Legislature(2017 - 2018)SENATE FINANCE 532

01/18/2017 09:00 AM FINANCE

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09:03:53 AM Start
09:05:07 AM Presentation: Overview Fy 18 Operating Budget
10:46:49 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: Overview FY18 Operating Budget TELECONFERENCED
Pat Pitney, Director, Office of Management and
Budget
                 SENATE FINANCE COMMITTEE                                                                                       
                     January 18, 2017                                                                                           
                         9:03 a.m.                                                                                              
                                                                                                                                
9:03:53 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 9:03 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Natasha von Imhof                                                                                                       
Senator Click Bishop, Vice-Chair                                                                                                
Senator Mike Dunleavy                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Pat  Pitney,  Director,  Office of  Management  and  Budget,                                                                    
Office of the Governor.                                                                                                         
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^PRESENTATION: OVERVIEW FY 18 OPERATING BUDGET                                                                                
                                                                                                                                
Co-Chair MacKinnon introduced the committee members.                                                                            
                                                                                                                                
9:05:07 AM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman  recounted that the state  had gone through                                                                    
its' savings accounts  in the previous four  years and spent                                                                    
in excess of  $13 billion. Four years  previously, the state                                                                    
started with  a balance  of $16  billion, and  he considered                                                                    
that  the  legislature  was  in  the  final  hours  to  make                                                                    
monumental changes in order that  Alaskans could continue to                                                                    
enjoy  state services.  He thought  it would  be challenging                                                                    
and felt  confident that the Senate,  organized under Senate                                                                    
President  Pete Kelly,  had the  capability  to address  the                                                                    
state's  financial  concerns.  He  spoke  to  the  extensive                                                                    
finance background of the members.  He thought the people of                                                                    
Alaska should  continue to put  pressure on  the legislature                                                                    
to  take  action. He  looked  forward  to working  with  the                                                                    
committee,   the    other   legislative   body,    and   the                                                                    
administration.                                                                                                                 
                                                                                                                                
Senator Dunleavy  commented on  the short time  remaining to                                                                    
balance  the budget,  and hoped  that the  legislature would                                                                    
coalesce around a multi-component  approach. He thought that                                                                    
the Senate had come up with  a good start for looking at the                                                                    
budget. He remarked  that it was not possible to  get out of                                                                    
the fiscal  crisis without budget  cuts. He  emphasized that                                                                    
the  state  could  not  support  the  size  of  the  current                                                                    
government.  He looked  forward  to more  discussion on  the                                                                    
concept  of a  revised  appropriation limit.  He thought  it                                                                    
would require  a multi-faceted approach to  solve the fiscal                                                                    
crisis.                                                                                                                         
                                                                                                                                
Vice-Chair Bishop emphasized that  new revenue was necessary                                                                    
to solve  the fiscal gap.  He mentioned the over  $2 billion                                                                    
in deferred  maintenance costs and  an industry  starting to                                                                    
go into recession. He reiterated  the importance of deferred                                                                    
maintenance.  He   looked  forward   to  working   with  the                                                                    
committee to keep the state moving forward.                                                                                     
                                                                                                                                
He9:08:30 AM                                                                                                                  
                                                                                                                                
Co-Chair MacKinnon  discussed the agenda. She  discussed the                                                                    
work of the support staff to the Senate Finance Committee.                                                                      
                                                                                                                                
Co-Chair  MacKinnon noted  that each  member's office  had a                                                                    
team  to  assist  with  the   work  of  the  committee.  She                                                                    
introduced members of her staff.                                                                                                
                                                                                                                                
Co-Chair Hoffman introduced his staff.                                                                                          
                                                                                                                                
Senator Micciche introduced his staff.                                                                                          
                                                                                                                                
Senator Olson introduced his staff.                                                                                             
                                                                                                                                
Senator Dunleavy introduced his staff.                                                                                          
                                                                                                                                
Senator von Imhof introduced her staff.                                                                                         
                                                                                                                                
Vice-Chair Bishop introduced his staff.                                                                                         
                                                                                                                                
9:11:53 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:13:30 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair MacKinnon thanked groups  including Gavel to Gavel,                                                                    
and   Legislative  Information   Office.  She   thanked  the                                                                    
Legislative Finance Division.                                                                                                   
                                                                                                                                
PAT  PITNEY,  DIRECTOR,  OFFICE OF  MANAGEMENT  AND  BUDGET,                                                                    
OFFICE OF  THE GOVERNOR,  introduced herself and  her staff.                                                                    
She thanked  the committee for  putting her  presentation on                                                                    
the  agenda of  the  first meeting.  She  looked forward  to                                                                    
working  with  the   committee  throughout  the  legislative                                                                    
session. She speculated that  serious conversations would be                                                                    
necessary to solve the fiscal crisis.                                                                                           
                                                                                                                                
Ms.  Pitney   discussed  the  presentation   "FY2018  Budget                                                                    
Overview"  (copy on  file). She  showed  slide 2,  "Alaska's                                                                    
Budget in Household Terms":                                                                                                     
                                                                                                                                
     Income has dropped more than 80%                                                                                           
          •  Your  annual  income dropped  from  $80,000  to                                                                    
          $16,000                                                                                                               
     Spending has been reduced 44%                                                                                              
          •  You  have been  able  to  reduce your  rent  or                                                                    
          mortgage,  heat,  food,   every  day  travel,  and                                                                    
          vacations.  You   stopped  building   your  cabin,                                                                    
          stopped remodeling, and you'll keep your old car.                                                                     
          • Expenses have been cut from $80,000 to $45,000                                                                      
     Savings has one year remaining                                                                                             
          •  You had  $130,000  in the  bank,  but now  only                                                                    
          $25,000                                                                                                               
     Investment accounts have been growing steadily                                                                             
          •  You have  $500,000 in  an IRA  and you  need to                                                                    
          decide  whether to  use it  and how  much you  can                                                                    
          prudently use                                                                                                         
Ms.  Pitney discussed  the analogy  described on  the slide.                                                                    
She  stated  that  the  analogy was  a  translation  of  the                                                                    
state's revenue and expenses to a smaller scale.                                                                                
                                                                                                                                
9:17:38 AM                                                                                                                    
                                                                                                                                
Ms.  Pitney displayed  slide  3,  "Governor Walker's  FY2018                                                                    
Fiscal Plan":                                                                                                                   
                                                                                                                                
     To foster safer  communities, resource development, and                                                                    
     economic  security  requires sustainable  and  balanced                                                                    
     budgets  long  term, and  to  that  end the  Governor's                                                                    
     FY2018   budget  is   comprised   of  three   necessary                                                                    
     elements:                                                                                                                  
                                                                                                                                
     1. Continue to reduce state spending                                                                                       
     2. Draw from Permanent Fund earnings to support vital                                                                      
     state services and protect the dividend                                                                                    
     3. Generate more revenue                                                                                                   
                                                                                                                                
Ms. Pitney observed  that the three components  on the slide                                                                    
were  very  similar  to the  budget  introduction  from  the                                                                    
previous year.  She noted that while  the administration had                                                                    
included one revenue  measure (a motor fuels  tax), it would                                                                    
take more revenue measures to close the fiscal gap.                                                                             
                                                                                                                                
Ms. Pitney  turned to  slide 4, "FY2018  Budget by  All Fund                                                                    
Sources,"  which  showed  a pie  chart  labelled  with  fund                                                                    
sources  that she  thought  would set  the  context for  the                                                                    
total budget.  She noted that the  Unrestricted General Fund                                                                    
(UGF) category was most  frequently discussed, however there                                                                    
were other fund sources.                                                                                                        
                                                                                                                                
Ms.  Pitney  reviewed  the funding  categories  on  the  pie                                                                    
chart. She  specified that 30  percent of the  overall state                                                                    
budget came  from federal funds;  which were  almost equally                                                                    
split between  the Department  of Transportation  and Public                                                                    
Facilities (DOT), Medicaid financing,  and all other federal                                                                    
programs. She stated  that 7 percent of the  budget was from                                                                    
Other  State  Funds  such   as  Permanent  Fund  Corporation                                                                    
management  fees,  Retirement  Board  management  fees,  the                                                                    
Alaska  Housing  Finance Corporation  (AHFC),  International                                                                    
Airport funds,  and other funds.  Another 10 percent  of the                                                                    
overall  state budget  came  from  Designated General  Funds                                                                    
(DGF),  which  included  tuition  and  fees,  Alaska  Marine                                                                    
Highway fees,  and quasi-endowments from things  such as the                                                                    
Power Cost Equalization Fund and  the Higher Education Fund.                                                                    
The Permanent  Fund Dividend (PFD)  accounted for  7 percent                                                                    
of the total, and UGF accounted  for 42 percent of the total                                                                    
budget.                                                                                                                         
                                                                                                                                
Ms.  Pitney showed  slide  5,  "FY2018 Unrestricted  General                                                                    
Fund  Spending  Without  Dividends":  $4.3  Billion,"  which                                                                    
showed a  bar graph depicting  the years 2013  through 2018.                                                                    
She  explained  that  the  graph showed  the  trend  of  the                                                                    
state's UGF spending,  which went from $7.6  billion in 2013                                                                    
down  to  $4.33  billion  in 2018.  The  graph  showed  both                                                                    
operating  and  capital  expenditures, and  revealed  a  $27                                                                    
million decrease in UGF from the previous year.                                                                                 
                                                                                                                                
9:20:25 AM                                                                                                                    
                                                                                                                                
Ms. Pitney  discussed slide 6,  "FY2018 Governor's  Budget -                                                                    
Changes  From  FY2017  Management   Plan,"  which  showed  a                                                                    
spreadsheet  with a  summary of  where  reductions had  been                                                                    
taken from FY 17  to FY 18. She noted that  she would not go                                                                    
into  great  detail  on  the   slide,  as  the  end  of  the                                                                    
presentation would  address the figures in  the summary. She                                                                    
drew attention  to the  UGF column,  and specified  that the                                                                    
major reduction was $127 million  in the non-formula area of                                                                    
agency  operating expenditures.  She  pointed  out that  the                                                                    
increases   were  largely   in  the   statewide  components;                                                                    
including  debt, retirement,  and oil  and gas  tax credits.                                                                    
She  continued  that  that  the  $127  reduction  to  agency                                                                    
operating was  reduced to a $46  million operating reduction                                                                    
and  a  $27 million  total.  She  pointed  out that  it  was                                                                    
possible  to see  on the  slide where  other reductions  and                                                                    
additions were placed.                                                                                                          
                                                                                                                                
Senator Micciche asked  Ms. Pitney to return to  slide 4. He                                                                    
observed  that the  UGF spend  was $4.3  billion, the  total                                                                    
with  the  PFD was  $10.2  billion,  and  there was  a  $5.8                                                                    
billion difference.  He looked at  slide 5, and  wondered if                                                                    
the proportion  would be about  the same (60  percent 'Other                                                                    
Spend'  and 40  percent UGF).  He wondered  about the  total                                                                    
spend represented on slide 5 being overlaid on slide 4.                                                                         
                                                                                                                                
Ms. Pitney answered  in the negative, and  drew attention to                                                                    
the categories of Federal Funds,  other state funds, and DGF                                                                    
as listed on slide 4. She  explained that the funds had been                                                                    
increasing slightly. She pointed out  that in the years 2013                                                                    
and  2014, the  GF fund  proportion  would be  closer to  60                                                                    
percent rather than 40 percent.                                                                                                 
                                                                                                                                
Senator Micciche indicated he would  like to view a slide of                                                                    
what he  described as a  combination of  slides 4 and  5. He                                                                    
commented on  budget reductions made  by the  committee over                                                                    
the years since 2013. He  thought there had been significant                                                                    
reductions  for  three  years. He  thought  spending  should                                                                    
continue  to be  curtailed.  He thought  the proposed  slide                                                                    
would  help elucidate  the proportion  of federal  funds and                                                                    
other funds were coming in to the budget.                                                                                       
                                                                                                                                
9:24:09 AM                                                                                                                    
                                                                                                                                
Ms. Pitney  turned to slide  7, "FY2018 Governor's  Budget -                                                                    
Changes  From  FY2017  Management   Plan,"  which  showed  a                                                                    
spreadsheet.  She   described  the   slide  as   a  slightly                                                                    
different view of the budgetary  change between FY 17 and FY                                                                    
18. She explained  that there had been  agency reductions in                                                                    
spending, agency additions, higher  cost pressures, and fund                                                                    
source  changes.  She  pointed   out  the  Agency  Operating                                                                    
Subtotal; as  well as  the $76 million  increase to  the Oil                                                                    
and Gas Tax Credits,  Debt Service, and Regional Educational                                                                    
Attendance Area  (REAA). The  Operating Budget  Subtotal was                                                                    
reduced  by approximately  $50 million,  with a  $20 million                                                                    
increase in  Capital Additions. She  added that there  was a                                                                    
$27 million  net change in the  UGF budget from FY  17 to FY                                                                    
18.                                                                                                                             
                                                                                                                                
Ms.  Pitney  thanked  the  Senate  and  House  for  work  on                                                                    
Medicaid  reform  and  criminal justice  reform,  which  had                                                                    
resulted in some of the  largest proposed budget reductions.                                                                    
She gave  examples of  agency reductions  through negotiated                                                                    
furloughs as  well as a  "pay freeze" bill. She  mentioned a                                                                    
reduction in the Alaska Marine Highway System.                                                                                  
                                                                                                                                
Ms.  Pitney continued  discussing slide  7, specifying  that                                                                    
budget additions  were due  to an  increase in  the employee                                                                    
healthcare   rate,   as   well  as   some   justice   reform                                                                    
reinvestment items.  She explained  that $69 million  of the                                                                    
fund  source change  was from  the introduction  of a  motor                                                                    
fuels  tax which  was directed  at DOT  highway maintenance,                                                                    
the  Marine Highway  system, and  the state  airport system.                                                                    
She noted that shifts to  federal funds (as part of Medicaid                                                                    
reform) and  fee increases  (in the  Department of  Fish and                                                                    
Game and the Department  of Natural Resources) comprised the                                                                    
remaining fund  source change. She  summarized that  all the                                                                    
cost  reductions in  the  proposed  agency operating  budget                                                                    
were  largely  offset  by  the  statewide  items  that  were                                                                    
formula-driven.                                                                                                                 
                                                                                                                                
9:27:06 AM                                                                                                                    
                                                                                                                                
Ms.  Pitney  reviewed  slide 8,  "Spending  on  Major  Items                                                                    
FY2013 Compared  to FY2018," which  showed a bar  graph that                                                                    
demonstrated  change over  time. The  graph compared  FY 13,                                                                    
which represented a spending peak;  FY 15, which showed when                                                                    
the current administration  came into office; and  the FY 18                                                                    
proposed budget. She pointed out  that the 'Agencies Without                                                                    
K-12' category had reduced spending  from over $3 billion to                                                                    
under $2.5  billion. She noted  that K-12 spending in  FY 18                                                                    
was only  slightly higher than  it was  in FY 13,  and below                                                                    
where it was in FY 15.                                                                                                          
                                                                                                                                
Ms.  Pitney continued  discussing slide  8, noting  that the                                                                    
retirement  and   debt  service   component  on   the  graph                                                                    
reflected  a decrease  in the  retirement contribution.  The                                                                    
deposit into the retirement account  had reduced the state's                                                                    
on-behalf  payments  for  the Public  Employees'  Retirement                                                                    
System (PERS) and the Teachers  Retirement System (TRS). She                                                                    
noted that the payments were  increasing. She noted that the                                                                    
capital budget  had been as low  as it could go  in order to                                                                    
be able to meet the  federal matching funds. She agreed with                                                                    
Vice-Chair   Bishop's   previous  comments   regarding   the                                                                    
inevitability of funding deferred maintenance.                                                                                  
                                                                                                                                
Ms. Pitney  spoke to the graph  on slide 8, noting  that the                                                                    
FY 18  spending of  $74 million  shown for  oil and  gas tax                                                                    
credits represented  the minimum requirement.  The Permanent                                                                    
Fund  Dividend (PFD)  spending for  FY  18 was  shown to  be                                                                    
above the FY 13 amount, but lower than in FY 15.                                                                                
                                                                                                                                
Co-Chair Hoffman  inquired about the anticipated  payout for                                                                    
individual PFDs under the proposed FY 18 budget.                                                                                
                                                                                                                                
Ms. Pitney informed that  individual dividends were budgeted                                                                    
to be $1000.                                                                                                                    
                                                                                                                                
9:29:38 AM                                                                                                                    
                                                                                                                                
Senator  Micciche   considered  that  the   proposed  budget                                                                    
included a couple  of categories of revenue that  may or may                                                                    
not occur.  He referred to  SB 128  [a bill that  passed the                                                                    
previous session  and related to  the Alaska  Permanent Fund                                                                    
Corporation  (APFC)  and  the earnings  from  the  Permanent                                                                    
Fund], and assumed that if a  similar bill did not pass both                                                                    
bodies in the  current session that the  governor would plan                                                                    
a similar veto as the  previous year. He discussed the motor                                                                    
fuel tax  increase, and asked  if the Department  of Revenue                                                                    
(DOR)  had  produced  two  budgets  to  reflect  either  the                                                                    
substantial increase in revenue or the lack thereof.                                                                            
                                                                                                                                
Ms.  Pitney  stated  that   the  administration  would  make                                                                    
decisions based on what happened  with the budget, and hoped                                                                    
that there  would not be  a financial crisis to  consider at                                                                    
the end of  the session. She shared  that the administration                                                                    
had  produced  one  budget  with  the  assumption  that  the                                                                    
revenue measures  would both pass.  If the measures  did not                                                                    
pass,  it   would  almost  deplete  the   state's  remaining                                                                    
savings,  with the  exception of  approximately $1  billion.                                                                    
She  stated that  $1 billion  in  the Constitutional  Budget                                                                    
Reserve (CBR)  was not  a prudent level  of savings  for the                                                                    
state.   She  mentioned   best  practices   as  advised   by                                                                    
professional  finance organizations,  which would  recommend                                                                    
(given  the  volatility of  the  state's  revenue) that  the                                                                    
state keep  one year's  reserves of $5  billion in  the CBR,                                                                    
with a minimum balance of $2 billion.                                                                                           
                                                                                                                                
Senator  Micciche  did not  disagree  with  Ms. Pitney,  and                                                                    
pointed out that if the  two additional revenue measures did                                                                    
not   pass  the   legislature,   it   would  constitute   an                                                                    
approximately $770  million additional  gap in  the proposed                                                                    
budget.                                                                                                                         
                                                                                                                                
9:32:56 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy asked how the  budget being presented would                                                                    
help  private  economy. He  thought  it  was clear  how  the                                                                    
administration's  budget would  help the  government sector.                                                                    
He thought  that some could  argue that the  proposed budget                                                                    
was light on reductions; and  suggested that the state would                                                                    
be asking more of  individuals, businesses, and corporations                                                                    
of  the  state  to  support   the  size  of  government.  He                                                                    
mentioned the high unemployment rate in the state.                                                                              
                                                                                                                                
Ms. Pitney  stated that the  administration was  using state                                                                    
resources  in  the  budget  as much  as  possible  to  match                                                                    
federal  funds.   She  emphasized  that  federal   funds  in                                                                    
transportation   served   the    design   and   construction                                                                    
community,  which equated  to jobs  in the  private economy.                                                                    
She discussed matching Medicaid  funding for health services                                                                    
and the  jobs created in the  medical professions throughout                                                                    
the state.  She discussed maintaining  the PFD, which  had a                                                                    
positive impact  on retail. She mentioned  community revenue                                                                    
sharing, which  had a  benefit to  the overall  economy. She                                                                    
asserted  that  46  percent  of  the  operating  budget  was                                                                    
distributed to organizations,  individuals, and communities.                                                                    
She  was  encouraged  by  recent  Senate  Labor  &  Commerce                                                                    
Committee meetings  that pertained  to the economics  of the                                                                    
state, and looked forward to revisiting the discussions.                                                                        
                                                                                                                                
9:36:01 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy referred to the  governor's veto of part of                                                                    
the funding  for the  PFD, which had  removed close  to $700                                                                    
million  from  the  private economy.  He  wondered  how  the                                                                    
transaction  had supported  the economy  of Alaska,  as many                                                                    
lower income Alaskans spent the dividends within the state.                                                                     
                                                                                                                                
Ms. Pitney  stated that the  $700 million in  question would                                                                    
pay for  future programs that individuals  throughout Alaska                                                                    
depended upon; such as healthcare,  education, and roads. In                                                                    
doing so,  the administration  had preserved the  ability to                                                                    
provide necessary state services.                                                                                               
                                                                                                                                
Co-Chair  Hoffman  mentioned community  revenue  assistance,                                                                    
and  referenced  language  on   slide  3  that  referred  to                                                                    
fostering safer communities. He  recounted that the previous                                                                    
year  the  Senate  had  proposed  to  reduce  the  Community                                                                    
Revenue Sharing  program, and the  governor had  supported a                                                                    
payout of  $60 million. The  Senate had considered  that the                                                                    
state  could not  afford the  program while  considering the                                                                    
state's  finances. He  recalled  that the  governor had  not                                                                    
included funding  for continuation  of the program,  and the                                                                    
Senate had  changed the  program from  revenue sharing  to a                                                                    
Community Assistance Program. He  expressed that the concept                                                                    
behind the  change would give communities  a commitment that                                                                    
they would be receiving funds for three years.                                                                                  
                                                                                                                                
Co-Chair  Hoffman  pointed  out that  the  governor's  newly                                                                    
proposed  budget did  not contain  a provision  to keep  the                                                                    
funding  at   the  $90  million   level  required   for  the                                                                    
continuation  of   the  program.   He  wondered   about  the                                                                    
administration's policy with regard  to the funding level of                                                                    
the Community  Assistance Program.  He asked  if it  was the                                                                    
administration's  intent to  phase out  the fund,  or if  it                                                                    
planned  to add  $60 million  to the  program the  following                                                                    
year  to assure  the  communities would  be  funded for  the                                                                    
subsequent three years.                                                                                                         
                                                                                                                                
9:40:29 AM                                                                                                                    
                                                                                                                                
Ms. Pitney  indicated that the intent  of the administration                                                                    
was  to  put forth  $60  million  to  fund the  program  the                                                                    
following year with  the assumption that the  funds would be                                                                    
available.  She  commented  that without  significant  steps                                                                    
towards a  balanced long-term budget, the  program would not                                                                    
fit within  the administration's  overall approach  to state                                                                    
spending.                                                                                                                       
                                                                                                                                
Co-Chair  Hoffman asked  about  Ms.  Pitney's definition  of                                                                    
"stable  footing,"  when  she  had  described  future  state                                                                    
budgets. He asked  if a re-writing of the  PFD program would                                                                    
put  the  state budget  on  what  she  termed to  be  stable                                                                    
footing.                                                                                                                        
                                                                                                                                
Ms.  Pitney  asserted  that  it  would  take  at  least  the                                                                    
measures that  had been proposed  in the  governor's budget,                                                                    
but  perhaps  even  more,  as there  was  a  remaining  $900                                                                    
million gap.  She reiterated that the  administration wanted                                                                    
to see a long-term, stable, and balanced budget.                                                                                
                                                                                                                                
Co-Chair   Hoffman  responded   that   the  Senate   Finance                                                                    
Committee,   more   so   than   any   other   committee   or                                                                    
administration,  had taken  the task  of developing  a long-                                                                    
term stable  budget very seriously.  He took issue  with the                                                                    
administration's  assertion  that   it  would  foster  safer                                                                    
communities and  maintain community assistance  payments; as                                                                    
the  proposed budget  did  not include  the  $30 million  to                                                                    
maintain the  community assistance  program. He  thought the                                                                    
proposed budget  would warn communities that  there would be                                                                    
a  33.3 percent  reduction in  the program.  He thought  the                                                                    
proposal seemed to  be a complete reversal of  what had been                                                                    
previously  communicated.  He  thought   it  would  be  very                                                                    
difficult to put the state  on stable footing. He noted that                                                                    
any  department  that  faced a  same-sized  reduction  would                                                                    
cause a significant  out-cry. He did not  think the proposal                                                                    
maintained the  commitment to the communities  that had been                                                                    
made  by  the  state.   The  Senate  had  envisioned  giving                                                                    
communities  a  three-year  commitment, while  the  proposed                                                                    
budget only gave a two-year commitment.                                                                                         
                                                                                                                                
9:44:27 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon  thought the proposed  budget prioritized                                                                    
the  replacement  of a  ferry  over  stabilizing funding  to                                                                    
smaller communities.  She thought  the budget fell  short in                                                                    
other areas.  She recognized that  that the  proposed budget                                                                    
was a  work in progress  and an opportunity  to collaborate.                                                                    
She mentioned  long hours spent  in the previous  session to                                                                    
prioritize  security  for  local communities  while  working                                                                    
toward stabilizing  the state's  economy. She  mentioned tax                                                                    
credits.                                                                                                                        
                                                                                                                                
Senator  Dunleavy asked  if the  governor supported  capping                                                                    
the  size  of  government through  a  revised  appropriation                                                                    
limit that was currently in the constitution.                                                                                   
                                                                                                                                
Ms.  Pitney stated  that the  topic of  capping the  size of                                                                    
government had  not been discussed. She  thought there could                                                                    
be  an active  discussion on  the topic  during the  current                                                                    
legislative session.                                                                                                            
                                                                                                                                
Senator  Dunleavy discussed  the reduction  of the  PFD, and                                                                    
wondered  if it  was  the philosophy  of the  administration                                                                    
that it knew how to spend the people's money better.                                                                            
                                                                                                                                
Ms.   Pitney   expressed   that  the   philosophy   of   the                                                                    
administration was to find stability  for all of Alaska. She                                                                    
stated  that  the  administration  anticipated  a  long-term                                                                    
average  of $1000  for dividends.  She  emphasized an  over-                                                                    
arching theme of stability for the state.                                                                                       
                                                                                                                                
9:46:59 AM                                                                                                                    
                                                                                                                                
Senator  Micciche noted  that the  legislature had  passed a                                                                    
bill  pertaining to  the  Community  Assistance Program  the                                                                    
previous  year. He  reiterated his  view  that the  proposed                                                                    
budget had  approximately $770 million in  "phantom" revenue                                                                    
that  had  not  yet   passed  the  legislature,  while  also                                                                    
eliminating $30 million in spending  for the program. He did                                                                    
not  disagree  that the  other  associated  major pieces  of                                                                    
legislation  needed  to  pass.  He opined  that  there  were                                                                    
inconsistencies  in  the  proposed   budget  that  would  be                                                                    
difficult  for   the  legislature  to  deal   with.  He  had                                                                    
supported  the   bill  that  reduced  expenditures   to  the                                                                    
Community Assistance Program. He thought  that if a piece of                                                                    
legislation had gone through both  bodies and been signed by                                                                    
the governor, it should be in the budget.                                                                                       
                                                                                                                                
Ms.  Pitney  understood  the points  expressed  by  Co-Chair                                                                    
Hoffman and  Senator Micciche. She  informed that  there had                                                                    
been a  long discussion  regarding the  Community Assistance                                                                    
Program.  She  described  a  forward-funding  mechanism  for                                                                    
funding  the  Community  Assistance Program.  She  expressed                                                                    
that the  matter was open  for discussion, and  relayed that                                                                    
the governor was supportive of the program.                                                                                     
                                                                                                                                
9:50:58 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon suggested that  if the governor supported                                                                    
the program, it would be funded in the proposed budget.                                                                         
                                                                                                                                
Co-Chair  Hoffman  reiterated  that the  previous  year  the                                                                    
governor had supported $60 million  for the program, and the                                                                    
Senate  had taken  a conservative  approach and  only funded                                                                    
$30 million.  He furthered  that the  governor had  signed a                                                                    
bill  with  a  three-year  commitment  to  the  program.  He                                                                    
thought it seemed as though the  program was being used as a                                                                    
carrot in order to get legislation passed.                                                                                      
                                                                                                                                
Co-Chair MacKinnon stated that the  Senate was ready to work                                                                    
with the administration. She  thought that community revenue                                                                    
sharing should  have been included  in the  proposed budget,                                                                    
and  thought there  were additional  items missing  from the                                                                    
budget  that might  be being  used for  political advantage.                                                                    
She asserted that  the Senate would take up  the things that                                                                    
would benefit the  people of the state. She  shared that the                                                                    
Senate  was  trying to  set  politics  aside, and  focus  on                                                                    
completing the work of the session.                                                                                             
                                                                                                                                
9:54:05 AM                                                                                                                    
                                                                                                                                
Ms. Pitney  displayed slide 9, "FY2018  Unrestricted General                                                                    
Fund  Operating Spending  Without Dividends:  $4.2 Billion,"                                                                    
which showed  a bar graph.  She noted that the  graph showed                                                                    
the  peak  spending year  of  FY  14  with $6.1  billion  in                                                                    
expenditures,  which  dropped  to  $4.2  billion  in  agency                                                                    
operating expenditures for FY 18.                                                                                               
                                                                                                                                
Ms. Pitney  discussed slide  10, "Unrestricted  General Fund                                                                    
Agency  Operating   Budgets  FY2002  -  FY2018   in  Nominal                                                                    
Dollars,"  which   showed  a  bar  graph   depicting  agency                                                                    
operating  budgets not  including  statewide  items such  as                                                                    
debt service and tax credits.                                                                                                   
                                                                                                                                
Ms.   Pitney  reviewed   slide  11,   "Budget  Guidance   to                                                                    
Agencies":                                                                                                                      
                                                                                                                                
     Among the issues that departments were asked to                                                                            
     consider as they evaluated their budgets:                                                                                  
     •Is it required by a constitutional mandate?                                                                               
     •Is it required by a legislative mandate?                                                                                  
     •Does it leverage other resources?                                                                                         
     •Does it pay for itself or make money for the state?                                                                       
     •How utilized is the service?                                                                                              
     •What is the impact on the statewide economy?                                                                              
     •How effective would it be to privatize or be absorbed                                                                     
     by another agency? Would it be less expensive if                                                                           
     privatized?                                                                                                                
                                                                                                                                
Ms. Pitney asked members to  feel free to discuss the points                                                                    
on slide  11 with commissioners during  the upcoming finance                                                                    
subcommittee process.                                                                                                           
                                                                                                                                
Ms.  Pitney displayed  slide 12,  "All  Agencies Are  Making                                                                    
Reductions,"   which   showed    a   bar   graph   entitled,                                                                    
'Unrestricted  General  Fund  Reduction  by  Agency  -  FY15                                                                    
Management  Plan  to  FY18 Governor."  She  noted  that  all                                                                    
agencies  had seen  reductions.  She drew  attention to  the                                                                    
Department of  Commerce, Community and  Economic Development                                                                    
(DCCED)  and DOT;  the agencies  that had  been reduced  the                                                                    
most. She  specified that tourism marketing  was absent from                                                                    
the  graph's data.  She noted  that  there were  only a  few                                                                    
agencies that had  not been reduced by at  least 20 percent.                                                                    
She  elaborated that  the Department  of  Health and  Social                                                                    
Services   (DHSS)  had   a  15   percent  reduction,   which                                                                    
constituted  the largest  monetary reduction  over the  time                                                                    
frame represented on the graph.                                                                                                 
                                                                                                                                
Ms.  Pitney  continued  on  slide 12,  and  noted  that  the                                                                    
reduction  to   the  Department   of  Education   and  Early                                                                    
Development (DEED) reduction was  largely due to the removal                                                                    
of a one-time funding addition from FY 15.                                                                                      
                                                                                                                                
Co-Chair MacKinnon  noticed that Ms. Pitney  had stated that                                                                    
tourism marketing  funding was  not addressed on  the slide.                                                                    
She wondered if  the excluded data would result  in a higher                                                                    
or  lower  reduction  total. She  noted  that  the  proposed                                                                    
budget for  the current  year moved  the tourism  funding to                                                                    
the capital budget.                                                                                                             
                                                                                                                                
Ms. Pitney  discussed the change  in spending for  DCCED and                                                                    
directed attention to  the FY 15 and the FY  17 figures. She                                                                    
explained  that  without  normalizing  the  tourism  budget,                                                                    
there  would be  an over  70 percent  reduction. She  stated                                                                    
that the tourism budget was  an in-house operation until the                                                                    
previous  year, at  which time  it transitioned  to a  named                                                                    
recipient grant to the Alaska Travel Industry Association.                                                                      
                                                                                                                                
Co-Chair  MacKinnon   informed  that  the   documents  being                                                                    
considered could be found online.                                                                                               
                                                                                                                                
9:58:06 AM                                                                                                                    
                                                                                                                                
Ms. Pitney looked at slide  13, "FY2018 Unrestricted General                                                                    
Fund Agency  Operating Budget Reflecting  Priorities," which                                                                    
showed  a  pie  chart   representing  the  agency  operating                                                                    
budget. She  directed attention to  the blue portion  of the                                                                    
pie,   which    included   K-12   education    payments   to                                                                    
communicates,  the  University,  and the  Alaska  Vocational                                                                    
Technical Center (AVTEC). She  specified that there had been                                                                    
a 9  percent decrease from FY  15. She pointed out  that the                                                                    
category of  'Health, Life, Safety, Justice'  was reduced by                                                                    
13 percent  and comprised 44 percent.  The category included                                                                    
Alaska State  Troopers, DOC,  Courts, public  defenders; and                                                                    
reflected recent justice reform  efforts. All other agencies                                                                    
were shown  as being  reduced by 41  percent. She  felt that                                                                    
the  graph  showed where  the  majority  of reductions  were                                                                    
being taken.                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon explained that  the reason the Senate had                                                                    
mentioned cost drivers in the  press conference the previous                                                                    
day, was  because the  administration had  made cuts  to all                                                                    
areas  except those  considered  "major  cost drivers."  She                                                                    
discussed  the cost  of K-12  education, Medicaid,  and DOC.                                                                    
She wanted the  general public to know  that Medicaid reform                                                                    
and  criminal justice  reform  were  undertaken because  the                                                                    
Senate  believed that  lives would  be saved.  She expressed                                                                    
concern about  opioid abuse and incarceration.  She asserted                                                                    
that the Senate  was trying to deploy resources  in a manner                                                                    
to  save lives  versus saving  money. She  relayed that  the                                                                    
issues  would  be  brought  up  for  discussion  during  the                                                                    
upcoming legislative session.                                                                                                   
                                                                                                                                
Ms.  Pitney  agreed   with  Co-Chair  MacKinnon's  statement                                                                    
regarding saving  lives, and stated that  the administration                                                                    
was trying to achieve cost containment.                                                                                         
                                                                                                                                
Ms.  Pitney discussed  slide 14,"  Ongoing Cost  Containment                                                                    
Efforts Continue to Reduce Spending":                                                                                           
                                                                                                                                
     •2500 fewer state employees since FY2015                                                                                   
     •State employee savings through eliminated pay                                                                             
     increases, furloughs, and healthcare cost passed to                                                                        
     employees                                                                                                                  
     •Executive branch travel reductions                                                                                        
     •Reduced and consolidated leases                                                                                           
                                                                                                                                
Ms.  Pitney  specified that  the  proposed  budget showed  a                                                                    
travel  reduction of  $17 million  since FY  15. Leases  had                                                                    
been reduced  by $3 million,  and the state had  reduced its                                                                    
footprint by 100,000 square feet.                                                                                               
                                                                                                                                
10:02:18 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Bishop   stated  that  the  previous   year  the                                                                    
committee had  discussed the  reduction in  state employees,                                                                    
and inquired if  the 2,500 fewer employees  mentioned on the                                                                    
slide had been vacant positions.                                                                                                
                                                                                                                                
Co-Chair  MacKinnon added  that there  was a  perspective of                                                                    
positions with associated funds.                                                                                                
                                                                                                                                
Ms.   Pitney  indicated   that  the   reduction  represented                                                                    
paychecks and real  bodies in seats. She  furthered that the                                                                    
Department  of Labor  and Workforce  Development provided  a                                                                    
monthly report with the relevant data.                                                                                          
                                                                                                                                
Ms. Pitney  displayed slide  16, "Position  Reductions," and                                                                    
noted  that the  table on  the slide  listed 2,259  position                                                                    
reductions  -  795  of  which were  in  the  current  budget                                                                    
proposal.  She  referred  to Co-Chair  MacKinnon's  comments                                                                    
about  positions  with  funding.   She  commented  that  the                                                                    
administration  had  a  list  of  position  control  numbers                                                                    
(PCNs), only some of which were funded.                                                                                         
                                                                                                                                
Ms.  Pitney   showed  slide  15,  "FY2002   -  FY2017  State                                                                    
Employees," and  calculated that the state  employment level                                                                    
was the same as 2002.                                                                                                           
                                                                                                                                
Senator  Dunleavy considered  that  the  committee had  been                                                                    
discussing  the issue  of position  reductions for  the past                                                                    
few  years. He  asked  for further  detail  relating to  the                                                                    
"2,500  fewer  state  employees"  listed  on  slide  14.  He                                                                    
wondered  if  there  was  a way  to  observe  true  realized                                                                    
savings from  the elimination of the  positions and inquired                                                                    
if  any  of   the  savings  had  been   shifted  to  funding                                                                    
contractors.                                                                                                                    
                                                                                                                                
Ms.  Pitney detailed  that the  savings from  the eliminated                                                                    
positions was roughly $250 million.                                                                                             
                                                                                                                                
10:06:09 AM                                                                                                                   
                                                                                                                                
Ms. Pitney  went back to  slide 16. She referred  to Senator                                                                    
Dunleavy's   question    about   position    deletions   and                                                                    
contractors.  She noted  that more  detailed information  on                                                                    
the executive  branch level  was available,  but information                                                                    
on  other areas  was  not  available at  the  same level  of                                                                    
detail.                                                                                                                         
                                                                                                                                
Senator  Dunleavy  asked if  the  2,500  positions had  been                                                                    
full-time, year-round positions with  an average of $100,000                                                                    
attached to each position.                                                                                                      
                                                                                                                                
Ms.  Pitney  indicated that  $100,000  per  employee was  an                                                                    
average and  not all  the positions  in question  were full-                                                                    
time or year-round.                                                                                                             
                                                                                                                                
Senator von Imhof asked how  many actual pink slips had been                                                                    
given. She  recalled that Ms.  Pitney had reviewed  the same                                                                    
presentation with  Commonwealth North, and at  that time had                                                                    
stated that  there had only  been 40  to 50 people  that had                                                                    
been laid off.                                                                                                                  
                                                                                                                                
Ms. Pitney  specified that in  the first budget  year, there                                                                    
had been  37 individuals given  pink slips; and in  the next                                                                    
budget year  there had  been 40. She  detailed that  80 pink                                                                    
slips  had  been  delivered.  Some  individuals  had  chosen                                                                    
retirement prior to the execution  of the layoff, and others                                                                    
chose  to  resign.  She furthered  that  the  administration                                                                    
worked  very hard  to manage  reductions through  attrition.                                                                    
She discussed hiring practices.  She discussed the timing of                                                                    
the budget and listing  of positions earmarked for deletion.                                                                    
More  positions  would  be  added   to  the  list  when  the                                                                    
legislature   began   discussing  budget   reductions.   She                                                                    
discussed the process  of attrition, and the  cost of layoff                                                                    
of employees.                                                                                                                   
                                                                                                                                
10:10:53 AM                                                                                                                   
                                                                                                                                
Senator  von Imhof  had researched  the  number of  position                                                                    
reductions and  had estimated it  to be 1,200 less  than was                                                                    
presented.                                                                                                                      
                                                                                                                                
Co-Chair  MacKinnon  asked for  Ms.  Pitney  to return  with                                                                    
refined  numbers. She  discussed  development  of PCNs.  She                                                                    
expressed  concern with  the  numbers  being presented,  and                                                                    
discussed  practices in  the private  sector. She  discussed                                                                    
the need for standardized numbers,  and asked for Ms. Pitney                                                                    
to  provide a  detailed description  of employee  types. She                                                                    
discussed increased  spending on unemployment  insurance and                                                                    
Medicaid  spending, and  the importance  of jobs.  She asked                                                                    
for  a  detailed  overview  of  slide  14,  with  supporting                                                                    
documentation and dollar amounts.                                                                                               
                                                                                                                                
10:15:16 AM                                                                                                                   
                                                                                                                                
Senator Micciche  commented that  the committee  had engaged                                                                    
in the  same discussion multiple  times. He thought  that it                                                                    
was in  the administration's  best interest to  provide more                                                                    
detail.  He   discussed  the  oil  and   gas  industry,  and                                                                    
commented that  companies in the  industry did the  best not                                                                    
to  hand out  pink  slips. He  expressed  the importance  of                                                                    
understanding  how agency  reductions  would translate  into                                                                    
cutting employees. He thought  information in greater detail                                                                    
would help all parties engaged in the budget process.                                                                           
                                                                                                                                
Co-Chair   MacKinnon  asked   members  to   provide  written                                                                    
comments or  questions to her  office for submission  to the                                                                    
Office of Management and Budget (OMB).                                                                                          
                                                                                                                                
10:18:17 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney turned  to slide  17, "Ongoing  Cost Containment                                                                    
Efforts Complex State Policy Considerations":                                                                                   
                                                                                                                                
     •Justice Reform                                                                                                            
     •Health Care                                                                                                               
          •Medicaid expansion                                                                                                   
          •Medicaid reform                                                                                                      
          •Employee health plans                                                                                                
          •Healthcare authority feasibility                                                                                     
          •Private health insurance market                                                                                      
     •Education                                                                                                                 
          •System reform process                                                                                                
                                                                                                                                
Ms.  Pitney  expressed  her appreciation  for  the  previous                                                                    
mention  of saving  lives and  containing future  costs. She                                                                    
discussed  changes  to the  DOC  budget  that included  both                                                                    
reductions  and   additional  costs,  and   working  towards                                                                    
keeping  long-term  costs down.  She  thanked  the body  for                                                                    
Medicaid  reform.  She  commented   that  healthcare  was  a                                                                    
pervasive  cost  driver  in   the  state,  and  mentioned  a                                                                    
healthcare    authority   feasibility    study   that    the                                                                    
administration  was working  on.  She hoped  there would  be                                                                    
further dialogue pertaining to  healthcare in which multiple                                                                    
viewpoints were examined.                                                                                                       
                                                                                                                                
10:22:03 AM                                                                                                                   
                                                                                                                                
Ms. Pitney  continued discussing slide 17,  and relayed that                                                                    
DEED Commissioner  Michael Johnson was preparing  to begin a                                                                    
reform process  looking at innovation and  quality education                                                                    
for every student. She furthered  that the legislature would                                                                    
be invited  to participate  in the  process. She  added that                                                                    
education was  also a  major cost driver  in the  state, and                                                                    
better quality was desired.                                                                                                     
                                                                                                                                
Senator  Dunleavy noted  that  the title  of  the slide  had                                                                    
included the  words "ongoing  cost containment"  and assumed                                                                    
that the education system reform  process would constitute a                                                                    
reduction in the cost of education.                                                                                             
                                                                                                                                
Ms.   Pitney  stated   that  there   were  additional   cost                                                                    
pressures,  and the  administration  wanted  to extract  the                                                                    
highest quality  for the  money spent. She  was not  sure it                                                                    
was possible to spend less  on education, but thought it was                                                                    
possible  to  receive education  of  a  higher quality.  She                                                                    
summarized that cost containment  and increased quality were                                                                    
the overarching expectations of the system reform.                                                                              
                                                                                                                                
Senator  Dunleavy  thought  that  the  title  of  the  slide                                                                    
indicated  that the  system reform  process was  in fact  an                                                                    
ongoing  cost  containment  effort. He  suggested  that  the                                                                    
bullet be moved to a different slide.                                                                                           
                                                                                                                                
Ms.  Pitney presented  slide 18,  "Ongoing Cost  Containment                                                                    
Efforts: K-12 Education":                                                                                                       
                                                                                                                                
     K-12 UGF formula is 29% the UGF budget                                                                                     
     K-12 UGF formula $1.26 B                                                                                                   
     Base student allocation, in AS 14.17.470,                                                                                  
          FY15 $5,830                                                                                                           
          FY16 $5,880                                                                                                           
          FY17 $5,930                                                                                                           
          FY18 $5,930                                                                                                           
     •From FY2017, $6.2 million increase due to increased                                                                       
     student counts and decrease in the Public School Trust                                                                     
     Fund                                                                                                                       
     •Education Commissioner Johnson is beginning an                                                                            
     education system reform process                                                                                            
                                                                                                                                
Ms.  Pitney pointed  out that  the  Base Student  Allocation                                                                    
(BSA)  had  not  changed,  however  there  was  an  expected                                                                    
increase  in student  population as  well as  the number  of                                                                    
students  with special  needs. The  previous year  the state                                                                    
had utilized  the Public  School Trust Fund  at a  rate that                                                                    
was  higher   than  reasonable,  which  accounted   for  the                                                                    
decrease in the fund.                                                                                                           
                                                                                                                                
10:25:27 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney discussed  slide 19,  "Ongoing Cost  Containment                                                                    
Efforts Reorganizations":                                                                                                       
                                                                                                                                
     •Shared Services                                                                                                           
     •Information Technology (IT) Consolidation                                                                                 
     •Department   of    Transportation   Optimize   Project                                                                    
     Delivery                                                                                                                   
                                                                                                                                
Ms.  Pitney explained  that all  departments had  engaged in                                                                    
reorganization  efforts to  deal  with constrained  budgets.                                                                    
She mentioned  the shared  services approach  to back-office                                                                    
functions, which  was reflected  for the  first time  in the                                                                    
proposed  budget. She  noted that  70  positions were  being                                                                    
moved   from  other   agencies   into   the  Department   of                                                                    
Administration (DOA)  for new  shared services,  which would                                                                    
also  include  some  existing   DOA  personnel.  The  shared                                                                    
services  organization   in  the   budget  would   show  140                                                                    
positions.                                                                                                                      
                                                                                                                                
Ms.  Pitney   continued  discussing  shared   services.  She                                                                    
explained  that while  the positions  were transferred  from                                                                    
the  agencies,  the  agencies would  retain  the  associated                                                                    
funds   and   buy   services  from   the   shared   services                                                                    
organization. She expected a 10  percent decrease in cost to                                                                    
departments,  which   was  reflected  in  the   budget.  The                                                                    
following year the  decrease was expected to  be 30 percent.                                                                    
The  shared services  organization  was  starting with  five                                                                    
functions. She  looked forward  to more  detailed discussion                                                                    
on  the  topic,  and  noted   that  mature  shared  services                                                                    
organizations  could often  save as  much as  50 percent  of                                                                    
operating costs.                                                                                                                
                                                                                                                                
Vice-Chair  Bishop relayed  that he  would contact  Co-Chair                                                                    
MacKinnon after  the meeting to  discuss the  possibility of                                                                    
the committee  engaging in a  deeper dialogue  pertaining to                                                                    
shared services.                                                                                                                
                                                                                                                                
Ms.  Pitney  continued  discussing  slide  19,  noting  that                                                                    
information  technology (IT)  consolidation  was similar  to                                                                    
that of  shared services, and  promoted having IT as  a more                                                                    
strategic  part of  state operations.  She relayed  that DOT                                                                    
was contracting out  more design functions with  the goal of                                                                    
getting more for the money that was spent.                                                                                      
                                                                                                                                
10:28:40 AM                                                                                                                   
                                                                                                                                
Vice-Chair Bishop communicated  that he was not  in favor of                                                                    
contracting out DOT's functions and  wanted to have a deeper                                                                    
discussion on the matter.                                                                                                       
                                                                                                                                
Co-Chair   MacKinnon  inquired   about   the  economics   of                                                                    
contracting out DOT's functions  and wondered about outcomes                                                                    
in other  states. She  understood that 55  to 60  percent of                                                                    
the  existing design  team was  already  by contract.  After                                                                    
communicating with individuals from  DOT, she had understood                                                                    
that there  may be a morale  issue with some of  the changes                                                                    
that  that   had  been  implemented.  She   hoped  that  the                                                                    
administration  would  reach  out  to DOT  to  gain  further                                                                    
understanding  on  the  matter,  and  looked  forward  to  a                                                                    
detailed analysis of the economics of the new policy.                                                                           
                                                                                                                                
Ms. Pitney acknowledged Co-Chair MacKinnon's request.                                                                           
                                                                                                                                
Ms. Pitney reviewed slide 20, "Statewide Obligations":                                                                          
                                                                                                                                
     •Oil and gas: Statutorily  required amount increased to                                                                    
     $74 million                                                                                                                
     •School debt  reimbursement and REAA  funding: Restored                                                                    
     veto, FY2018 increase $40 million                                                                                          
     •Retirement  payments on  behalf of  municipalities and                                                                    
     school districts: Amount is based  on an actuarial rate                                                                    
     which  is predicted  to  grow  significantly in  coming                                                                    
     years                                                                                                                      
                                                                                                                                
     •Community  assistance:  Per  legislation,  payout  has                                                                    
     been  reduced by  50% since  FY2015,  will continue  to                                                                    
     require a $30 million  annual appropriation to maintain                                                                    
     current payout level                                                                                                       
     •Maintaining   private   insurance   viability:   Keeps                                                                    
     insurance   costs   low  for   individuals   purchasing                                                                    
     insurance  through private  market and  enables current                                                                    
     insurer to remain in Alaska, $55 million                                                                                   
                                                                                                                                
Ms.  Pitney  summarized that  slide  20  reflected areas  in                                                                    
which  the administration  felt cost  pressures rising.  She                                                                    
noted that some of the  funding for retirement payments came                                                                    
from  the  Higher  Education Fund.  She  informed  that  the                                                                    
current budget  cycle was  the last  opportunity to  use the                                                                    
fund for any items other  than the scholarship program so as                                                                    
to maintain the program in perpetuity.                                                                                          
                                                                                                                                
10:31:31 AM                                                                                                                   
                                                                                                                                
Co-Chair MacKinnon asked Ms. Pitney  to remind the committee                                                                    
how much vetoed tax credit  obligation was on the books. She                                                                    
wanted  a summation  of  the amount  that  the governor  had                                                                    
vetoed  over the  previous two  years,  as well  as any  new                                                                    
receipts for tax credits resulting in unpaid bills.                                                                             
                                                                                                                                
Ms.  Pitney stated  that  based on  statute,  there were  no                                                                    
unpaid  bills; however  there were  companies  that had  tax                                                                    
credits in hand.                                                                                                                
                                                                                                                                
Co-Chair  MacKinnon  interjected  that the  legislature  had                                                                    
authorized  spending  which  the governor  had  vetoed.  She                                                                    
reiterated her request for a summation of the numbers.                                                                          
                                                                                                                                
Ms. Pitney stated  that the veto in FY 16  had been for $200                                                                    
million,  and the  veto the  previous year  was down  to the                                                                    
statutory minimum and was for $480 million.                                                                                     
                                                                                                                                
Co-Chair  MacKinnon  asked  if   the  committee  could  have                                                                    
confidence that the governor would  not veto the funding for                                                                    
the statutorily required payment.                                                                                               
                                                                                                                                
Ms.  Pitney stated  that  the governor  had  not vetoed  the                                                                    
statutorily required payment the previous year.                                                                                 
                                                                                                                                
Co-Chair MacKinnon  asked Ms. Pitney  to provide  the number                                                                    
of what was remaining to be paid in tax credits.                                                                                
                                                                                                                                
Ms. Pitney  estimated that there  was an  outstanding amount                                                                    
of  $700 million  owed  in tax  credits.  She expected  $1.1                                                                    
billion by the end of FY 18.                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon asked  if the  number was  based on  the                                                                    
statutory payment calculation.                                                                                                  
                                                                                                                                
Ms. Pitney replied that the amount  was a sum of the accrued                                                                    
cashable credits, and did not  count credits that offset tax                                                                    
obligation.                                                                                                                     
                                                                                                                                
Co-Chair  MacKinnon asked  about school  debt reimbursement,                                                                    
and referred  to the  "restored veto"  listed on  the slide.                                                                    
She  wondered  if  the  proposed  budget  included  the  $40                                                                    
million  that  was  previously  vetoed, or  if  a  veto  was                                                                    
undone.                                                                                                                         
                                                                                                                                
Ms. Pitney  stated that the administration  had not restored                                                                    
the  funds vetoed  in  FY  17, but  had  included the  state                                                                    
obligation   for  debt   reimbursement   and  the   Regional                                                                    
Education Attendance  Area (REAA) funding  in FY 18.  The FY                                                                    
18 budget was $40 million higher  than FY 17, because of the                                                                    
veto.                                                                                                                           
                                                                                                                                
10:34:26 AM                                                                                                                   
                                                                                                                                
Senator Dunleavy referred to the  bottom of slide 20, and to                                                                    
a $55  million bill the  legislature received in  the waning                                                                    
days   of  the   previous  session.   He  wondered   if  the                                                                    
administration  would be  requesting  funds  to continue  to                                                                    
subsidize insurance.                                                                                                            
                                                                                                                                
Ms. Pitney  specified that the  FY 17  budget and the  FY 18                                                                    
budget had  each included $55 million  for private insurance                                                                    
viability.  She characterized  the  funding  as a  "two-year                                                                    
experiment."   She  thought   there  was   federal  activity                                                                    
present, and that  there were many moving  parts to consider                                                                    
such  as federal  waivers. She  relayed that  the topic  was                                                                    
part of an  ongoing discussion, and was not  able to surmise                                                                    
what would happen in FY 19.                                                                                                     
                                                                                                                                
Senator  Dunleavy could  not recall  if  the discussion  the                                                                    
previous year was for the funding to be year to year.                                                                           
                                                                                                                                
Co-Chair  MacKinnon  recollected  that the  legislature  had                                                                    
received the  request for  $55 million  in funding,  and she                                                                    
had considered that  the $55 million was for  two years. She                                                                    
recalled that  when she had  checked the spending  status of                                                                    
the $55 million,  she that there was  savings. She expressed                                                                    
a  need to  see  an  accounting of  the  expenditure of  the                                                                    
funds. She  recounted that the  committee had  requested the                                                                    
administration  to   provide  a  plan.  She   discussed  the                                                                    
Affordable Care Act, which had  ceased to provide grants for                                                                    
individuals.  She recounted  that during  the third  special                                                                    
session   the  legislature   had  discussed   500  high-risk                                                                    
individuals  and the  difficulties  of obtaining  insurance.                                                                    
She would look  to Commissioner Sheldon Fisher  and DCCED to                                                                    
hear more details on the matter.                                                                                                
                                                                                                                                
10:37:51 AM                                                                                                                   
                                                                                                                                
Senator Dunleavy asked if there  had been guarantees made on                                                                    
the part  of the insurance companies  when the appropriation                                                                    
was  made  to  stabilize   insurance.  He  wondered  if  the                                                                    
companies could have received the  funds and then later exit                                                                    
the state,  or were bound to  stay in the state  and provide                                                                    
insurance.                                                                                                                      
                                                                                                                                
Ms.  Pitney  informed  that  the   state  was  down  to  one                                                                    
insurance  carrier  in  the private  insurance  market.  She                                                                    
clarified that the insurance stabilization  was not for only                                                                    
the 500 high-risk  individuals, but was also  for any person                                                                    
that  did not  have employer-covered  healthcare. She  noted                                                                    
that  the group  included  some who  had  a federal  subsidy                                                                    
based on  income (that  did not  qualify for  Medicaid). She                                                                    
estimated that  there was  25,000 individuals  who purchased                                                                    
insurance  through a  private company.  The funding  allowed                                                                    
for  insurance premiums  not to  go  up by  40 percent,  but                                                                    
rather  only by  7 percent.  She emphasized  that the  state                                                                    
needed to look at the  issue holistically, and thought maybe                                                                    
the healthcare  authority study would assist  in finding the                                                                    
right balance and direction.                                                                                                    
                                                                                                                                
Senator Dunleavy wondered about  the nature of the agreement                                                                    
with insurance companies. He asked  if there was a guarantee                                                                    
that an insurance company would stay  in the state, or if it                                                                    
was a year-by-year agreement.                                                                                                   
                                                                                                                                
Ms. Pitney  indicated that DCCED Commissioner  Chris Hladick                                                                    
and  Deputy Commissioner  Fred Parady  could provide  an in-                                                                    
depth  view  of  the  contracts and  expectations.  She  was                                                                    
certain there had been several layers of due diligence.                                                                         
                                                                                                                                
Ms.  Pitney  showed  slide 21,  "Examples  of  Direct  State                                                                    
Funding,"  which showed  a data  table.  She had  previously                                                                    
mentioned that 40  percent of state funding  was grants that                                                                    
went to communities rather than  staying at the state level.                                                                    
She detailed  that the table  gave a community view  of some                                                                    
of the various larger programs  that were included in the 40                                                                    
percent.                                                                                                                        
                                                                                                                                
10:40:57 AM                                                                                                                   
                                                                                                                                
Ms. Pitney looked at slide 22, "Revenue Measures":                                                                              
                                                                                                                                
     FY2018 Governors Proposal                                                                                                  
          •Permanent Fund Protection Act                                                                                        
          •Motor Fuels Tax Increase                                                                                             
          Office                                                                                                                
                                                                                                                                
Ms. Pitney noted  that the two revenue measures  were in the                                                                    
proposed  budget.   She  added   that  the   Permanent  Fund                                                                    
Protection Act  (PFPA) mirrored a  bill that had  passed the                                                                    
Senate,  and  thanked the  members  for  their part  in  the                                                                    
process.  She  explained that  the  motor  fuels tax  was  a                                                                    
multi-phased  increase. She  estimated that  the PFPA  would                                                                    
solve between 70  percent and 75 percent of  the budget gap.                                                                    
The motor fuels  tax increase would bring  an additional $40                                                                    
million in  revenue for FY  18, and another increase  of $40                                                                    
million  in FY  19. At  the end  of the  implementation, the                                                                    
fuel  tax would  generate approximately  $120 million.  With                                                                    
the two  revenue measures,  there would be  just short  of a                                                                    
$900  million  revenue  gap.  She hoped  to  work  with  the                                                                    
legislature  on additional  revenue measures,  to include  a                                                                    
broad-based tax and bridge the fiscal gap.                                                                                      
                                                                                                                                
Senator Dunleavy thought it seemed  as though there had been                                                                    
a reversal of  philosophy. The previous year  there had been                                                                    
money  moved  into  the Permanent  Fund  and  discussion  of                                                                    
endowments, and  in the current  year money was  being moved                                                                    
out of  the Permanent Fund and  into the CBR. He  thought it                                                                    
would   take  more   discussion  to   understand  what   the                                                                    
administration was trying to accomplish.                                                                                        
                                                                                                                                
Co-Chair  MacKinnon reminded  that  the  presentation was  a                                                                    
budget  overview, and  that the  committee  would engage  in                                                                    
topics at a deeper level at a later time.                                                                                       
                                                                                                                                
10:43:22 AM                                                                                                                   
                                                                                                                                
Ms. Pitney  showed slide 23, "FY2015-2018  Funding by Type,"                                                                    
which was  an illustration of  DGF and UGF. She  pointed out                                                                    
that  the  draw from  the  Permanent  Fund Earnings  Reserve                                                                    
Account (ERA) would  begin in 2017, and  continue into 2018.                                                                    
The graph indicated that in FY  16 there was not a draw from                                                                    
the ERA.                                                                                                                        
                                                                                                                                
Co-Chair   MacKinnon  asked   if   the  administration   was                                                                    
repurposing the  funds into  the CBR, and  if the  CBR would                                                                    
grow  if  the   legislature  approved  the  administration's                                                                    
proposed budget.                                                                                                                
                                                                                                                                
Ms. Pitney explained that the CBR  would go to $5 billion in                                                                    
FY  17,  and  assuming spending  stayed  relatively  steady,                                                                    
would  grow over  time.  She thought  that  the CBR  balance                                                                    
could address some capital budget  needs in later years. She                                                                    
asserted that the  CBR would be healthy,  and would increase                                                                    
along with the ERA.                                                                                                             
                                                                                                                                
Ms. Pitney showed slide 24,  "Future Reserve Balances" which                                                                    
showed   what   the  CBR   balance   would   be  under   the                                                                    
administration's  proposed  plan.  She  explained  that  the                                                                    
graph  depicted  estimates   considering  an  inflation-only                                                                    
growth model in the agency  budgets and retirement. She made                                                                    
note of stability  in the ERA balance,  and slight increases                                                                    
in the CBR balance. She  reiterated that the figures assumed                                                                    
a very  constrained capital budget,  so it was  difficult to                                                                    
say  what  the  CBR  balance  would be  -  however,  at  the                                                                    
proposed  spending  level,  the  investment  earnings  would                                                                    
allow  the funds  to  grow. She  thought  the proposed  plan                                                                    
would  preserve the  overall value  of  the Permanent  Fund,                                                                    
while the status quo could threaten the value.                                                                                  
                                                                                                                                
Ms. Pitney turned to slide 25, "Additional Materials":                                                                          
                                                                                                                                
     Additional Materials                                                                                                       
    •Condensed Budget Comparison FY2015, FY2017, FY2018                                                                         
     •FY2018 Fiscal Summary                                                                                                     
     •OMB Home Page                                                                                                             
          •https://www.omb.alaska.gov//                                                                                         
                                                                                                                                
Ms. Pitney  directed attention to two  documents: "Condensed                                                                    
Budget  Comparison FY2015,  FY2017, FY2018;"  and "State  of                                                                    
Alaska -  Fiscal Year 2018 Governor  Fiscal Summary" (copies                                                                    
on file).                                                                                                                       
                                                                                                                                
Co-Chair MacKinnon  discussed the  agenda for  the following                                                                    
day.                                                                                                                            
                                                                                                                                
ADJOURNMENT                                                                                                                   
10:46:49 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:46 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
011817 OMB Condensed Budget Comparison.pdf SFIN 1/18/2017 9:00:00 AM
Operating Budget
011817 OMB FY18_Fiscal_Summary_Detail_12-15-16.pdf SFIN 1/18/2017 9:00:00 AM
Operating Budget FY18
011817 OMB Presentation to Senate Finance- Fiscal Plan and Budget Overview 1-18-17.pdf SFIN 1/18/2017 9:00:00 AM
Operating Budget FY 18