Legislature(2021 - 2022)ADAMS 519

01/08/2021 11:00 AM FINANCE

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Audio Topic
11:01:32 AM Start
11:04:57 AM Presentation: Governor's Budget Assessment by Larry Persily
11:47:15 AM Overview: Fy22 Governor's Budget by the Legislative Finance Division
12:40:26 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Rescheduled from 1/6/20 --
-- Teleconference Only --
+ Presentation: Governor's Budget Assessment by TELECONFERENCED
Larry Persily
+ Overview: FY22 Governor's Budget by Legislative TELECONFERENCED
Finance Div.
**Streamed live on AKL.tv**
                   HOUSE FINANCE COMMITTEE                                                                                      
                           INTERIM                                                                                              
                       January 8, 2021                                                                                          
                         11:01 a.m.                                                                                             
                                                                                                                                
                                                                                                                                
11:01:32 AM                                                                                                                   
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Foster called the House Finance Committee meeting                                                                      
to order at 11:01 a.m.                                                                                                          
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Neal Foster, Co-Chair                                                                                            
Representative Jennifer Johnston, Co-Chair (via                                                                                 
teleconference)                                                                                                                 
Representative Ben Carpenter (via teleconference)                                                                               
Representative Dan Ortiz, Vice-Chair (via teleconference)                                                                       
Representative Andy Josephson (via teleconference)                                                                              
VACANT                                                                                                                          
Representative Bart LeBon (via teleconference)                                                                                  
Representative Kelly Merrick (via teleconference)                                                                               
Representative Colleen Sullivan-Leonard(via teleconference)                                                                     
Representative Cathy Tilton (via teleconference)                                                                                
Representative Adam Wool (via teleconference)                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative Delena Johnson; Representative-Elect James                                                                       
Kaufman.                                                                                                                        
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Larry  Persily, Former  Department  of Revenue  Commissioner;                                                                   
Alexei  Painter,  Director,  Legislative   Finance  Division;                                                                   
Representative   Harriett   Drummond;   Representative   Matt                                                                   
Claman;   Speaker   Bryce   Edgmon;   Representative   Sharon                                                                   
Jackson.                                                                                                                        
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
PRESENTATION: GOVERNOR'S BUDGET ASSESSMENT BY LARRY PERSILY                                                                     
                                                                                                                                
OVERVIEW: FY22  GOVERNOR'S BUDGET BY THE  LEGISLATIVE FINANCE                                                                   
DIVISION                                                                                                                        
                                                                                                                                
Co-Chair Foster reviewed the meeting agenda.                                                                                    
                                                                                                                                
^PRESENTATION:   GOVERNOR'S   BUDGET  ASSESSMENT   BY   LARRY                                                                 
PERSILY                                                                                                                       
                                                                                                                                
11:04:57 AM                                                                                                                   
                                                                                                                                
LARRY  PERSILY,  FORMER DEPARTMENT  OF  REVENUE  COMMISSIONER                                                                   
(via  teleconference),  introduced  himself.  He  provided  a                                                                   
PowerPoint  presentation  titled   "Time  and  Money,"  dated                                                                   
January 6,  2021 (copy on file).  He would be  providing some                                                                   
context around the  governor's proposed budget for  FY 22. As                                                                   
he reviewed  the budget,  he concluded  legislators  would be                                                                   
faced with  two questions  around time  and money.  The first                                                                   
question  was whether  the state  would have  enough time  to                                                                   
wait for  enough money  to come  in to  ensure a  sustainable                                                                   
balanced  fiscal plan.  The second question  was whether  the                                                                   
state  had  enough  money  until   additional  monies  became                                                                   
available.  His  presentation  was designed  to  explain,  in                                                                   
realistic terms,  where Alaska  stood. He suspected  it would                                                                   
be a tough year for legislators.                                                                                                
                                                                                                                                
Co-Chair  Foster  noted  Co-Chair  Jennifer  Johnston,  House                                                                   
Speaker  Bryce Edgmon,  and  Representative  Matt Claman  had                                                                   
joined the meeting via teleconference.                                                                                          
                                                                                                                                
Mr. Persily  turned to  slide 2: "Time  is short  for Alaska,                                                                   
as  is  money."   He  indicated  that  the   balance  of  the                                                                   
Permanent  Fund (PF)  earnings  reserve account  (ERA) as  of                                                                   
November  30,  2020   was  $9.45  billion.  The   funds  were                                                                   
described  as  uncommitted  and  available  in  the  ERA.  He                                                                   
asserted that  of the $9.45  billion about $7.1  Billion were                                                                   
realized  gains  (actually  in  the  bank).  The  other  $2.3                                                                   
billion were  unrealized gains  (profits on  the books  as of                                                                   
November  30, 2020).  The unrealized  gains  would turn  into                                                                   
realized   gains  when   the  investments   were  sold.   The                                                                   
uncommitted $9.45  billion balance  in the ERA  accounted for                                                                   
the  percent of  market  value (POMV)  draw  for the  current                                                                   
fiscal year [FY  21] and the anticipated 5  percent POMV draw                                                                   
for FY 22 in the amount of $3.069 billion.                                                                                      
                                                                                                                                
Mr. Persily continued  that in the FY 22 budget  the governor                                                                   
was  proposing  a $1.2  billion  draw  from  the ERA  in  the                                                                   
spring of 2021  to pay an additional dividend  to Alaskans of                                                                   
about  $1,900. He  was also  proposing a  $2 billion draw  in                                                                   
FY 22  to pay  a full  $3,000 dividend  in the  fall of  2021                                                                   
which  would require  legislative approval.  In summary,  the                                                                   
governor was  looking for an  additional $3.2 billion  in the                                                                   
calendar  year  spread  over  a couple  of  fiscal  years  to                                                                   
payout an  additional $5000  in dividends.  The governor  had                                                                   
been talking with  Alaskans about how the PF  had gained more                                                                   
than  $10 billion  from April  1, 2020  through November  30,                                                                   
2020. However,  there was  more to  the story. He  elaborated                                                                   
that $7 billion  was lost in the first three  months of 2020.                                                                   
The Permanent  Fund's net balance was  up by the end  of 2020                                                                   
but not by $10  billion. The numbers provided  on the balance                                                                   
sheet were as of  the date of the balance sheet  and could be                                                                   
different on the following day.                                                                                                 
                                                                                                                                
11:11:17 AM                                                                                                                   
                                                                                                                                
Co-Chair Foster  recognized Representative Sharon  Jackson on                                                                   
the line.                                                                                                                       
                                                                                                                                
Mr.  Persily turned  to slide  3 and  considered whether  the                                                                   
savings would last.  He indicated the governor  was proposing                                                                   
POMV 5 percent  draws for FY 21 and FY 22  and two additional                                                                   
draws for spring  and fall dividends which  totaled more than                                                                   
$9 million  or 13 percent of the  total balance of  the PF on                                                                   
November 30,  2020. He noted that  the principle of  the fund                                                                   
could not be spent.                                                                                                             
                                                                                                                                
Mr.  Persily  continued that  over  the  years the  board  of                                                                   
trustees  of the  Alaska  Permanent Fund  Corporation  (APFC)                                                                   
had  consistently talked  about maintaining  a solid  balance                                                                   
in  the ERA  because the  funds were  being used  to pay  for                                                                   
public services  and dividends.  The board recommended  that,                                                                   
if the legislature  were to continue taking a POMV  draw of 5                                                                   
percent, the  amount remaining in  the ERA should be  about 4                                                                   
times  the  amount  of  the draw  or  $12  billion  to  guard                                                                   
against any future  losses. He provided context  by referring                                                                   
to  the economic  meltdown  in FY  09 in  which  the PF  lost                                                                   
about  $6  billion.  He  thought   there  was  reason  to  be                                                                   
concerned  about  the  potential  of  overdrawing  the  fund,                                                                   
experiencing  a poor  investment return  period, and  leaving                                                                   
the state  without much of a  cushion. Alaska had  been using                                                                   
fund earnings  through the  POMV since FY  19. Prior  to that                                                                   
for more  than half  of the  30 years  since it was  created,                                                                   
the  constitutional budget  reserve  (CBR) had  been used  to                                                                   
assist in balancing spending.                                                                                                   
                                                                                                                                
Mr.  Persily indicated  that  the deficit  was  not new.  The                                                                   
balance of  the CBR would  be about  $600 million at  the end                                                                   
of the fiscal year  and would not be a fund  source the state                                                                   
could count  on. The state  would be  relying on the  ERA and                                                                   
the PF.                                                                                                                         
                                                                                                                                
11:14:28 AM                                                                                                                   
                                                                                                                                
Co-Chair  Foster  recognized  Representative  Tilton  on  the                                                                   
line.                                                                                                                           
                                                                                                                                
Mr.   Persily   moved   to  slide   4   titled   "Longer-term                                                                   
solutions." He noted  that the state had run  through the CBR                                                                   
and had not  paid the full statutory Permanent  Fund Dividend                                                                   
(PFD)  since 2015  because  of a  lack  of funding.  Previous                                                                   
legislatures  and  governors  had  looked  at  the  available                                                                   
funds and the needs  of the state to arrive  at an affordable                                                                   
PFD amount.  If the PFD was  calculated based on  the formula                                                                   
from 1982, it  would be greater than $3000.  The governor had                                                                   
proposed  a special  election in  the spring  on an  advisory                                                                   
question to  Alaskans regarding  a 50/50 split  for dividends                                                                   
and government services.  He thought there was a  risk of the                                                                   
public rejecting  the 50/50 split. He speculated  that if the                                                                   
legislature  did not have  to debate  the dividend  annually,                                                                   
sessions would be shorter.                                                                                                      
                                                                                                                                
Mr. Persily  also reported  that the  governor was  proposing                                                                   
three  constitutional  amendments.  By  law they  could  only                                                                   
appear on  a general election  ballot, the next of  which was                                                                   
set for November  2022. The first proposal would  turn the PF                                                                   
into   a  true   endowment,   something   the  trustees   had                                                                   
previously  recommended.  There would  no  longer  be a  line                                                                   
between  the principle  and  the earnings  of  the fund.  The                                                                   
whole kitty would  be treated as an endowment  with a maximum                                                                   
withdraw  amount (5  percent in  current  statute). The  fund                                                                   
was  expected to  earn  6.75 percent  in  the long-term.  The                                                                   
fund would continue  to grow after drawing the  5 percent. In                                                                   
some years,  the earnings  might be  less than 6.75  percent,                                                                   
while in other years, they might be greater.                                                                                    
                                                                                                                                
Mr.  Persily  relayed  that  the  governor  was  proposing  a                                                                   
constitutional  amendment  that would  set  a spending  limit                                                                   
and  another that  would  instate a  prohibition  on any  new                                                                   
taxes without  the vote  of the  public   potentially  posing                                                                   
calendar challenges.                                                                                                            
                                                                                                                                
11:17:57 AM                                                                                                                   
                                                                                                                                
Mr.  Persily turned  to slide  5  titled: "Matching  spending                                                                   
with revenues."  The governor  was proposing $450  million or                                                                   
more in  budget cuts in FY  22 through FY 24.  The governor's                                                                   
10-year  budget  plan counted  on  other revenue  sources  of                                                                   
$1.2  billion  in  FY  23 and  about  $1  billion  each  year                                                                   
thereafter. He  suggested new  revenue sources would  need to                                                                   
be addressed  soon in  preparation for the  FY 23  budget. He                                                                   
remarked   that   any   new  broad-based   tax   would   take                                                                   
significant time  to implement, and the revenue  numbers were                                                                   
speculative.  He thought  it ironic that  after Alaskans  had                                                                   
voted  not to change  oil taxes  in November  2020, the  most                                                                   
immediate way for  the state to generate revenue  would be to                                                                   
raise  oil taxes.  He was not  advocating  for the idea,  but                                                                   
noted the state had boxed itself in.                                                                                            
                                                                                                                                
Mr. Persily advanced  to slide 6: "Repair and  rebuild Alaska                                                                   
economy."  He   reviewed  the   items  that  had   negatively                                                                   
impacted  Alaska's economy  including  COVID-19, low  fishing                                                                   
prices, low  oil prices, and  the outmigration  of residents.                                                                   
The governor  was proposing  a state-wide general  obligation                                                                   
bond package ($300  million - $350 million)  which would have                                                                   
to be  voted on by  the public. The  bonds would be  used for                                                                   
shovel-ready  projects.  The  governor  did not  provide  any                                                                   
specifics  but   mentioned  roads  to  resources,   renewable                                                                   
energy  projects,  ports,  harbors,  and  runways.  The  vote                                                                   
would occur  in the spring  in order  for Alaskans to  get to                                                                   
work on the projects.  He was unsure if the  people of Alaska                                                                   
would be willing to take on any additional debt.                                                                                
                                                                                                                                
11:22:05 AM                                                                                                                   
                                                                                                                                
Mr.  Persily moved  to  a calendar  on slide  7:  "Is this  a                                                                   
realistic  calendar?".  He  suggested  that  the  legislature                                                                   
would  have  to determine  whether  the  state would  have  a                                                                   
special election in  the spring to decide the  bond issue and                                                                   
to determine  whether to  exceed the 5  percent POMV  draw to                                                                   
pay for public  services or dividends. He suggested  that any                                                                   
dividend  payment  would  require the  legislature  to  spend                                                                   
beyond  the  5  percent  draw. In  the  following  year,  the                                                                   
legislature would  be building the  FY 23 budget with  a hole                                                                   
to fill  of $1.2 billion.  He stressed  that if  new revenues                                                                   
were desired  for FY  23 it would  be necessary  to implement                                                                   
something in FY 21.                                                                                                             
                                                                                                                                
Mr.  Persily   turned   to  slide  8   titled  "Support   for                                                                   
constitutional  amendment."  The   Permanent  Fund  Board  of                                                                   
Trustees had  adopted resolutions  three times in  support of                                                                   
a constitutionally  protected endowment that  would eliminate                                                                   
the distinction  between  the principal  and earnings  of the                                                                   
fund.  The  principal and  the  ERA  were being  managed  the                                                                   
same.  However,   the  accessibility  of  each   account  was                                                                   
different.  The Board  had  not weighed  in  on the  dividend                                                                   
formula. He  wondered whether  the dividend should  be placed                                                                   
in the constitution  if the constitution was  amended to make                                                                   
the  PF a  true endowment  fund.  He reiterated  that if  the                                                                   
legislature  limited its  draw  to 5  percent  per year,  the                                                                   
APFC was  confident $80 billion  would reside in the  fund by                                                                   
the end of FY 30 based on its forecast.                                                                                         
                                                                                                                                
Mr.  Persily  advanced  to slide  9  titled  "Permanent  Fund                                                                   
grows."  He stated  that APFC  projected $80  billion at  the                                                                   
end of FY 30  assuming that the fund earned  6.75 percent and                                                                   
the annual  draw was  maintained at  5 percent. He  suggested                                                                   
that  if  the  legislature  paid out  a  $5,000  dividend  in                                                                   
FY 21, in  FY 30 there  would be less of  a POMV draw  in the                                                                   
future.                                                                                                                         
                                                                                                                                
11:27:25 AM                                                                                                                   
                                                                                                                                
Mr. Persily turned  to the last slide titled:  "Almost forgot                                                                   
- what  about oil."  Mr. Persily  opined that  Alaska  was no                                                                   
longer an oil  state in terms of revenue.  The state received                                                                   
its  revenues  from the  federal  government  and  investment                                                                   
earnings  of the Permanent  Fund. He  reported the  projected                                                                   
oil revenues  for  FY 22 were  $800 million  versus the  POMV                                                                   
draw of  over $3 billion.  All other revenues  generated from                                                                   
taxes and  fees for  unrestricted general  funds (UGF)  would                                                                   
be  less than  $400 million.  The Fall  2020 Revenue  Sources                                                                   
Book projected  oil at $48  per barrel  in FY 22.  The Alaska                                                                   
North Slope  crude closed earlier  in the week a  few dollars                                                                   
higher. He  stated that if North  Slope oil averaged  $60 per                                                                   
barrel in FY 22,  the state would earn about  $270 million in                                                                   
additional revenue  for the general fund (GF).  He noted that                                                                   
the  budget gap  would likely  be closed  for FY  22, but  it                                                                   
would not include a PFD payout.                                                                                                 
                                                                                                                                
11:30:01 AM                                                                                                                   
                                                                                                                                
Co-Chair Foster  thanked Mr. Persily for the  high-level look                                                                   
at the primary issues facing the state.                                                                                         
                                                                                                                                
Co-Chair  Johnston  referenced  a contract  Mr.  Persily  had                                                                   
been  a party  to  with  the Alaska  Municipal  League  (AML)                                                                   
regarding sales tax  and internet sales. She asked  if he had                                                                   
done any modeling  of a statewide sales tax.  She wondered if                                                                   
he had any revenue figures.                                                                                                     
                                                                                                                                
Mr. Persily answered  that he had a contract with  AML in the                                                                   
previous  year to  help with  setting  up the  organization's                                                                   
online sales  tax administration  and collection  program. He                                                                   
had  not done  any  modeling for  AML  regarding a  statewide                                                                   
tax.  However, he  had done  modeling for  the Department  of                                                                   
Revenue (DOR)  over the previous  20 years. He had  also done                                                                   
some  modeling  when  he  worked   for  the  Municipality  of                                                                   
Anchorage  and as a  legislative aide.  He addressed  a state                                                                   
sales tax. He  indicated that every percentage  point had the                                                                   
potential to  generate between  $100 million to  $200 million                                                                   
in revenue. The question came down to exemptions and caps.                                                                      
                                                                                                                                
Mr. Persily  continued that the  Kenai Peninsula  Borough had                                                                   
a 3 percent tax  with a cap of $500. A person  could purchase                                                                   
a $50,000  truck but only pay  a sales tax of $500.  In North                                                                   
Dakota if  a person  were to purchase  a $50,000  truck, they                                                                   
would pay  sales tax on the  full $50,000. Having a  cap made                                                                   
a huge difference  in collections as well as  what was taxed.                                                                   
He brought up the  notion of the end user paying  the tax for                                                                   
goods. A person  buying a book at Barnes and  Noble would pay                                                                   
a sales  tax. He wondered if  an oil company buying  oil pipe                                                                   
should   pay   a   sales   tax.   Currently,   municipalities                                                                   
considered  the  oil companies  activities  as  manufacturing                                                                   
and  did not  collect sales  tax on  materials. He  suggested                                                                   
that  in  order  to  spread  out the  oil  tax  base  it  was                                                                   
necessary to  pull back  on exemptions and  have a  lower tax                                                                   
rate with a broader base.                                                                                                       
                                                                                                                                
Co-Chair Johnston  mentioned a value-added tax  which was low                                                                   
and broad. She  had been looking at the 10-year  fiscal plan,                                                                   
2023,  other   revenues,  and   the  50/50  split.   She  was                                                                   
concerned with the  ERA. She recalled a low  dividend in 2008                                                                   
due to  a market drop. She  thought the legislature  would be                                                                   
taking the majority  of the ERA and noted  that the look-back                                                                   
was only  for 5 years at  5 percent. She wondered  what would                                                                   
happen and asked Mr. Persily to comment.                                                                                        
                                                                                                                                
Mr. Persily  replied that  there was always  the risk  of the                                                                   
market declining  resulting in  declined earnings of  the PF.                                                                   
He stressed that  the market had been up and  down during the                                                                   
current week.  He listed various  unknowns that  could impact                                                                   
the  market   including  the   incoming  administration   and                                                                   
COVID-19.                                                                                                                       
                                                                                                                                
11:35:15 AM                                                                                                                   
                                                                                                                                
Co-Chair  Johnston  asked  for  verification  that  it  would                                                                   
require  a  vote  of  the  people   to  use  funds  from  the                                                                   
principal of the Permanent Fund.                                                                                                
                                                                                                                                
Mr.  Persily   replied  affirmatively.  He   elaborated  that                                                                   
currently  in the  constitution  there was  a principle  that                                                                   
could not be used,  and the earnings from the  fund went into                                                                   
the  GF  just   like  motor  fuel  taxes.   He  relayed  that                                                                   
eliminating the  line between the principle and  the earnings                                                                   
of the  fund and  putting a  constitutional direction  around                                                                   
the entire fund  as an endowment would require a  vote of the                                                                   
people. It  would take  a two-thirds vote  in both  the House                                                                   
and  the Senate  and  a vote  in  the next  general  election                                                                   
scheduled in November 2022.                                                                                                     
                                                                                                                                
Co-Chair Johnston  was concerned with  the value of  the U.S.                                                                   
dollar.  It was  her  understanding that  35  percent of  the                                                                   
money in  existence had been  printed since March.  She noted                                                                   
the uncertainty  of  the value  of the dollar  in the  coming                                                                   
year or two.                                                                                                                    
                                                                                                                                
11:37:07 AM                                                                                                                   
                                                                                                                                
Representative LeBon  thanked the presenter. He  asked if Mr.                                                                   
Persily had  an opinion  on the revenue  level that  could be                                                                   
raised  through  a state  income  tax.  He indicated  that  a                                                                   
typical model  would be  a percentage  of the federal  income                                                                   
tax. He  asked what  percentage  would be  needed to raise  a                                                                   
meaningful  amount of  money  for the  state  given how  many                                                                   
Alaskans paid a federal income tax.                                                                                             
                                                                                                                                
Mr. Persily replied  that a percentage of federal  taxes paid                                                                   
would  be   the  easiest  and   simplest  state   income  tax                                                                   
structure. However,  the state would  be at the mercy  of the                                                                   
federal  government's tax  policies rather  than setting  its                                                                   
own. A  recent statistic showed  that 40 percent  of American                                                                   
households did  not pay an income  tax even though  some paid                                                                   
withholding and  Social Security.  He viewed an  Alaska state                                                                   
income tax as a financial, economic,  and political problem.                                                                    
                                                                                                                                
Mr. Persily  elaborated that over  the course of  working for                                                                   
the  legislature, he  had heard  from  legislators that  they                                                                   
did not like  the idea of a  state income tax because  only a                                                                   
portion  of people  would pay  any tax at  all. He  suggested                                                                   
the  issue could  be dealt  with by  incorporating a  minimum                                                                   
tax. He  was uncertain  how much  of an  income tax  Alaskans                                                                   
could afford.  He thought  generating $1.2 billion  in income                                                                   
taxes would  be a heavy  lift with economic  consequences. He                                                                   
suggested collecting  $300 million to $500 million  in either                                                                   
an  income tax  or  a sales  tax  in conjunction  with  other                                                                   
revenue  sources.  He  believed   the  state  would  have  to                                                                   
overdraw the  ERA at  greater than 5  percent to  balance the                                                                   
books  in  the  coming  year.   He  would  try  to  find  the                                                                   
percentage  rate needed for  an income  tax based  on federal                                                                   
income taxes paid by Alaskans.                                                                                                  
                                                                                                                                
11:41:01 AM                                                                                                                   
                                                                                                                                
Representative  Wool  commented   on  the  previous  question                                                                   
related to  an income tax. He  suggested using a line  of the                                                                   
federal income  tax form  such as  the adjusted gross  income                                                                   
line. A  percentage could  be applied  to the adjusted  gross                                                                   
income  rather  than the  federal  income  tax paid.  If  the                                                                   
state were  to overdraw the ERA  by $3 billion in  the coming                                                                   
year, by  FY 30 the 5 percent  draw would be reduced  by $200                                                                   
million and would  decrease every year between  now and then.                                                                   
He asked what  the cumulative reduction in the  draw would be                                                                   
in the same period.                                                                                                             
                                                                                                                                
Mr. Persily  replied that he  had not done any  calculations.                                                                   
In  the early  years  there would  be a  smaller  hit to  the                                                                   
annual draw and  a greater hit in the out years.  He reminded                                                                   
members that  the POMV  draw was based  on a 5-year  average.                                                                   
There would  be a reduced balance  in the first year,  but it                                                                   
would grow over time.                                                                                                           
                                                                                                                                
Representative   Wool    thanked   Mr.   Persily    for   the                                                                   
clarification.  He reiterated  that over  time the  reduction                                                                   
would increase, especially if it was spread over 5 years.                                                                       
                                                                                                                                
Vice-Chair Ortiz  thanked Mr.  Persily for his  presentation.                                                                   
He  referred  to slide  5.  His  understanding was  that  the                                                                   
governor was proposing  an annual reduction in  the budget of                                                                   
10 percent (approximately  $450 million per year)  for FY 22,                                                                   
FY 23,  and FY 24.  He suggested  that such reductions  would                                                                   
likely come out  of the budgets for education  and health and                                                                   
social services,  as several  cuts had  already been  applied                                                                   
to  other  departments.  He  asked   if  his  assumption  was                                                                   
accurate.                                                                                                                       
                                                                                                                                
Mr. Persily  clarified  that the proposed  reductions  to the                                                                   
state  budget  totaled   $450  million  by  FY   24  -  about                                                                   
10 percent  of  the  current   GF  budget.  He  responded  to                                                                   
Representative  Ortiz's question  about areas  of the  budget                                                                   
that  would  likely   be  affected.  The  largest   areas  of                                                                   
spending  in the budget  were K-12  education, Medicaid,  and                                                                   
PFDs. He  opined that it would  be difficult to come  up with                                                                   
$450 million  in cuts  over three years  that did  not affect                                                                   
the big-ticket items.                                                                                                           
                                                                                                                                
Co-Chair Foster thanked Mr. Persily for his presentation.                                                                       
                                                                                                                                
^OVERVIEW:   FY22  GOVERNOR'S   BUDGET  BY  THE   LEGISLATIVE                                                                 
FINANCE DIVISION                                                                                                              
                                                                                                                                
11:47:15 AM                                                                                                                   
                                                                                                                                
Co-Chair  Foster noted  Mr.  Painter would  be  doing a  more                                                                   
detailed analysis  of the governor's budget at  a later date.                                                                   
The  current day's  presentation would  provide a  high-level                                                                   
perspective.  Legislators would have  the opportunity  to ask                                                                   
questions  allowing the  Legislative  Finance Division  (LFD)                                                                   
time to respond at a future hearing.                                                                                            
                                                                                                                                
ALEXEI PAINTER,  DIRECTOR, LEGISLATIVE FINANCE  DIVISION (via                                                                   
teleconference),  provided a  PowerPoint presentation  titled                                                                   
"Preliminary Overview  of the Governor's FY22  Budget," dated                                                                   
January  6,  2021  (copy  on file).  He  was  happy  to  take                                                                   
questions following the items in the outline:                                                                                   
                                                                                                                                
    Alaska's Structural Budget Deficit                                                                                       
    LFDs FY22 Budget Baselines                                                                                               
    Governor's FY22 Proposal and FY21 Supplementals                                                                          
    Governor's 10-Year Plan                                                                                                  
                                                                                                                                
Mr. Painter  began on  slide 3 titled  "Note of  Caution." He                                                                   
qualified that  the numbers in  the presentation  were drafts                                                                   
and  might change  prior  to session.  He  reported that  LFD                                                                   
would publish  its overview of  the governor's budget  on the                                                                   
first day  of session  with a detailed  analysis. It  was his                                                                   
understanding  that  some  of  the items  in  the  governor's                                                                   
budget might shift,  as he had sent out  clarifying questions                                                                   
prior  to  the  holidays. He  anticipated  responses  to  the                                                                   
questions within the week.                                                                                                      
                                                                                                                                
Mr.  Painter moved  to slide  4  titled "Alaska's  Structural                                                                   
Budget  Deficit." He  reported that  FY 21  marked the  ninth                                                                   
straight year  of budget  deficits for  the State  of Alaska.                                                                   
The  budget deficit  began in  FY 13  when the  price of  oil                                                                   
reached $100  per barrel. Therefore,  the budget  deficit was                                                                   
not just  a function  of oil  prices, even  though the  state                                                                   
was currently in a significantly low period of oil revenue.                                                                     
                                                                                                                                
Mr.  Painter  continued that  the  projection  in  FY 22  was                                                                   
anticipated to  be lower than  in FY 21. It was  projected to                                                                   
be the  lowest amount  of oil revenue  the state  had brought                                                                   
in  since   FY  78  in   nominal  terms  (not   adjusted  for                                                                   
inflation). If  adjusted for inflation,  the amount  would be                                                                   
the  least  amount   of  petroleum  revenue  the   state  had                                                                   
received since  the pipeline's  construction began in  FY 75.                                                                   
He opined  that the state was  at a historical point,  as oil                                                                   
would no  longer be the foundation  of the budget  because of                                                                   
the  decline in  revenue. The  state had  reduced its  budget                                                                   
substantially  over the  prior  decade.  The state's  largest                                                                   
budget  totaled $7.8  billion  UGF in  FY  13. By  FY 21  the                                                                   
budget had  been reduced  to $4.5 billion  UGF, a  43 percent                                                                   
decrease. However,  9 straight years of deficits  had taken a                                                                   
toll on  state reserves.  The reserve  balances dropped  from                                                                   
over $16 billion in FY 13 to about $900 million in FY 21.                                                                       
                                                                                                                                
11:50:38 AM                                                                                                                   
                                                                                                                                
Mr.  Painter moved  to slide  5  titled "Alaska's  Structural                                                                   
Budget  Deficit   (Cont.)"  The  slide  showed   UGF  revenue                                                                   
excluding   anything   from    the   Permanent   Fund.   Only                                                                   
traditional revenue  was reflected over the  previous decade.                                                                   
The state's  revenue peaked  in FY  12. Petroleum  was nearly                                                                   
$9 billion  declining thereafter.  It declined  in FY  16 and                                                                   
FY  17 and  started  increasing again  in  FY 18  and FY  19.                                                                   
Revenue  dropped again  with the  COVID-19 pandemic  starting                                                                   
in FY 20. He  noted that the state had deficits  in FY 18 and                                                                   
FY 19  based on petroleum  revenue that  was over  twice what                                                                   
was expected  in the current year.  He suggested that  even a                                                                   
recovery  in  oil prices  would  not  bring  the state  to  a                                                                   
structurally balanced budget.                                                                                                   
                                                                                                                                
Mr.  Painter moved  to a  chart on  slide 6  showing the  UGF                                                                   
budget from FY  12 to FY 22. He reemphasized  that the budget                                                                   
had decreased. The  state's peak budget was in FY  13 at over                                                                   
$8 billion UGF.  The state saw its largest  capital budget in                                                                   
the same  year reaching $2  billion UGF. The  state's largest                                                                   
operating  budget  was  in  FY 14.  The  capital  budget  was                                                                   
reduced  at the  time  due to  the budget  deficit.  However,                                                                   
statewide   items   and   agency    operations   were   still                                                                   
significantly  high. He  reported  that FY  15  was the  high                                                                   
year  for  agency   operations  but  noted  a   reduction  to                                                                   
statewide  items due  to refinancing  the retirement  system.                                                                   
The state  began budget  reductions to  the operating  budget                                                                   
in agency operations  in FY 16 and FY 17.  Since then, agency                                                                   
operations had  remained flat with  upward pressure in  FY 19                                                                   
and FY 20 which was reversed in FY 21 and FY 22.                                                                                
                                                                                                                                
Mr. Painter advanced  to slide 7 with a chart  combining both                                                                   
pictures of the  UGF budget and revenue for FY  12 through FY                                                                   
22.  He relayed  that the  bars  showed the  budgets for  the                                                                   
years and  the area  in the  background represented  revenue.                                                                   
The last time the  state had a balanced budget  was in FY 12.                                                                   
The state  had a significant  amount of  surplus at  the time                                                                   
and transferred  money to the  state's savings  accounts. The                                                                   
deficits  began in  FY  13. He  highlighted  that as  revenue                                                                   
declined,  the deficits peaked  in FY  15. Adopting  the POMV                                                                   
draw,  beginning  in FY  19,  had substantially  reduced  the                                                                   
state's budget  deficits. They had  been over $2  billion per                                                                   
year  beforehand.  In  FY  19 the  deficit  dropped  to  $300                                                                   
million, but  the state  was paying  less than the  statutory                                                                   
dividend.  The governor's  budget  in the  current year  paid                                                                   
the statutory dividend  bringing the state back  to a deficit                                                                   
of about $2 billion.                                                                                                            
                                                                                                                                
Mr.  Painter  moved to  the  graph  on  slide 8  showing  the                                                                   
state's  budget   reserve  balances  for  the   CBR  and  the                                                                   
statutory  budget reserve  (SBR)  from FY 12  to  FY 22.  The                                                                   
years of  deficits had taken their  toll on the  balances. He                                                                   
elaborated  that from  a peak  of $16 billion  the state  had                                                                   
spent  down the  SBR  completely  and the  CBR  would have  a                                                                   
balance  of about  $900  million at  the  end of  FY 21.  The                                                                   
governor's budget  would not draw  much from the  CBR leaving                                                                   
a balance of about $900 million at the end of FY 22.                                                                            
                                                                                                                                
Mr.  Painter reported  that in  October 2020,  he had  stated                                                                   
that the  CBR balance  would likely be  larger than  the $600                                                                   
million  he had  projected  at  the end  of  session. He  had                                                                   
increased the  projection to $900  million which was  a rough                                                                   
figure.  He had  not yet  received  the Comprehensive  Annual                                                                   
Financial  Report (CAFR)  of the  state  which was  currently                                                                   
being  audited   by  the  Legislative  Audit   Division.  The                                                                   
auditor  might  make  adjustments  and  provide  a  different                                                                   
understanding of  the reserve balances. The  current estimate                                                                   
was  agreed  on by  LFD  and  the Office  of  Management  and                                                                   
Budget  (OMB).   He  reiterated  that  the   number  remained                                                                   
preliminary.                                                                                                                    
                                                                                                                                
11:55:00 AM                                                                                                                   
                                                                                                                                
Mr. Painter advanced  to slide 9: Alaska's  Structural Budget                                                                   
Deficit (con't)."  He noted  an error on  the slide  where it                                                                   
stated  "Overall  UGF  Reduction."   He  explained  that  the                                                                   
reduction  was  made to  the  FY  21 authorized  budget.  The                                                                   
management  plan included  some  carry  forward funding.  The                                                                   
overall  UGF reduction  to agency operations  should  be $515                                                                   
million  or 11  percent, not  $625 million  or 13.8  percent.                                                                   
The  slide showed  that while  the state  reduced the  budget                                                                   
substantially  since the peak  of agency operations  spending                                                                   
in FY  15, the reductions  had not  been felt equally  across                                                                   
state  agencies.  The  state's   public  protection  agencies                                                                   
including   the   Department   of  Corrections   (DOC),   the                                                                   
Department  of Public Safety  (DPS), the  Department  of Law,                                                                   
and the  Judiciary had  seen increased  budgets of  6 percent                                                                   
above  where they  were in FY  15. Generally,  the trend  was                                                                   
downward for other agencies.                                                                                                    
                                                                                                                                
Mr. Painter  reported that  the Department  of Education  and                                                                   
Early  Childhood   Development   (DEED)  had  been   slightly                                                                   
reduced. Most  of the  education funding  went out  to school                                                                   
districts  and  the K-12  formula  and  had been  reduced  by                                                                   
about 2  percent. The  reduction was  mostly due to  one-time                                                                   
money outside  the formula that  districts received in  FY 15                                                                   
and  had   not  received  in   FY  21.  Education   had  been                                                                   
relatively  flat over the  period. The  Department of  Health                                                                   
and  Social  Services   (DHSS)  had  been  down   6  percent.                                                                   
However,  he   thought  the  true   reduction  to   DHSS  was                                                                   
understated.  He explained that  in FY 21  the state  had $90                                                                   
million  of one-time  money  for  COVID-19 relief.  The  true                                                                   
reduction to the  department was larger, but  a straight-line                                                                   
comparison  showed a  6 percent  decrease.  The twelve  other                                                                   
agencies  were down  by $441  million  or by  more than  one-                                                                   
third.  He  surmised  that  while  the  large  formula-driven                                                                   
agencies  had  seen  relatively  small  reductions  to  their                                                                   
budgets,  the  other   agencies  had  seen  much   larger  GF                                                                   
reductions.                                                                                                                     
                                                                                                                                
11:57:46 AM                                                                                                                   
                                                                                                                                
Mr.  Painter  turned   to  slide  10  titled   "LFD's  Budget                                                                   
Baselines." His  division had  developed budget  baselines as                                                                   
a  point  of   comparison  for  the  governor's   budget.  He                                                                   
explained  that, rather  than viewing  the governor's  budget                                                                   
in  isolation, LFD  wanted to  have  baselines to  understand                                                                   
the governor's  budget  more clearly.  The division used  two                                                                   
different  baselines:  current  policy  and current  law.  He                                                                   
elaborated  that the  difference  between  the two  baselines                                                                   
was  that in  current  policy there  was  an assumption  that                                                                   
statutes overfunded  or underfunded  in FY 21  would continue                                                                   
into  FY   22.  The   current  law   baseline  assumed   that                                                                   
regardless  of how  the  items  were treated  in  FY 21,  the                                                                   
legislature would return to the statute in FY 22.                                                                               
                                                                                                                                
Mr. Painter  continued  that for agency  operations,  both of                                                                   
the baselines  used an adjusted  base which removed  one-time                                                                   
items  from agency  budgets and  added  in automatic  changes                                                                   
such as  salary adjustments. A  slightly modified  version of                                                                   
the FY 22  adjusted base was  used to incorporate  changes to                                                                   
the K-12 formula  due to projected student  count changes. He                                                                   
did not  think it was  fair to blame  or credit  the governor                                                                   
for a change  in projection outside of his  control which was                                                                   
why LFD  incorporated it into  its baseline. He  relayed that                                                                   
the  largest  difference  was  the PFD.  The  current  policy                                                                   
assumed  that the  state would  pay a  dividend costing  $680                                                                   
million  which  equated  to  about  $1,000  per  person.  The                                                                   
current  law  assumption  was  that the  state  would  pay  a                                                                   
statutory  dividend which  was slightly  over $2 billion  - a                                                                   
payout of approximately $3,000 per person.                                                                                      
                                                                                                                                
Mr.  Painter  advanced  to  slide   11  showing  a  table  of                                                                   
statewide items  detail. He conveyed that the  slide compared                                                                   
the   statewide  items   between  the   two  baselines.   The                                                                   
difference in debt  service was due to the  municipal project                                                                   
debt that  the governor vetoed  in FY 21 equaling  about $2.4                                                                   
million.  In  FY 21,  the  governor  vetoed all  funding  for                                                                   
school   bond   debt  reimbursement.   The   current   policy                                                                   
assumption would  leave the number  at zero. The  current law                                                                   
assumption    would   result    in   an   appropriation    of                                                                   
$54.2 million in  UGF along with funding from  other sources.                                                                   
The  amount  for  state  retirement  was  the  same,  as  the                                                                   
appropriation  was  fully  funded  in  FY  21.  The  Regional                                                                   
Educational  Attendance  Area  (REAA)  fund,  which  provided                                                                   
funding  for school  construction  and  major maintenance  in                                                                   
rural  schools, was  vetoed  in FY  21.  The governor  vetoed                                                                   
community  assistance  funding  in  FY  21.  If  the  current                                                                   
policy assumption  was applied,  the UGF appropriation  would                                                                   
be  zero.  In current  law,  he  would  assume that  the  UGF                                                                   
portion (in  order to do  the statutory $30  million deposit)                                                                   
would  be $17.6 million  and would  also be  funded from  the                                                                   
Power Cost Equalization  (PCE) Fund. The legislature  did not                                                                   
fund the  oil and gas  tax credits in  FY 21 even  though the                                                                   
statutory  formula  called for  $60  million  in FY  22.  The                                                                   
current  law  assumption included  $60  million.  Altogether,                                                                   
there was about  $170 million of differences  between the two                                                                   
assumptions for statewide items.                                                                                                
                                                                                                                                
12:01:37 PM                                                                                                                   
                                                                                                                                
Mr.  Painter moved  to  slide 12  showing  a table  of FY  22                                                                   
current policy and  current law scenarios and  a full-picture                                                                   
comparison. The  agency operations total was $3.9  billion in                                                                   
both  scenarios.  The Legislative  Finance  Division  assumed                                                                   
that a baseline  capital budget was about $150  million based                                                                   
on the numbers  from the previous 6 years. It  was not enough                                                                   
to fully  address the  state's maintenance  needs. Under  the                                                                   
current  policy scenario,  the state  would be  looking at  a                                                                   
budget  deficit of  about $900  million in  FY 22. Under  the                                                                   
current  law scenario,  the  deficit would  be  approximately                                                                   
$2.4 billion mainly due to the difference in the PFD.                                                                           
                                                                                                                                
Mr. Painter compared  the governor's budget to  the baselines                                                                   
on  slide 13.  The governor's  agency  operations were  $77.4                                                                   
million   below  LFD's   baseline.   He   would  detail   the                                                                   
reductions in an  upcoming slide. Statewide items  were about                                                                   
$30 million higher  than the current policy  and $139 million                                                                   
below  the  current  law,  as  the  governor  was  not  fully                                                                   
funding  several items.  The  governor's  capital budget  was                                                                   
$58.3  million -  significantly  below  currently policy  and                                                                   
current  law  due  to the  use  of  one-time  Alaska  Housing                                                                   
Finance  Corporation (AHFC)  bonding  for statewide  matching                                                                   
funds. The  statewide match  was about  $101 million.  If the                                                                   
match  was counted  as  UGF,  the governor's  capital  budget                                                                   
would  be  about $160  million  -  slightly higher  than  the                                                                   
baseline.  The  governor's  budget   included  the  statutory                                                                   
dividend.  Altogether,  the  governor's  budget  deficit  was                                                                   
about  $1.2 billion  before  fund transfers  landing  between                                                                   
current policy  and current law baselines.  Overall, compared                                                                   
to the current  law scenario, the governor's  budget was down                                                                   
by about  $300 million reflecting  some reductions.  He would                                                                   
provide  additional detail  of  the reductions  further  into                                                                   
the presentation.                                                                                                               
                                                                                                                                
12:03:50 PM                                                                                                                   
                                                                                                                                
Mr. Painter turned  to slide 14 and continued  to address the                                                                   
governor's  FY  21/22  budget.  He pointed  to  some  of  the                                                                   
budget highlights  including a  supplemental PFD  payment for                                                                   
FY 21 ($1.2  billion from the  ERA). The budget took  two ERA                                                                   
draws  in  FY   22:  the  regular  POMV  draw   plus  another                                                                   
$2 billion  for  the  dividend  which  LFD thought  of  as  a                                                                   
deficit  draw beyond  the  statutory amount.  The  governor's                                                                   
budget  submission also  included  a fast-track  supplemental                                                                   
budget, many  items of which were  not funded in  the capital                                                                   
budget.  During the  previous  session,  the legislature  did                                                                   
not  pass a  stand-alone  capital  budget. Rather  it  placed                                                                   
portions  of the typical  capital budget  into the  operating                                                                   
budget.   He   noted,   however,   there   were   substantial                                                                   
omissions.  The  intention had  been  to return  to  session.                                                                   
Many  of  the  same  items  were   found  in  the  fast-track                                                                   
supplemental  budget.  Altogether, the  FY  22  budget had  a                                                                   
small deficit from  the CBR after the ERA  draw. He suggested                                                                   
that  even  with  the  additional  $2 billion  there  was  an                                                                   
additional $38 million deficit from the CBR.                                                                                    
                                                                                                                                
12:05:15 PM                                                                                                                   
                                                                                                                                
Mr. Painter  moved to  slide 15 and  continued to  review the                                                                   
governor's  budget. Reductions  to agency operations  totaled                                                                   
$77.4 million. The  largest reduction was to  Medicaid in the                                                                   
amount  of  $35  million.  However,   the  governor  included                                                                   
backstop  language  that  reappropriated   projected  lapsing                                                                   
Medicaid  funds,  about $35  million,  from  FY 21  into  the                                                                   
FY 22 budget.  Resultingly, Medicaid  would be funded  at the                                                                   
same  level  as  it  was in  the  current  fiscal  year.  The                                                                   
projected   lapse   was  due   to   the  higher   FMAP,   the                                                                   
reimbursement rate  from the federal government  in the CARES                                                                   
Act.  Therefore,   there  was  really  not  a   reduction  to                                                                   
Medicaid.  He thought  the numbers  reflected the  governor's                                                                   
ambition for  FY 23.  He continued  that despite the  numbers                                                                   
looking  like  a  reduction,   it  was  not  a  reduction  in                                                                   
service. It was  simply a reduction in the  funding level. He                                                                   
noted that looking  at the 10-year plan, the  governor called                                                                   
for  further agency  operations reductions  in FY  23 and  FY                                                                   
24. The  governor was already  setting Medicaid at  the level                                                                   
he hoped  to achieve in  FY 23 and  would most likely  not be                                                                   
suggesting further reductions in FY 23.                                                                                         
                                                                                                                                
Mr. Painter  continued  that the next  largest reduction  was                                                                   
to  the  University   of  Alaska.  The  budget   reflected  a                                                                   
$20 million  reduction  which  was  part  of  the  governor's                                                                   
compact  agreement   with  the   University.  The   agreement                                                                   
reflected  a reduction  of $70  million  to the  University's                                                                   
budget over  3 years.  The Department  of Transportation  and                                                                   
Facilities  Maintenance  (DOT)  was down  by  $17.2  million;                                                                   
$14.1  million  due  to  one-time  fund  changes  to  utilize                                                                   
federal  CARES  Act money  and  $3.6  million to  the  Alaska                                                                   
Marine Highway System  (AMHS). The reductions  to DOT brought                                                                   
the  budget  down to  match  the  governor's original  FY  21                                                                   
proposal  (slightly lower  than  his post-veto  amount).  The                                                                   
fund change  of $14.1  million would  not be sustainable  and                                                                   
would likely have  to be reversed in FY 23.  Therefore, while                                                                   
it made  the budget appear smaller  in the current  year, the                                                                   
amount would need to be reinstated in the following year.                                                                       
                                                                                                                                
Mr. Painter  reported another  major reduction in  the budget                                                                   
to  the Public  Assistance Administration  in  the amount  of                                                                   
$3.4  million   UGF  and  a   reduction  in  more   than  101                                                                   
positions.  The  change  was due  to  substantial  technology                                                                   
changes  resulting from  the  pandemic  and related  workflow                                                                   
changes.  The division  would be  reducing about  one-quarter                                                                   
of  its workforce.  He also  reported that  the K-12  formula                                                                   
was fully  funded in the  governor's budget.  The Legislative                                                                   
Finance  Division had factored  in changes  to the  baseline.                                                                   
He  reported  a  projected student  count  reduction  in  the                                                                   
following  year  below  the  count  used to  set  the  FY  21                                                                   
budget.  The  student  count   projection  was  sensitive  to                                                                   
changes in  how schools  would operate  - there were  massive                                                                   
differences because  of the pandemic. Districts  had been all                                                                   
over  the  map  in  their  projections  for  FY  22.  It  was                                                                   
difficult  to know  whether the  projected  reduction to  the                                                                   
student count  would materialize  because of not  knowing how                                                                   
the  pandemic would  proceed  over  the following  year.  All                                                                   
other agency changes  netted a reduction of  $1.7 million. He                                                                   
also  noted  there were  small  increases  in DOC  and  other                                                                   
places and  smaller reductions in  many of the  agencies. The                                                                   
result was a relatively flat budget.                                                                                            
                                                                                                                                
12:09:32 PM                                                                                                                   
                                                                                                                                
Mr.  Painter advanced  to slide  16 and  continued to  review                                                                   
the  governor's  proposed  budget.  Statewide  Items  in  the                                                                   
governor's  budget  totaled  $464.1   million.  The  governor                                                                   
proposed  only  funding  School Debt  Reimbursement  and  the                                                                   
Regional    Education    Attendance    Area    (REAA)    Fund                                                                   
Capitalization at  50 percent of the statutory  level - areas                                                                   
he had  vetoed in  FY 20. In  FY 21  the governor  vetoed 100                                                                   
percent  of the  two  items.  The governor  proposed  funding                                                                   
Community  Assistance  solely   with  PCE  funds  which  were                                                                   
designated general  funds (DGF),  and he did  not add  any of                                                                   
the allowable UGF.  The fund was paid out  based on one-third                                                                   
of  the  fund  balance.  If  the   legislature  accepted  the                                                                   
governor's   budget,   $19.5 million   would   be   paid   to                                                                   
communities  in  FY  23.  The amount  was  almost  the  exact                                                                   
amount needed  to pay the  community base payments.  The base                                                                   
payments  went   out  first.   Any  additional   funding  was                                                                   
disbursed  in per-capita  payments  according to  population.                                                                   
He  continued  that  the  $19.5   million  only  covered  the                                                                   
community  base  payments.  Therefore,  large  urban  centers                                                                   
would  experience  the  largest   impact  not  receiving  any                                                                   
funding.                                                                                                                        
                                                                                                                                
Mr.  Painter  reported  that   in  the  budget  the  governor                                                                   
proposed fully  funding oil  and gas tax  credits at  the $60                                                                   
million  statutory level.  However, the  credits were  funded                                                                   
with  Alaska  Industrial  Development  and  Export  Authority                                                                   
(AIDEA)  receipts, "other"  fund  code, rather  than UGF.  He                                                                   
indicated that  LFD considered  such a change  to be  a trick                                                                   
to  reduce the  budget. If  the legislature  felt that  AIDEA                                                                   
was  over-capitalized  there  was  a number  of  things  that                                                                   
could be done to  reduce the amount in AIDEA's  funds such as                                                                   
increasing  the  dividend it  paid  the state.  He  suggested                                                                   
that having AIDEA  pay directly for statewide  items that had                                                                   
nothing to  do with  AIDEA's functions  made the budget  look                                                                   
smaller but  was not consistent  with transparent  budgeting.                                                                   
If  the  legislature  felt  that   AIDEA  had  an  extra  $60                                                                   
million,  the transparent  action  would be  to transfer  $60                                                                   
million from AIDEA's  reserves into the CBR and  fund the tax                                                                   
credits  with UGF.  He concluded  that  while the  governor's                                                                   
number was  $464 million, another  $60 million would  need to                                                                   
be added to truly reflect the size of the budget.                                                                               
                                                                                                                                
Mr.  Painter conveyed  that the  governor also  had a  Public                                                                   
Employees'  Retirement  System  (PERS) bill.  The  associated                                                                   
dollars  were not  included in  the  totals but  were in  the                                                                   
fiscal  summary. There  was an  estimated savings  associated                                                                   
with  the  bill  of $43.3  million  UGF.  The  bill  involved                                                                   
eliminating  the   statutory  cap  a  state   employer  paid.                                                                   
However,  it would not  impact non-state  entities.  Only the                                                                   
State of Alaska  would be impacted. The amount  would be paid                                                                   
with other fund  sources, particularly federal  funds, to pay                                                                   
the  full  costs.  The estimate  was  $43 million,  and  more                                                                   
analysis would  need to  be done by  the executive  branch to                                                                   
determine  how much  of  the non-UGF  fund  sources would  be                                                                   
realizable.  Once the  bill reached  the legislature,  fiscal                                                                   
notes would be necessary to truly understand it.                                                                                
                                                                                                                                
12:13:21 PM                                                                                                                   
                                                                                                                                
Mr.  Painter advanced  to slide  17 and  continued to  review                                                                   
the governor's  proposed budget.  The capital budget  totaled                                                                   
$58.5 million UGF  but was bolstered by an  AHFC bond package                                                                   
in  the amount  of  $101.6 million.  The  true  total of  the                                                                   
capital  budget  would  be  closer  to  $160  million  taking                                                                   
advantage  of the low  interest rate  environment to  propose                                                                   
bonding. The  bonding would  be paid for  out of  a reduction                                                                   
to  the  future  AHFC dividend,  a  UGF  revenue  source.  He                                                                   
relayed that  AHFC would pay the  debt service and  lower its                                                                   
dividend to the  state. Essentially, the payments  would show                                                                   
up as reduced UGF revenue.                                                                                                      
                                                                                                                                
Mr.  Painter  reported  that  the  governor  also  planned  a                                                                   
general   obligation   (GO)  bond   proposal.   However,   no                                                                   
legislation  had  been  submitted  to-date,  and  a  list  of                                                                   
projects had  not been  submitted. There  was no shortage  of                                                                   
projects that  could be  listed. He  indicated that  the list                                                                   
of  school   construction  and  major  maintenance   projects                                                                   
combined to  over $400 million.  The division was  waiting on                                                                   
details that might  be provided once the  legislative session                                                                   
began.  He   reiterated  that  the  fast-track   supplemental                                                                   
included  some   unfunded  FY  21  capital   projects;  other                                                                   
projects  were  moved  to  the  FY 22  budget;  a  few  other                                                                   
projects  had   been  funded  through  the   Revised  Program                                                                   
Legislative (RPL)  process in  FY 21; and some  projects were                                                                   
funded  through other  means.  The division  would provide  a                                                                   
full analysis in its overview of the governor's budget.                                                                         
                                                                                                                                
12:15:14 PM                                                                                                                   
                                                                                                                                
Mr. Painter  turned to a  table on slide  18 showing  a short                                                                   
fiscal  summary  of the  governor's  budget (UGF  only).  The                                                                   
slide  showed the  factors he  had  reviewed. He  highlighted                                                                   
that in FY 21  the governor's budget would have  a deficit of                                                                   
$2.1  billion. The  legislature  had already  authorized  CBR                                                                   
draws to pay  for some of the deficit. The  governor proposed                                                                   
to  pay for  the  rest by  paying  for the  supplemental  PFD                                                                   
directly  out  of the  ERA  beyond  the statutory  POMV  draw                                                                   
level. In  FY 22 there  would be  a slightly smaller  deficit                                                                   
but close to  $2.1 billion. The governor proposed  to pay for                                                                   
most of the  deficit with a draw  from the ERA that  would go                                                                   
directly to  the dividend fund.  The remainder would  be paid                                                                   
with CBR monies. He paused for questions.                                                                                       
                                                                                                                                
Co-Chair Foster referred  to slide 18. He clarified  that for                                                                   
FY  22 the  governor's budget  included a  full PFD  totaling                                                                   
about  $2 billion.  He also  clarified  that for  FY 21,  the                                                                   
supplemental  appropriations included  a supplemental  PFD of                                                                   
$1.2 billion  and other  supplemental items.  He asked  if he                                                                   
was correct.                                                                                                                    
                                                                                                                                
Mr.  Painter responded,  "Mr. Chairman,  that's correct."  He                                                                   
noted  that the  other supplementals  equaled $39.8  million,                                                                   
the  largest of  which was  part of  contingency language  to                                                                   
reappropriate  money  into  the  disaster  relief  fund.  The                                                                   
governor  was appropriating  $30  million  into the  disaster                                                                   
fund and the rest was for capital projects.                                                                                     
                                                                                                                                
Co-Chair Johnston  asked if LFD  would be able to  model what                                                                   
the PF  would need  to earn  to have  the funds available  in                                                                   
FY 23 for  the governor's budget    for the  structured draw.                                                                   
She wondered whether  there would be enough funds  in the ERA                                                                   
to balance  the budget  if the legislature  were to  pass the                                                                   
governor's  budget   and  the  governor's   supplemental,  or                                                                   
whether  the  account  would   earn  enough  to  balance  the                                                                   
budget. Mr. Painter could followup with some modeling.                                                                          
                                                                                                                                
Co-Chair Johnston  thanked Mr.  Painter for pointing  out the                                                                   
one-time only  budget reductions.  She was interested  in the                                                                   
unfunded liability  of the state's  pension funds and  how to                                                                   
pay  it.  She  appreciated  the   governor's  idea  regarding                                                                   
savings. She  mentioned the Department  of Health  and Social                                                                   
Services positions  and wondered how  many of them  were paid                                                                   
with  both federal  and state  dollars.  She thought  federal                                                                   
dollars would  be used  to pay for  positions related  to the                                                                   
unfunded  liability. She  queried  about a  reduction in  the                                                                   
budget.                                                                                                                         
                                                                                                                                
Mr.  Painter  replied  that  it  would be  a  shift  of  fund                                                                   
sources. There  would be  no reduction in  the budget  in all                                                                   
funds.  He  explained  that  when  the  additional  costs  of                                                                   
retirement  were  paid,  they  were paid  entirely  with  UGF                                                                   
dollars. In  the agencies there  were matching  federal funds                                                                   
available. Some of  the spending could be shifted  to federal                                                                   
fund sources.  He would  expect that  the fiscal notes  would                                                                   
reflect  a $95  million reduction  to the  statewide item  of                                                                   
retirement  payments.  There  would  also be  a  $95  million                                                                   
increase  in  agency   funding.  However,  not   all  of  the                                                                   
$95 million  in agency  funding  would be  UGF. He  explained                                                                   
that $43  million was  the amount of  reduced UGF  because of                                                                   
the  switch  to  other  funds   sources  that  OMB  estimated                                                                   
related to  the 50/50  positions within  DHSS. There  was the                                                                   
potential for  significant UGF reductions simply  by shifting                                                                   
the payment of certain positions to the federal government.                                                                     
                                                                                                                                
12:20:44 PM                                                                                                                   
                                                                                                                                
Co-Chair  Johnston surmised  that  the amount  of the  budget                                                                   
would remain  the same. The federal  funds would be  used for                                                                   
operations  and  for  paying   off  the  state  pension  fund                                                                   
liability. Mr. Painter  agreed. The total budget  level would                                                                   
remain  the same.  However,  there would  be  an increase  in                                                                   
federal funds being used to pay for the liability costs.                                                                        
                                                                                                                                
Co-Chair  Foster   acknowledged  Representative-Elect   James                                                                   
Kaufman  in the  audience.  He thanked  him  for joining  the                                                                   
meeting.                                                                                                                        
                                                                                                                                
Vice-Chair  Ortiz  returned  to  slide 9.  The  slide  showed                                                                   
where  the  different   reductions  had  been   made  to  the                                                                   
different  agencies. He  drew  attention to  the  top of  the                                                                   
slide. Under  "all other agencies"  there was a  35.6 percent                                                                   
reduction  in  funding  for all  agencies  outside  of  DHSS,                                                                   
DEED, and  DPS. He wondered if  it was within the  purview of                                                                   
LFD  to  conduct   assessments  related  to  the   impact  of                                                                   
reductions  on the  effectiveness  of agencies  to carry  out                                                                   
their  constitutional requirements.  Conversely, he  wondered                                                                   
whether  assessments   had  been   conducted  regarding   the                                                                   
impacts of  funding increases  of agencies and  their ability                                                                   
to do their required work.                                                                                                      
                                                                                                                                
Mr. Painter replied  that there are a series  of missions and                                                                   
measures   reported  as   part  of   the  governor's   budget                                                                   
submission  that were  required  by statute.  The success  of                                                                   
each component  within  the budget, relative  to the  applied                                                                   
metrics,  were reported.  A person  could  study and  compare                                                                   
the  performance   metrics  prior   to  the  reductions   and                                                                   
following the reductions.  The legislature had  not given the                                                                   
metrics  resource   much  attention  in  recent   years.  The                                                                   
missions  and measures  process was designed  to provide  the                                                                   
information.  He  indicated  that the  information  could  be                                                                   
found  on OMB's  website  where  detailed budget  books  were                                                                   
available.  He   reported  that  LFD  had  not   perform  any                                                                   
additional analysis.                                                                                                            
                                                                                                                                
12:24:41 PM                                                                                                                   
                                                                                                                                
Representative   Wool   referred   to   slide   12   of   the                                                                   
presentation   showing  current   policy   and  current   law                                                                   
scenarios.  He deduced  that the  pre-transfer deficit  would                                                                   
be $886  million. If the PFD  was zero, the deficit  would be                                                                   
$200  million.  He  asked  if he  was  correct.  Mr.  Painter                                                                   
answered that  with the other  current policy  assumptions he                                                                   
would  be correct.  He  suggested  that without  funding  any                                                                   
other  statewide  items  the  deficit  would  be  about  $200                                                                   
million.                                                                                                                        
                                                                                                                                
Representative  Wool   asked  about  the  reduction   of  101                                                                   
positions  in the  Public Assistance  Division  and a  budget                                                                   
reduction of $3.4  million. He averaged the  cost savings per                                                                   
position  of $34,000.  He  thought there  had  to be  greater                                                                   
reductions than  $34,000 per position.  He wondered  if other                                                                   
areas had  experienced a similar  reduction in  positions due                                                                   
to the pandemic and people working remotely.                                                                                    
                                                                                                                                
Mr.  Painter clarified  that  the $3.4  million  was the  UGF                                                                   
reduction.  There was also  a reduction  in federal  funding.                                                                   
The reduction  was about  twice the amount  in all  funds. He                                                                   
indicated  that the  Public Assistance  Division  experienced                                                                   
the  largest  reduction  of  positions  clarifying  that  the                                                                   
change was  essentially  a shift in  service delivery.  There                                                                   
were  some  smaller  efforts  towards  reductions.  He  noted                                                                   
closing some of  the Division of Motor Vehicle  (DMV) offices                                                                   
which  would result  in a  reduction  of positions  and in  a                                                                   
smaller savings.  The Department of Revenue within  the Child                                                                   
Support  Division experienced  the  second largest  reduction                                                                   
of  positions. The  reduction  was  due to  a  re-platforming                                                                   
project.  Most  of  the  decreases   applied  to  contractual                                                                   
services rather than positions.                                                                                                 
                                                                                                                                
Representative  Wool summarized  that  the Public  Assistance                                                                   
Division and the  Division of Child Support  had received the                                                                   
largest reductions.  He pointed  to the short  fiscal summary                                                                   
on the bottom  of slide 18. He asked for  clarification about                                                                   
the  balance  of  the CBR.  Mr.  Painter  answered  that  LFD                                                                   
projected that $900  million would be left in the  CBR at the                                                                   
end  of FY  21 following  the  deficit draw.  The amount  had                                                                   
already  been   calculated  out   because  of  the   way  the                                                                   
legislature funded  the budget. The legislature  had approved                                                                   
one-quarter  of the budget  coming directly  out of  the CBR.                                                                   
The amount  was drawn at  the beginning  of the year  and was                                                                   
factored into LFD's projections.                                                                                                
                                                                                                                                
Representative Wool  confirmed that the balance  included the                                                                   
withdraw  of  $896  million.  Mr.  Painter  responded,  "Yes,                                                                   
that's correct."                                                                                                                
                                                                                                                                
12:29:07 PM                                                                                                                   
                                                                                                                                
Representative  LeBon  referred to  slide  16.  He wanted  to                                                                   
discuss AIDEA  receipts being  used to fund  oil and  gas tax                                                                   
credits. He opined  that it was not possible for  AIDEA to be                                                                   
overcapitalized,  as it  was the state's  bank. He  suggested                                                                   
it would be helpful  to define what it meant  for AIDEA to be                                                                   
overcapitalized.  He  continued  that AIDEA's  capital  level                                                                   
helped them to  originate investments on behalf  of the state                                                                   
and  to secure  low  interest  rates  on their  bond  raising                                                                   
activities. He  disagreed that AIDEA was  overcapitalized. He                                                                   
asked  if it was  a practical  strategy to  draw $60  million                                                                   
from AIDEA in FY  22 to fund the oil and gas  tax credits. He                                                                   
was unsure  if the governor's  plan was a one-year  or multi-                                                                   
year plan.                                                                                                                      
                                                                                                                                
Mr. Painter  did not know  the governor's plan  in subsequent                                                                   
years. Based  on the  governor's 10-year  plan there  did not                                                                   
appear to  be an increase  in FY 23  that would  suggest that                                                                   
the the  administration planned to  pay for tax  credits with                                                                   
UGF. Two years  prior, the legislature had  discussed whether                                                                   
AIDEA was capitalized  at the proper level  when the governor                                                                   
had  proposed  to directly  draw  AIDEAs  funds. It  was  the                                                                   
legislature's  policy  call  as  to how  much  funding  AIDEA                                                                   
should have.                                                                                                                    
                                                                                                                                
Mr. Painter suggested  that if the legislature  thought AIDEA                                                                   
had  more  reserves  than  needed,   it  could  increase  the                                                                   
dividend  statute  to  match  AHFC's  dividend  statute.  The                                                                   
Alaska  Housing  Finance  Corporation  had to  pay  about  75                                                                   
percent  of its  earnings  of net  revenue  as its  dividend.                                                                   
Alaska   Industrial   Development  and   Export   Authority's                                                                   
dividend statute  called for a dividend payout  of between 25                                                                   
percent to  50 percent  of earnings. He  noted that  the most                                                                   
recent  credit  rating  for  AIDEA   specifically  cited  the                                                                   
legislative appropriations  from AIDEA receipts  from 2 years                                                                   
prior with  a note of caution  for AIDEA's credit.  There was                                                                   
a  general concern  that AIDEA  funds  would be  used by  the                                                                   
state to  meet its expenses which  could result in  a reduced                                                                   
credit rating.                                                                                                                  
                                                                                                                                
12:32:35 PM                                                                                                                   
                                                                                                                                
Representative LeBon appreciate the input.                                                                                      
                                                                                                                                
Mr.  Painter moved  to  slide 19  to  discuss the  governor's                                                                   
10-year plan.  It called for  ERA draws beyond  the statutory                                                                   
level in  FY 21  and FY 22.  However, his  plan called  for a                                                                   
balanced  budget beginning  in FY  23. He  achieved his  plan                                                                   
through  three main mechanisms.  The first  mechanism  was to                                                                   
change  the statutory  dividend  formula from  50 percent  of                                                                   
statutory  net income  to 50  percent  of the  POMV draw.  It                                                                   
would be a  reduction of approximately $400  million per year                                                                   
and  was contingent  on  a vote  of  the public.  The  second                                                                   
mechanism  was to  reduce  agency  operations  by about  $100                                                                   
million each  in FY  23 and FY  24. In  out years  he planned                                                                   
for  1.5  percent  growth,  which  was  consistent  with  the                                                                   
constitutional spending  limit proposed by the  governor. The                                                                   
largest deficit  filling item in the governor's  10-year plan                                                                   
was $900 million  to $1.2 billion in new revenue  starting in                                                                   
FY 23. The governor  did not specify where  the revenue would                                                                   
come from. The  largest year of revenue was in  FY 23 and the                                                                   
amount  moved  around  as  needed to  ensure  there  were  no                                                                   
budget deficits each year.                                                                                                      
                                                                                                                                
12:34:25 PM                                                                                                                   
                                                                                                                                
Mr. Painter  moved to  final slide,  slide 20. The  overdraws                                                                   
from  the  ERA  increased future  deficits  by  reducing  the                                                                   
amount  of   money  in  the   PF.  The  Legislative   Finance                                                                   
Division's  rule of  thumb  was  to have  a  5 percent  POMV.                                                                   
Therefore, $3.2 billion  of draws meant that 5  percent was a                                                                   
permanent  increase   in  the  deficit.  He   suggested  that                                                                   
5 percent of $3.2  billion was $160 million.  Future deficits                                                                   
would  be $160  million larger  in real  terms or  inflation-                                                                   
adjusted terms.  The legislature  needed to weigh  its desire                                                                   
for  stimulus  spending  in the  current  year.  Because  the                                                                   
economy  was  struggling,  the   governor  wanted  to  inject                                                                   
capital  into the  economy  through  higher dividends  and  a                                                                   
bonding  proposal. Both  would come  at a  long-term cost  in                                                                   
the form  of reductions to  future revenues which  could lead                                                                   
to future taxes and reduced services.                                                                                           
                                                                                                                                
Mr.  Painter  also  noted  that  the new  revenue  in  FY  23                                                                   
proposed  in   the  governor's   budget  would  need   to  be                                                                   
authorized in the  current year because of the  time it would                                                                   
take  to   implement  tax  measures.   It  was   possible  to                                                                   
incorporate  revenue measures  quickly,  particularly with  a                                                                   
sales tax.  He noted  several municipalities  that had  sales                                                                   
taxes in  place and  reiterated the  possibility of  having a                                                                   
sales  tax in place  in a  timely fashion.  He suggested  the                                                                   
legislature would  need to take  up the issue in  the current                                                                   
session.  He  pointed out  that  in  the following  year  the                                                                   
legislature would  still be faced  with a large  deficit even                                                                   
with turning  a corner  with the  pandemic and infusing  cash                                                                   
into  the  economy.  There  would  be  no  other  measure  to                                                                   
resolve  the deficit  than  to  take another  unplanned  draw                                                                   
from the  ERA. He  thought the ERA  could be drained  rapidly                                                                   
similar to how  the CBR and SBR were depleted.  Each year the                                                                   
legislature  delayed  resolving  the long-term  deficit,  the                                                                   
deeper  the  deficit  hole  would   become.  Every  year  the                                                                   
legislature drew  more from the  ERA than the  statute called                                                                   
for would result  in higher taxes or reduced  services in the                                                                   
future.                                                                                                                         
                                                                                                                                
Mr. Painter  continued  that if the  legislature pulled  from                                                                   
designated  funds such  as the PCE  fund, additional  funding                                                                   
would  have  to be  identified  or  the program  would  cease                                                                   
placing  increased pressure  on the budget.  He presented  an                                                                   
analogy.  The governor's  stimulus plan  was akin to  getting                                                                   
dessert  (stimulus monies)  but  only if  a  person also  ate                                                                   
their  vegetables  (budget  cuts   and  new  revenue)  -  the                                                                   
governor's plan  relied on both.  The legislature  could make                                                                   
completely  different policy  decisions such  as calling  for                                                                   
lower dividends,  less  revenues and  deeper cuts, and  other                                                                   
actions. However,  the bottom  line was  that every  year the                                                                   
legislature  delayed  closing  the structural  deficit  would                                                                   
make  it more  difficult  and more  costly  to do  so in  the                                                                   
future. He concluded his presentation.                                                                                          
                                                                                                                                
Co-Chair Foster  asked about  the FY  22 budget and  wondered                                                                   
what  the price  of  oil  would need  to  be to  balance  the                                                                   
budget.  Mr.  Painter could  provide  an  answer at  a  later                                                                   
time.                                                                                                                           
                                                                                                                                
Mr. Painter  looked forward to  working with  the legislature                                                                   
in the coming session.                                                                                                          
                                                                                                                                
Co-Chair Foster thanked the presenters.                                                                                         
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
12:40:26 PM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 12:40 p.m.                                                                                         

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