Legislature(2015 - 2016)SENATE FINANCE 532

01/22/2015 09:00 AM FINANCE


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09:04:46 AM Start
09:07:40 AM Presentation: Overview Fy 16 Operating and Capital Budgets
10:38:55 AM Committee Contracts: Angela Rodell and William Streur
11:00:58 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: Overview FY17 Operating Budget TELECONFERENCED
Departments: Environmental Conservation and
Finance Division
Committee Contracts: Angel Rodell and Bill Streur
                 SENATE FINANCE COMMITTEE                                                                                       
                     January 22, 2015                                                                                           
                         9:04 a.m.                                                                                              
                                                                                                                                
9:04:46 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Kelly  called the  Senate Finance Committee  meeting                                                                   
to order at 9:04 a.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Peter Micciche, Vice-Chair                                                                                              
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
David Teal, Director, Legislative Finance Division                                                                              
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
PRESENTATION:  OVERVIEW FY 16 OPERATING and CAPITAL BUDGETS                                                                     
                                                                                                                                
COMMITTEE CONTRACTS: ANGELA RODELL and WILLIAM STREUR                                                                           
                                                                                                                                
Co-Chair  Kelly  introduced  the  members and  staff  of  the                                                                   
Senate Finance Committee.                                                                                                       
                                                                                                                                
^PRESENTATION:     OVERVIEW  FY  16  OPERATING   and  CAPITAL                                                                 
BUDGETS                                                                                                                       
                                                                                                                                
9:07:40 AM                                                                                                                    
                                                                                                                                
DAVID   TEAL,   DIRECTOR,   LEGISLATIVE   FINANCE   DIVISION,                                                                   
discussed  the PowerPoint,  "An Overview  of Alaska's  Fiscal                                                                   
Situation"(copy  on  file).  He stated  that  the  governor's                                                                   
budget was currently  a "work in progress."  He remarked that                                                                   
the current  oil prices  were related  to the state's  budget                                                                   
deficit.                                                                                                                        
                                                                                                                                
Mr.   Teal  looked   at   the   slide  titled,   "Figure   1.                                                                   
Unrestricted  General Fund  Revenue and  Budget History."  He                                                                   
felt that  the graph reflected  all of the issues  related to                                                                   
the   budget.  He   stated  that   the   dark  blue   portion                                                                   
represented   the   agency   operations;   the   light   blue                                                                   
represented the  statewide operating; the  yellow represented                                                                   
the  capital  budget;  the  red   represented  the  net  fund                                                                   
transfers;  and  the  green  portion  was  the  general  fund                                                                   
revenue. He  stated that there  were substantial  deposits to                                                                   
the savings.                                                                                                                    
                                                                                                                                
Mr.  Teal  discussed  the slide  titled,  "Figure  2.  Alaska                                                                   
Unrestricted   General  Fund   Revenue."  He  stressed   that                                                                   
Alaska's  revenue  was  quite   volatile.  He  stressed  that                                                                   
Alaska's  reserves were  essential  to  maintaining a  stable                                                                   
budget.                                                                                                                         
                                                                                                                                
Mr.  Teal displayed  the  slide  titled, "Figure  2a.  Alaska                                                                   
Unrestricted  General Fund  Revenue (Left  Axis) and  Average                                                                   
ANS   Price/bbl    (Right   Axis)."   He   added    a   price                                                                   
representation  in   order  to  understand   the  correlation                                                                   
between oil price and revenue.                                                                                                  
                                                                                                                                
Mr.   Teal   discussed   the   slide   titled,   "Figure   2.                                                                   
Unrestricted General  Fund Revenue and Budget  History Agency                                                                   
Operations." From  1982 peak production  to the  early 2000s,                                                                   
revenue   was  on  a   downward  trend,   due  to   declining                                                                   
production.  The decline  was  steady up  until present  day,                                                                   
and   would  continue   to   decline   short  of   additional                                                                   
investment  and production.  He stated  that price drove  the                                                                   
increases  in  2003 to  2006.  At  that time,  the  petroleum                                                                   
profit  tax  (PPT)  was  enacted,   followed  by  changes  to                                                                   
Alaska's Clear and  Equitable Share (ACES). He  remarked that                                                                   
it  was  difficult  to differentiate  the  impact  of  prices                                                                   
versus the taxation scheme.                                                                                                     
                                                                                                                                
9:13:53 AM                                                                                                                    
                                                                                                                                
Senator  Dunleavy observed  that the  committee would  either                                                                   
accept  or reject  the projection.  Mr. Teal  replied in  the                                                                   
affirmative.  He  explained  that   the  Legislative  Finance                                                                   
Division (LFD)  may have an opinion  on the direction  of oil                                                                   
prices.  There   were  some  forecasters  that   believed  40                                                                   
dollars or lower  was possible in the near  future. He stated                                                                   
that LFD  did not  have the data  to override the  Department                                                                   
of Revenue  (DOR) forecast  structure.  He stressed that  LFD                                                                   
accepted the DOR forecast, for budget purposes.                                                                                 
                                                                                                                                
Senator  Dunleavy  stated  that the  state's  current  fiscal                                                                   
situation   could  be   a   result  of   optimistic   revenue                                                                   
predictions.                                                                                                                    
                                                                                                                                
Mr.   Teal   presented   the   slide   titled,   "Figure   1.                                                                   
Unrestricted  General  Fund  Revenue   and  Budget  History."                                                                   
Without expenditure  reductions  or revenue enhancement,  the                                                                   
state  would  experience  a  roughly   $1  billion  per  year                                                                   
deficit.   The  growth,   which  began   in  2005,  was   not                                                                   
sustainable.  The expenditures  increased from  approximately                                                                   
$3 billion  to $6 billion over  ten years. He  announced that                                                                   
many legislators  understood  that there  would be a  decline                                                                   
in  revenue, but  the deficit  was  unavoidable. He  stressed                                                                   
that there  was a  substantial amount of  money set  aside in                                                                   
the state's  reserves. He  pointed out that  the red  bars at                                                                   
the  bottom  of  the graph  indicated  withdrawals  from  the                                                                   
state's  reserves. He  declared  that the  state was  rapidly                                                                   
withdrawing from the reserves.                                                                                                  
                                                                                                                                
9:18:33 AM                                                                                                                    
                                                                                                                                
Mr.   Teal  looked   at   the   slide  titled,   "Figure   3.                                                                   
Unrestricted   General  Fund   Revenue  and  Budget   History                                                                   
Statewide  Operations."   The  slide  displayed   the  agency                                                                   
operations,  which would  be considered  the cost of  running                                                                   
government.  He believed  that most Alaskans  would think  of                                                                   
the  agency operations,  when  referring to  the budget.  The                                                                   
category  consisted of  formula programs  including K-12  and                                                                   
Medicaid; and  consisted of non-formula programs,  which were                                                                   
the funds  for the  day-to-day activities  that did  not have                                                                   
statutory  funding rules.  He  noted that  expenditures  were                                                                   
fairly  flat for  over  twenty  years. As  revenue  increased                                                                   
beginning  in  2005,  the  unrestricted  general  fund  (UGF)                                                                   
operations  spending  doubled.  That activity  reflected  the                                                                   
trend  from  the  first  oil production  in  the  1970s.  The                                                                   
driver of  agency operations was  not just formula  programs.                                                                   
He  remarked   that  only  half   of  the  operation   budget                                                                   
increases were due to formula programs.                                                                                         
                                                                                                                                
Mr.  Teal  discussed  the  slide   titled,  "Figure  4.  Cost                                                                   
Drivers--Agency    Operations,    Contribution   to    Budget                                                                   
Increases  FY 06 to  FY 15  ($ millions)  $1.9 Billion  Total                                                                   
UGF  Increase." He  stated that  approximately two-thirds  of                                                                   
the  $1.9 billion  UGF increase  was due  to three  different                                                                   
factors. He  stated that  K-12 was  currently a $1.3  billion                                                                   
program, took  approximately 61  percent of formula  funding,                                                                   
and was approximately  26 percent of the  expenditure growth.                                                                   
The K-12  program was increased  by $485 million  during that                                                                   
period, which was  a 57 percent growth rate  since 2006. This                                                                   
growth  was   slower  than   the  non-formula  programs.   He                                                                   
stressed that K-12  was formerly 33 percent of  the budget in                                                                   
2006,  but that  share  of the  budget  was  decreased to  30                                                                   
percent  currently.  He  stressed  that K-12  was  a  driver,                                                                   
because it was large, not because it was growing rapidly.                                                                       
                                                                                                                                
Co-Chair Kelly  wondered if the  K-12 program was  33 percent                                                                   
of the  budget. Mr. Teal responded  that K-12 was  33 percent                                                                   
of the  budget in 2006.  The K-12 program  was now  taking 26                                                                   
percent of the $1.9 billion.                                                                                                    
                                                                                                                                
Mr.  Teal restated  that  K-12  had grown  at  a  rate of  57                                                                   
percent  in dollar  terms. In  2006, K-12  was 33 percent  of                                                                   
the budget,  and the share  of the budget  had dropped  to 30                                                                   
percent  in 2015.  He restated  that K-12  was 26 percent  of                                                                   
the  $1.9 billion  increase. He  stressed that  the cost  was                                                                   
high  and growing  rapidly.  He stated  that  Medicaid had  a                                                                   
slightly  smaller  increase  than  K-12,  but  together  they                                                                   
accounted  for  approximately  $900  million.  Other  formula                                                                   
programs had  smaller growth,  so Medicaid and  K-12 programs                                                                   
were  most often  considered the  only  formula programs.  He                                                                   
remarked that  Medicaid was small  compared to K-12,  but was                                                                   
growing at  a more rapid  pace. Medicaid  had grown at  a 149                                                                   
percent  increase over  ten  years, from  11  percent of  the                                                                   
budget  in  2006  to  15  percent   of  the  current  budget.                                                                   
Medicaid would surpass  K-12, if it continued to  grow at its                                                                   
current pace.                                                                                                                   
                                                                                                                                
9:23:32 AM                                                                                                                    
                                                                                                                                
Vice-Chair Micciche  wondered if there were  controlled costs                                                                   
in  each  of  the categories.  He  felt  that  the  increased                                                                   
spending  from  the   two  years  prior  could   be  seen  as                                                                   
irresponsible.  Co-Chair Kelly  replied that  there would  be                                                                   
hearings related  to individuals  who were contracted  by the                                                                   
committee to determine the controllable costs.                                                                                  
                                                                                                                                
Mr.  Teal furthered  that all  costs  were controllable,  but                                                                   
some were  more controllable  than others.  He remarked  that                                                                   
Medicaid was an  entitlement program, so some  people thought                                                                   
that the  Medicaid costs were  not controllable.  He stressed                                                                   
that  the  costs  were  controllable,   but  the  costs  were                                                                   
difficult to control.                                                                                                           
                                                                                                                                
Senator Olson noted  that the Alaska budget  utilized federal                                                                   
funds.  He  asked  for  a comparison  of  general  funds  and                                                                   
federal funds.  He wanted  to analyze  the federal  funds, so                                                                   
he could make an informed decision.                                                                                             
                                                                                                                                
Co-Chair  Kelly  asked  for  Senator  Olson  to  restate  the                                                                   
question.                                                                                                                       
                                                                                                                                
Senator  Olson explained  that the slide  only displayed  the                                                                   
general  funds, but  the committee  also  dealt with  federal                                                                   
funds. He understood that all costs were controllable.                                                                          
                                                                                                                                
Co-Chair  Kelly remarked  that  it was  difficult to  control                                                                   
many of the  funds, because of the entanglement  with federal                                                                   
dollars. He assumed  that doubling Medicaid would  be similar                                                                   
to  the  total  fund  for  Medicaid.  Mr.  Teal  agreed,  and                                                                   
explained  that the  UGF was the  only fund  category  with a                                                                   
surplus or deficit,  so it was the main focus  of the budget.                                                                   
He explained that  the federal funds were a  large portion of                                                                   
Medicaid   and  a  small   portion  of   K-12.  The   federal                                                                   
expenditures and  revenues were always balanced,  because the                                                                   
state could  only spend as  much of  the federal money  as it                                                                   
was given. He  added that the designated general  funds (DGF)                                                                   
and  other  state  funds  had   assumptions  built  into  the                                                                   
spending,  so they  could only  be spent to  the extent  that                                                                   
revenues were collected.  He restated that there  would never                                                                   
be a deficit in  any fund category, except for  UGF. He added                                                                   
that  he  did  not  intend  to  diminish  the  importance  of                                                                   
federal funds or other funds in the budget process.                                                                             
                                                                                                                                
9:28:54 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly  felt  that  the   current  issue  should  be                                                                   
referred  to as  "shortfalls"  rather than  a "deficit."  Mr.                                                                   
Teal replied  that the  terms, "surplus"  and "deficit"  were                                                                   
related  to  cash  flow.  He  stated  that  Alaska  had  $2.2                                                                   
billion  in  revenue,  and  was   spending  more  than  that,                                                                   
therefore there was a cash flow deficit.                                                                                        
                                                                                                                                
Co-Chair  Kelly remarked  that  the shortfall  was  dramatic,                                                                   
and  felt   that  the  federal   budget  deficit   should  be                                                                   
separated from  Alaska's current  budget situation.  Mr. Teal                                                                   
responded  that Alaska  established reserves  during a  cash-                                                                   
flow surplus.  He felt  that drawing  from reserves  during a                                                                   
cash-flow deficit was a fair way to budget.                                                                                     
                                                                                                                                
Co-Chair  Kelly  stressed  that   Alaska's  budget  shortfall                                                                   
would  result  in  more dramatic  impacts  than  the  federal                                                                   
government.                                                                                                                     
                                                                                                                                
Senator Hoffman  remarked that the budget should  be examined                                                                   
within  the context  of  each given  fiscal  year. He  stated                                                                   
that  the legislature  was required  to  balance the  budget,                                                                   
but  the revenue  during  a particular  fiscal  year may  not                                                                   
meet the  needs of  the operations  for the year.  Therefore,                                                                   
the need must be filled by utilizing the reserves.                                                                              
                                                                                                                                
Mr.  Teal  furthered  that his  colleagues  in  other  states                                                                   
wonder  how Alaska  can balance  its budget,  because of  its                                                                   
volatile revenue.  He reiterated  that Alaska deposits  money                                                                   
in  its reserves  in times  of surplus,  enabling a  balanced                                                                   
budget.                                                                                                                         
                                                                                                                                
9:34:56 AM                                                                                                                    
                                                                                                                                
Co-Chair   Kelly  stressed   that   Alaska's  revenues   were                                                                   
volatile,  and felt  that Alaska  could not  rely on  natural                                                                   
resource  development  for  the   majority  of  its  revenue,                                                                   
because the  political environment  had changed so  much over                                                                   
20 years. He remarked  that North Dakota was able  to see its                                                                   
financial  return over  45 days,  but Alaska  had to wait  10                                                                   
years  for the  return. He  explained that  the long  waiting                                                                   
period was a result of regulations and permitting.                                                                              
                                                                                                                                
Vice-Chair  Micciche looked  at  page 77  of the  Legislative                                                                   
Finance  Division Revenue  Sources Book.  The chart  compared                                                                   
the  capital  budget  with  the   Alaska  North  Slope  (ANS)                                                                   
average  price.  He  noted  from 1985  to  1988,  roughly  80                                                                   
percent  of Alaska's  budget was  reduced.  He remarked  that                                                                   
the operating budget  at that time remained  relatively flat.                                                                   
He wondered  if the  legislature of  the 1980s believed  that                                                                   
the  capital  costs  were more  easily  controlled  than  the                                                                   
operating  costs. He  asked if  that  legislature focused  on                                                                   
keeping operating  costs at a minimum, because  it understood                                                                   
the volatility  of the  oil prices. He  noted that  from 2005                                                                   
to 2011,  the budget  was doubled, which  resulted in  a more                                                                   
challenging operating  budget task.  Mr. Teal responded  that                                                                   
he believed that  the legislature at the time  understood ANS                                                                   
price volatility.  He remarked  that former legislator,  Mike                                                                   
Kelly, believed  that state employees  were very  attached to                                                                   
their jobs.  He furthered that  the legislature in  the 1980s                                                                   
was  aware  that   the  state  used  an   incremental  budget                                                                   
process, meaning  that once money was added  to the operating                                                                   
budget, it became  part of the base that remained  year after                                                                   
year.  The  capital  budget, on  the  other  hand,  consisted                                                                   
solely  of one-time  expenditures.  Historically the  capital                                                                   
budget would  be increased  if the  money was available,  and                                                                   
reduced  when money  was  unavailable.  The operating  budget                                                                   
was difficult  to reduce, because  it was difficult  to scale                                                                   
down the growth after it occurred.                                                                                              
                                                                                                                                
9:39:45 AM                                                                                                                    
                                                                                                                                
Co-Chair Kelly announced  that he had served  as a legislator                                                                   
in the  1990s, and shared that  the legislature at  that time                                                                   
was faced  with a  quantifiable shortfall  in the  future. He                                                                   
referred from  a think  tank, which found  that in  the 1990s                                                                   
Alaska  was  unprecedented  among  the  history  of  all  the                                                                   
states.  At that time,  Alaska was  anticipating a  shortfall                                                                   
that  was  far  into  the  future,   and  was  applying  some                                                                   
stringent   fiscal  restraints   in   preparation  for   that                                                                   
shortfall.  From   2000  to  2010,  the   fiscal  environment                                                                   
changed  because  of  the  massive  amount  of  revenue  that                                                                   
Alaska received.  The legislature  at  that time filled  some                                                                   
of the  needs that it  was hoping to  get filled at  times of                                                                   
fiscal  restraint.  He  felt   that  there  was  currently  a                                                                   
similar  situation to  that  of the  1990s,  but the  current                                                                   
predicted shortfall  was nearer in  the future. He  felt that                                                                   
there were  current legislators  that understood the  need to                                                                   
respond quickly to the upcoming shortfall.                                                                                      
                                                                                                                                
Senator  Dunleavy  remarked  that  there  was  a  pattern  of                                                                   
"partially building"  in an effort to spread  out the capital                                                                   
expenditure  over   the  years.  Mr.  Teal  replied   in  the                                                                   
affirmative.                                                                                                                    
                                                                                                                                
9:43:07 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy  surmised that there was a  recent effort to                                                                   
mirror the capital  budget efforts with the  operating budget                                                                   
efforts. Mr.  Teal agreed. There  was a recent  philosophy of                                                                   
phasing the  capital projects.  The phasing would  reduce the                                                                   
amount of money  that was available for new  future projects.                                                                   
The  philosophy worked  well for  a  few years,  but at  some                                                                   
point  the  capital  funds  were   only  intended  to  finish                                                                   
current  projects  with  no  money  available  to  begin  new                                                                   
projects. He explained  that the governor's reduction  of the                                                                   
megaprojects  was a result  of that  spending philosophy.  He                                                                   
opined that  the revenue  earned in the  early 2000s  was not                                                                   
enough money  to finish  six megaprojects.  He felt  that the                                                                   
money  could have  possibly  completed  one megaproject,  had                                                                   
the revenue continued to increase.                                                                                              
                                                                                                                                
Senator  Dunleavy   felt  that   Mr.  Teal  often   had  good                                                                   
opinions.  He wondered  if the committee  should continue  to                                                                   
budget on a  $105 barrel of oil assumption.  Mr. Teal replied                                                                   
in the negative.                                                                                                                
                                                                                                                                
Senator Dunleavy  asked if the  committee should  continue to                                                                   
budget on  the assumption of a  $90 barrel. Mr.  Teal replied                                                                   
in the negative.                                                                                                                
                                                                                                                                
Senator  Dunleavy queried  if the  committee should  continue                                                                   
to  budget on  the  assumption  of an  $80  barrel. Mr.  Teal                                                                   
replied in the negative.                                                                                                        
                                                                                                                                
Senator Dunleavy  wondered if  the committee should  continue                                                                   
to  budget  on the  assumption  of  a  $60 barrel.  Mr.  Teal                                                                   
replied that  a $60  per barrel assumption  was close  to his                                                                   
recommendation.                                                                                                                 
                                                                                                                                
Mr.  Teal  continued to  discuss  the  pie chart.  The  third                                                                   
budget driver  was salary and  benefits at $350  million, and                                                                   
was  18  percent  of  the  $1.9  billion.  There  were  three                                                                   
aspects  to the  salary and  benefits portion  of the  chart.                                                                   
Negotiated   salaries   accounted  for   approximately   $150                                                                   
million of  that portion. The  number could be  doubled, when                                                                   
considering   total   funds   instead   of   GF.   In   2006,                                                                   
approximately $800  per employee  per month was  dedicated to                                                                   
health insurance.  Since that time, it had  increased to over                                                                   
$1300 per month,  which was approximately $6500  per employee                                                                   
per  year for  health coverage.  In addition,  the number  of                                                                   
employees  had increased  by  approximately  10 percent.  The                                                                   
health premiums  had subsequently increased  by approximately                                                                   
$75  million. The  retirement  costs,  were included  in  the                                                                   
salary and  benefits portion.  Those costs  did not  refer to                                                                   
the  state-assistance  to  retirement,  but referred  to  the                                                                   
part of the  retirement costs that were built  into every pay                                                                   
roll. The  cost was formerly 7  percent of pay roll,  but was                                                                   
currently  22  percent  of  the   pay  roll.  The  retirement                                                                   
portion  of the  salary  and benefits  totaled  approximately                                                                   
$130  million. He  reiterated  that the  main budget  drivers                                                                   
were K-12; Medicaid;  and salaries and benefits,  including a                                                                   
portion  of  retirement  costs.  The  final  portion  of  the                                                                   
chart,  "Other Program  Expansion",  referred to  all of  the                                                                   
remaining operating costs for government.                                                                                       
                                                                                                                                
9:48:32 AM                                                                                                                    
                                                                                                                                
Mr.   Teal   displayed   the   slide   titled,   "Figure   3.                                                                   
Unrestricted General  Fund Revenue and Budget  History Agency                                                                   
Operations." He  pointed out that  K-12 remained  fairly flat                                                                   
from the  late 1980s  to 2005.  In 1984,  K-12's GF  fund was                                                                   
under  $500 million  per  year. The  fund  increased to  $675                                                                   
million,  which  was a  60  percent  growth, over  a  20-year                                                                   
period.  Medicaid  doubled during  the  1990s,  but was  $136                                                                   
million  in 2000. Currently,  Medicaid  was $700 million  per                                                                   
year.  There were  no negotiated  increases  to the  salaries                                                                   
and benefits  for most of the  bargaining units in  11 of the                                                                   
20 years preceding  2006. There were also no  retirement cost                                                                   
increases  during that  time:  no unfunded  liability and  no                                                                   
benefit increases.  There were  revenue sharing  adjustments:                                                                   
$125 million  in 1982,  dropped to $18  million in  2002, and                                                                   
then disappeared  completely. He agreed that  there were some                                                                   
unmet  needs  during  that  time,   because  money  was  only                                                                   
available  for  established  and/or  needed  programs  during                                                                   
that 20-year period.                                                                                                            
                                                                                                                                
Mr.   Teal  looked   at   the   slide  titled,   "Figure   5.                                                                   
Unrestricted   General  Fund   Revenue  and  Budget   History                                                                   
Statewide  Operations."  Statewide   expenditures  were  once                                                                   
very low, and  almost insignificant. He pointed  out that the                                                                   
statewide  expenditures completely  disappeared, because  the                                                                   
entire  category was  composed  of debt  service. Bonds  were                                                                   
issued at  a Prudhoe  Bay curve,  which required bond  payoff                                                                   
by 2000,  when the oil was  supposed to run out.  After 2000,                                                                   
the state  began issuing general  obligation bonds.  The debt                                                                   
service  then  increased,  and  was  currently  approximately                                                                   
$230 million.                                                                                                                   
                                                                                                                                
9:51:24 AM                                                                                                                    
                                                                                                                                
Mr. Teal  discussed the  slide titled,  "Figure 6.  Statewide                                                                   
Operations (UGF  $ thousands)." He explained that  the bottom                                                                   
portion of  the graph was debt  service, but was not  a major                                                                   
piece of statewide  operations. He looked at  2006, which was                                                                   
the first year  for state assistance to retirement  funds. It                                                                   
was a  small initial cost,  with the expectation  to increase                                                                   
to  approximately  $75 million  by  2007  or 2008,  and  then                                                                   
decline then  disappear by 2020.  The economic crash  in 2008                                                                   
resulted in  massive losses  in the  market, which  created a                                                                   
large unfunded liability  to the systems. The  state began to                                                                   
assist the  Teachers Retirement  System (TRS) and  the Public                                                                   
Employees  Retirement  System (PERS),  by  capping the  rates                                                                   
the  employers paid.  The  state  paid money  on  top of  the                                                                   
rates to  make up  the difference, in  order to  maintain the                                                                   
full actuarial  funding.  The cost was  then several  hundred                                                                   
million dollars per  year, growing to a peak  of $634 million                                                                   
in 2014.  He pointed  out that the  state assistance  to PERS                                                                   
and  TRS  then  completely  vanished  in  2015,  because  the                                                                   
legislature  appropriated $3  billion  to PERS  and TRS  from                                                                   
the  Constitutional  Budget  Reserve  (CBR),  so it  was  not                                                                   
represented  in the UGF  chart. He noted  that 2016  showed a                                                                   
much lower  PERS and TRS assistance  than it had been  in the                                                                   
recent  past.  It  was  predicted   that  the  PERS  and  TRS                                                                   
contribution  would  remain  near  the current  rate  in  the                                                                   
future.                                                                                                                         
                                                                                                                                
Co-Chair MacKinnon  looked at  the $260 million  proposal for                                                                   
PERS   and  TRS in the current year. She  remarked that there                                                                   
was  a set  of assumptions  at  a rate  of return  in a  very                                                                   
robust  current  market, which  was  said to  stabilize.  She                                                                   
wondered if there  should be an analysis of  an additional $1                                                                   
billion  deposit, and  whether  that would  relieve the  $260                                                                   
million  debt service  payment.  Mr. Teal  replied that  only                                                                   
$700  million  of the  recent  $3  billion was  considered  a                                                                   
required contribution.  The only additional deposit  made was                                                                   
approximately  $2.3  billion. The  result  was  a savings  of                                                                   
approximately $750  million per  year, which meant  the money                                                                   
would return  to the  state in  three years.  He felt  that a                                                                   
money return  in three years  under any investment  should be                                                                   
seriously considered.  He felt that there would  be a benefit                                                                   
to  infusing the  liability with  an  additional $1  billion,                                                                   
but the  question was whether  or not the state  could afford                                                                   
that contribution.                                                                                                              
                                                                                                                                
9:57:22 AM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon remarked  that  her  comments were  given                                                                   
with the  respect of those who  considered the $3  billion on                                                                   
one single  factor in the budget.  She wondered if  the large                                                                   
infusions  were  a  smart  choice,  if  the  return  occurred                                                                   
inside  of three  years.  Resulting  in an  operating  budget                                                                   
savings of $260  million each year. She felt  that the option                                                                   
should  be available  for consideration.  Mr. Teal  responded                                                                   
that  he would  be  willing to  discuss  the  impact of  that                                                                   
option.  He agreed  to provide  that information  at a  later                                                                   
date.                                                                                                                           
                                                                                                                                
Mr.   Teal  continued   to  discuss   Figure   6.  The   fund                                                                   
capitalizations placed  money into a fund or  a location that                                                                   
did not  require appropriation in  order to spend.  The major                                                                   
portions  of the  fund  capitalization was  the  oil and  gas                                                                   
production   tax  credit   fund,  which   did  not   have  an                                                                   
appropriation in 2006  and 2007. The cost of  the tax credits                                                                   
had  since  increased  substantially.  The cost  of  the  tax                                                                   
credits  was   currently  $625  million,  and   the  governor                                                                   
remarked  that   the  cost  of  purchasable   production  tax                                                                   
credits  now   exceeded  the  production  tax   revenue.  The                                                                   
credits would  continue to be a  great cost in FY  16 at $700                                                                   
million,  which  was $300  million  more that  the  projected                                                                   
production tax revenue.                                                                                                         
                                                                                                                                
Co-Chair  MacKinnon   shared  that   she  had  reviewed   the                                                                   
governor's  comments  in  the   op-ed  piece.  She  ran  some                                                                   
preliminary analysis  and spoke with the governor  to ask for                                                                   
additional  information on  the tax  credit liabilities.  She                                                                   
remarked that  the Cook Inlet  tax credits might  be included                                                                   
in that  piece, which  could have been  from the  loss carry-                                                                   
forward credit that  was increased under ACES  to 45 percent.                                                                   
She believed that  the producers on the North  Slope paid and                                                                   
would continue to pay taxes.                                                                                                    
                                                                                                                                
Co-Chair Kelly  furthered that  individuals in the  press and                                                                   
media aligned  the tax credits  with the large  producers, so                                                                   
Alaska can  be negative  with the oil  companies. He  did not                                                                   
believe it was  fair to assume that the large  companies were                                                                   
not  paying taxes.  He agreed  that  the governor's  comments                                                                   
were associated with the smaller producers in Cook Inlet.                                                                       
                                                                                                                                
10:03:13 AM                                                                                                                   
                                                                                                                                
Mr. Teal  felt that the  committee should evaluate  other tax                                                                   
schemes. He  offered that,  had the  oil and gas  legislation                                                                   
passed in  2013 not passed, the  situation might be  worse in                                                                   
terms of production  tax revenue. The projection  for the tax                                                                   
credits  was  that  they would  drop  to  approximately  $250                                                                   
million at a rapid pace.                                                                                                        
                                                                                                                                
Co-Chair Kelly  asked if the  reduction would begin  in 2017.                                                                   
Mr. Teal replied in the affirmative                                                                                             
                                                                                                                                
                                                                                                                                
Co-Chair  Kelly  shared that  compared  to the  ACES,  larger                                                                   
credits  would have  been awarded  for reasons  that did  not                                                                   
result in  production. He stressed  that the  current credits                                                                   
exist to encourage more production.                                                                                             
                                                                                                                                
Senator Bishop  announced that  the credits would  eventually                                                                   
result in a positive cash flow to state.                                                                                        
                                                                                                                                
Senator  Dunleavy  stressed  that there  were  many  economic                                                                   
impacts  that were difficult  to predict.  He explained  that                                                                   
the recent  change  in the tax  structure  was the result  of                                                                   
the  predicted continuous  oil  price  increase. He  stressed                                                                   
that  the  committee  should seriously  think  about  how  to                                                                   
budget in the upcoming years.                                                                                                   
                                                                                                                                
Co-Chair  Kelly  stressed that  the  decisions  must be  made                                                                   
based  on current  situations,  and future  legislatures  may                                                                   
deal with a different looking economy.                                                                                          
                                                                                                                                
10:07:31 AM                                                                                                                   
                                                                                                                                
Vice-Chair   Micciche   shared  that   conservative   revenue                                                                   
projections  helped to  make careful  spending and  budgeting                                                                   
decisions.   Mr.   Teal   replied  that   LFD   conducted   a                                                                   
sensitivity  analysis,  so the  legislature  could  determine                                                                   
the best course of action.                                                                                                      
                                                                                                                                
Senator Hoffman  shared that the  CBR was established  in the                                                                   
1980s  and  set   up  the  requirement  of   the  savings  on                                                                   
settlements on  oil taxes. He  stressed that  accessing those                                                                   
reserves  required  a  three-quarter  majority.  He  believed                                                                   
that  the spending  pattern would  have  been much  different                                                                   
during the 1990s,  if the CBR was established  in a different                                                                   
manner.  Mr. Teal  agreed. He  felt  that legislatures  acted                                                                   
with wisdom in a number of ways over a period of time.                                                                          
                                                                                                                                
Co-Chair  Kelly asked  that the  presentation  conclude in  a                                                                   
timely manner.                                                                                                                  
                                                                                                                                
Mr. Teal remarked  that the fund capitalization  was a way to                                                                   
discuss capital projects.                                                                                                       
                                                                                                                                
Mr.   Teal   addressed   the   slide   titled,   "Figure   7.                                                                   
Unrestricted   General  Fund   Revenue  and  Budget   History                                                                   
Capital  Budget." He  noted the  correlation between  revenue                                                                   
and capital.                                                                                                                    
                                                                                                                                
10:14:40 AM                                                                                                                   
                                                                                                                                
Mr. Teal  discussed the slide  titled, "Figure 8.  Per Capita                                                                   
Unrestricted   General  Fund   Revenue  and  Budget   History                                                                   
Adjusted  for  Inflation  (Expressed in  2015  Dollars)."  He                                                                   
remarked that  the graph  was the same  as Figure 1,  but was                                                                   
adjusted  to  reflect  inflation and  population  growth.  He                                                                   
noted  the  declining  trend   in  per  capita  expenditures,                                                                   
beginning in 2005. He explained the cost driving factors.                                                                       
                                                                                                                                
Mr.  Teal  displayed   the  slide  titled,  "Figure   9.  UGF                                                                   
Revenue/  Budget (Oil  at $60/bbl)  (No  Growth Scenario)  ($                                                                   
millions)." He  stressed that quick  action must be  taken to                                                                   
address the possibility  that oil prices would  remain at $60                                                                   
per barrel.                                                                                                                     
                                                                                                                                
Co-Chair  Kelly understood  that quick  action must be  taken                                                                   
within three years.  Mr. Teal agreed that the  reserves would                                                                   
deplete within  three years. He  stressed that there  must be                                                                   
a balanced budget, once the reserves were gone.                                                                                 
                                                                                                                                
10:19:23 AM                                                                                                                   
                                                                                                                                
Mr.  Teal  explained  the  slide   titled,  "Figure  10.  UGF                                                                   
Revenue/  Budget   (DOR  Forecast)  (No   Expenditure  Growth                                                                   
Scenario) ($  millions)." He stated  that the  reserves would                                                                   
still deplete significantly,  if the oil price  began to rise                                                                   
again.                                                                                                                          
                                                                                                                                
Senator  Dunleavy believed  that  the slide  did not  include                                                                   
production.  He understood  that  the state  was  financially                                                                   
saved  because of  a  combination  production  and price.  He                                                                   
felt that  Alaska was  in a better  situation than  1989, but                                                                   
Alaska  did  not  have  a  prediction   of  vastly  increased                                                                   
production. He  reiterated that  production must  be included                                                                   
in the  conversation, in addition  to price of oil.  Mr. Teal                                                                   
agreed,   and  explained   that   the   problem  worsens   as                                                                   
production  declines.  He  stressed  that  very  high  prices                                                                   
would not relieve the current situation.                                                                                        
                                                                                                                                
Mr. Teal  discussed the  slide titled,  "Figure 11.'  Hard to                                                                   
Cut' Items in the Operating Budget":                                                                                            
                                                                                                                                
     Debt Service: $230 million                                                                                                 
     Retirement Assistance: $260 million                                                                                        
     Production Tax Credits: $700 million                                                                                       
     K-12 Formula: $1.3 billion                                                                                                 
     Medicaid: $700 million                                                                                                     
                                                                                                                                
     Total: $3.19 billion                                                                                                       
                                                                                                                                
Co-Chair Kelly  asked that the  committee meet with  Mr. Teal                                                                   
personally to address specific concerns.                                                                                        
                                                                                                                                
10:27:40 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:38:40 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
^COMMITTEE CONTRACTS: ANGELA RODELL and WILLIAM STREUR                                                                        
                                                                                                                                
10:38:55 AM                                                                                                                   
                                                                                                                                
Co-Chair  Kelly   discussed  the  Senate   Finance  Committee                                                                   
contracts.                                                                                                                      
                                                                                                                                
Co-Chair  MacKinnon   looked  at  the  professional   service                                                                   
contract  between the  Senate  Finance  Committee and  Angela                                                                   
Rodell (copy on  file). The contract was in an  amount not to                                                                   
exceed  $100,000.  She stated  that  the  scope of  work  was                                                                   
outlined  in Clause  1,  and the  other  clauses were  fairly                                                                   
standard for this type of contract.                                                                                             
                                                                                                                                
Co-Chair  MacKinnon  looked  at  the  list  of  Ms.  Rodell's                                                                   
credentials (copy on file).                                                                                                     
                                                                                                                                
Senator Dunleavy  wondered if  the $100,000 investment  would                                                                   
result  in millions  of dollars  of realized  savings to  the                                                                   
budget  process. Co-Chair  MacKinnon replied  that the  state                                                                   
saved  $750 million,  with the  move of $3  billion from  the                                                                   
CBR  for  PERS  and  TRS.  She  felt  that  there  was  great                                                                   
opportunity for savings.                                                                                                        
                                                                                                                                
Vice-Chair  Micciche   wondered  if   Ms.  Rodell   would  be                                                                   
available  through  the entire  session.  Co-Chair  MacKinnon                                                                   
replied that the  actual contract was for just  over $80,000.                                                                   
She  looked  at  page  2,  under   the  Compensation  Clause.                                                                   
January was  pro-rated, and the  total contract  was $80,710.                                                                   
The amount  would not  exceed $100,000,  because of  possible                                                                   
additional legislative  time that might require  Ms. Rodell's                                                                   
services.                                                                                                                       
                                                                                                                                
Vice-Chair  Micciche looked at  Clause 3,  and felt  that the                                                                   
day  rate of  $870  was  extremely competitive.  He  stressed                                                                   
that the  contract was non-political,  and would  provide the                                                                   
person  with the  most  experience in  the  desired scope  of                                                                   
work.                                                                                                                           
                                                                                                                                
Senator  Bishop queried  the name  of  the project  director.                                                                   
Co-Chair MacKinnon  replied that  the project director  would                                                                   
be her staff, Laura Pierre.                                                                                                     
                                                                                                                                
10:48:07 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:48:23 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Senator  Dunleavy  stated  that  he  could not  vote  on  the                                                                   
issue, because  he was  ill during  the swearing in  ceremony                                                                   
of the current Senate.                                                                                                          
                                                                                                                                
Co-Chair  MacKinnon  MOVED  to  AUTHORIZE  the  Co-Chairs  as                                                                   
procurement  officers  to  enter  into a  contract  with  Ms.                                                                   
Angela  Rodell for  professional  services regarding  matters                                                                   
related to  fiscal and investment  strategies, not  to exceed                                                                   
a total  contract amount of  $100,000 provided  through April                                                                   
19, 2015. There being NO OBJECTION, it was so ordered.                                                                          
                                                                                                                                
10:49:50 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:50:21 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
10:50:33 AM                                                                                                                   
                                                                                                                                
Co-Chair  Kelly  referred  to  a final  slide  from  the  LFD                                                                   
presentation.  The   slide  outlined  the  items   that  were                                                                   
difficult to  eliminate. He shared  that the items  were very                                                                   
sensitive,  and  historically   there  was  no  expertise  to                                                                   
analyze  the possibility  of reductions  in the programs.  He                                                                   
remarked  that  the  political  environments  affected  those                                                                   
discussions  and   decisions  on  the  program's   retention.                                                                   
Therefore, the  legislatures often  deferred the  decision to                                                                   
future legislatures.  Medicaid was extremely  complicated and                                                                   
affected  peoples' lives  dramatically. He  felt that  it did                                                                   
not  matter whether  people  were  supposed to  use  Medicaid                                                                   
services  or  abuse  the  services.  He  stressed  that  many                                                                   
people rely on  Medicaid, and wanted to proceed  in a fashion                                                                   
that affects Alaskans.                                                                                                          
                                                                                                                                
Co-Chair  Kelly looked  at the  contract  between the  Senate                                                                   
Finance Committee  and William  Streur. He stated  that there                                                                   
were  no  arrangements  for ongoing  work  with  Mr.  Streur,                                                                   
after  the  legislative  session ended.  He  echoed  Co-Chair                                                                   
MacKinnon's earlier comments.                                                                                                   
                                                                                                                                
Co-Chair  Kelly presented  the contract  for the  committee's                                                                   
consideration.                                                                                                                  
                                                                                                                                
10:55:17 AM                                                                                                                   
                                                                                                                                
Co-Chair  MacKinnon  stressed  that expertise  was  essential                                                                   
when considering  the governor's  desire to expand  Medicaid.                                                                   
Mr.  Streur  would  fully  vet  the  governor's  proposal  to                                                                   
ensure that there would be new cost savings to the state.                                                                       
                                                                                                                                
Co-Chair  Kelly  remarked  that  there were  members  of  the                                                                   
committee  who  had made  strong  statements  about  Medicaid                                                                   
expansion.  He   felt  that  a  consultant  would   help  the                                                                   
committee make an unbiased decision.                                                                                            
                                                                                                                                
Senator  Hoffman  felt that  there  were strategies  to  save                                                                   
money through Medicaid expansion. Co-Chair Kelly agreed.                                                                        
                                                                                                                                
Vice-Chair  Micciche  looked  at  items C  through  E,  which                                                                   
outlined the  scope of work. He  asked for an  explanation of                                                                   
those items.                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  looked at  page  2,  item C,  under  the                                                                   
"Scope  of   Work",  which   identified  the  statutory   and                                                                   
programmatic  changes  to  Department  of Health  and  Social                                                                   
Services (DHSS)  that could result  in savings;  consult with                                                                   
DHSS and the  mental health budget; provide  a written report                                                                   
on  the mental  health  budget, and  programs  in funds;  and                                                                   
coordinate  with   the  committee   and  the  House   Finance                                                                   
Committee as needed.                                                                                                            
                                                                                                                                
Co-Chair Kelly  pointed out  that the  outline was  a portion                                                                   
of the work,  and Mr. Streur  may be expected to  or assigned                                                                   
other related tasks.                                                                                                            
                                                                                                                                
Co-Chair  MacKinnon  MOVED  to  AUTHORIZE  the  Co-Chairs  as                                                                   
procurement  officers  to  enter  into a  contract  with  Mr.                                                                   
William Streur  for professional  services regarding  matters                                                                   
related  to  health and  social  services,  not to  exceed  a                                                                   
total contract amount  of $45,000 provided through  April 30,                                                                   
2015. There being NO OBJECTION, it was so ordered.                                                                              
                                                                                                                                
Senator  Olson wondered  if there were  provisions to  ensure                                                                   
the  retention  of  Mr.  Streur  during  a  possible  special                                                                   
legislative  session.  Co-Chair   Kelly  replied  that  there                                                                   
would probably be  an addendum to outline a day  rate for Mr.                                                                   
Streur's services.                                                                                                              
                                                                                                                                
ADJOURNMENT                                                                                                                   
11:00:58 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 11:00 a.m.                                                                                         

Document Name Date/Time Subjects
012215 LFD SFC Overview.pdf SFIN 1/22/2015 9:00:00 AM
Budget Overviews
SFIN Contract DRAFT - William Streur.pdf SFIN 1/22/2015 9:00:00 AM
Budget Contracts
SFIN Contract Draft - Angela Rodell - 2.pdf SFIN 1/22/2015 9:00:00 AM
Budget Contracts
SFIN Contract Rodell Resume.pdf SFIN 1/22/2015 9:00:00 AM
Budget Contracts