programs                                                                    
including  with   school  debt  reimbursement   and  capital                                                                    
project  debt  reimbursement  (a series  of  three  statutes                                                                    
applied   to   the   latter  program).   The   school   debt                                                                    
reimbursement program  had been  in statute for  decades and                                                                    
had provided  for various levels of  debt reimbursement when                                                                    
municipalities engage in  construction of school facilities.                                                                    
Currently under  state law  there was  a moratorium  on debt                                                                    
reimbursement for  new projects, which was  scheduled to end                                                                    
in  FY 20.  He elaborated  that new  projects under  current                                                                    
statute  could be  submitted for  reimbursement  on a  50/50                                                                    
percentage basis starting in FY  21. Legislation put forward                                                                    
by   the   governor   proposed   to   eliminate   all   debt                                                                    
reimbursement for  schools and removed the  $100 million for                                                                    
school debt reimbursement from the  FY 20 budget. The repeal                                                                    
would  mean   a  shift  in   cost  responsibility   back  to                                                                    
municipalities   that   issued    the   debt   to   commence                                                                    
construction of school facilities.                                                                                              
Vice-Chair  Johnston  asked  if   there  could  be  a  legal                                                                    
challenge to the proposal.                                                                                                      
Mr. Barnhill  replied that legal  challenges could  be filed                                                                    
for  any or  no reason.  There was  always a  possibility of                                                                    
litigation. His understanding that in  every one of the debt                                                                    
issuances  by municipalities,  it was  a general  obligation                                                                    
(GO)  bond  issued  on  the  basis  of  the  credit  of  the                                                                    
municipality, with a statement  to voters that reimbursement                                                                    
by  the state  under the  school debt  reimbursement program                                                                    
was subject to appropriation. He  furthered that in order to                                                                    
issue bonds, the voters had to  be apprised of the impact if                                                                    
the appropriation was  not made. He believed  there had been                                                                    
multiple instances in  the past when the  legislature or the                                                                    
governor  had not  funded  100 percent  of  the school  debt                                                                    
reimbursement  under  the   statute.  However,  the  current                                                                    
budget  was the  first  time  a proposal  had  been made  to                                                                    
eliminate 100 percent of the funds.                                                                                             
3:04:51 PM                                                                                                                    
Representative Josephson had been  told that Anchorage Mayor                                                                    
Ethan Berkowitz believed to compensate  for the reduction in                                                                    
the  BSA, property  taxes on  an  average home  may rise  by                                                                    
$1,600. He observed  the amount was slightly  more than half                                                                    
a PFD.  He believed at some  point there would be  a tipping                                                                    
point where people would start  to view a PFD less favorably                                                                    
than  otherwise.  He  asked   if  the  administration  would                                                                    
provide  a global  look at  the  changes to  the culture  of                                                                    
Alaska based on the need to  adhere to the payment of a full                                                                    
Ms. Arduin asked to stick to budgetary questions.                                                                               
Representative   Josephson   thought    the   question   was                                                                    
budgetary.  He understood  they would  discuss the  issue at                                                                    
another time and looked forward to talking about it.                                                                            
Mr.  Barnhill  could  not comment  on  cultural  impacts  at                                                                    
present or later. He reported  that OMB had spreadsheet data                                                                    
on each  of the GO  bond issuances showing the  numerics and                                                                    
impacts  of  shifted   debt  service  to  each   of  the  19                                                                    
communities  in the  program. He  was happy  to provide  the                                                                    
Representative Carpenter pointed out  that policy and budget                                                                    
questions were  intertwined and  impossible to  separate. He                                                                    
wondered  about the  destination the  budget was  aiming for                                                                    
and did not  see a big picture showing  that information. He                                                                    
wondered whether  policy was  driving the  budget discussion                                                                    
or  whether the  budget  discussion was  driving policy.  He                                                                    
wanted to believe there was  a goal envisioned that could be                                                                    
articulated to  the public. He  stated that it did  not seem                                                                    
appropriate  to not  contemplate how  a budget  change would                                                                    
impact  culture. He  considered that  perhaps the  committee                                                                    
would have a  picture of where the budget was  going, but he                                                                    
believed Representative Josephson's question was fair.                                                                          
3:07:53 PM                                                                                                                    
Ms. Arduin  referenced slide 5  and replied that  the fiscal                                                                    
goal was  to balance the  budget and increase  reserves. She                                                                    
stated that at  that point they could work  to diversify the                                                                    
economy.  She highlighted  bringing stability  to businesses                                                                    
as  an example.  She  elaborated that  stability meant  that                                                                    
businesses would not have to  worry about a tax change every                                                                    
year. She  detailed that a  stable government  and financial                                                                    
system would  mean the ability  to attract  outside capital.                                                                    
Additionally,  stability  would  allow legislators  and  the                                                                    
governor  to focus  on bringing  in  jobs and  opportunities                                                                    
from  other states  instead of  having people  continuing to                                                                    
leave due to  uncertainty. She did not want to  comment on a                                                                    
question of culture.                                                                                                            
Representative Carpenter  remarked that  slide 5  showed the                                                                    
state budget but  was missing any information  about how the                                                                    
boroughs would  be impacted. He  asked whether  the proposed                                                                    
budget had  a net positive impact  on the state as  a whole,                                                                    
which   included   local   boroughs  and   governments.   He                                                                    
underscored  that the  analysis was  not represented  in the                                                                    
slide. He  reasoned that if  the proposed  budget negatively                                                                    
impacted local  governments and communities, perhaps  it was                                                                    
not the best thing to do.  He stressed that the analysis was                                                                    
not represented on slide 5.                                                                                                     
Ms.  Arduin  replied  that the  OMB  chief  economist  would                                                                    
present an  analysis of  the overall  economic impact  [at a                                                                    
later date].                                                                                                                    
Mr.  Barnhill  returned  to  slide   15  and  addressed  the                                                                    
proposal to repeal debt  reimbursement for capital projects.                                                                    
He explained the program had  been removed from the proposed                                                                    
budget. Additionally, the  governor had proposed legislation                                                                    
to eliminate  the three statutes providing  for the program.                                                                    
He detailed there  were three types of projects  and a total                                                                    
of nine  projects. The first  category was two  projects for                                                                    
the University of  Alaska; the second category  was six port                                                                    
projects  through DOT  for port  communities; and  the third                                                                    
category was two utility projects  through the Alaska Energy                                                                    
Authority.  Debt  service  shifted   back  to  each  of  the                                                                    
entities was  a total  of $4.5  million. He  elaborated that                                                                    
the  debt service  was  fairly  far along  for  most of  the                                                                    
projects. The  remaining debt services extended  between one                                                                    
and nine years for a total of $32 million.                                                                                      
3:11:50 PM                                                                                                                    
Co-Chair Wilson asked if the  state was currently paying for                                                                    
the projects. She asked for  verification that repealing the                                                                    
program  would   mean  municipalities  would  pay   for  the                                                                    
Mr. Barnhill  replied in the  affirmative. He  corrected his                                                                    
previous  statement and  detailed  that  the remaining  debt                                                                    
service extended between  one and twelve years  for the nine                                                                    
Mr. Barnhill addressed oil and  gas tax credits on slide 15.                                                                    
He referenced  extensive conversation  the previous  year in                                                                    
the  context   of  HB  331   [legislation  passed   in  2018                                                                    
establishing   an  Alaska   Tax   Credit  Certificate   Bond                                                                    
Corporation].  He detailed  that over  a period  of decades,                                                                    
the state  had offered cashable  oil and gas tax  credits in                                                                    
an effort  to incent new  exploration for gas in  Cook Inlet                                                                    
and oil in the Middle Earth  and North Slope regions. At the                                                                    
beginning   of    2018   the   cashable    credits   totaled                                                                    
approximately $900 million. Prior  to the commodity crash in                                                                    
2014   there  was   a  practice   by   the  legislature   of                                                                    
appropriating the  full amount  (of what had  been presented                                                                    
in the  previous fiscal year)  to companies that  earned the                                                                    
oil and  gas tax  credits. The practice  had ended  with the                                                                    
crash of  oil prices in  2014. He elaborated  that initially                                                                    
former  Governor  Bill Walker  had  vetoed  the full  amount                                                                    
presented the  previous year down  to the  statutory amount.                                                                    
Since  that  time,  the  credits  had  been  funded  to  the                                                                    
statutory  amount.  He  noted   there  was  an  asterisk  on                                                                    
"statutory  amount,"   which  he   could  elaborate   on  if                                                                    
committee members were interested.                                                                                              
Mr. Barnhill  continued that in the  previous session [2018]                                                                    
the  former Walker  Administration had  proposed HB  331, in                                                                    
recognition the state did not  have general funds to pay off                                                                    
the  entire  $900  million, to  authorize  the  creation  of                                                                    
public corporation  to issue subject to  appropriation debt.                                                                    
The  proposal was  to  take out  the  entire [$900  million]                                                                    
balance of cashable tax credits  and the state would pay off                                                                    
the  debt  service  over  a  period  of  years.  Immediately                                                                    
following  the  enactment of  HB  331  (at  the end  of  the                                                                    
legislative  session), litigation  had been  brought against                                                                    
the   state  challenging   the   constitutionality  of   the                                                                    
legislation; therefore,  bonds had  not been issued  and the                                                                    
litigation  was continuing.  He detailed  that the  superior                                                                    
court had ruled  in favor of the state and  an appeal to the                                                                    
state  supreme   court  was   expected.  The   earliest  the                                                                    
administration anticipated  debt could be issued  was in one                                                                    
or  more   years  from  present  (assuming   the  state  was                                                                    
successful in the supreme court).                                                                                               
Mr. Barnhill explained the  governor's proposed budget would                                                                    
continue paying  down the  balance of  cashable oil  and gas                                                                    
tax credits  with Alaska  Industrial Development  and Export                                                                    
Authority  (AIDEA) receipts  instead  of  general funds.  He                                                                    
expounded that DOR calculated  the statutory amount annually                                                                    
and published  the information in its  Revenue Sources Book.                                                                    
The amount  was $184 million  for FY 19 and  the legislature                                                                    
had  appropriated $100  million in  the event  debt was  not                                                                    
issued.  The $100  million had  been distributed,  leaving a                                                                    
residual $84 million [owed for  FY 19]. The statutory amount                                                                    
for FY  20 was $170  million, which was the  amount included                                                                    
in the governor's proposed budget.                                                                                              
3:15:50 PM                                                                                                                    
Vice-Chair  Johnston asked  how  the  proposal would  impact                                                                    
AIDEA's fund balances and bond rating.                                                                                          
Mr.  Barnhill answered  that  DOR had  done  an analysis  to                                                                    
examine AIDEA's  excess liquidity  and had  determined there                                                                    
was $391  million available. Taking  the proposed  amount of                                                                    
over $200 million  [$254 million] out of  AIDEA would impact                                                                    
its ability to  continue to fund new  projects. He addressed                                                                    
the  bond rating  and shared  his  understanding that  AIDEA                                                                    
housed  around $50  million in  outstanding bonds  that were                                                                    
completely  secured by  money the  budget  proposal did  not                                                                    
seek to appropriate. He could not comment on the impact.                                                                        
Vice-Chair Johnston  asked if the proposal  had been brought                                                                    
to the AIDEA board and approved.                                                                                                
Mr. Barnhill  responded that he  had discussed  the proposal                                                                    
with  the new  AIDEA  director  and the  chair.  He had  not                                                                    
discussed the proposal with AIDEA board members.                                                                                
Vice-Chair Johnston  was interested  in an analysis  on what                                                                    
the change would  do to AIDEA funding in terms  of a 10-year                                                                    
fiscal plan. She pointed out  that the proposal meant taking                                                                    
funds away for reinvestment. She  was interested in a report                                                                    
from the board.                                                                                                                 
3:18:07 PM                                                                                                                    
Mr. Barnhill was  more than happy to provide  an analysis to                                                                    
the  budget subcommittee.  He shared  the concern  about the                                                                    
need  to continue  to  provide resources  in  order for  the                                                                    
state to continue to grow  its economy, which was important.                                                                    
He  underscored  that  paying  the  credits  owed  was  also                                                                    
important.   The  proposal   would   complete  the   state's                                                                    
investment  in new  oil and  gas exploration,  which was  of                                                                    
critical  importance,   to  secure  the   state's  financial                                                                    
future. He acknowledged the goals  were in tension with each                                                                    
other and the administration was trying to accomplish both.                                                                     
Co-Chair  Wilson had  learned  the previous  day that  AIDEA                                                                    
receipts were  GF and could  be used for any  reason because                                                                    
the state  did not have  dedicated funds. She  remarked that                                                                    
most legislators had  not known the funds  existed, but they                                                                    
did now, which she surmised may  be a "sad thing." She spoke                                                                    
to  the proposal  to use  $84  million and  $170 million  in                                                                    
AIDEA receipts to  pay off the oil and gas  tax credits. She                                                                    
wondered  why  the state  would  not  consider some  of  the                                                                    
concepts  from the  bond package  where AIDEA  could be  the                                                                    
holder  of  the  money  versus   the  banks.  She  suggested                                                                    
requiring  the money  to  be reinvested  in  the state.  She                                                                    
observed the proposal  [on slide 15] would  give companies a                                                                    
payout  they could  use anywhere  (e.g.  Europe, Texas,  and                                                                    
North Dakota);  however, if  a structure  was put  in place,                                                                    
AIDEA could  go forward  with capital  projects and  use the                                                                    
money as collateral instead. She  thought it would help grow                                                                    
the state's  economy more than  giving money out  that could                                                                    
be utilized somewhere else.                                                                                                     
Mr. Barnhill  acknowledged the ideas  had merit,  but stated                                                                    
that  from  an OMB  policy  perspective,  the state  had  an                                                                    
obligation  to pay  the money  owed  from a  program it  had                                                                    
created in  the past and  ended. He spoke to  the importance                                                                    
of paying  off the  debt owed to  companies, which  had been                                                                    
the point of  HB 331, which had not come  to fruition due to                                                                    
litigation. He  was happy  to explore  any way  to "clearing                                                                    
the decks" by  concluding the state's investment  in the new                                                                    
exploration effort.                                                                                                             
Co-Chair Wilson  agreed the state  should pay its  debt, but                                                                    
she  noted  that  companies had  told  the  legislature  the                                                                    
previous  year that  they  could not  utilize  paper no  one                                                                    
would  give   them  any  money   for.  She   referenced  the                                                                    
governor's objective  to live within the  state's means. She                                                                    
stressed  that raiding  a savings  account  did not  reflect                                                                    
living within the  state's means. She reasoned  if the state                                                                    
could  utilize a  program where  companies would  invest the                                                                    
money  back into  oil  on the  North Slope  or  gas in  Cook                                                                    
Inlet, it would  be an opportunity for the state  to pay its                                                                    
debt and benefit with jobs in Alaska.                                                                                           
3:21:46 PM                                                                                                                    
Mr. Barnhill  addressed the proposal  to begin  to eliminate                                                                    
quasi-dedicated funds  (last item  on slide 15),  which were                                                                    
sometimes called  designated funds. He detailed  that over a                                                                    
series of decades  the legislature had enacted  a variety of                                                                    
quasi-dedicated fund  structures for a specific  purpose. He                                                                    
estimated  there were  currently  dozens of  quasi-dedicated                                                                    
funds on the  state's books. The concern from  an OMB budget                                                                    
and  policy  perspective   was  that  quasi-dedicated  funds                                                                    
decreased  the  legislature's  flexibility to  manage  state                                                                    
funds, particularly  in times where  revenues did  not equal                                                                    
proposed   expenditures.    The   governor    had   proposed                                                                    
legislation to  eliminate the funds established  in statute.                                                                    
The proposal  would start with  the largest  funds including                                                                    
the   Power   Cost   Equalization  (PCE)   Fund,   Community                                                                    
Assistance Fund,  and the Higher Education  Investment Fund.                                                                    
He emphasized  the proposal did  not change the  funding for                                                                    
programs  with quasi-dedicated  funds; the  fund source  was                                                                    
changed  to  general  funds. He  emphasized  that  the  fund                                                                    
source  for PCE,  the  Alaska  Performance Scholarship,  and                                                                    
Community Assistance would change to GF.                                                                                        
Co-Chair  Foster understood  the concept  would be  to sweep                                                                    
the $1.1 billion  from PCE to GF and still  make payments to                                                                    
the communities for PCE from  the GF. He was concerned about                                                                    
PCE having to  compete against other programs  in the future                                                                    
for  funds,  meaning there  was  potential  for payments  to                                                                    
become less predictable. He discussed  the origin of PCE and                                                                    
detailed  different parts  of the  state had  received funds                                                                    
for  energy projects  to  help keep  energy  costs down.  He                                                                    
reviewed past  energy projects including the  Four-Dam Pool,                                                                    
Bradley Lake  hydroelectric, the electric intertie  from the                                                                    
Kenai Peninsula through Anchorage  to Fairbanks, and over $1                                                                    
billion  in  Cook Inlet  tax  credits  (he noted  the  state                                                                    
barely taxed  Cook Inlet natural  gas). He supported  all of                                                                    
the projects because they helped  to reduce energy costs for                                                                    
huge  swaths  of  the state's  population.  He  stated  that                                                                    
dismantling the PCE program would  effectively take down the                                                                    
energy reduction projects in rural Alaska.                                                                                      
3:24:47 PM                                                                                                                    
Vice-Chair Johnston asked  if the change [moving  PCE to GF]                                                                    
would change how DOR managed the funds.                                                                                         
Mr. Barnhill answered that DOR  managed the General Fund. He                                                                    
noted  that  DOR  could  speak   to  the  specifics  on  its                                                                    
management of the  fund. He detailed that DOR  pooled GF and                                                                    
other  GeFONSI   [General  Fund  and   Other  Non-Segregated                                                                    
Investments] together  (there were  dozens of  funds). There                                                                    
was  a GeFONSI  I and  GeFONSI  II pool.  He explained  that                                                                    
GeFONSI  II  had equity  exposure.  He  elaborated that  DOR                                                                    
would  decide how  to allocate  the General  Fund as  it got                                                                    
bigger  assuming the  governor's proposal  to eliminate  the                                                                    
[quasi-dedicated] funds  took place. He added  that DOR also                                                                    
managed  the CBR  - any  funds  available for  appropriation                                                                    
were swept from GF to the  CBR per the constitution. The CBR                                                                    
had  a  main account  and  subaccount;  currently there  was                                                                    
nothing in the subaccount, but  it was available for longer-                                                                    
term investments.                                                                                                               
Vice-Chair Johnston speculated that  as funds were currently                                                                    
managed, liquidity  may not be  necessary, which may  not be                                                                    
the case if  the funds became part of the  General Fund. She                                                                    
intended  to ask  about the  issue  during the  subcommittee                                                                    
3:26:32 PM                                                                                                                    
Co-Chair Wilson stated, "I appreciate  that you think we can                                                                    
manage our  funds on our  own because  we don't have  a very                                                                    
good  track  record of  that."  She  asked which  funds  Mr.                                                                    
Barnhill was  referring to.  She asked  if Mr.  Barnhill was                                                                    
talking about  several funds or  the myriad funds  the state                                                                    
Mr. Barnhill  replied that  the state  had dozens  of funds.                                                                    
The administration was  looking at making the  change over a                                                                    
multiyear  period and  had identified  a handful  [of quasi-                                                                    
dedicated funds] to  start with. He added  that depending on                                                                    
the  reception to  the idea,  it could  be revisited  in the                                                                    
future with other funds.                                                                                                        
Co-Chair Wilson wondered  why they were testing  it out. She                                                                    
reasoned  that someone  either believed  all of  the funding                                                                    
should  be in  one  fund  (e.g. CBR  or  ERA)  or they  were                                                                    
amenable  to  having thousands  of  small  funds of  various                                                                    
sizes. She stated it was not possible to have it both ways.                                                                     
Mr. Barnhill replied that it  was more of a logistical issue                                                                    
in  terms  of jamming  up  the  legislature with  dozens  of                                                                    
fiscal notes.                                                                                                                   
Ms. Sanders added that OMB intended  to work with LFD on the                                                                    
project  over  the interim  regarding  how  funds should  be                                                                    
categorized and where they should be placed.                                                                                    
Co-Chair  Wilson  was  trying   to  understand  whether  the                                                                    
administration  believed the  state should  not have  all of                                                                    
the small  funds and that  it would be necessary  to compete                                                                    
for   the    available   funds.   She   wondered    if   the                                                                    
administration's philosophy  was to  eventually have  all of                                                                    
the money in one place. She  reasoned they would not be able                                                                    
to  say  whether PCE  or  the  higher education  scholarship                                                                    
program  would still  be  funded because  there  would be  a                                                                    
matrix or priority list developed by the administration.                                                                        
3:28:53 PM                                                                                                                    
Mr. Barnhill  replied that the  intent of the policy  was to                                                                    
put all stakeholders  on a level playing  field. He detailed                                                                    
that the subject  had been discussed in 1955  at the state's                                                                    
constitutional convention. The  framers intended the state's                                                                    
financing  and budgeting  process to  be structured  in that                                                                    
way.  He elaborated  that framers  had been  concerned about                                                                    
the  dozens  of  states  that did  not  have  a  prohibition                                                                    
against dedicated  funds; states  had created pots  of money                                                                    
all  over the  place  and there  had  been no  appropriation                                                                    
flexibility, which had  been of concern to  the framers. The                                                                    
proposal  was to  return back  to the  framer's intent  with                                                                    
respect to budgeting and appropriation flexibility.                                                                             
Co-Chair Wilson stated  that PCE had established  for a very                                                                    
different reason than  many of the other  funds. The purpose                                                                    
was  to provide  a  way to  equalize  energy throughout  the                                                                    
state.  She believed  it would  get lost  with the  [loss of                                                                    
the]  fund.   The  Railbelt  was   supposed  to   have  more                                                                    
affordable energy  via various hydro projects.  She asked if                                                                    
certain funds  fell under a different  guideline and perhaps                                                                    
certain things could  not be equal throughout  the state and                                                                    
[quasi-dedicated]  funds  were  the method  of  solving  the                                                                    
issue versus all funds being up for grabs.                                                                                      
Mr.  Barnhill answered  that ultimately,  the administration                                                                    
wanted to  evaluate all of  the [quasi-dedicated]  funds. He                                                                    
clarified  that  the budget  proposal  was  limited to  PCE,                                                                    
higher  education,  community  assistance, and  one  or  two                                                                    
Co-Chair  Wilson asked  why the  particular  five funds  had                                                                    
been  selected.  Mr. Barnhill  replied  that  they were  the                                                                    
biggest [of the quasi-dedicated funds].                                                                                         
Representative  LeBon followed  up on  Vice-Chair Johnston's                                                                    
comments  on AIDEA.  He agreed  there needed  to be  concern                                                                    
about stripping  too much capital  from AIDEA  and impairing                                                                    
the agency's ability to act  as an effective lending partner                                                                    
to the  state's commercial  banking community.  He addressed                                                                    
school  debt  reimbursement.   He  detailed  that  organized                                                                    
boroughs  and municipalities  would  obtain permission  from                                                                    
voters to  sell bonds  for school  construction. Conversely,                                                                    
when unorganized portions of the  state needed a new school,                                                                    
the  state built  the school;  the local  community did  not                                                                    
contribute 30 percent  of the cost and some  type of general                                                                    
obligation bond. He asked if his statements were accurate.                                                                      
3:32:39 PM                                                                                                                    
Mr. Barnhill  explained there  were 19  Regional Educational                                                                    
Attendance  Areas (REAA)  in the  state. There  was an  REAA                                                                    
school  grant construction  fund and  a formula  designed to                                                                    
deliver a percentage  (to the fund) of the  amount the state                                                                    
reimbursed  school  districts  under the  school  bond  debt                                                                    
reimbursement program.  The budget proposal did  not attempt                                                                    
to  restructure the  REAA grants  fund -  those funds  would                                                                    
remain in place.                                                                                                                
Representative  LeBon spoke  about  the  operating cost  per                                                                    
student  per University  of Alaska  campus.  He assumed  the                                                                    
administration was going  to do a comparison  between all of                                                                    
the  campuses,  given  the   difference  between  them.  For                                                                    
example, the University of Alaska  Fairbanks had a number of                                                                    
dormitory buildings,  a research  facility, and  a statewide                                                                    
administration  facility. He  asked for  an apples-to-apples                                                                    
comparison and reasoned  the cost of educating  a student at                                                                    
each campus would differ due  to a difference in facilities,                                                                    
overhead, and fixed cost.                                                                                                       
3:34:20 PM                                                                                                                    
Mr. Barnhill  replied that the  University had the  data and                                                                    
had provided  it to  the state.  He believed  the University                                                                    
would be willing  to provide the data on a  per campus basis                                                                    
to the  committee. He  understood the  data provided  by the                                                                    
University to the administration  did not fully allocate out                                                                    
the  administration  costs  to  each  of  the  campuses.  He                                                                    
thought  it may  be better  to  wait for  the University  to                                                                    
adjust its  numbers so the  administration costs  were fully                                                                    
allocated out.  The data the administration  received showed                                                                    
a fairly stark difference between campuses.                                                                                     
Representative  LeBon   asked  for  verification   that  the                                                                    
administration based  its proposed cut to  K-12 education on                                                                    
the belief  that the cost per  student was too high  and the                                                                    
outcome was too low.                                                                                                            
Ms. Arduin replied that the  observations were separate. She                                                                    
noted  that   the  administration  had  not   specified  the                                                                    
spending was too high. She  clarified they had specified the                                                                    
state  had   been  spending  more  than   other  states  and                                                                    
receiving  less.  The  administration believed  it  was  the                                                                    
beginning of  a process and  reforming education would  be a                                                                    
longer-term process.  The observation was the  state was not                                                                    
getting what it should for the money.                                                                                           
3:36:21 PM                                                                                                                    
Representative Sullivan-Leonard asked  about AIDEA receipts.                                                                    
She  noted  that  the  agency  already  provided  an  annual                                                                    
stipend to the  state. She speculated the  amount was around                                                                    
$20 million  or so. She asked  if it had been  factored into                                                                    
the FY 19  and FY 20 conclusions by  the administration. She                                                                    
asked  if the  calculation  factored in  that AIDEA  already                                                                    
provided the  state a  portion of its  reserves. If  so, she                                                                    
wondered if  it was something the  administration could look                                                                    
at stretching  out farther  with regard  to paying  down oil                                                                    
and gas tax credits.                                                                                                            
Mr.  Barnhill characterized  the discussions  with AIDEA  as                                                                    
ongoing. He  believed it was  fair to say  appropriating the                                                                    
proposed  amount from  AIDEA  would have  an  impact on  the                                                                    
dividend. He  relayed that the  departments and  AIDEA could                                                                    
address the details in the budget subcommittee process.                                                                         
Vice-Chair    Ortiz   referenced    earlier   comments    by                                                                    
Representative    Carpenter,   Vice-Chair    Johnston,   and                                                                    
Representative Josephson  regarding the proposed  budget and                                                                    
the administration's vision going  forward. He believed that                                                                    
ultimately for  the administration  to sell the  budget, the                                                                    
administration  needed to  address  its vision  and how  the                                                                    
budget would impact the state  as a whole. He referenced Ms.                                                                    
Arduin's  comments about  the need  to create  stability. He                                                                    
agreed  the  state  could not  continue  the  deficit  spend                                                                    
because it  lacked sufficient savings. However,  he believed                                                                    
there had to  be a recognition there were other  ways to get                                                                    
to  a  balanced  budget  - methods  that  did  not  continue                                                                    
deficit  spend but  did not  create the  havoc the  proposed                                                                    
budget would create.                                                                                                            
Vice-Chair Ortiz asked what stability  there would be if the                                                                    
proposed  23  percent reduction  in  the  BSA were  enacted,                                                                    
requiring his district to lay  off potentially 70 of its 170                                                                    
teachers.  He countered  there was  not a  lot of  stability                                                                    
there. He reasoned there would  not be significant stability                                                                    
for  businesses  either.  He questioned  whether  businesses                                                                    
would want to invest in a  town where schools were no longer                                                                    
supported.   He    requested   that   going    forward   the                                                                    
administration begin to address  its vision and the budget's                                                                    
overall impacts on the economy.                                                                                                 
3:40:40 PM                                                                                                                    
Ms.  Arduin replied  that the  goal was  to be  sustainable,                                                                    
predictable,  and  affordable.  She  stated  that  the  most                                                                    
instability  the state  could give  to its  school districts                                                                    
would  be to  continue  deficit spending  and  to drain  its                                                                    
reserves  completely.  She  underscored  that  the  scenario                                                                    
would  drive complete  instability.  The administration  was                                                                    
proposing  sustainability  by  spending within  the  state's                                                                    
means  and showing  school districts  there  would be  money                                                                    
available  in  the  future,  which  is  what  was  meant  by                                                                    
sustainable   and   predictable.  The   administration   was                                                                    
producing an  economic analysis and believed  the impacts to                                                                    
the economy would  be positive if the  state stopped sending                                                                    
signals to investors that it did  not know what it was doing                                                                    
with  its budget  (e.g. where  it would  tax in  the future,                                                                    
where  the money  would  come from,  and  how the  education                                                                    
system    would    be    funded).   She    reiterated    the                                                                    
administration's  goal  of   sustainable,  predictable,  and                                                                    
affordable budgets in order to turn the economy around.                                                                         
Representative  Josephson stated  that  his primary  concern                                                                    
was  the  use of  the  word  predictable  on slide  16.  The                                                                    
previous  administration  had  welcomed and  encouraged  oil                                                                    
development  but had  aimed to  divorce the  state from  its                                                                    
codependent  relationship  with  the oil  industry.  He  was                                                                    
concerned that the  proposed budget wedded the  state to the                                                                    
industry. He  referenced slide 9  reflecting changes  in the                                                                    
last four or  five months due to declining  oil [prices]. He                                                                    
wondered how any of the  proposed budget was predictable. He                                                                    
reasoned that  if oil prices  dropped to $29 per  barrel, it                                                                    
would likely be necessary to  cut another $500 million [from                                                                    
the  budget].  He referenced  Ms.  Arduin's  comment on  the                                                                    
reliance  on  the  greater world,  i.e.,  school  districts,                                                                    
businesses, investment. He  asked how any of  the budget was                                                                    
predictable, given that  it would double down  on a marriage                                                                    
to a single funding source.                                                                                                     
3:43:25 PM                                                                                                                    
Ms. Arduin answered  that OMB had talked  about beginning to                                                                    
diversify  the  economy.  She  detailed   that  the  way  to                                                                    
diversify the economy was to  attract outside investment and                                                                    
to attract investors who would  bring jobs and growth to the                                                                    
state. She reasoned  that the goal was not  possible as long                                                                    
as deficit spending continued, and  the state could not tell                                                                    
potential investors  where they may  or may not be  taxed in                                                                    
the  future.   In  order   for  the   state  budget   to  be                                                                    
predictable,  the governor  was proposing  a spending  limit                                                                    
based on an amount of money  that would likely be an average                                                                    
of where oil revenues came  in. The budget would continue to                                                                    
spend 2 percent  more per year, which  would be predictable,                                                                    
sustainable,  and affordable.  The  administration was  also                                                                    
talking about building the CBR  back up to make it available                                                                    
when revenues dipped.                                                                                                           
Representative  Carpenter  asked   if  the  administration's                                                                    
economic  analysis  would provide  a  timeline  on what  the                                                                    
positive impact to the private sector would look like.                                                                          
Ms. Arduin replied  in the affirmative. The  analysis by OMB                                                                    
would  look at  the impacts  on the  private and  government                                                                    
Co-Chair Foster  thanked the presenters. He  provided detail                                                                    
regarding the schedule for the following week.                                                                                  
3:46:08 PM                                                                                                                    
The meeting was adjourned at 3:46 p.m.                                                                                          

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