Legislature(2019 - 2020)Anch LIO Lg Conf Rm

10/02/2020 10:00 AM FINANCE

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Audio Topic
10:06:17 AM Start
10:08:05 AM Presentation: Supreme Court Decision on Oil & Gas Tax Credit Bonding: Department of Law
10:20:19 AM Presentation: Revenue Projections: Department of Revenue
11:18:18 AM Presentation: Fy 21 and Fy 22 Fiscal Outlook: Legislative Finance Division
12:10:19 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Teleconference Only --
-- Testimony <Invitation Only> --
- Supreme Court Decision on Oil & Gas Tax Credit
Bonding by Dept. of Law
- Revenue Projections by Dept. of Revenue
- FY21 & FY22 Fiscal Outlook by Legislative
Finance Division
**Streamed live on AKL.tv**
                  HOUSE FINANCE COMMITTEE                                                                                       
                      October 2, 2020                                                                                           
                        10:06 a.m.                                                                                              
[Note:  meeting took  place  in the  Anchorage  LIO and  was                                                                    
recorded from Juneau.]                                                                                                          
10:06:17 AM                                                                                                                   
CALL TO ORDER                                                                                                                 
Co-Chair  Johnston   called  the  House   Finance  Committee                                                                    
meeting to order at 10:06 a.m.                                                                                                  
MEMBERS PRESENT                                                                                                               
Representative Jennifer Johnston, Co-Chair                                                                                      
Representative Dan Ortiz, Vice-Chair (Via Teleconference)                                                                       
Representative Ben Carpenter (Via Teleconference)                                                                               
Representative Andy Josephson                                                                                                   
Representative Bart LeBon (Via Teleconference)                                                                                  
Representative Kelly Merrick                                                                                                    
Representative Cathy Tilton (Via Teleconference)                                                                                
Representative Adam Wool (Via Teleconference)                                                                                   
MEMBERS ABSENT                                                                                                                
Representative Neal Foster, Co-Chair                                                                                            
Representative Colleen Sullivan-Leonard                                                                                         
PRESENT VIA TELECONFERENCE                                                                                                    
Bill Milks,  Assistant Attorney General, Department  of Law;                                                                    
Lucinda  Mahoney, Commissioner,  Department of  Revenue; Dan                                                                    
Stickel,  Chief  Economist,  Economic  Research  Group,  Tax                                                                    
Division, Department  of Revenue; Deven  Mitchell, Executive                                                                    
Director, Alaska  Municipal Bond Bank  Authority, Department                                                                    
of  Revenue; Alexei  Painter, Director,  Legislative Finance                                                                    
Division;   Representative   Bryce  Edgmon;   Representative                                                                    
Harriet Drummond; Senator  Elvi Gray-Jackson; Representative                                                                    
Sharon     Jackson;    Representative     Delena    Johnson;                                                                    
Representative Geran Tarr.                                                                                                      
PRESENTATION:  SUPREME  COURT  DECISION  ON OIL  &  GAS  TAX                                                                    
CREDIT BONDING: DEPARTMENT OF LAW                                                                                               
PRESENTATION: REVENUE PROJECTIONS: DEPARTMENT OF REVENUE                                                                        
PRESENTATION: FY  21 AND FY  22 FISCAL  OUTLOOK: LEGISLATIVE                                                                    
FINANCE DIVISION                                                                                                                
Co-Chair Johnston recognized House  Speaker Bryce Edgmon and                                                                    
Representative  Harriet Drummond  online.  She reviewed  the                                                                    
meeting agenda.                                                                                                                 
^PRESENTATION:  SUPREME  COURT DECISION  ON  OIL  & GAS  TAX                                                                  
CREDIT BONDING: DEPARTMENT OF LAW                                                                                             
10:08:05 AM                                                                                                                   
Co-Chair Johnston  recognized the  presence of  Senator Elvi                                                                    
Gray-Jackson,    Representative    Sharon    Jackson,    and                                                                    
Representative Geran Tarr on the line.                                                                                          
10:08:31 AM                                                                                                                   
BILL MILKS,  ASSISTANT ATTORNEY  GENERAL, DEPARTMENT  OF LAW                                                                    
(via  teleconference), introduced  himself. He  indicated he                                                                    
would provide  a short  update on  the Alaska  Supreme Court                                                                    
decision Forrer v.  State of Alaska, issued  on September 4,                                                                    
2020. He explained that the case  was in response to HB 331,                                                                    
legislation introduced  by former  Governor Bill  Walker and                                                                    
passed  by the  legislature in  2018. He  detailed that  the                                                                    
legislation sought  to address  outstanding oil and  gas tax                                                                    
credits  that had  accumulated. The  legislation proposed  a                                                                    
financing  structure  where  a state  corporation  would  be                                                                    
created,  the   corporation  would  issue  bonds,   and  the                                                                    
proceeds would  be used to  pay off outstanding oil  and gas                                                                    
tax credits.  He added that  the debt service for  the bonds                                                                    
would   be   subject   to  legislative   appropriation.   He                                                                    
elaborated  that   the  debt  service   would  be   paid  by                                                                    
legislative   appropriation,  but   there  was   no  binding                                                                    
requirement for the legislature to appropriate the funds.                                                                       
Mr. Milks  provided more  general background  information on                                                                    
the issue.  He detailed  that the legislation  concerned the                                                                    
oil and gas tax credit program  that began in the first part                                                                    
of the 2000s. He elaborated that  in 2003 and 2006 a program                                                                    
had been established that allowed  tax credits to be used to                                                                    
reduce production tax. Alternatively,  a producer could sell                                                                    
the credits  to another producer  to allow the  purchaser to                                                                    
reduce its tax  liability or the credits  could be submitted                                                                    
to the Department  of Revenue (DOR) for purchase  of the tax                                                                    
credits, subject to  legislative appropriation. He explained                                                                    
that it had  all been part of a concept  to try to encourage                                                                    
production and spur job growth.                                                                                                 
Mr. Milks relayed that when  oil prices had plunged in 2014,                                                                    
the  appropriations to  pay  for the  tax  credits had  been                                                                    
reduced  for the  first time  in a  veto by  former Governor                                                                    
Walker.  The  legislature  had  eventually  phased  out  the                                                                    
program in  2017, but there  had still been  outstanding oil                                                                    
and gas tax  credits. When the governor had  proposed HB 331                                                                    
in  2018 and  the  legislature had  passed the  legislation,                                                                    
there  had been  outstanding  tax  credits of  approximately                                                                    
$800 million  with around  $200 million  more that  could be                                                                    
requested. The bill  included a process to  try to refinance                                                                    
the tax credits through the  issuance of bonds with the debt                                                                    
service to be paid out over a decade.                                                                                           
Mr.  Milks reported  that  there had  quickly  been a  legal                                                                    
challenge  to the  legislation by  Mr. Forrer  alleging that                                                                    
the specific type  of debt was not  permitted under Alaska's                                                                    
constitution. The  superior court  had found the  bonds were                                                                    
constitutional and  had dismissed  the lawsuit.  The court's                                                                    
decision  was based  on the  fact  that the  full faith  and                                                                    
credit of  the state  were not  being pledged.  He explained                                                                    
that an appeal  had been filed and the  Alaska Supreme Court                                                                    
reversed  the superior  court decision  on September  4. The                                                                    
supreme  court  reached  the conclusion  that  the  specific                                                                    
bonds  violated  the   Alaska  Constitution's  provision  on                                                                    
contracting state debt.                                                                                                         
10:13:08 AM                                                                                                                   
Mr. Milks  provided a couple  of take-a-ways on  the court's                                                                    
decision. He explained that the  court had been faced with a                                                                    
kind of bond where a  corporation would issue the bonds, but                                                                    
the corporation had no independent  revenues to pay the debt                                                                    
service. The  debt service would  be subject  to legislative                                                                    
appropriation. He  informed the  committee that  the court's                                                                    
decision  marked a  guiding  line on  the  ability to  issue                                                                    
bonds.  The decision  did not  affect  the state's  ability,                                                                    
which  was clear  under the  Alaska  Constitution, to  issue                                                                    
general   obligation  bonds.   He  explained   that  general                                                                    
obligation  bonds were  first approved  by the  legislature,                                                                    
followed  by  voters for  purposes  of  things like  capital                                                                    
improvements and veterans'  loans. Additionally, the court's                                                                    
decision did  not impact the  ability of the state  or state                                                                    
entities  to issue  revenue bonds  with a  dedicated revenue                                                                    
stream. He  summarized that the  court had ruled  that bonds                                                                    
could not be  issued for the payment of the  oil and gas tax                                                                    
credits under the HB 331 structure.                                                                                             
Mr.  Milks reported  that the  Department of  Law (DOL)  had                                                                    
filed  a  limited petition  to  the  court for  a  rehearing                                                                    
because it  was seeking the  court to clarify that  the case                                                                    
was  about a  specific  type  of bond  that  had no  revenue                                                                    
stream  and required  legislative  appropriation. The  state                                                                    
sought clarification that the court  ruling did not apply to                                                                    
revenue bonds  with dedicated  revenue streams.  He detailed                                                                    
that the  petition had  been filed on  September 28  and the                                                                    
department was waiting for the court clarification.                                                                             
10:16:00 AM                                                                                                                   
Representative LeBon  broached the topic of  moving forward.                                                                    
He  asked whether  DOL had  looked into  a repayment  method                                                                    
that  may be  tied to  an escrow  approach. For  example, he                                                                    
asked whether  the legislature should authorize  a draw from                                                                    
the Permanent  Fund Earnings Reserve  Account (ERA)  and set                                                                    
aside  for  future  bond  debt  repayments  an  amount  that                                                                    
allowed  for a  ten-year  repayment. He  explained that  the                                                                    
method  would mean  the  legislature  would be  guaranteeing                                                                    
bond  debt  repayment  from a  funding  source  outside  the                                                                    
General  Fund.  He elaborated  that  it  would mean  setting                                                                    
aside  one-tenth  of 1  percent  of  the  value of  the  $65                                                                    
billion Permanent  Fund for future commitments.  He detailed                                                                    
that about  $750 million would  then be available  and would                                                                    
reassure bond  holders there was  a commitment to  repay the                                                                    
Representative  LeBon  explained  it   would  not  create  a                                                                    
problem  as far  as a  general obligation  - it  would be  a                                                                    
revenue stream  connected to the  ERA for example.  He asked                                                                    
if  it  would  be  a  violation of  SB  26  [Permanent  Fund                                                                    
legislation passed  in 2018]  and the  5 percent  draw [from                                                                    
the  ERA].  He argued  that  the  bond repayment  would  not                                                                    
necessarily be  funded from  the ERA.  He expounded  that it                                                                    
would be a  commitment that if the legislature  chose not to                                                                    
use general funding  in the future, it could fall  back on a                                                                    
draw from the  ERA. He asked if Mr. Milks  had an opinion on                                                                    
the approach.                                                                                                                   
Mr. Milks  responded that he  could not offer an  opinion at                                                                    
present.  He explained  that due  to  the complex  financing                                                                    
structure, he  would have to  confer with DOR and  pencil it                                                                    
Representative  LeBon thanked  Mr. Milks  for his  reply and                                                                    
noted  he  had  not  expected  there to  be  an  answer.  He                                                                    
remarked that the state was  currently in technical default.                                                                    
He asked how the state's  credit rating would be impacted if                                                                    
it failed to pay its tax credit obligations.                                                                                    
Co-Chair Johnston suggested that  the question might be more                                                                    
appropriate for the upcoming presenters.                                                                                        
Representative  LeBon   responded  that  he   respected  the                                                                    
notion. He wondered whether DOL had an opinion.                                                                                 
Mr.  Milks  indicated  DOL  did  not  have  an  opinion.  He                                                                    
believed the question would be better addressed to DOR.                                                                         
Co-Chair Johnston thanked Mr. Milks for his testimony.                                                                          
^PRESENTATION: REVENUE PROJECTIONS: DEPARTMENT OF REVENUE                                                                     
10:20:19 AM                                                                                                                   
LUCINDA  MAHONEY, COMMISSIONER,  DEPARTMENT OF  REVENUE (via                                                                    
teleconference),   introduced    the   combined   PowerPoint                                                                    
presentation:   "Update   on   Tax   Credits   and   Revenue                                                                    
Projections" (copy  on file). She outlined  the department's                                                                    
intent to  provide a fiscal  update and  a follow up  to Mr.                                                                    
Milks'  discussion  of  the  tax  credit  certificates.  The                                                                    
presentation  included historical  purchase  amounts and  an                                                                    
update on  the remaining tax credit  certificate amounts and                                                                    
the statutory  payoff rate.  She referenced  questions asked                                                                    
by the committee earlier in  the meeting about how the state                                                                    
would  move  forward  with  the   debt.  She  spoke  to  the                                                                    
importance  of  understanding  the  information  because  it                                                                    
would  drive  policy  discussions  and  conversations  about                                                                    
resolutions  for the  future.  Additionally, the  department                                                                    
would  discuss  its  current   revenue  outlook  that  would                                                                    
include some of the changes DOR  had made to its 2020 spring                                                                    
Commissioner Mahoney relayed  that the presentation included                                                                    
a  few  economic  indicators regarding  the  overall  fiscal                                                                    
health of  the state's  economy and would  use it  to launch                                                                    
into  a discussion  on the  2021 and  2022 revenue  outlook.                                                                    
Lastly,  the  presenters  would   provide  comments  on  the                                                                    
uncertainties  of the  state's revenue  stream. She  relayed                                                                    
that DOR thought about the  aforementioned topics on a daily                                                                    
basis and  the areas  that would  drive policy  decisions in                                                                    
all  three   levels  of  government  in   the  near  future.                                                                    
Specifically, the  uncertainty around the path  of the virus                                                                    
and how it impacted the  global and local economies would be                                                                    
critical to the discussion.                                                                                                     
Commissioner  Mahoney   highlighted  the   global  economy's                                                                    
impact  on  the  price  of oil  and  Alaska's  revenues  and                                                                    
investment  portfolios.  She  shared   that  due  to  supply                                                                    
shortages on the West Coast,  inventories in Valdez had been                                                                    
filling up and  DOR had been notified the  previous day that                                                                    
Alyeska would begin a proration  of 25 percent of production                                                                    
beginning  Saturday at  noon through  October 6.  She stated                                                                    
the  situation  illustrated how  things  taking  place at  a                                                                    
global   level   were    significantly   impacting   Alaska.                                                                    
Additionally,  the department  would speak  about mitigating                                                                    
investment volatility  risk. She stated that  the percent of                                                                    
market value (POMV) was the  state's largest revenue source.                                                                    
The  department  would  share how  it  managed  through  the                                                                    
largest investment portfolio, the Permanent Fund.                                                                               
10:23:47 AM                                                                                                                   
Commissioner Mahoney  continued to review an  outline of the                                                                    
presentation.   The  department   would  also   discuss  the                                                                    
preliminary analytics  it performed to assess  the potential                                                                    
revenue impacts  if Ballot  Measure 1 were  to pass  [in the                                                                    
upcoming  November general  election].  She emphasized  that                                                                    
the data represented  estimates. The ultimate interpretation                                                                    
of  the  ballot  measure  would  only  be  determined  post-                                                                    
enactment.  The   goal  was  to   provide  the   public  and                                                                    
legislature with estimates and  information in order to make                                                                    
informed  decisions.  The   discussion  during  the  current                                                                    
meeting  would be  based on  the frequently  asked questions                                                                    
from the public hearing process held the previous week.                                                                         
10:25:01 AM                                                                                                                   
DAN STICKEL,  CHIEF ECONOMIST, ECONOMIC RESEARCH  GROUP, TAX                                                                    
DIVISION,  DEPARTMENT   OF  REVENUE   (via  teleconference),                                                                    
shared that  he would begin with  a couple of slides  on tax                                                                    
credits  followed  by  the  revenue  outlook  and  areas  of                                                                    
uncertainty in  the forecast. He  began with slide  2 titled                                                                    
"Tax  Credit Certificates  Historical Purchases."  The slide                                                                    
showed a graph with a  history of the tax credit certificate                                                                    
purchases  made  each  year since  the  purchases  began  in                                                                    
FY 07.  Since FY  07, $3.65  billion had  been spent  by the                                                                    
state on credit  certificate purchases. Prior to  FY 16, the                                                                    
full amount of eligible tax  credits had been purchased each                                                                    
year. In FY 16 and FY 17,  changes to the credit laws set in                                                                    
place sunset  provisions for new  credits. He  reported that                                                                    
the  ability to  earn new  credits had  been phased  out. He                                                                    
elaborated that  as state budget  issues intensified,  FY 16                                                                    
was  the first  year  that less  than  the full  outstanding                                                                    
amount was purchased; it had  been the case every year since                                                                    
FY 16.  He relayed that FY  20 was the first  year there was                                                                    
no   appropriation   for   the  purchase   of   tax   credit                                                                    
10:26:31 AM                                                                                                                   
Mr.   Stickel  moved   to  slide   3   titled  "Tax   Credit                                                                    
Certificates  for Purchase  Status." The  slide contained  a                                                                    
chart projecting  how the outstanding  tax credits  would be                                                                    
paid off over time if  the statutory appropriation were made                                                                    
each year beginning  in FY 22. He noted  the information was                                                                    
based on  the 2020  spring forecast.  He explained  that DOR                                                                    
calculated the  statutory appropriation  based on  either 10                                                                    
or  15 percent  of  estimated production  tax levied  before                                                                    
subtracting any tax credits. He  expounded that when the oil                                                                    
price was less  than $60 per barrel, which was  the case for                                                                    
the next  several years,  the multiplier  was 15  percent of                                                                    
the  production tax  before  credit  amount. The  department                                                                    
estimated  there  was  $738 million  in  outstanding  credit                                                                    
certificates  at  the end  of  FY  21  and $5  million  more                                                                    
becoming  available  for purchase  in  FY  22, for  a  total                                                                    
balance  of   $743  million.  The  chart   assumed  that  no                                                                    
statutory  appropriation  would be  made  for  FY 21,  which                                                                    
would have  been $36  million per  the spring  forecast. The                                                                    
chart  assumed  a  $40 million  statutory  appropriation  in                                                                    
FY  22. The  appropriation  was projected  to increase  over                                                                    
time  based  on improving  oil  prices.  Under the  scenario                                                                    
presented on  the slide, most  of the credits would  be paid                                                                    
off by FY 32, with the last $4 million purchased in FY 33.                                                                      
10:28:08 AM                                                                                                                   
Representative   Josephson   referred   to   Mr.   Stickel's                                                                    
statement  that the  state would  have paid  $36 million  in                                                                    
FY  21. He  asked for  the  bond amortization  rate had  the                                                                    
court had ruled  in a different direction. He  was trying to                                                                    
determine  the  difference  between   a  successful  and  an                                                                    
unsuccessful HB 331.                                                                                                            
Mr. Stickel  replied that  he would have  to follow  up with                                                                    
the information.                                                                                                                
10:29:16 AM                                                                                                                   
DEVEN  MITCHELL, EXECUTIVE  DIRECTOR, ALASKA  MUNICIPAL BOND                                                                    
BANK AUTHORITY, DEPARTMENT  OF REVENUE (via teleconference),                                                                    
answered that he did not have the figures on hand.                                                                              
Representative  Josephson  considered the  situation  solely                                                                    
through the  lens of  the state's treasury.  He asked  if it                                                                    
was possibly a  good thing that HB 331 had  been rejected by                                                                    
the Alaska Supreme Court.                                                                                                       
Commissioner Mahoney answered that  she could not speculate.                                                                    
The department was focused on  trying to evaluate the impact                                                                    
of the ruling and manage its way through.                                                                                       
Co-Chair  Johnston indicated  Representative Delena  Johnson                                                                    
had joined the meeting.                                                                                                         
10:30:26 AM                                                                                                                   
Representative Wool looked  at the chart on  slide 2 showing                                                                    
the  state purchase  of tax  credit  certificates by  fiscal                                                                    
year.  He  observed  that  the  laws  had  been  changed  to                                                                    
eliminate cashable  credits in FY  17, but there  were still                                                                    
purchases in  FY 17 through FY  19. He asked for  clarity on                                                                    
the  word  "purchase."  He  knew  there  had  been  cashable                                                                    
credits the state had paid  out to oil companies. He thought                                                                    
the law had  been changed so that going  forward the credits                                                                    
were  simply   a  reduction  in   taxes  received   and  not                                                                    
necessarily  purchases. He  remarked  that  it appeared  the                                                                    
state  purchased zero  tax credits  purchased in  FY 20.  He                                                                    
asked if  the state  was continuing  to incur  tax liability                                                                    
going forward.  Alternatively, he wondered if  new liability                                                                    
stopped  when  the  legislature passed  a  bill  eliminating                                                                    
cashable credits.                                                                                                               
Mr. Stickel responded  that DOR was using  the term "credits                                                                    
for  state purchase,"  while "cashable  credits" was  a more                                                                    
colloquial term. The terms both  referred to the tax credits                                                                    
available for  the state to  write a  check to a  company to                                                                    
purchase.  He detailed  there had  been legislation  in 2016                                                                    
and 2017  that made changes  to the tax credit  program; the                                                                    
bills implemented  a gradual sunset  on the ability  to earn                                                                    
new  credits  for state  purchase.  He  elaborated that  the                                                                    
provisions had taken effect over  several years, meaning the                                                                    
state had been incurring  some additional credit obligations                                                                    
over  the  past  several  years. The  ability  to  earn  new                                                                    
credits  had  been  entirely phased  out.  The  department's                                                                    
spring  forecast  assumed  there  would  be  $5  million  in                                                                    
additional credits that would  become available for purchase                                                                    
in  FY 22.  At  that  point, there  would  be no  additional                                                                    
credits  available for  purchase. The  $743 million  balance                                                                    
the  department was  forecasting to  be available  in FY  22                                                                    
should be the final balance.                                                                                                    
10:33:35 AM                                                                                                                   
Representative  Wool  referred  to  the  repayment  schedule                                                                    
beginning  in 2022  and  ramping  up to  2032  based on  oil                                                                    
prices  and a  15 percent  statutory minimum  (slide 3).  He                                                                    
asked  how  the  projection  compared to  a  scenario  where                                                                    
HB 331  had not  been overturned.  He knew  a deal  had been                                                                    
struck with  oil companies where  they would take  a reduced                                                                    
payment. He  wondered if the  state's total  liability would                                                                    
be about the  same due to the fees on  the bond. He wondered                                                                    
if the  overall cost  in both scenarios  was about  the same                                                                    
for the state.                                                                                                                  
Mr. Stickel  answered that the  net cost to the  state would                                                                    
be the  same or less.  He deferred  to a colleague  for more                                                                    
Mr. Mitchell confirmed that there  was an impact on the deal                                                                    
that may  have been struck in  the past as the  price of oil                                                                    
fluctuated in the future. He  explained that if the price of                                                                    
oil went  up, the expected  payments under the  formula went                                                                    
up in a similar fashion and  the deal the state struck would                                                                    
be more  beneficial to the state  than expected. Conversely,                                                                    
if the price  of oil went down, the deal  would be worse for                                                                    
the  state   than  expected.   The  expectation   under  the                                                                    
legislation  [HB 331]  was that  bonds  would be  sold at  a                                                                    
discount to  the expected payments under  the projections of                                                                    
the day  and it would be  necessary to wait to  see what the                                                                    
future held in terms of the actual results.                                                                                     
Representative  LeBon   was  trying  to  determine   a  path                                                                    
forward.  He highlighted  the existing  situation where  the                                                                    
state  could not  sell  bonds to  immediately  pay back  the                                                                    
total  obligation   to  the  tax  credit   holders  and  the                                                                    
potential for payments  to be stretched out  over a ten-year                                                                    
basis (as  shown on slide 3).  He asked how to  reassure tax                                                                    
credit holders  and banks that repayment  would happen, that                                                                    
the  state had  committed  to  repay, and  that  it had  set                                                                    
aside, through  an escrow  method on the  ERA, the  money to                                                                    
pay the  installments should  there not be  the will  of the                                                                    
legislature to fund  the repayment from the  General Fund at                                                                    
some time  in the future.  He asked if  doing so would  be a                                                                    
sign of  good faith toward  the credit holders and  banks to                                                                    
indicate that  they could  count on being  paid. He  did not                                                                    
know if the  concept made complete sense.  He explained that                                                                    
he was trying to find a path forward.                                                                                           
Commissioner  Mahoney  responded  that  the  department  was                                                                    
evaluating all of  the possible options to  determine a step                                                                    
forward. She assured the committee  that the issue was a top                                                                    
priority.  She  invited  Mr.  Mitchell  to  comment  on  the                                                                    
potential view of the investors, banks, and credit ratings.                                                                     
Mr. Mitchell  informed the committee that  the nonpayment of                                                                    
the tax credits  in the current fiscal year did  not have an                                                                    
immediate  reaction from  the  credit  rating agencies.  The                                                                    
commitment  that the  state had  made was  salient to  fill.                                                                    
There were  other examples of  similar experience  in recent                                                                    
history that  were cumulatively a  death by a  thousand cuts                                                                    
that  reflected negatively  on a  state's  ability to  stand                                                                    
behind its  commitments. He  shared that  the lobby  wall of                                                                    
the  ratings  agency  Moody's displayed  the  saying  "man's                                                                    
faith in  fellow man." He  relayed that the  saying captured                                                                    
the  basis of  debt -  the  belief that  people would  stand                                                                    
behind their  word. He explained  that when that  belief was                                                                    
lost, it was reflected in the credit rating.                                                                                    
10:39:54 AM                                                                                                                   
Representative LeBon  asked whether  the bond could  be sold                                                                    
to pay tax  credits immediately if the  legislature was able                                                                    
to  attach  repayment  to  the  ERA in  the  manner  he  had                                                                    
previously described.  He explained that the  revenue stream                                                                    
would  be   committed  through  the   ERA  and   should  the                                                                    
legislature  fail to  meet the  annual debt  service through                                                                    
the General  Fund it  could fall back  on state  savings. He                                                                    
asked if the approach would be valid.                                                                                           
Mr.  Mitchell replied  that  he believed  there  would be  a                                                                    
number  of structuring  issues that  would  be difficult  to                                                                    
overcome for purposes  of issuing a bond  under the scenario                                                                    
presented by  Representative LeBon. He explained  there were                                                                    
prohibitions  on   the  dedication  of  state   revenue.  He                                                                    
contemplated the scenario where  the legislature was looking                                                                    
at appropriating the entire amount  due under the tax credit                                                                    
program to  an escrow that  would be irrevocably  pledged to                                                                    
the repayment of the obligations  over time. He relayed that                                                                    
it was a  complex question that would  require thought about                                                                    
the  limitations resulting  from  the  recent supreme  court                                                                    
decision  and how  something might  be structured.  He would                                                                    
not characterize  the idea as impossible  but believed there                                                                    
would be some challenges.                                                                                                       
10:41:39 AM                                                                                                                   
Representative  LeBon   believed  the  situation   may  have                                                                    
reached the  point where it  was necessary to  think outside                                                                    
the box if the state was  in a position where paying the tax                                                                    
credits was  in question.  He stressed  that default  by the                                                                    
state would send  a very bad message to  the capital markets                                                                    
and future bond  issues by the state  and municipalities. He                                                                    
underscored that  the state did  not want to have  to damage                                                                    
control that message.                                                                                                           
Representative Josephson  referred to  slide 3.  He believed                                                                    
Mr.  Stickel  had stated  that  paying  the credits  at  the                                                                    
statutory  level  would  have  required  a  payment  of  $36                                                                    
million [in FY  21]. He knew that HB 331  had backloaded the                                                                    
main  obligation to  paydown the  bonds. He  recognized that                                                                    
the  conversations  were  vital   and  important,  yet  when                                                                    
considering the  $2.3 billion deficit with  a full dividend,                                                                    
the amount appeared much smaller.                                                                                               
Mr.  Stickel   responded  that  the  $36   million  was  the                                                                    
statutory appropriation  for FY 21 under  the spring revenue                                                                    
forecast.  He  referenced  the current  payoff  schedule  on                                                                    
slide  3 and  highlighted  that the  spring  forecast had  a                                                                    
lower  price point  and production  tax revenue  calculation                                                                    
than  the previous  forecast. He  clarified that  the payoff                                                                    
schedule  under  the  spring  forecast  included  a  smaller                                                                    
payment and a longer time horizon.                                                                                              
10:44:34 AM                                                                                                                   
Mr. Stickel  addressed the revenue  outlook on slide  4. The                                                                    
slide  included world  changes that  had occurred  since the                                                                    
spring forecast.  He detailed that  the spring  forecast had                                                                    
been released  in early  April during  a time  of tremendous                                                                    
and  unprecedented uncertainty  in  the  world. He  reported                                                                    
that   despite  all   of  the   change,   the  outlook   for                                                                    
unrestricted  revenue  had  not  changed  significantly.  He                                                                    
shared  that  investment  revenue  was  currently  the  most                                                                    
important  revenue source  -  markets  had recovered  faster                                                                    
than expected  from the March  lows. On the  federal revenue                                                                    
side, the CARES Act had  been passed right before the spring                                                                    
forecast  had been  released  and was  not  included in  the                                                                    
forecast.   He   elaborated    that   between   the   state,                                                                    
municipalities,  and other  entities, there  had been  about                                                                    
$5.6  billion  in  federal  aid  to  Alaska.  A  significant                                                                    
portion of the federal funding  would be state revenue to be                                                                    
reflected in  FY 20  and FY  21. He  noted that  the federal                                                                    
funding was considered restricted revenue in the forecast.                                                                      
Mr.  Stickel continued  to address  the  revenue outlook  on                                                                    
slide 4. He discussed that  oil prices had plunged in April,                                                                    
immediately  after   DOR  had  released  its   forecast.  He                                                                    
reported that  oil prices had  gone negative for one  day on                                                                    
April 20, but they had headed  back up and were now slightly                                                                    
above  the   spring  forecast  level.  Oil   production  was                                                                    
curtailed in  April through June, first  due to Trans-Alaska                                                                    
Pipeline System  (TAPS) prorations caused by  concerns about                                                                    
oil  storage  capacity and  then  due  to low  prices  where                                                                    
ConocoPhillips had  chosen to  reduce production  at Kuparuk                                                                    
and  Alpine  because  of unacceptable  pricing  levels.  The                                                                    
curtailments  had  ended,  but  DOR was  still  waiting  for                                                                    
drilling to come back at  Prudhoe and Kuparuk in particular.                                                                    
He reported  that it had been  a rough year for  tourism and                                                                    
many  other industries,  which was  largely  baked into  the                                                                    
spring  revenue forecast.  He noted  that the  federal CARES                                                                    
Act  had made  some  changes to  corporate  income tax  that                                                                    
would  reduce  revenue  slightly  over the  next  couple  of                                                                    
10:46:55 AM                                                                                                                   
Mr. Stickel turned to slide  5: "Fall Forecast Process." The                                                                    
slide provided  a high level  overview of the  fall forecast                                                                    
process,  which was  just getting  underway.  He noted  that                                                                    
FY  20 data  was still  preliminary and  would be  finalized                                                                    
later in  the month.  The department was  in the  process of                                                                    
updating its  forecast models and  assumptions and  it would                                                                    
be working through them over  the next couple of months. The                                                                    
fall forecast and Revenue Sources  Book would be released in                                                                    
early  to mid-December,  which would  be  the next  official                                                                    
update to the revenue forecast  and would form the basis for                                                                    
the governor's budget proposal.                                                                                                 
Mr. Stickel reviewed the key  economic indicators for Alaska                                                                    
on slide  6. He noted  that while DOR  focused substantially                                                                    
on  state revenue,  it  was  important to  look  at how  the                                                                    
overall  state economy  was doing.  He  reported that  state                                                                    
gross domestic product (GDP) was  down slightly in the first                                                                    
quarter after  gains in seven straight  quarters. The second                                                                    
quarter GDP  had been  released earlier in  the day  and was                                                                    
down 33.8 percent  for Alaska, which was  slightly more than                                                                    
the national decline  of 31.4 percent. The  declines were at                                                                    
a record level and COVID-19 had  a major impact on the goods                                                                    
and services produced in the national economy and Alaska.                                                                       
Mr. Stickel  shared that slide  6 included  the unemployment                                                                    
rate because  it was a  widely followed  economic indicator;                                                                    
however,  he noted  the figure  was  slightly misleading  at                                                                    
present.   He   explained   that   the   unemployment   rate                                                                    
calculation was  an estimate of  the share of people  in the                                                                    
labor force  who are  out of work  and actively  looking for                                                                    
work.  He  expounded  that some  COVID  related  issues  had                                                                    
complicated  the  unemployment rate  calculation,  including                                                                    
the  enhanced unemployment  benefits as  well as  difficulty                                                                    
conducting   the   survey   that  helped   to   inform   the                                                                    
calculation. He  informed the  committee that  currently the                                                                    
best  read on  the unemployment  situation likely  came from                                                                    
looking  at   jobs  numbers  and  claims   for  unemployment                                                                    
insurance  benefits.   He  pointed  out   that  unemployment                                                                    
insurance claims were  still nearly 7 times  higher than one                                                                    
year earlier  and despite the unemployment  rate, employment                                                                    
in  the state  was actually  down by  37,000 people  or 10.5                                                                    
percent compared to one year earlier.                                                                                           
Mr. Stickel  reported that  wages and  salaries were  down 6                                                                    
percent  from  one year  earlier  and  showed an  impact  of                                                                    
COVID-19.  He  relayed  that bankruptcies  and  foreclosures                                                                    
were  less  than  the  prior year,  likely  due  to  various                                                                    
government  programs providing  temporary  aid and  limiting                                                                    
foreclosures. He noted that COVID's  full impact had not yet                                                                    
been  seen in  the bankruptcy  and foreclosure  category. He                                                                    
concluded  slide 6  by reporting  that  housing starts  were                                                                    
down slightly  from 2019.  He remarked  that a  big question                                                                    
was what  the last  three indicators looked  like throughout                                                                    
the   fall  with   federal   support   and  limitations   on                                                                    
foreclosures  and bankruptcies  tapering  off. He  explained                                                                    
that without  further federal stimulus, it  was possible the                                                                    
indicators could begin  to look very bad  and Alaskans could                                                                    
be looking to the state for help.                                                                                               
10:50:14 AM                                                                                                                   
Mr. Stickel  discussed the current  revenue outlook  and oil                                                                    
price forecast update on slide  7. He detailed that the next                                                                    
set of  slides showed  how FY  20 ended  up relative  to the                                                                    
spring forecast  and an  updated view  on FY  21 and  22. He                                                                    
noted  that  two years  of  history  had been  included  for                                                                    
comparative purposes.  The FY 20 average  Alaska North Slope                                                                    
(ANS) oil price was $52.12,  which was slightly ahead of the                                                                    
spring forecast of  $51.55. Oil prices had  plunged in April                                                                    
and  on April  20, ANS  prices were  assessed at  a negative                                                                    
value for the first time ever.  Slide 7 showed a revised oil                                                                    
price outlook  for FY 21 and  FY 22 based on  futures market                                                                    
prices  from the  end of  the previous  week. The  projected                                                                    
FY 21 price was $42.97  compared to the $37 spring forecast.                                                                    
The projected  FY 22  price was $45.91  compared to  the $41                                                                    
spring forecast.  He reported  that overall,  the department                                                                    
was seeing some possible support  for oil prices; global oil                                                                    
demand had rebounded  faster than supply and  April lows. He                                                                    
elaborated  that  inventories  were  being  drawn  down.  He                                                                    
stated  that   while  they   were  still   above  historical                                                                    
averages,  absent a  second wave  of COVID,  there was  some                                                                    
10:51:58 AM                                                                                                                   
Mr. Stickel  reviewed the oil production  forecast update on                                                                    
slide  8.  The slide  included  a  chart comparing  the  ANS                                                                    
average  daily oil  production to  the  spring forecast.  He                                                                    
reported that  FY 20 production  came in at  472,000 barrels                                                                    
per day compared  to the spring forecast  of 486,000 barrels                                                                    
per day.  The production curtailments in  April through June                                                                    
caused  production to  drop below  the forecast.  He relayed                                                                    
that the drilling  of new wells was on pause  in Prudhoe Bay                                                                    
and  Kuparuk, which  impacted  oil  production. The  revised                                                                    
outlook was  based on a  low oil price scenario  prepared by                                                                    
the   Department  of   Natural  Resources   in  April.   The                                                                    
information  also  included  actual  production  so  far  in                                                                    
FY 21.  The revised  outlook for FY  21 was  468,000 barrels                                                                    
per day compared to 487,000  barrels per day included in the                                                                    
spring forecast. The  revised outlook for FY  22 was 448,000                                                                    
barrels per day compared to the spring forecast of 458,000.                                                                     
Mr.  Stickel  relayed that  DOR  was  actively revising  the                                                                    
production  outlook for  the fall  forecast. He  shared that                                                                    
the department  had begun meeting with  companies earlier in                                                                    
the week  to understand  how their  plans had  changed since                                                                    
the spring.                                                                                                                     
10:53:13 AM                                                                                                                   
Mr.  Stickel   provided  an  updated   unrestricted  revenue                                                                    
forecast (not  including the POMV  from the  Permanent Fund)                                                                    
on  slide 9.  He  relayed  that  FY  20  revenue  was  still                                                                    
preliminary and could come in  slightly higher or lower than                                                                    
the  forecast when  the  reconciliations  were complete.  He                                                                    
reported  that  it  currently  looked  like  the  state  had                                                                    
received $1.6 billion of unrestricted  revenue, which was in                                                                    
line  with  the  spring  forecast.  He  explained  that  the                                                                    
rebound  in oil  price in  May and  June roughly  offset the                                                                    
impacts  of  lower   production.  The  department's  revised                                                                    
outlook  was  based  on the  revised  price  and  production                                                                    
numbers,  in addition  to other  revenue changes.  He shared                                                                    
that both FY 21  and FY 22 were looking to  be right in line                                                                    
with  the  spring forecast,  as  the  slightly higher  price                                                                    
offset slightly lower production and other impacts.                                                                             
Mr. Stickel  elaborated that for  FY 21  and FY 22,  DOR was                                                                    
expecting  $1.2 billion  and  $1.3  billion of  unrestricted                                                                    
revenue,  respectively. The  slide  contained  good and  bad                                                                    
news -  while the  outlook had  not worsened,  the projected                                                                    
revenue  was  historically  low,   and  the  state's  fiscal                                                                    
situation remained extremely challenging.                                                                                       
10:54:36 AM                                                                                                                   
Representative  Wool surmised  that Mr.  Stickel was  saying                                                                    
the  forecast was  almost as  predicted  because oil  prices                                                                    
were  slightly higher,  and  production  was slightly  lower                                                                    
than expected.  He asked if  it was  fair to say  that price                                                                    
was more volatile, so if  price were to dip down, production                                                                    
was  harder to  rebound,  especially in  the short-term.  He                                                                    
asked if the  reduced production was based on  low demand as                                                                    
a  result  of COVID.  He  wondered  if  the low  demand  was                                                                    
expected  to  continue  even  if   COVID  was  remedied.  He                                                                    
remarked on more  people working from home  and fewer people                                                                    
flying for business travel.                                                                                                     
Mr. Stickel replied  that he believed the  concern about oil                                                                    
demand  was legitimate.  Demand  had  rebounded faster  than                                                                    
supply  on a  global level;  however, demand  was still  not                                                                    
back to its  pre-COVID level. There was  some question about                                                                    
when and  if demand globally  would return to  those levels.                                                                    
Speaking specifically  to Alaska's production,  he explained                                                                    
that  the revised  outlook  was  based on  a  low oil  price                                                                    
scenario that  DNR prepared in  April and May.  The scenario                                                                    
was  based  on  the  presumption that  production  would  be                                                                    
paused.  He reported  that drilling  was still  on pause  at                                                                    
major  fields.   He  suggested   paying  attention   to  the                                                                    
announcements coming  out of major fields  including Prudhoe                                                                    
and Kuparuk  where production  had been  paused in  order to                                                                    
learn how oil production may compare to the outlook.                                                                            
10:57:05 AM                                                                                                                   
Mr.  Stickel  turned to  slide  10:  "POMV Revenue  Forecast                                                                    
Update."  The  slide  included  a  chart  showing  the  POMV                                                                    
transfer from  the Permanent Fund,  which was  currently the                                                                    
state's largest  source of unrestricted  revenue by  far. He                                                                    
detailed that the POMV draw  was available for dividends and                                                                    
government spending; the split was  up to the legislature to                                                                    
determine. He elaborated  that the POMV was  a fairly stable                                                                    
revenue  source,  based  on  the  Permanent  Fund's  average                                                                    
ending  market values  of the  first  five of  the last  six                                                                    
fiscal  years. The  FY 20  draw  was $2.9  billion, and  the                                                                    
FY 21  draw was $3.1 billion.  The FY 22 draw  was estimated                                                                    
at just under $3.1 billion. He  detailed that the FY 22 draw                                                                    
was  $21  million  higher  than   projected  in  the  spring                                                                    
forecast,  which   was  due  to   a  better   than  expected                                                                    
investment  recovery at  the end  of FY  20 (the  final year                                                                    
that went into the FY 22 POMV calculation).                                                                                     
10:58:25 AM                                                                                                                   
Mr. Stickel  covered the areas of  uncertainty impacting the                                                                    
revenue  outlook  in  the  fall forecast  on  slide  11.  He                                                                    
indicated  there  was   always  uncertainty  with  commodity                                                                    
prices and production, but there  were additional hurdles to                                                                    
deal with in the current year.                                                                                                  
Representative LeBon asked if it  were safe to predict there                                                                    
would not be a need  for a supplemental budget appropriation                                                                    
when the 32nd legislature met in January 2021.                                                                                  
Commissioner  Mahoney responded  that it  was too  difficult                                                                    
for DOR to predict an answer at present.                                                                                        
10:59:55 AM                                                                                                                   
Representative Josephson  referred to slide 10.  He believed                                                                    
Mr. Stickel's  testimony that the  POMV draw was  stable was                                                                    
the  best news.  He stated  that the  Alaska Permanent  Fund                                                                    
Corporation  (APFC)   reported  an  ERA  balance   of  $10.3                                                                    
billion.  The corporation  anticipated that  the legislature                                                                    
would spend $3 billion of  the balance. The corporation also                                                                    
reported  that  $1.7  billion  could  not  be  realized.  He                                                                    
suggested  that   if  the  legislature   were  to   pay  the                                                                    
retroactive dividends of $4.6 billion  it would leave an ERA                                                                    
balance  of $1  billion. He  wondered if  the earnings  were                                                                    
sufficient  to get  back up  to the  $3 billion  sustainable                                                                    
draw shown on slide 10.                                                                                                         
Commissioner  Mahoney  answered  that it  was  difficult  to                                                                    
speculate. She  offered to run  the analytics  to reevaluate                                                                    
the balances before responding in writing.                                                                                      
Representative  Josephson  accepted  the offer  and  thanked                                                                    
Commissioner Mahoney.                                                                                                           
11:01:31 AM                                                                                                                   
Mr. Stickel  reviewed the  uncertainties around  COVID-19 on                                                                    
slide  12.  He  stated   that  the  uncertainty  around  the                                                                    
pandemic and potential and current  recovery impacted all of                                                                    
the state's  major revenue sources  in some way.  He relayed                                                                    
that  the potential  for investment  volatility was  a major                                                                    
concern   as  it   was  the   state's   primary  source   of                                                                    
unrestricted  revenue.  He  reported that  federal  stimulus                                                                    
funding  through the  CARES Act  and other  programs totaled                                                                    
$5.6 billion thus far. He  elaborated that the federal funds                                                                    
had helped put a floor under  many parts of the economy, but                                                                    
it was  unclear whether  the support  would be  extended and                                                                    
what  would  happen  when   the  funding  ceased.  Petroleum                                                                    
revenue  had   been  impacted  by  low   prices  and  demand                                                                    
destruction  and a  resurgence  in COVID  cases could  cause                                                                    
demand  to  fall  again.  He   noted  that  the  low  prices                                                                    
threatened the economics of new projects.                                                                                       
Mr. Stickel addressed uncertainty  on the non-petroleum side                                                                    
on  slide  12.  He  noted  that  the  revenue  sources  were                                                                    
impacted  in several  ways. He  explained  that the  tourism                                                                    
season   had  been   lost,  for   the  cruise   industry  in                                                                    
particular. The  department was  anticipating a  slow return                                                                    
to normal. He  detailed that it currently  looked like there                                                                    
could  be a  half-capacity  season in  the  summer of  2021;                                                                    
however,  the possibility  was  speculative. He  highlighted                                                                    
that  COVID   had  impacted  many   of  the   state's  basic                                                                    
industries  such as  mining and  fishing. He  explained that                                                                    
impacts  to the  basic  industries were  an extra  challenge                                                                    
because they threatened state  revenue and directly impacted                                                                    
communities and their economies.                                                                                                
Mr.  Stickel reported  that corporate  income  tax had  been                                                                    
impacted in two ways. First,  corporate income tax was based                                                                    
on profits and there  was significant uncertainty about what                                                                    
the  taxes  would look  like  for  the calendar  year  2020.                                                                    
Second, the CARES Act made  a change to the corporate income                                                                    
tax that allowed companies to  carry back any losses for the                                                                    
2018, 2019,  and 2020 tax years,  up to five years  back. He                                                                    
explained that Alaska statutes were  tied to the federal law                                                                    
and the  department estimated that the  carry back provision                                                                    
would have an impact of up  to $200 million across FY 21 and                                                                    
FY  22. He  added that  the estimate  was uncertain  because                                                                    
what 2021 would look like was not yet known.                                                                                    
11:04:14 AM                                                                                                                   
Co-Chair  Johnston  noted  Mr.  Stickel  had  mentioned  the                                                                    
federal CARES  Act funding on  slides 11 and 12.  She stated                                                                    
that the  last time Alaska  had a similar amount  of federal                                                                    
funding  injected  into its  economy  was  during the  Exxon                                                                    
Valdez oil spill.  He asked if anyone had taken  a look back                                                                    
to see  if any adjustment  had been made because  there were                                                                    
very few  ways to  get the  secondary and  tertiary revenues                                                                    
from  the federal  funding unless  it  impacted the  state's                                                                    
corporate tax.  She remarked that  it could impact  sales or                                                                    
property  taxes at  a  local  level. She  asked  if DOR  had                                                                    
looked back to see what impact  there had been on the bottom                                                                    
line  during  the  Exxon  Valdez   oil  spill  in  order  to                                                                    
determine what the effect may be during the current year.                                                                       
Mr.  Stickel  replied that  it  was  not something  DOR  had                                                                    
looked  at directly,  but  he thought  it  was an  excellent                                                                    
suggestion. He  remarked that one of  the interesting things                                                                    
about  the  current  federal  funding  was  it  was  largely                                                                    
replacing what would  have been in the  private economy. The                                                                    
federal  stimulus  had  replaced  wages  and  salaries  lost                                                                    
through the  unemployment benefits  and to  replace economic                                                                    
activities such as the lost tourism season.                                                                                     
Co-Chair Johnston  considered what effect the  situation had                                                                    
on the state's bottom line.                                                                                                     
11:06:22 AM                                                                                                                   
Mr. Stickel discussed investment  volatility on slide 13. He                                                                    
stated that  as witnessed  in the current  year, investments                                                                    
could be extremely  volatile. He pointed out  that in March,                                                                    
the stock market  had lost over one-third of its  value in a                                                                    
single month; however, markets had  rallied back to all time                                                                    
highs since  then. For example,  the anticipated  return for                                                                    
large cap stocks  was expected to range from  a 10.7 percent                                                                    
loss to  a 24.7 percent  gain about two-thirds of  the time,                                                                    
which  was  too broad  of  a  range  to  base a  budget  on,                                                                    
especially when the other major  revenue source was based on                                                                    
oil  price. One  way to  reduce the  volatility was  through                                                                    
diversification. For  example, in FY 21,  the Permanent Fund                                                                    
had an  expected return  of a  0.2 percent  loss in  the low                                                                    
case  and  a  13.9  percent  return in  the  high  case.  He                                                                    
explained  it was  a smaller  range  of uncertainty  through                                                                    
diversification.   He  noted   that   for  comparison,   the                                                                    
Permanent Fund had a 2 percent positive return in FY 20.                                                                        
Mr. Stickel  shared that  investment volatility  was further                                                                    
reduced for  the POMV draw  through its  calculation method.                                                                    
He  explained that  the draw  was based  on an  average fund                                                                    
value of  the first five  of the  last six fiscal  years. He                                                                    
elaborated  that  even with  the  range  of possible  FY  21                                                                    
returns  with  volatility reduced  through  diversification,                                                                    
the range  of returns  did not  impact the  POMV calculation                                                                    
until FY 23  and then the potential range on  the FY 23 draw                                                                    
was about $50 million.                                                                                                          
11:08:21 AM                                                                                                                   
Co-Chair Johnston  asked for  verification that  the current                                                                    
year had closed out at a 2 percent return.                                                                                      
Mr. Stickel replied affirmatively.  He confirmed that the FY                                                                    
20 net return for the Permanent Fund was 2 percent.                                                                             
Co-Chair  Johnston asked  for verification  that the  target                                                                    
return for the  Permanent Fund was 7 percent  over the five-                                                                    
year lookback.                                                                                                                  
Mr.  Stickel replied  that the  7 percent  was the  expected                                                                    
return baseline assumption from  Callan Associates that went                                                                    
into the Permanent Fund calculation.                                                                                            
Mr. Stickel  continued to  the last  area of  uncertainty on                                                                    
slide  14:   "Ballot  Measure  1."   He  relayed   that  the                                                                    
information on slide  14 was taken from an  FAQ document DOR                                                                    
had  prepared   in  conjunction  with  the   public  hearing                                                                    
conducted by the lieutenant governor  the previous week. The                                                                    
department  had used  one  potential  interpretation of  the                                                                    
ballot measure  for its modeling,  based on how  the sponsor                                                                    
had  described   the  initiative.  He  clarified   that  the                                                                    
interpretation  was  subject  to change.  He  detailed  that                                                                    
Ballot Measure 1 provisions would  apply to the Prudhoe Bay,                                                                    
Kuparuk,  and Colville  River units.  He  detailed that  the                                                                    
minimum tax  would be  increased to at  least 10  percent of                                                                    
gross  value;  all  per   barrel  credits,  carried  forward                                                                    
losses,  and other  offsets would  be prohibited;  and there                                                                    
would  be an  additional  net profits  tax  that would  take                                                                    
effect at higher oil prices.                                                                                                    
Mr.  Stickel  elaborated  that   the  ballot  measure  would                                                                    
increase  state revenue  and decrease  producer profit.  The                                                                    
department  had  not  yet  attempted  to  evaluate  the  net                                                                    
impacts of the  revenue increase compared to  changes in oil                                                                    
production  and the  economy; however,  some companies  were                                                                    
delaying decisions pending the outcome of the election.                                                                         
11:11:00 AM                                                                                                                   
Mr.   Stickel  reviewed   slide  15:   "Ballot  Measure   1:                                                                    
Production   Tax  Revenue."   The  slide   showed  estimated                                                                    
production  tax revenue  for  FY 22  under  current law  and                                                                    
Ballot  Measure  1  at several  different  oil  prices.  The                                                                    
analysis  was  based  on the  spring  forecast  assumptions,                                                                    
assuming   no  changes   in  oil   production  and   company                                                                    
investments  as a  result of  the tax  change. He  explained                                                                    
that the  revenue impact  depended on the  oil price.  At an                                                                    
oil price of  $35 per barrel, Ballot Measure  1 was expected                                                                    
to bring in  $224 million in incremental  revenue, which was                                                                    
a 215 percent increase in  production taxes. At an oil price                                                                    
of $75 per  barrel, Ballot Measure 1 was  estimated to bring                                                                    
in  just  over  $1  billion of  incremental  revenue,  which                                                                    
represented a  223 percent increase in  production taxes. He                                                                    
asked members to  keep in mind the estimates  did not factor                                                                    
in any potential changes to oil production or investment.                                                                       
11:11:58 AM                                                                                                                   
Mr.  Stickel  discussed  the government  and  producer  take                                                                    
under  Ballot Measure  1 on  slide 16.  The slide  showed an                                                                    
estimate  of  how oil  production  profits  would be  shared                                                                    
between the different stakeholders  at different prices. The                                                                    
analysis was  based on the  spring forecast  assumptions for                                                                    
FY 22. He noted that the  analysis looked at the three units                                                                    
[Prudhoe  Bay, Kuparuk,  and Colville  River] that  would be                                                                    
impacted  by  the  ballot measure.  He  explained  that  the                                                                    
government  and producer  take  calculations  looked at  the                                                                    
profit  leftover after  accounting for  transportation costs                                                                    
and lease  expenditures and  the share  of that  profit that                                                                    
went  to the  state, federal  government, and  producers. At                                                                    
$35 per barrel,  under current law, the  state's revenue was                                                                    
higher  than the  profit per  barrel. He  detailed that  the                                                                    
state's  take   was  greater  than   100  percent   and  the                                                                    
producers' take  was negative. Under the  example, costs for                                                                    
the  impacted  fields  amounted to  about  $30  per  barrel,                                                                    
leaving a  profit of approximately  $5 per barrel.  He noted                                                                    
that the state took slightly more than that amount.                                                                             
Mr. Stickel continued to address  slide 16. He detailed that                                                                    
under Ballot  Measure 1 at an  oil price of $35  per barrel,                                                                    
the  government  take  increased  to  140  percent  and  the                                                                    
producer  take was  even  more in  the  negative. At  higher                                                                    
prices  under Ballot  Measure 1  the  producers' share  went                                                                    
positive. At a price of  $45 per barrel the total government                                                                    
take was 70  percent with 30 percent going  to producers. At                                                                    
an oil  price of $75  per barrel, the total  government take                                                                    
was  62  percent with  38  percent  going to  producers.  He                                                                    
reiterated his earlier statement  that the estimates did not                                                                    
factor   in  any   potential  changes   to  oil   production                                                                    
11:13:37 AM                                                                                                                   
Representative Josephson looked at  the information on slide                                                                    
16  and could  not tell  what  the producer  take was  under                                                                    
SB 21  [oil tax  legislation passed in  2013] at  oil prices                                                                    
other than $35  per barrel. He observed  that the department                                                                    
had  a position  about  the total  government  take and  the                                                                    
producer take, but he  did not have much to go  off of for a                                                                    
Mr.  Stickel  replied  that  he could  follow  up  with  the                                                                    
information.  He  reported that  at  under  current law  the                                                                    
producer take  would be  39 percent  at a  price of  $45 per                                                                    
barrel, 49 percent at $55 per  barrel, 52 percent at $65 per                                                                    
barrel, and  50 percent  at $75 per  barrel. He  noted there                                                                    
was a significant difference between the two laws.                                                                              
Representative Josephson  highlighted Mr.  Stickel's comment                                                                    
that  it was  not possible  to predict  how producers  would                                                                    
respond if Ballot Measure 1  were to pass. He reasoned there                                                                    
were  many variables  on  the  producers' plates,  including                                                                    
price, that were not entirely in the producers' control.                                                                        
Mr.  Stickel  agreed;  however, DOR  had  not  attempted  to                                                                    
predict what the producers' response would be.                                                                                  
11:15:46 AM                                                                                                                   
Vice-Chair Ortiz  asked how  the producer  take under  SB 21                                                                    
compared  to the  producers' locations  in other  states. He                                                                    
asked if the producer take  under SB 21 was generally higher                                                                    
or lower than in other tax regimes.                                                                                             
Mr. Stickel responded  that there had been  some third party                                                                    
studies  comparing the  current tax  system under  SB 21  to                                                                    
other tax regimes. He was  happy to direct committee members                                                                    
to  some  of the  studies.  It  was his  understanding  that                                                                    
Alaska  was competitive  with other  tax  regimes under  the                                                                    
current law.                                                                                                                    
Co-Chair Johnston asked the federal  take at an oil price of                                                                    
$45 per barrel.                                                                                                                 
Mr.  Stickel  responded that  slide  16  showed the  federal                                                                    
corporate income tax at the  current marginal tax rate of 21                                                                    
percent.  The reason  it was  not  shown in  the $35  barrel                                                                    
price range was  because there was no profit  to the company                                                                    
to be taxed at that price.                                                                                                      
Co-Chair   Johnston  thanked   the   presenters  for   their                                                                    
^PRESENTATION: FY  21 AND FY 22  FISCAL OUTLOOK: LEGISLATIVE                                                                  
FINANCE DIVISION                                                                                                              
11:18:18 AM                                                                                                                   
ALEXEI PAINTER, DIRECTOR,  LEGISLATIVE FINANCE DIVISION (via                                                                    
teleconference),   introduced   a  PowerPoint   presentation                                                                    
titled "FY21/FY22  Fiscal Update: House  Finance Committee,"                                                                    
dated October 2,  2020 (copy on file). He  shared his intent                                                                    
to discuss  the outlook for  FY 21 and  FY 22, but  noted it                                                                    
was necessary  to first look at  FY 20, which had  just been                                                                    
completed. He  relayed that actual expenditures  and revenue                                                                    
would   not  be   finalized  until   the   release  of   the                                                                    
Comprehensive  Annual  Financial Report  (CAFR);  therefore,                                                                    
all FY 20 numbers were currently in draft form.                                                                                 
Mr.  Painter shared  that the  Legislative Finance  Division                                                                    
(LFD)  was  frequently asked  about  the  prospects for  the                                                                    
Constitutional Budget  Reserve (CBR) balance  going forward.                                                                    
Unfortunately, it was not possible  to rely on extrapolating                                                                    
from the cash balance of the  CBR any longer for a couple of                                                                    
reasons. First,  over the past  few years  increasing direct                                                                    
appropriations had been  made from the CBR  for the previous                                                                    
year's  capital budget  and  for a  portion  of the  current                                                                    
year's operating  budget. He explained that  looking at cash                                                                    
did  not capture  the fact  that appropriations  for capital                                                                    
projects could be  drawn out over several  years. Second, as                                                                    
the CBR  balance had diminished,  the amount of cash  in the                                                                    
general fund at the end of  the fiscal year that belonged to                                                                    
the  CBR  was  becoming  a  more  important  factor  in  the                                                                    
balance. He  elaborated that it  was a variable  number that                                                                    
was  not known  until the  CAFR was  published later  in the                                                                    
Mr. Painter  reported there was  currently about  $1 billion                                                                    
in cash in the CBR. He  expected the final number at the end                                                                    
of  the  current  fiscal  year would  be  lower  than  that;                                                                    
however, it  would likely be  a bit higher than  the balance                                                                    
in  the  LFD  fiscal  summary, which  was  just  under  $600                                                                    
million. He  stated that  looking ahead,  it was  likely the                                                                    
reasonable range that could be expected.                                                                                        
11:20:28 AM                                                                                                                   
Co-Chair Johnston  asked for verification that  the CAFR did                                                                    
not   include   the    supplemental   under   revenues   and                                                                    
Mr. Painter  clarified that the CAFR  included supplementals                                                                    
spent  in the  given  fiscal year.  He  elaborated that  the                                                                    
report  included all  state expenditures  in a  fiscal year,                                                                    
regardless of when they were appropriated.                                                                                      
11:21:14 AM                                                                                                                   
Representative  Josephson congratulated  Mr. Painter  on his                                                                    
new  job. He  assumed part  of  the reason  the balance  was                                                                    
higher  was because  the  April 7th  vetoes  left over  $200                                                                    
million in the CBR.                                                                                                             
Mr. Painter  replied that the  $586.9 million in  the fiscal                                                                    
summary projection  included the vetoes. The  primary reason                                                                    
the  balance  was  looking  to  be a  bit  higher  than  the                                                                    
projection  was due  to lapsed  funding. For  example, there                                                                    
had been  a mild  fire season; therefore,  some of  the fire                                                                    
supplemental  lapsed  to  the  General  Fund.  Additionally,                                                                    
deposits to the CBR appeared  to be slightly higher than the                                                                    
forecast. He shared  that it looked like the state  may be a                                                                    
little better  off than  had been  anticipated -  the amount                                                                    
would be known once the numbers were finalized.                                                                                 
11:22:19 AM                                                                                                                   
Co-Chair Johnston  indicated that  it was  her understanding                                                                    
in the spring that  approximately $550 million was available                                                                    
from  the CBR  to  be  used as  the  cash  resource for  the                                                                    
budget. She asked for the accuracy of her statement.                                                                            
Mr.  Painter responded  that  it depended  on  the year.  He                                                                    
elaborated that at the end of  FY 19, the General Fund ended                                                                    
at a fairly  high balance. He explained that  there had been                                                                    
about $500 million that belonged to  the CBR that was in the                                                                    
General Fund at the end of  FY 19 for cash flow. He reported                                                                    
that FY 20 had ended with a  much lower level of cash and it                                                                    
was possible  the CBR  would owe the  General Fund  when the                                                                    
numbers  were  finalized.  He   confirmed  that  about  $500                                                                    
million was  used for cashflow, but  how it ended up  at the                                                                    
end of  a fiscal  year was highly  variable. There  had been                                                                    
large  swings from  year to  year based  on cash  management                                                                    
needs. He  clarified that $500  million was an  average, but                                                                    
it had been higher and lower in different years.                                                                                
11:23:40 AM                                                                                                                   
Representative Josephson  suggested the  state was in  a red                                                                    
or  danger zone.  He recalled  the Treasury  Division saying                                                                    
they  did  not  like  a balance  anywhere  near  the  number                                                                    
projected for the CBR.                                                                                                          
Mr. Painter  responded that  in the  past several  years the                                                                    
legislature had drawn from the  CBR before going to the POMV                                                                    
draw, which  allowed APFC  to maximize  investment earnings.                                                                    
He explained  that if  there was  no CBR  and the  POMV draw                                                                    
took  place  first,  it  would  cost  the  state  investment                                                                    
revenue. He stated that the  situation was not unmanageable,                                                                    
but  it  was  costly   because  the  Permanent  Fund  earned                                                                    
7 percent  per year  and the  CBR was  in much  shorter term                                                                    
investments.  The situation  would result  in losing  out on                                                                    
higher return  investments because it would  be necessary to                                                                    
use the POMV draw earlier in the year.                                                                                          
11:25:05 AM                                                                                                                   
Representative  LeBon   asked  Mr.  Painter  if   he  had  a                                                                    
prediction  for  what  the  32nd  legislature  may  face  in                                                                    
January with  regard to  a potential  supplemental budgetary                                                                    
need.  He  discussed  that  a   couple  of  years  back  the                                                                    
legislature needed  to deal with  the economic  fallout from                                                                    
an  extreme fire  season and  the  Anchorage earthquake.  He                                                                    
asked  if Mr.  Painter  had any  prediction  about what  the                                                                    
legislature may  be facing  in January  due to  COVID-19 and                                                                    
other issues.                                                                                                                   
Mr. Painter  replied that there  were several areas  LFD had                                                                    
identified  that may  have  supplemental  needs. He  relayed                                                                    
that  the following  few slides  would address  some of  the                                                                    
potential  supplemental   issues.  He  noted  it   was  very                                                                    
difficult to put a number on some of them at present.                                                                           
11:26:12 AM                                                                                                                   
Mr.  Painter   began  addressing   some  of   the  potential                                                                    
supplemental  needs  on slide  3  titled  "FY 21  Incomplete                                                                    
Capital Budget."  He explained  that in  the past  few years                                                                    
the  typical  capital  budget had  been  limited  mostly  to                                                                    
federal  matching funds;  the majority  of that  funding had                                                                    
been  included  in  the  FY   21  operating  budget  as  the                                                                    
legislature tried to get out  of session quickly. Additional                                                                    
RPLs  [Revised Program  Legislative]  had  been approved  in                                                                    
August that had added some  of the missing capital projects;                                                                    
however,  a  fairly  large  chunk   of  the  capital  budget                                                                    
remained outstanding.                                                                                                           
Mr.  Painter  relayed  that when  comparing  the  governor's                                                                    
capital  budget submission  with  what  the legislature  had                                                                    
passed, LFD  had identified about  $150 million  in projects                                                                    
that  had not  yet  been  funded. He  noted  that about  $33                                                                    
million of  the total was undesignated  general funds (UGF).                                                                    
He elaborated that some of  the outstanding funding may be a                                                                    
result of policy  decisions to not fund  things the governor                                                                    
requested, but  some of  the things  were normal  big ticket                                                                    
items  that  were  included  every  year  such  as  deferred                                                                    
maintenance and  Alaska Energy  Authority projects  like the                                                                    
Bulk Fuel  Program. Many agencies  had very little  of their                                                                    
capital budget  funded such  as the  Department of  Fish and                                                                    
Game and the Department of Natural Resources.                                                                                   
Mr. Painter reported  that skipping payment for  some of the                                                                    
items for a year meant  likely missing the 2021 construction                                                                    
season  for  deferred  maintenance. He  elaborated  that  if                                                                    
funding were not  appropriated for items until  April or May                                                                    
it would be  very difficult to get the  funds spent quickly.                                                                    
For  many  of   the  projects,  the  earlier   it  could  be                                                                    
appropriated  the  better.  He highlighted  that  the  first                                                                    
deadline had already been missed  because the federal fiscal                                                                    
year  had  ended  earlier  in  the  week.  He  relayed  that                                                                    
precisely how much the state  had lost because of the missed                                                                    
deadline was  not yet known.  He continued that  more detail                                                                    
may be  available by  the start of  session. He  stated that                                                                    
not appropriating funding  to some of the  items likely cost                                                                    
the state some federal revenue.                                                                                                 
Co-Chair Johnston remarked  that there had been  quite a bit                                                                    
of  discussion   about  the  topic  the   past  spring.  The                                                                    
legislature  had learned  from the  federal delegation  that                                                                    
there were lapsed funds from  other states that Alaska could                                                                    
potentially  take advantage  of.  She  cautioned that  other                                                                    
states were  in as bad  or worse  shape than Alaska  and she                                                                    
hoped  it did  not  mean  the matching  funds  would not  be                                                                    
Mr. Painter replied  that it was a good  point. He explained                                                                    
that the situation would vary  by grant and it was currently                                                                    
unclear  how  much  the  state   lost  because  the  federal                                                                    
matching  funds were  not in  place.  As the  administration                                                                    
went through  its budget  process, he  expected there  to be                                                                    
more information on the topic by the time session began.                                                                        
11:29:48 AM                                                                                                                   
Mr.  Painter  moved  to  slide 4:  "FY  21  Emerging  Budget                                                                    
Issues." He  stated that some agencies  had lost significant                                                                    
revenue  due  to COVID-19  and  may  need some  supplemental                                                                    
appropriations. The  most prominent being the  Alaska Marine                                                                    
Highway System  (AMHS). He detailed that  the department had                                                                    
estimated about  $45 million of  lost revenue between  FY 20                                                                    
and  FY 21  and  had responded  with  a drastically  reduced                                                                    
schedule; however,  AMHS may  still need  additional funding                                                                    
in order  to get through the  year and pay for  the required                                                                    
vessel overhauls. There were other  agencies reliant on fees                                                                    
or designated taxes such as  the Department of Fish and Game                                                                    
(DFG)  and  the  Department  of  Environmental  Conservation                                                                    
(DEC) to a  lesser extent. He elaborated that  some of those                                                                    
agencies  may have  shortfalls and  whether they  could make                                                                    
the shortfalls up out of  carryforward or other things would                                                                    
be clearer at the start of session.                                                                                             
Mr. Painter  continued to review  emerging budget  issues on                                                                    
slide 4.  Another large potential  supplemental item  had to                                                                    
do with  school enrollment  decreases in many  districts. He                                                                    
noted  there  had  been numerous  news  articles  about  the                                                                    
situation.  He  explained  that the  October  student  count                                                                    
would make  the scope of  the issue much clearer  (the count                                                                    
had begun on Monday and would  go for four weeks) within the                                                                    
next couple  of months.  He believed  that once  the numbers                                                                    
were available  it would be  much easier to see  exactly how                                                                    
much  enrollment was  down in  different districts  and what                                                                    
sort  of fiscal  impact it  would have.  For the  first nine                                                                    
months  of the  year, districts  received payments  from the                                                                    
state based  on the student  count from the previous  year -                                                                    
only  the  last quarter  of  payments  depended on  the  new                                                                    
student count. He  explained that no matter  how the student                                                                    
count  came out,  districts would  receive  a solid  revenue                                                                    
stream until April  and any revenue declines  would start to                                                                    
be felt at that time.                                                                                                           
Mr.  Painter highlighted  that there  was  a statutory  hold                                                                    
harmless  provision  for  reduced enrollment.  He  clarified                                                                    
that a  district with a  5 percent enrollment  reduction got                                                                    
to keep 75 percent of  the enrollment difference between the                                                                    
prior and  current years. He  stated that while some  of the                                                                    
news  reports about  enrollment being  down 10  percent were                                                                    
alarming, it  would trigger the hold  harmless provision and                                                                    
districts would  keep 75 percent  of the  difference between                                                                    
the two years' funding. He  recognized that the funding loss                                                                    
was not insignificant;  however, it may not be  as severe as                                                                    
doing the straight line math  [without factoring in the hold                                                                    
harmless  provision].   He  discussed  that  there   may  be                                                                    
districts that lose just under  5 percent that were actually                                                                    
worse off  than the  district losing  exactly 5  percent. He                                                                    
noted there may  be some equity issues  that the legislature                                                                    
may want  to address.  He reiterated  that once  the student                                                                    
count  was   available  it  would  be   much  clearer  which                                                                    
districts  fell  under  the hold  harmless  category,  which                                                                    
districts did not, and what the budgetary impact would be.                                                                      
Representative Wool stated his  understanding that if school                                                                    
enrollment were down  in October - it was  currently down by                                                                    
more than  5 percent in  his district - the  previous year's                                                                    
numbers would  be used for  the first three-quarters  of the                                                                    
year.  He reasoned  that the  following year  would use  the                                                                    
current  year's  numbers. He  asked  if  it meant  districts                                                                    
would take a cut in funding  for the following year based on                                                                    
the attendance in the current year.                                                                                             
Mr. Painter  explained that districts' early  payments would                                                                    
be reduced and  the true up payments in the  last quarter of                                                                    
the fiscal year  would get districts to  their total amount.                                                                    
He  noted  that it  may  cause  some  cash flow  issues  for                                                                    
districts if  their enrollment rebounded next  year and they                                                                    
were receiving  reduced payments throughout the  first three                                                                    
quarters of the year.                                                                                                           
Representative Wool stated  his understanding that districts                                                                    
would be made  whole at the end  of the year to  make up for                                                                    
the  first three-quarters  of the  year that  were low  as a                                                                    
result  of being  based on  the current  year's [enrollment]                                                                    
numbers.  Additionally,  he  understood that  if  enrollment                                                                    
dropped by greater than 5  percent there was a mechanism for                                                                    
districts to  receive 75 percent  of the  difference between                                                                    
the two years, meaning that the  situation was not as bad as                                                                    
it may  look. He asked  if the  University of Alaska,  as an                                                                    
entity that would see a  significant decrease in funding due                                                                    
to COVID-19,  was included in  the category with  AMHS, DFG,                                                                    
and other agencies.                                                                                                             
Mr. Painter  confirmed that the University  had communicated                                                                    
that  it had  seen significant  tuition decreases.  Although                                                                    
the  latest numbers  were a  little less  than the  original                                                                    
projections, the University was seeing a significant loss.                                                                      
11:36:03 AM                                                                                                                   
Vice-Chair Ortiz understood there  would be more information                                                                    
once the  October school  count had  been completed.  He was                                                                    
trying to  determine how  much funding may  be needed  for a                                                                    
supplemental  or  increase  in  funding in  FY  22  to  make                                                                    
districts whole.  He noted  that slide  4 showed  AMHS being                                                                    
down by  $45 million;  however, the school  district portion                                                                    
of the  slide only showed enrollment  percentages, which was                                                                    
hard to equate to potential actual dollars.                                                                                     
Mr. Painter replied  that it was very  difficult to identify                                                                    
a number because it was  not yet known which districts would                                                                    
trigger the  hold harmless provision.  He explained  that if                                                                    
numerous  districts came  in with  a 4.5  percent enrollment                                                                    
decline it would  be a very different  situation than having                                                                    
numerous  districts with  a 5  percent decline,  which would                                                                    
trigger  the  hold  harmless provision.  He  clarified  that                                                                    
because of that  threshold it was very  difficult to project                                                                    
the scale until  the student count was  available. In regard                                                                    
to  AMHS, because  of the  schedule  reductions and  secured                                                                    
CARES Act  funding, the supplemental  need would not  be the                                                                    
full  $45  million. He  relayed  that  the number  would  be                                                                    
significantly less,  and the department would  come out with                                                                    
its proposal  in the governor's  budget. He did not  want to                                                                    
speculate on the amount at present.                                                                                             
Representative  Carpenter  asked   if  current  law  allowed                                                                    
school districts  to submit enrollment numbers  based on the                                                                    
previous year. If not, he  wondered whether it would require                                                                    
a change in statute to do so.                                                                                                   
Mr. Painter responded that the  department did not have that                                                                    
flexibility under  current law. The department  was required                                                                    
to distribute  funding according  to the  statutory formula.                                                                    
He remarked that  the legislature could try to  come up with                                                                    
some  complicated language  to  accomplish  the same  thing;                                                                    
however, a statutory change would  be much cleaner. He added                                                                    
that  a  statutory  change would  be  highly  preferable  to                                                                    
trying to backfill with an appropriation.                                                                                       
11:39:36 AM                                                                                                                   
Mr.  Painter  turned to  slide  5  and continued  to  review                                                                    
emerging  budget  issues.  He reported  that  a  significant                                                                    
portion of the  CARES Act funding flowing  through the state                                                                    
was currently unspent.  Particularly, some local governments                                                                    
had been slow to receive  and spend their funding. The state                                                                    
Small Business  Grant Program had  a slow start, but  if all                                                                    
of the current applications  were approved the funding would                                                                    
be  exhausted. He  noted that  the  slide did  not show  the                                                                    
portion of  funding going through  the Department  of Health                                                                    
and Social  Services (DHSS)  budget for  use in  other state                                                                    
agencies.  He explained  that the  funding had  largely been                                                                    
allocated, but  it had  not all been  spent. He  noted there                                                                    
were only several more months to spend the funding.                                                                             
Mr. Painter  reported that it  was not yet known  what would                                                                    
happen if there was money remaining  at the end of the year.                                                                    
There had been some expectation  earlier on that the federal                                                                    
government may  extend the  deadline or  change some  of the                                                                    
rules; however,  it was unclear  what would happen  if there                                                                    
was money left  over from any of the  allocations. There had                                                                    
been speculation that the funding  could be used to shore up                                                                    
the balance  in the  Unemployment Trust  Fund. He  stated it                                                                    
could  happen but  there were  questions  about whether  the                                                                    
administration   could   take   the   action   without   the                                                                    
Mr. Painter  continued to review  emerging budget  issues on                                                                    
slide  5. He  relayed that  the Election  Fund would  need a                                                                    
minor   supplemental  appropriation   to  the   Division  of                                                                    
Elections early in  the 2021 calendar year.  The RPL process                                                                    
had  enabled  the state  to  get  federal funding  into  the                                                                    
Election  Fund  to  be  used   for  the  November  election;                                                                    
however, the RPL process could not  be used to get money out                                                                    
of the  election fund.  He explained  that the  division was                                                                    
spending more  from the  fund than  it would  be able  to do                                                                    
under   the  current   appropriation   and   would  need   a                                                                    
supplemental  to  continue  operating  throughout  the  full                                                                    
Mr. Painter shared  the good news that the state  had a mild                                                                    
fire season. Funds  had lapsed in FY 20 and  there was about                                                                    
$11  million remaining  for the  second half  of the  fiscal                                                                    
year.  Depending  on  the  forecast  for  next  year's  fire                                                                    
season, there could be a  small supplemental or none at all,                                                                    
which was a large difference from the previous year.                                                                            
Mr.  Painter  cautioned that  when  the  CBR vote  had  been                                                                    
included in HB 205 [FY  21 operating budget bill], there had                                                                    
been no  headroom or space for  future supplementals without                                                                    
taking another  three-quarters vote.  He explained  that any                                                                    
future appropriation bills that  spent from the General Fund                                                                    
beyond the level  in HB 205 would require  another CBR vote.                                                                    
He elaborated that in past  years there had been some amount                                                                    
that could  be used without  another CBR vote, but  that was                                                                    
not an option in the current year.                                                                                              
11:43:23 AM                                                                                                                   
Representative  Josephson  referenced election  funding  and                                                                    
CARES Act  dollars. He recalled that  the administration had                                                                    
declined some  of the CARES  Act funding that it  could have                                                                    
accepted,  presumably during  the  April/May timeframe  that                                                                    
would have helped with COVID  impacts on elections. He asked                                                                    
if Mr. Painter recalled the situation.                                                                                          
Mr.  Painter  replied  that  he   would  follow  up  on  the                                                                    
11:44:06 AM                                                                                                                   
Representative   Wool  addressed   the  unspent   CARES  Act                                                                    
funding.  He believed  local  governments  were required  to                                                                    
spend  the funding  on certain  things  directly related  to                                                                    
COVID  and   many  communities  did  not   have  the  direct                                                                    
expenses.  He wondered  if other  states had  similar issues                                                                    
and whether the deadline  could be extended, or restrictions                                                                    
could  be loosened.  He  knew  that some  of  the issue  was                                                                    
federal and  the answers  were not  known. He  remarked that                                                                    
the Municipality of Anchorage  had meetings with the federal                                                                    
government over  buying a  building. He  knew that  when the                                                                    
funding  had been  given to  communities, they  did not  all                                                                    
have direct expenses  that could be attributed  to COVID. He                                                                    
wondered about  the solution and  wanted to keep as  much of                                                                    
the funding in Alaska as  possible. He cited past discussion                                                                    
about  returning  the  unspent  funds to  the  state  to  be                                                                    
reappropriated  elsewhere   in  Alaska.   Alternatively,  he                                                                    
wondered  if new  legislation was  required to  override the                                                                    
Mr.  Painter  replied  that  the  RPL  statute  allowed  for                                                                    
appropriations to  be increased;  there was no  provision to                                                                    
allow  appropriations  to  be   decreased  through  the  RPL                                                                    
process. He was  unsure how the situation would  play out if                                                                    
the  funding  were  to be  redistributed.  There  were  some                                                                    
places in the budget, such  as unemployment, where there was                                                                    
open-ended  federal  receipt  authority. He  stated  it  was                                                                    
possible the administration could  merely shift the funding,                                                                    
but  he recommended  talking to  Legislative Legal  Services                                                                    
about  the concept.  He did  not want  to speculate  on what                                                                    
could  and could  not be  done  through the  RPL process  as                                                                    
there  were  some conflicting  opinions.  In  terms of  what                                                                    
other states  had experienced,  some states  had substantial                                                                    
unspent money and others had  been able to spend the funding                                                                    
quickly. He explained that the  funding had a floor of $1.25                                                                    
billion  that hit  every  state from  Wyoming  to Kansas  in                                                                    
population. He  detailed that Alaska  had received  the same                                                                    
amount of  funding some of  the states with  populations far                                                                    
exceeding  its  own.  Consequently, those  states  had  much                                                                    
higher needs and  had been able to spend  the funds quickly.                                                                    
He  believed it  had been  harder for  some other  states to                                                                    
spend the funding. He reported  there was a lot of variation                                                                    
in states' ability  to spend the funding. He  had last heard                                                                    
there was  some interest at  the federal level  of extending                                                                    
the  deadline;  however,  he could  not  speculate  on  what                                                                    
Congress would do.                                                                                                              
Representative  Wool  had  heard  other  states  were  in  a                                                                    
similar position. He remarked that  the flat amount given to                                                                    
many states helped explain the situation.                                                                                       
11:47:49 AM                                                                                                                   
Mr. Painter  moved to  slide 6: "FY  22 Budget  Outlook." He                                                                    
explained that to look at  the coming year, LFD was adopting                                                                    
the  Congressional Budget  Office's  methodology where  they                                                                    
consider  current  law  and   current  policy  as  potential                                                                    
baselines. He explained that on  the federal level sometimes                                                                    
there was  a little  less distinction,  but in  Alaska there                                                                    
could  be  a  large  distinction  because  of  its  lack  of                                                                    
dedicated funds.  The current law outlook  assumed the state                                                                    
would  fully   fund  statutory   obligations  such   as  the                                                                    
statutory Permanent Fund  Dividend (PFD) calculation, school                                                                    
debt  reimbursement,  the  Regional  Educational  Attendance                                                                    
Area  (REAA) fund,  community assistance,  and  the oil  tax                                                                    
credits  of $40  million for  FY  22. He  reported that  the                                                                    
statutory  PFD   was  projected  at  about   $2  billion  or                                                                    
approximately  $3,100  per recipient  in  FY  22. The  other                                                                    
statewide  items that  were not  funded  in FY  21 but  were                                                                    
still  on the  books  statutorily, added  up  to about  $174                                                                    
million UGF  in FY 22.  He noted  it was a  rough projection                                                                    
because the  newer school debt  projections and a  couple of                                                                    
other things that may vary, were not yet known.                                                                                 
Mr.  Painter highlighted  that  the  current policy  outlook                                                                    
assumed  that  FY 22  would  match  up  with  FY 21  with  a                                                                    
dividend of  roughly $1,000 and  no funding for  school debt                                                                    
reimbursement, the  REAA fund, community  assistance (beyond                                                                    
the  amount coming  from the  Power Cost  Equalization (PCE)                                                                    
Fund), or oil tax credits.  He explained that both baselines                                                                    
assumed  flat  agency  operations  in  FY  22,  which  given                                                                    
natural increases  in the budget each  year, may necessitate                                                                    
some cuts  to get there.  He elaborated that  both baselines                                                                    
used the revenue  forecast DOR had presented  earlier in the                                                                    
11:50:17 AM                                                                                                                   
Representative LeBon noted Mr.  Painter had mentioned school                                                                    
bond debt  to communities,  REAA, and  community assistance.                                                                    
He asked for  the actual number projected for  the items for                                                                    
FY 22.                                                                                                                          
Mr. Painter directed  attention to the appendix  on slide 11                                                                    
showing  FY 22  scenarios for  statewide items.  He reported                                                                    
that  LFD estimated  the  UGF portion  of  school bond  debt                                                                    
reimbursement  at $82.6  million,  which  assumed about  $15                                                                    
million  would come  from the  school fund  that was  funded                                                                    
with  tobacco  tax  revenue.  The   REAA  fund  deposit  was                                                                    
projected  at   approximately  $34  million,  which   was  a                                                                    
percentage of  school debt reimbursement. He  explained that                                                                    
a  portion  of PCE  Fund  earnings  could  be used  for  the                                                                    
Community Assistance  Program, which  was about  $12 million                                                                    
based on the calculation. The  remaining amount to reach $30                                                                    
million deposit  was about $17.6 million.  He expounded that                                                                    
a  higher  deposit  for community  assistance  was  possible                                                                    
because  statute specified  depositing  $30  million or  the                                                                    
amount needed to  reach a $90 million fund  balance. Oil tax                                                                    
credits  would  be  $40  million   based  on  DOR's  numbers                                                                    
provided earlier in the meeting.                                                                                                
Representative LeBon discussed that  the state was helping a                                                                    
variety  of school  districts around  the  state with  their                                                                    
bonded debt  reimbursement. He asked  Mr. Painter  to repeat                                                                    
the number for the next fiscal year.                                                                                            
Mr. Painter replied that the  number was about $82.6 million                                                                    
UGF; however, it  was an old projection from  the spring. He                                                                    
relayed that  an updated projection  was not  yet available.                                                                    
He elaborated  that LFD's figures assumed  $15 million would                                                                    
come  from the  tobacco tax  revenue. The  total number  was                                                                    
just under $100 million.                                                                                                        
11:53:09 AM                                                                                                                   
Mr. Painter previewed the FY  22 budget under current law in                                                                    
a table  on slide 7. The  revenue figures on the  first line                                                                    
for  agency operations  had been  presented  earlier in  the                                                                    
meeting  by DOR.  The baseline  assumption  was that  agency                                                                    
operations  would be  flat at  $3.9  billion. The  statewide                                                                    
items  would  increase  because   some  of  the  items  were                                                                    
unfunded in FY 21. The  capital budget was estimated at $150                                                                    
million, which reflected an average  over the past six years                                                                    
rather  than the  incomplete capital  budget  of about  $120                                                                    
million in  FY 21. The  table included a placeholder  of $50                                                                    
million  for  supplemental   appropriations.  He  noted  the                                                                    
number  may be  conservative, but  they did  not want  to go                                                                    
overboard on  the figure given  the absence of  any headroom                                                                    
in the current fiscal year. The  result was an FY 22 deficit                                                                    
of  just  over  $2.4  billion. The  number  reflected  about                                                                    
36  percent of  the total  budget. He  detailed that  if the                                                                    
dividend  was removed  from the  equation it  was just  over                                                                    
half of the non-dividend  budget. Without further revenue or                                                                    
major  budget  reductions,  the  baseline  assumption  going                                                                    
forward  was  a  deficit  that equaled  about  half  of  the                                                                    
state's budget (excluding the dividend).                                                                                        
Representative  Wool surmised  that Mr.  Painter was  saying                                                                    
that  the  deficit  of  $2.4   billion  (with  the  dividend                                                                    
excluded) would  be about  half of  the budget.  He observed                                                                    
that  if  the  dividend   were  removed,  the  budget  would                                                                    
decrease substantially. He elaborated  that $2 billion would                                                                    
be removed  from the PFD line  [on slide 7] and  the deficit                                                                    
would be  roughly $0.4 billion.  He thought if  the dividend                                                                    
was  removed from  one end  it  should be  removed from  the                                                                    
Mr. Painter  clarified that under the  governor's budget the                                                                    
dividend  was paid,  but the  amount was  excluded from  the                                                                    
governor's fiscal  summary. He  relayed that if  a statutory                                                                    
PFD were paid out, the deficit  would be equal to about half                                                                    
of  the  other expenditures.  He  confirmed  that without  a                                                                    
dividend the deficit would be about $400 million.                                                                               
Representative   Wool   stated    his   understanding   that                                                                    
Mr.  Painter was  explaining a  scenario where  the dividend                                                                    
was  taken out  of the  budget but  was included  as a  $2.4                                                                    
billion  expenditure  in  another category  outside  of  the                                                                    
budget. Under the  scenario, the $2.4 billion  would be half                                                                    
of the budget.                                                                                                                  
Mr.  Painter  agreed;  it  was  how  the  governor's  fiscal                                                                    
summary  had portrayed  the dividend  over  the past  couple                                                                    
Representative  Wool  observed  that   it  was  "more  of  a                                                                    
bookkeeping thing."                                                                                                             
Mr. Painter added  that he had included  the information [on                                                                    
slide 7]  to give an  idea of the  scope of the  problem. He                                                                    
stated  it was  difficult  to see  what  the deficit  number                                                                    
meant in scale. He elaborated  that putting in 36 percent of                                                                    
the  total  budget  or  half   of  the  non-dividend  budget                                                                    
provided a sense of scale of the deficit.                                                                                       
11:56:58 AM                                                                                                                   
Mr. Painter addressed an FY  22 budget preview under current                                                                    
policy  on slide  8. He  highlighted  that the  data on  the                                                                    
slide  was   identical  to  the  previous   slide  with  the                                                                    
exception of statewide items that  dropped to $456.2 million                                                                    
[from $630.2  million on slide  7] and the PFD  that dropped                                                                    
to $680 million [from $2.024  billion on slide 7]. The table                                                                    
assumed that items  not funded in FY 21 continued  to not be                                                                    
funded in  FY 22. The  reduction to the dividend  line would                                                                    
result in a  PFD of approximately $1,000  per recipient. The                                                                    
table on  slide 8  showed a deficit  of $900  million, which                                                                    
still exceeded the remaining CBR balance.                                                                                       
11:57:36 AM                                                                                                                   
Mr. Painter  reviewed the projected fund  balances available                                                                    
in FY 22 on slide 9. He  detailed that going into FY 22, the                                                                    
CBR balance was projected at  around $600 million or so. The                                                                    
ERA was  expected to have  a balance of  approximately $11.7                                                                    
billion,  which   did  not  include  unrealized   gains.  He                                                                    
explained that  gains had  to be  realized before  they were                                                                    
spendable.  He noted  that there  had  been various  numbers                                                                    
mentioned when  the ERA balance was  discussed. He clarified                                                                    
that the slide  showed the amount projected  to be available                                                                    
on the  first day  of FY  22 prior  to a  POMV draw  and any                                                                    
earnings  coming  in;  the  number  reflected  the  starting                                                                    
point.  He noted  that sometimes  people took  out the  POMV                                                                    
draw  but did  not  count the  earnings,  which resulted  in                                                                    
different  numbers.  The number  on  slide  9 reflected  the                                                                    
number shown  in the history and  projections sheet produced                                                                    
by APFC.                                                                                                                        
Representative LeBon referenced the  $587 million balance in                                                                    
the CBR shown  near the top of  slide 9. He asked  if the FY                                                                    
22  balance accounted  for  an  untouchable working  capital                                                                    
cushion of $1 billion, which he  deemed to be the floor of a                                                                    
working capital amount for the state.                                                                                           
Mr. Painter replied  in the negative. He  clarified that the                                                                    
working   capital  was   available  for   appropriation.  He                                                                    
elaborated that if  the CBR was fully expended  down to zero                                                                    
there were  other cash options  that were more  costly (e.g.                                                                    
the ERA).  He reported that after  FY 22 there would  not be                                                                    
anything available  in the  CBR beyond  the amount  used for                                                                    
cashflow. He explained  that the amount could  be drawn, but                                                                    
it would result in having  to turn to higher earning savings                                                                    
accounts or  other accounts  in order  to meet  the cashflow                                                                    
need.  The   state  had  already  passed   the  point  where                                                                    
$1 billion could be kept in  the CBR because the balance was                                                                    
already below that amount.                                                                                                      
Co-Chair  Johnston asked  if the  projected  ERA balance  of                                                                    
$11.7 billion included unrealized gains.                                                                                        
Mr.  Painter  replied  that  the   figure  did  not  include                                                                    
unrealized gains. He expounded  that $11.7 billion reflected                                                                    
the  spendable cash  level projected  to  be in  the ERA  on                                                                    
June 30 of the current fiscal year.                                                                                             
12:01:02 PM                                                                                                                   
Representative  Josephson  stated   that  the  [ERA]  number                                                                    
currently used by  APFC was $10.3 billion  or $10.5 billion.                                                                    
He  asked if  Mr. Painter  was projecting  earnings of  $1.2                                                                    
billion over the following nine months.                                                                                         
Mr.  Painter responded  that $11.7  billion  was the  number                                                                    
APFC  was projecting  to  be  available at  the  end of  the                                                                    
current  fiscal   year  with  the  remaining   earnings.  He                                                                    
explained that  the realized earnings thus  far had slightly                                                                    
outpaced the forecast.                                                                                                          
12:02:07 PM                                                                                                                   
Mr.  Painter identified  the last  item  on slide  9 as  the                                                                    
balance in funds the administration  listed as sweepable. He                                                                    
knew there were some legislators  who disagreed with some of                                                                    
the funds  included in the  list. He explained  that because                                                                    
the administration was responsible  for the sweep, the items                                                                    
it  included  were  the default;  however,  the  legislature                                                                    
could  contest the  action.  The  balance was  approximately                                                                    
$1.5 billion  with the  vast majority held  in the  PCE Fund                                                                    
and  Higher   Education  Fund  (funds  that   had  not  been                                                                    
considered  sweepable until  the past  couple of  years). He                                                                    
noted there  was very little  remaining in other  funds. The                                                                    
available  funds  in addition  to  the  CBR were  not  quite                                                                    
sufficient to  balance the  FY 22  budget under  the current                                                                    
loss scenario.  Absent action by  the legislature  to reduce                                                                    
the  budget or  add  new revenue,  LFD  expected that  other                                                                    
sources would be necessary.                                                                                                     
12:03:18 PM                                                                                                                   
Representative  LeBon referenced  the appendix  on slide  11                                                                    
that  referenced school  bond  debt  reimbursement of  $82.6                                                                    
million and the  REAA Fund deposit of $33  million. He asked                                                                    
for  Mr.  Painter   to  address  how  the   two  items  were                                                                    
Mr.  Painter   replied  that  there   was  a   complex  REAA                                                                    
calculation  in statute  that linked  the  student count  in                                                                    
REAAs versus organized areas and  giving a percentage of the                                                                    
bond debt reimbursement accrued  in organized areas into the                                                                    
REAA  Fund to  be  used  by the  department  to fund  school                                                                    
construction  and maintenance  in the  unorganized boroughs.                                                                    
He emphasized  that over the  past few years when  there had                                                                    
been  vetoes or  reductions  to  school debt  reimbursement,                                                                    
there had  also generally been a  corresponding reduction to                                                                    
the REAA Fund deposit because they were linked in statute.                                                                      
Mr. Painter  explained that the consent  decree that created                                                                    
the  REAA Fund  found  that the  school  construction was  a                                                                    
state responsibility  regardless of what  happened elsewhere                                                                    
because the  areas did not  have the ability to  raise their                                                                    
own  funds  through  bonding. He  elaborated  that  even  if                                                                    
school  bond  debt  reimbursement   were  zeroed  out  going                                                                    
forward,  the state  would  be out  of  compliance with  the                                                                    
order if it also zeroed out  the REAA Fund going forward. He                                                                    
characterized continuing to reduce  the REAA Fund deposit as                                                                    
legally  risky regardless  of what  the state  wanted to  do                                                                    
with school  bond debt  reimbursement despite  the statutory                                                                    
linkage between the two items.                                                                                                  
Representative   Josephson   considered  the   question   of                                                                    
sweepable  funds.  He  referenced Mr.  Forrer's  success  in                                                                    
stopping a  broader interpretation of the  state's authority                                                                    
to bond.  He shared  that he had  recently spent  about five                                                                    
hours reading  Hickel v. Cowper.  He had been struck  by the                                                                    
hearings  that occurred  on  the Senate  side  in July  2019                                                                    
about the differences of  opinion between the administration                                                                    
and LFD  about what was  sweepable. He mentioned  the Forrer                                                                    
case because  he believed there  could be litigation  if the                                                                    
PCE Fund was swept. He explained  that the PCE Fund was part                                                                    
of  the  Alaska  Energy  Authority and  it  was  unclear  in                                                                    
Hickel v.  Cowper what the  court would make of  the action.                                                                    
He  concluded that  the legislature  should not  assume that                                                                    
the  funds  were  available  for  expenditure  without  some                                                                    
Mr.  Painter  responded  that the  sweepable  funds  statute                                                                    
passed in the 1990s was  found unconstitutional in Hickel v.                                                                    
Cowper;  therefore,  there  was  no  statutory  guidance  to                                                                    
follow. He believed that how  the Alaska Supreme Court would                                                                    
rule  on the  case  was  ambiguous. He  stated  it could  be                                                                    
argued that the current sweepable  list was not large enough                                                                    
and   because  ERA   funding  was   used  for   the  general                                                                    
government,  it  should  also be  considered  sweepable.  He                                                                    
stated it  had not been  tested and  it was unclear  how the                                                                    
courts  would rule.  He continued  that it  was possible  to                                                                    
speculate  on  how the  courts  might  rule, but  there  was                                                                    
significant  uncertainty about  what  was sweepable  because                                                                    
the  supreme  court  had invalidated  the  statutes  and  no                                                                    
replacement had been made.                                                                                                      
12:08:11 PM                                                                                                                   
Representative Merrick asked for  the average rate of return                                                                    
on the PCE Fund.                                                                                                                
Mr. Painter  answered that the  last projection he  had seen                                                                    
was 6.2 percent  going forward. He had not looked  to see if                                                                    
there was  an updated  projection. He stated  that generally                                                                    
the funds managed  by DOR returned at a  fairly similar rate                                                                    
to the  Permanent Fund over  the long-term. He  believed the                                                                    
Higher  Education   Fund  return   was  also   projected  at                                                                    
6.2 percent.                                                                                                                    
Co-Chair Johnston  believed the actual return  for both [the                                                                    
PCE  Fund  and the  Higher  Education  Fund] had  been  very                                                                    
similar to the Permanent Fund in the current year at                                                                            
2 percent.                                                                                                                      
Representative LeBon looked  at the $40 million  for oil and                                                                    
gas  tax  credits  line  item  on slide  11.  He  asked  for                                                                    
verification that  the $40 million  was the  minimum payment                                                                    
required in  FY 22 related  to the state's  total obligation                                                                    
of approximately $743 million.                                                                                                  
Mr. Painter  replied affirmatively.  He elaborated  that the                                                                    
amount reflected the statutory  calculation for the deposit.                                                                    
The  obligation   was  subject  to  appropriation   and  the                                                                    
legislature could opt to deposit more or less.                                                                                  
Co-Chair  Johnston thanked  the testifiers  and members  for                                                                    
their participation.                                                                                                            
12:10:19 PM                                                                                                                   
The meeting was adjourned at 12:10 p.m.                                                                                         

Document Name Date/Time Subjects
DOR Presentation - Update on Tax Credits and Revenue Projections 10.02.2020.pdf HFIN 10/2/2020 10:00:00 AM
DOR Updates - HFIN
Leg Finance Presentation - FY21 & FY22 Fiscal Update 10.02.2020.pdf HFIN 10/2/2020 10:00:00 AM
LFD Fiscal Update - HFIN
HFIN Fiscal Update Response to Q 100220.pdf HFIN 10/2/2020 10:00:00 AM
DOR Response to HFin Revenue Outlook 11.2.2020.pdf HFIN 10/2/2020 10:00:00 AM
HFIN DOR Response