Legislature(2017 - 2018)Anch LIO

10/31/2017 10:00 AM FINANCE

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Audio Topic
10:02:25 AM Start
10:03:10 AM Presentation: Office of Management and Budget - Budget Forecast and Fund Balances
12:46:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Director Pat Pitney TELECONFERENCED
Office of Management and Budget
Budget Forecast and Fund Balances
                 SENATE FINANCE COMMITTEE                                                                                       
                  FOURTH SPECIAL SESSION                                                                                        
                     October 31, 2017                                                                                           
                        10:02 a.m.                                                                                              
                                                                                                                                
  [Note: The meeting was held in Anchorage, Alaska at the                                                                       
         Anchorage Legislative Information Office]                                                                              
                                                                                                                                
10:02:25 AM                                                                                                                   
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 10:02 a.m.                                                                                                  
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Gary Stevens                                                                                                            
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Natasha von Imhof                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Pat  Pitney,  Director,  Office of  Management  and  Budget,                                                                    
Office  of  the   Governor;  Sheldon  Fisher,  Commissioner,                                                                    
Department of Revenue.                                                                                                          
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
PRESENTATION:  OFFICE  OF  MANAGEMENT and  BUDGET  -  BUDGET                                                                    
FORECAST and FUND BALANCES                                                                                                      
                                                                                                                                
^PRESENTATION:  OFFICE OF  MANAGEMENT  and  BUDGET -  BUDGET                                                                  
FORECAST and FUND BALANCES                                                                                                    
                                                                                                                                
10:03:10 AM                                                                                                                   
                                                                                                                                
Co-Chair MacKinnon  communicated that the Senate  had worked                                                                    
with  the administration  on fact-finding  for consideration                                                                    
while  deliberating on  a tax  bill.  The information  would                                                                    
provide detail on the fiscal gap.                                                                                               
                                                                                                                                
PAT  PITNEY,  DIRECTOR,  OFFICE OF  MANAGEMENT  AND  BUDGET,                                                                    
OFFICE OF  THE GOVERNOR, discussed the  presentation, "State                                                                    
of Alaska  Fiscal Overview  - Budget  Gap Analysis  and Fund                                                                    
Source Balances" (copy on file).                                                                                                
                                                                                                                                
Ms.  Pitney  turned  to slide  2,  "Spending:  State  Budget                                                                    
Overview":                                                                                                                      
                                                                                                                                
     The total state budget is $10.2 billion, and                                                                               
     comprises:                                                                                                                 
     •Federally funded programs                                                                                                 
     •Service generated revenue                                                                                                 
     •State funded programs and services                                                                                        
                                                                                                                                
     Only 50% of the budget impacts the deficit, the                                                                            
     unrestricted general fund (UGF) portion.                                                                                   
                                                                                                                                
Ms.  Pitney reminded  that the  information on  slide 2  was                                                                    
inclusive of  all funding sources.  She continued  that when                                                                    
she  was   referring  to  the   deficit  it   signified  the                                                                    
Unrestricted General Fund (UGF) shortfall.                                                                                      
                                                                                                                                
Ms.  Pitney  looked  at slide  3,  "Spending:  State  Budget                                                                    
Overview," which showed a pie  chart depicting pieces of the                                                                    
state's UGF  spending. She pointed  out portions of  the pie                                                                    
which  included  education,  Medicaid,  the  Permanent  Fund                                                                    
Dividend (PFD),  other health  programs, public  safety, and                                                                    
statewide  items.   She  noted  that  the   larger  portions                                                                    
included   education,  Medicaid,   PFD,   and  health;   and                                                                    
signified the choices when considering budget reductions.                                                                       
                                                                                                                                
10:06:00 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney   viewed  slide   4,  "Spending:   State  Budget                                                                    
Overview":                                                                                                                      
                                                                                                                                
     More than 50% of the state-funded share of the budget                                                                      
     is sent as direct payments to communities, providers,                                                                      
     oil companies, and individuals.                                                                                            
                                                                                                                                
     Payments are for items such as:                                                                                            
     •Medicaid payments to providers (on behalf of                                                                              
     enrollees)                                                                                                                 
     •K-12 Schools                                                                                                              
     •Retirement payments (on behalf of communities and                                                                         
     schools)                                                                                                                   
     •School debt reimbursement                                                                                                 
     •Senior benefits                                                                                                           
     •Public assistance                                                                                                         
     •Foster care                                                                                                               
     •Oil and gas tax credits                                                                                                   
     •Permanent fund dividends                                                                                                  
                                                                                                                                
     Less  than  50% of  state  funded  budget is  spent  on                                                                    
     government  services like  troopers, road  maintenance,                                                                    
     ferries,  airports, prisons,  the legislature,  Pioneer                                                                    
     Homes,  the courts,  the  governor's  office, fish  and                                                                    
     game, etc.                                                                                                                 
                                                                                                                                
Ms. Pitney commented that half  of the $5.1 billion in state                                                                    
spending  would be  sent as  a check  out to  individuals or                                                                    
communities, and the amount would  be under consideration if                                                                    
budget cuts were deliberated.                                                                                                   
                                                                                                                                
Senator Micciche  referred to  slide 3  and wondered  if Ms.                                                                    
Pitney  was adding  UGF and  Designated General  Funds (DGF)                                                                    
together  to  come  up  with  a total  of  $5.1  billion  as                                                                    
reflected on the slide.                                                                                                         
                                                                                                                                
Ms.  Pitney informed  that she  had added  UGF and  the PFD,                                                                    
given that  the Earnings Reserve Account  (ERA) would become                                                                    
a UGF component.                                                                                                                
                                                                                                                                
Senator Micciche stated that the representation was fair.                                                                       
                                                                                                                                
10:08:08 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:08:51 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Hoffman  asked about what level  of PFD encompassed                                                                    
the $800 million listed on slide 3.                                                                                             
                                                                                                                                
Ms. Pitney specified that there  was an $1100 PFD calculated                                                                    
into the figures.                                                                                                               
                                                                                                                                
Senator  von Imhof  asked  if UGF  spending  was about  $4.3                                                                    
billion.                                                                                                                        
                                                                                                                                
Ms. Pitney answered in the affirmative.                                                                                         
                                                                                                                                
Senator von  Imhof referred  to a memo  that stated  the UGF                                                                    
spending was  $4.3 billion  when the  budget was  closed out                                                                    
the  previous June,  and- $200  million to  $300 million  in                                                                    
one-time  funding  sources  as   part  of  the  budget.  She                                                                    
wondered if  the one-time funding  sources were  included in                                                                    
the figures in the presentation.                                                                                                
                                                                                                                                
Ms. Pitney stated  that the presentation started  with FY 18                                                                    
spending (the  current year's approved  budget) on  slide 3,                                                                    
and subsequent  slides would  address ongoing  spending with                                                                    
one-time revenue solutions.                                                                                                     
                                                                                                                                
Co-Chair MacKinnon  appreciated transparency with  regard to                                                                    
the budget. She referred to slide  2, which had showed a $10                                                                    
billion  spend.  She  thought  Ms. Pitney  had  gone  on  to                                                                    
discuss  leveraging  federal  dollars  on  purpose  and  had                                                                    
focused on UGF spending. She  thought the slides reflected a                                                                    
different way of looking at the budget in layers.                                                                               
                                                                                                                                
Ms. Pitney stated that what  Co-Chair MacKinnon had surmised                                                                    
was fair was represented what she had tried to convey.                                                                          
                                                                                                                                
10:12:01 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney   showed  slide   5,  "Spending:   State  Budget                                                                    
Overview," which showed a  data table entitled 'Unrestricted                                                                    
General Fund  Spending Trend.' She listed  budget categories                                                                    
on  the slide.  She  reviewed reductions  in various  areas,                                                                    
listing the total operating budget down by 23 percent.                                                                          
                                                                                                                                
Senator Micciche asked why the  slide used a comparison from                                                                    
FY 15  to FY 18.  He pointed out that  FY 13 was  a spending                                                                    
peak and could more appropriately be used as a comparison.                                                                      
                                                                                                                                
Ms.  Pitney   stated  that   the  administration   had  used                                                                    
different versions of budget comparisons.  She noted that FY                                                                    
13 had been the first year  in the current oil price climate                                                                    
that the state  ran a deficit. She specified that  FY 15 had                                                                    
the budget  that the current  administration came  to office                                                                    
with.  She stated  she could  easily change  the comparison,                                                                    
and then  the FY 13  to FY  18 comparison signified  a total                                                                    
UGF budget reduction of 44 percent.                                                                                             
                                                                                                                                
Senator Micciche  thought that  Alaskans did  not understand                                                                    
the  comparisons that  were being  used. He  stated that  he                                                                    
used  the FY  13  comparison frequently.  He considered  the                                                                    
reduction from FY 13 to FY  18 to be substantial. He thought                                                                    
the  legislature had  done  a pretty  good  job at  reducing                                                                    
costs, although  some felt  further cuts  could be  made. He                                                                    
thought it  was important for  the public to  understand the                                                                    
substantial reductions that had been made.                                                                                      
                                                                                                                                
Ms. Pitney  stated that the  administration agreed  with the                                                                    
44  percent  reduction,  and the  27  percent  reduction  in                                                                    
operating budget reduction  from FY 13. She  stated that the                                                                    
reductions were real.                                                                                                           
                                                                                                                                
10:16:34 AM                                                                                                                   
                                                                                                                                
Senator Olson  looked at the 19  percent reduction reflected                                                                    
in the 'Medicaid  & Other Health Formula'  category on slide                                                                    
5. He  wondered what  percentage of  the reduction  had been                                                                    
related to Medicaid expansion.                                                                                                  
                                                                                                                                
Ms. Pitney explained  that a large portion  of the reduction                                                                    
had  been due  to Medicaid  expansion and  increased federal                                                                    
funding. She expected that the  category would not stay at a                                                                    
19 percent reduction.                                                                                                           
                                                                                                                                
Senator Olson  asked if Ms.  Pitney had specific  numbers to                                                                    
reflect the change.                                                                                                             
                                                                                                                                
Ms.  Pitney  did  not have  numbers  readily  available  but                                                                    
recalled that  there was many  fiscal notes  associated with                                                                    
SB  74 [a  Medicaid reform  bill passed  in 2016]  that were                                                                    
enabled because of Medicaid expansion.                                                                                          
                                                                                                                                
Senator  von Imhof  referenced the  19 percent  reduction to                                                                    
the 'Medicaid  and Other Health Formula'  category as listed                                                                    
on slide 5  and asked how much funding had  been replaced by                                                                    
federal funds.  She referred to  Ms. Pitney's  comment about                                                                    
discussion of  one-time revenue sources. After  two years of                                                                    
Medicaid expansion,  she wanted to  know what costs  paid by                                                                    
the  federal government,  versus  any  additional costs  the                                                                    
state   was   responsible   for.  She   listed   eligibility                                                                    
processing  and  other  administrative  duties  as  possible                                                                    
areas of cost.                                                                                                                  
                                                                                                                                
Ms.  Pitney   stated  thought   that  Senator   von  Imhof's                                                                    
questions  were   in-depth  enough  to   warrant  additional                                                                    
discussion time. She  estimated that the amount  of money in                                                                    
Medicaid  over  the  past  three   years  had  increased  by                                                                    
approximately  $300 million  to $400  million. She  reminded                                                                    
that healthcare  was the only  sector of the  Alaska economy                                                                    
that  was   growing,  because  of  the   additional  federal                                                                    
investment in Medicaid.  She stated that the  state level of                                                                    
Medicaid  funding had  gone down  due to  additional federal                                                                    
funding.  She  reiterated  that it  was  possible  to  delve                                                                    
deeper into the  issue at a later time, when  she would have                                                                    
more specific figures.                                                                                                          
                                                                                                                                
10:20:45 AM                                                                                                                   
                                                                                                                                
Co-Chair  MacKinnon wondered  if  the  numbers reflected  on                                                                    
slide 5  (under reductions  in Medicaid and  other) included                                                                    
the supplemental  items that were  secondary to  the budget.                                                                    
She wondered if subsequent  slides would address anticipated                                                                    
increases. She believed some of  the slides were highlighted                                                                    
to note that the supplemental items were not included.                                                                          
                                                                                                                                
Ms.  Pitney  stated that  the  supplemental  budget was  not                                                                    
included in the FY 18 figures on the slide.                                                                                     
                                                                                                                                
Co-Chair  MacKinnon  referred   to  the  'Debt,  Retirement,                                                                    
Credits,  etc' category  on  the slide,  which  showed a  52                                                                    
percent reduction.  She asked for more  detail and suggested                                                                    
that the  committee needed more  discussion on  the category                                                                    
and reduction.                                                                                                                  
                                                                                                                                
Ms. Pitney stated  that the category was  different from the                                                                    
comparison of  FY 13 to FY  18, versus the comparison  of FY                                                                    
15 to  FY 18. Slide 5  showed the majority of  the reduction                                                                    
from  FY 15  to  FY 18  was  a  result of  oil  and gas  tax                                                                    
credits.  She stated  that the  retirement number  was about                                                                    
the   same.  She   noted  that   there  was   no  retirement                                                                    
contribution in the 982.7 million  listed for FY 15 on slide                                                                    
5,  because  it was  the  same  year  a roughly  $3  billion                                                                    
deposit  went  to the  two  retirement  systems. The  $982.7                                                                    
million was largely made up of  oil and gas tax credits. She                                                                    
informed that  the number  from FY 13  was largely  the same                                                                    
but was  largely made up  of the retirement  contribution of                                                                    
$750 million.  Because of  the deposit in  FY 15,  the state                                                                    
was  able   to  reduce   its  on-behalf  payments   for  the                                                                    
retirement   liability.  She   stated  that   the  reduction                                                                    
depended upon the year that was being considered.                                                                               
                                                                                                                                
10:24:16 AM                                                                                                                   
                                                                                                                                
Co-Chair   MacKinnon   appreciated  the   information.   She                                                                    
referred  to consistency  in  reporting  and understood  the                                                                    
administration's choice  of comparing  years it  was present                                                                    
to  measure   budget  changes   with.  She   understood  the                                                                    
representation   of  the   $3   billion  contribution.   She                                                                    
referenced   a  bill   that   suspended   the  school   debt                                                                    
reimbursement program, which would sunset.                                                                                      
                                                                                                                                
Co-Chair MacKinnon  asked Ms. Pitney to  provide a breakdown                                                                    
of the category of 'Education  & University.' She noted that                                                                    
a  future  slide  referenced inflation  for  education.  She                                                                    
wanted to  see specific  figures for  the Court  system, and                                                                    
other details separated out.                                                                                                    
                                                                                                                                
Co-Chair MacKinnon  warned that she  would be asking  for an                                                                    
acknowledgement from the administration  that the state owed                                                                    
money  for  oil  and  gas   tax  credits.  She  referred  to                                                                    
businesses  going   bankrupt,  with  unpaid  credits   as  a                                                                    
contributing  factor. She  referenced companies  approaching                                                                    
legislators requesting  a plan as  to how the  credits would                                                                    
be paid to  those that had risked capital. She  asked if Ms.                                                                    
Pitney believed the state owed  the tax credits and that the                                                                    
state was obligated to pay the tax credits.                                                                                     
                                                                                                                                
10:28:22 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney believed  there  was an  obligation  to pay  tax                                                                    
credits, although  thought there was  no time limit  or cost                                                                    
to the time other than that to the companies.                                                                                   
                                                                                                                                
Co-Chair MacKinnon referred to  a statutory formula that the                                                                    
administration had been  relying on and what  some felt were                                                                    
minimum payments.                                                                                                               
                                                                                                                                
Ms. Pitney answered in the affirmative.                                                                                         
                                                                                                                                
Senator  Stevens  appreciated Co-Chair  MacKinnon's  request                                                                    
for a breakdown  of the education budget  overview. He asked                                                                    
for  a  rough  approximation   of  the  reductions  to  K-12                                                                    
education and the University.                                                                                                   
                                                                                                                                
Ms. Pitney  estimated there had  been a 6  percent reduction                                                                    
to  K-12 education  and  an  upwards of  12  percent to  the                                                                    
University. She  offered to provide more  precise numbers at                                                                    
a later  time. She stated  that in FY  15 there had  been an                                                                    
amount  of   one-time  funding   for  education;   that  was                                                                    
available for  FY 16,  FY 17,  and FY  18. The  reduction to                                                                    
education was  an elimination of  the one-time  funding. She                                                                    
summarized  that  the  FY  16 and  FY  17  one-time  funding                                                                    
intended  to  bridge to  an  increase  in the  Base  Student                                                                    
Allocation (BSA)  had been eliminated and  accounted for the                                                                    
reduction.                                                                                                                      
                                                                                                                                
Senator Micciche  thought it was  important to  clarify that                                                                    
there had  been increases to the  BSA after FY 15.  He noted                                                                    
that  FY  18 was  the  first  year  without an  increase  in                                                                    
several years.                                                                                                                  
                                                                                                                                
10:31:09 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney  looked  at slide  6,  "Spending:  State  Budget                                                                    
Overview," which showed a  data table entitled 'Unrestricted                                                                    
and   Designated    Spending   Trend.'   The    reason   the                                                                    
administration   had    provided   the    particular   slide                                                                    
presentation was  to provide a  picture of UGF and  DGF. She                                                                    
explained  that DGF  was a  category of  funding that  had a                                                                    
statutory designation. She explained  that some of the funds                                                                    
were  service  fees for  a  particular  item. She  used  the                                                                    
example  of University  tuition and  fees, wherein  students                                                                    
paid for a particular course, degree program, or dorm room.                                                                     
                                                                                                                                
Ms.  Pitney  continued discussing  slide  6  and noted  that                                                                    
funds  from  the  motor  fuels  tax (in  FY  18)  were  also                                                                    
considered DGF,  because the statute pointed  the money from                                                                    
the  tax  to transportation  purposes.  She  noted that  the                                                                    
motor  fuels tax  funds  were not  earned  for a  particular                                                                    
item, like a  ferry receipt. There were  two different kinds                                                                    
of  monies in  the DGF.  Other types  of DGF  were community                                                                    
assistance  (formerly known  as community  revenue sharing),                                                                    
which  was  a   GF  payment  into  a   fund  designated  for                                                                    
communities. She  listed the  Power Cost  Equalization (PCE)                                                                    
Fund  as an  example  of  a similar  fund  designated for  a                                                                    
particular  purpose. Even  counting all  the DGF,  the total                                                                    
operating budget since  FY 15 was down  16 percent. Compared                                                                    
to FY 13, it was down  over 20 percent. The total budget was                                                                    
down 23 percent  from FY 15 to  FY 18 when DGF  and UGF were                                                                    
included.                                                                                                                       
                                                                                                                                
Senator  Micciche  thought  Ms.   Pitney  had  been  showing                                                                    
numbers in  a specific  way for the  past several  years. He                                                                    
thought that  the grouping of funds  demonstrated some value                                                                    
for  the  administration  but  not  for  the  committee.  He                                                                    
thought it  was important to  have a standardized  format to                                                                    
presenting  the  budget  numbers.  He asked  Ms.  Pitney  to                                                                    
provide  budget  information  to  the  committee  using  the                                                                    
standard style.                                                                                                                 
                                                                                                                                
Ms. Pitney agreed to provide the information.                                                                                   
                                                                                                                                
10:35:53 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Bishop thought  Senator  Micciche had  requested                                                                    
the  alternatively  formatted  budget  information  for  the                                                                    
benefit of the public.                                                                                                          
                                                                                                                                
Co-Chair MacKinnon asked if it  was fair to extrapolate that                                                                    
the  spending total  number would  remain the  same, but  an                                                                    
alternate   format   would   provide  greater   detail   and                                                                    
transparency in understanding each operating line.                                                                              
                                                                                                                                
Ms. Pitney answered in the affirmative.                                                                                         
                                                                                                                                
Senator Micciche  suggested that in order  to understand the                                                                    
proposed  spending for  FY 18,  which some  members did  not                                                                    
necessarily   support,  it   was  important   to  understand                                                                    
successful  spending reductions  and resistance  to spending                                                                    
increases.                                                                                                                      
                                                                                                                                
10:37:39 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney spoke  to  slide 7,  "Budget  Gap: State  Budget                                                                    
Overview  - Known  Increases FY2018  to  FY2018." The  slide                                                                    
provided a  list of increases  the administration  had known                                                                    
the state would face between the  FY 18 budget and the FY 19                                                                    
budget. She explained  that the table on  the slide compared                                                                    
the Office  of Management and  Budget's (OMB) list  with the                                                                    
Legislative Finance Division's (LFD)  list, and there were a                                                                    
couple  of differences.  She drew  attention  to the  bottom                                                                    
line, where OMB  assumed a $360 million  increase, and where                                                                    
LFD  assumed a  $347 million  increase. In  addition to  the                                                                    
bottom line  increase, there was  a capital  budget increase                                                                    
as well  as an offset  for fiscal notes, one-time  items and                                                                    
sunset  programs that  brought the  OMB total  budget change                                                                    
number to $388.3 million.                                                                                                       
                                                                                                                                
Ms. Pitney referred  to the top of slide 7,  noting that the                                                                    
previous  year the  administration  had  known the  Medicaid                                                                    
budget would  be about $32  million below what  was expected                                                                    
in FY  18. There was also  a reduction in the  Senate and in                                                                    
the final  legislation. She shared that  Medicaid enrollment                                                                    
had  gone  up  much  faster than  was  anticipated,  through                                                                    
traditional  enrollment as  well as  expansion. Based  on FY                                                                    
17, the administration  expected $75 million for  FY 18. She                                                                    
reiterated that she was speaking to known increases.                                                                            
                                                                                                                                
Ms.  Pitney pointed  out an  increase in  the Alaska  Marine                                                                    
Highway System  (AMHS), which had  a deposit in FY  17 (into                                                                    
the Marine  Highway Fund) and then  a draw in FY  18 because                                                                    
of  the Medicaid  increase.  She  referenced an  explanatory                                                                    
memo  that  went  out  in   the  previous  two  months.  She                                                                    
explained that  because of the  cap on the CBR,  the deposit                                                                    
for FY  18 was  not made.  There was  a minimum  $40 million                                                                    
shortfall. There had been a  one-time item in addition to be                                                                    
restored.  In  total, just  to  get  even with  the  current                                                                    
fiscal  year's  level,  it  would   require  a  $44  million                                                                    
increase in UGF for AMHS.  She thought the configuration was                                                                    
difficult to  explain, but summarized that  it concerned the                                                                    
CBR  cap, and  supplementals  hitting the  cap the  previous                                                                    
year.                                                                                                                           
                                                                                                                                
10:41:37 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney  continued to  discuss  the  table on  slide  7,                                                                    
pointing   out   a   $15  million   placeholder   for   Fire                                                                    
Suppression, which LFD had put  in the budget documents, but                                                                    
OMB had not.  She noted that there had not  been a huge fire                                                                    
year the  previous year, and  there was funding in  the Fire                                                                    
Suppression  account.   She  thought   $15  million   was  a                                                                    
traditional amount that was  deposited for wildfire funding.                                                                    
She stated that OMB had also  not put in a figure for Salary                                                                    
and Benefits, and there were  very few contracts with salary                                                                    
increases. She guessed  the amount would be in  the range of                                                                    
$7  million. She  relayed that  LFD  had communicated  there                                                                    
would be  an increase in spending  for employer contribution                                                                    
for health.  She had  not confirmed that  there would  be an                                                                    
increase, and  the administration  was trying to  manage the                                                                    
program  and  keep  the  employer   payment  the  same.  She                                                                    
reiterated that the slide reflected known increases.                                                                            
                                                                                                                                
Ms.  Pitney  addressed  an increase  to  the  Department  of                                                                    
Corrections  (DOC) inmate  health. The  previous year  there                                                                    
had  been  a $10  million  supplemental  request for  inmate                                                                    
health,  which   was  not  included   in  the  FY   18  base                                                                    
allocation.   She  referred   to  criminal   justice  reform                                                                    
legislation  that  had  passed  the  previous  session.  She                                                                    
pointed out that the prison  population had not decreased to                                                                    
the level that  was predicted, so there  would be additional                                                                    
increases for the correction population  that were not built                                                                    
into the number on the slide.                                                                                                   
                                                                                                                                
Ms. Pitney highlighted the $4.7  million increase in funding                                                                    
for Mt. Edgecumbe  listed by OMB. She  referenced the Public                                                                    
School Trust Fund.                                                                                                              
                                                                                                                                
10:44:12 AM                                                                                                                   
                                                                                                                                
Senator  von   Imhof  referred  to  DOC   Commissioner  Dean                                                                    
Williams'   testimony   from    the   previous   week.   The                                                                    
commissioner  had  discussed  the  closure of  a  prison  in                                                                    
Palmer,  and  she understood  there  was  400 vacant  prison                                                                    
beds.  She   thought  there  was  a   backlog  in  pre-trial                                                                    
services, but  the commissioner  felt the  individuals would                                                                    
be addressed  in January  2018 when  the program  kicked in.                                                                    
She did  not recall  that the  commissioner had  stated that                                                                    
there was a significant increase in inmates.                                                                                    
                                                                                                                                
Ms. Pitney stated that the  criminal justice reform bill had                                                                    
estimated  a  decrease in  the  prison  population, but  the                                                                    
decrease not been commensurate with  what had been predicted                                                                    
and budgeted  for. She relayed  that the  administration had                                                                    
taken a significant amount of  money out of the correctional                                                                    
system in  anticipation of fewer inmates.  The reduction had                                                                    
not been what was anticipated.                                                                                                  
                                                                                                                                
Senator  von Imhof  understood that  one  of the  supporting                                                                    
arguments for Medicaid expansion  was that the central funds                                                                    
would be covering inmates.                                                                                                      
                                                                                                                                
Ms. Pitney  stated that  Medicaid expansion  covered inmates                                                                    
that were in a hospital setting  for 24 hours or more. There                                                                    
was about $7.2 million of  inmate health that was covered by                                                                    
Medicaid expansion.  She clarified that the  $10 million was                                                                    
for healthcare  that was  provided within  the walls  of the                                                                    
prison. She informed that Medicaid  did not cover healthcare                                                                    
that was within the walls of the prison.                                                                                        
                                                                                                                                
Senator  von Imhof  asked  if Ms.  Pitney  was referring  to                                                                    
Medicaid-eligible recipients.                                                                                                   
                                                                                                                                
Ms.  Pitney   stated  that  Medicaid   did  not   cover  the                                                                    
healthcare costs within the prison;  rather, it only covered                                                                    
inmates that had  to go to a hospital for  24 hours or more.                                                                    
Prior  to  Medicaid expansion,  the  state  had covered  the                                                                    
total amount.                                                                                                                   
                                                                                                                                
Senator  von Imhof  understood the  explanation but  did not                                                                    
think  that  the level  of  detail  was not  explained  when                                                                    
Medicaid  expansion  was   being  considered.  She  recalled                                                                    
sitting  in   meetings  in  which  she   heard  that  inmate                                                                    
healthcare would be covered under the expansion.                                                                                
                                                                                                                                
10:47:48 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney continued  reviewing  slide 7,  noting that  the                                                                    
next  two  items were  not  increases,  but there  had  been                                                                    
anticipation   of  an   increase.  The   administration  had                                                                    
received new debt service information  from the state's debt                                                                    
manager. At the end of  the previous session, there had been                                                                    
an  $8  increase to  the  Community  Assistance Program,  so                                                                    
there  was a  resultant decrease.  Oil and  gas tax  credits                                                                    
would  increase   $118  million   based  on   the  statutory                                                                    
minimums.  She referenced  the  Public  Education Fund,  and                                                                    
stated that  there was  one-time money  of $17  million used                                                                    
from  a  reappropriation,  which  would result  in  a  known                                                                    
increase.  The actuarial  increase to  State assistance  was                                                                    
increased by $108 million.                                                                                                      
                                                                                                                                
Co-Chair  Hoffman  referred   to  the  Community  Assistance                                                                    
Program  and recalled  that the  law stated  the legislature                                                                    
would put in $30 million per  year to keep a fund balance of                                                                    
$90 million  so that communities could  anticipate where the                                                                    
dollars  would be  spent. He  had received  information from                                                                    
the  administration that  indicated it  would treat  the $30                                                                    
million  as  an  add-back  similar to  how  AMHS  was  being                                                                    
treated.  He  asked  for  clarification  on  the  matter  of                                                                    
whether  the  administration  had   the  same  view  on  the                                                                    
program,  and  if it  planned  on  decreasing the  Community                                                                    
Assistance Program in the future.                                                                                               
                                                                                                                                
Ms.  Pitney  referred to  the  $30  million deposit  in  the                                                                    
Community Assistance Fund the  previous year, and stated the                                                                    
amount could be put in as  a supplemental item in the coming                                                                    
year if  there was  revenue to cover  it. She  asserted that                                                                    
the  $8 million  item listed  under Community  Assistance on                                                                    
the  slide  was  somewhat  different.   The  funds  went  to                                                                    
Community Assistance  as a direct appropriation  rather than                                                                    
into  the  fund.  She  elaborated that  the  slide  did  not                                                                    
reflect the intent of the  administration. She reminded that                                                                    
the  Senate's revision  of the  PCE Fund  also provided  the                                                                    
ability  to  fund  Community  Assistance  through  the  same                                                                    
mechanism.                                                                                                                      
                                                                                                                                
Co-Chair Hoffman thought  it was more a  question of whether                                                                    
the state  could afford the program  or not. He did  not see                                                                    
how  the  administration  could  differentiate  between  the                                                                    
Community Assistance Program, saying  it was not affordable,                                                                    
when it affected virtually every  person in the state; while                                                                    
saying  the state  could afford  the AMHS,  which served  20                                                                    
percent of the state population.                                                                                                
                                                                                                                                
10:52:18 AM                                                                                                                   
                                                                                                                                
Co-Chair  MacKinnon recalled  that  the House  had added  $7                                                                    
million   to  Community   Revenue   Sharing   as  a   direct                                                                    
appropriation  in the  capital  budget and  wondered if  the                                                                    
overview was  reflective of the  funds not being  added back                                                                    
in  a second  year.  She  asked Ms.  Pitney  to explain  the                                                                    
funding history.                                                                                                                
                                                                                                                                
Ms.  Pitney stated  that  as part  of  a budget  compromise,                                                                    
there  had  been $8  million  in  budgeting outside  of  the                                                                    
normal process for Community Revenue Assistance.                                                                                
                                                                                                                                
Co-Chair MacKinnon stated that  she had worked with Co-Chair                                                                    
Hoffman to  ensure that  the program was  funded at  a lower                                                                    
level. The  change was 50  percent lower funding and  a name                                                                    
change from  Community Revenue Sharing to  Community Revenue                                                                    
Assistance. She added that the  program had been back-funded                                                                    
with from  Power Cost Equalization funds.  She thought there                                                                    
would   eventually   be   a  cost-savings.   She   supported                                                                    
fulfilling the obligation.                                                                                                      
                                                                                                                                
Co-Chair MacKinnon  continued her  remarks on  the Community                                                                    
Revenue Sharing  item. She hoped that  the governor's budget                                                                    
for the  current year  would show  funding for  the program.                                                                    
She recalled that  the previous year the full  amount had to                                                                    
be back-filled.  She wanted to  ensure that there was  a $30                                                                    
million contribution in  order to keep the  $60 million fund                                                                    
whole.   She   pointed   out   that   specifically   smaller                                                                    
communities  suffered  more   adverse  effects  than  larger                                                                    
communities that  did receive a  higher portion of  the fund                                                                    
and had  other ways to  manage. She  mentioned a tax  cap in                                                                    
Anchorage,  and  relayed  Anchorage  assembly  members  were                                                                    
concerned with the lack of money coming from the state.                                                                         
                                                                                                                                
Ms.  Pitney appreciated  understanding the  position of  the                                                                    
committee.                                                                                                                      
                                                                                                                                
Co-Chair Hoffman  thought it seemed that  the administration                                                                    
made one statement the previous  year and was reversing that                                                                    
statement; but not with AMHS,  which benefitted a very small                                                                    
portion of the state  compared with the Community Assistance                                                                    
Program.  He was  befuddled at  the funding  differentiation                                                                    
between the two programs.                                                                                                       
                                                                                                                                
Senator  Micciche  reiterated  that he  wanted  more  detail                                                                    
pertaining  to   the  categories  of  Debt   Service;  State                                                                    
Assistance  to Retirement;  and Fiscal  notes, Sunsets,  and                                                                    
OTIs as  listed on  slide 7.  He asked  Ms. Pitney  for more                                                                    
detail on the expectations for all three of the categories.                                                                     
                                                                                                                                
Ms. Pitney agreed to provide  five-year forecasts on each of                                                                    
the  areas  requested. She  stated  she  could also  explain                                                                    
highlights if necessary.                                                                                                        
                                                                                                                                
Senator Micciche  stated that he  wanted more detail  on the                                                                    
line items at a later time.                                                                                                     
                                                                                                                                
Co-Chair MacKinnon relayed that  the committee had asked for                                                                    
more  detail to  provide greater  transparency for  the line                                                                    
items  on  slide 7.  She  stated  that  she would  make  the                                                                    
information  available  to the  public  as  soon as  it  was                                                                    
received.                                                                                                                       
                                                                                                                                
10:57:43 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney  reviewed slide  8,  "Budget  Gap: State  Budget                                                                    
Overview":                                                                                                                      
                                                                                                                                
     Known issues: Base scenario ~$600-800 million/year                                                                         
     Assumptions:                                                                                                               
     • Department of Revenue oil price and production                                                                           
     forecast: Fall 2017                                                                                                        
     • Agency cost increases are maintained at or below                                                                         
     inflation                                                                                                                  
     • No federal cost shifts                                                                                                   
     • K-12 school increases maintained at inflation only -                                                                     
     no student growth                                                                                                          
                                                                                                                                
Ms. Pitney  addressed the table  on slide 8,  entitled 'Base                                                                    
Scenario  Calculation  ($millions).'  She  stated  that  the                                                                    
slide  did  not  include  policy decisions,  new  items,  or                                                                    
reductions.  Rather  the   slide  reflected  current  status                                                                    
including  fiscal notes  and sunsets,  which had  been built                                                                    
into   the  future.   She  pointed   out  that   the  budget                                                                    
(maintaining  flat service  levels)  went up  from the  $4.3                                                                    
billion budget to $4.7 billion.  She detailed that inflation                                                                    
of  2.25  percent  for  agency  operating,  known  increases                                                                    
(based  on  the  revenue  forecast   for  oil  and  gas  tax                                                                    
credits),  known   decreases  of  debt,  and   increases  in                                                                    
retirement  were included  in the  calculation; after  which                                                                    
the budget  would go  from $4.7  billion in  FY 19,  to $4.9                                                                    
billion  in FY  20,  to  almost $5  billion  in  FY 21.  She                                                                    
qualified that the numbers were  for government only and did                                                                    
not include the PFD.                                                                                                            
                                                                                                                                
Ms. Pitney continued discussing the  table on slide 8, which                                                                    
projected a  deficit that started  at $2.7 billion  and grew                                                                    
to $2.8  billion in  the following 2  years. The  deficit in                                                                    
the  current  fiscal  year was  roughly  $2.5  billion.  She                                                                    
discussed the  budget gap predicated  on the  Permanent Fund                                                                    
plan (which  existed in SB 26  as passed by the  Senate), at                                                                    
roughly  $600 million.  She  considered  the Permanent  Fund                                                                    
Plan  as passed  by the  House (and  included a  sustainable                                                                    
draw from the  ERA), there was a gap of  $900 million in the                                                                    
short-term and $800 million in the long-term.                                                                                   
                                                                                                                                
Ms. Pitney  qualified that the  figures on the slide  had an                                                                    
assumption of  no federal cost  shifts, and  assumed funding                                                                    
schools with no adjustments. She  discussed the range of the                                                                    
budget  gap  as  calculated  through the  House  and  Senate                                                                    
proposals. She stated that there  was a number of items that                                                                    
could change the range.                                                                                                         
                                                                                                                                
11:01:55 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney discussed  slide 9,  "Budget  Gap: State  Budget                                                                    
Overview":                                                                                                                      
                                                                                                                                
     A number of items could increase the gap:                                                                                  
                                                                                                                                
     •Compromise dividend ~$80.0-$100.0 million (cost)                                                                          
     •Federal level health care changes ~$100.0+ million                                                                        
     (cost)                                                                                                                     
     •Supplemental budget ~100.0+ million (cost)                                                                                
     •Health care cost containment efforts (necessary to                                                                        
     meet forecast)                                                                                                             
     •Criminal justice initiatives (cost)                                                                                       
     •Major disaster spending (cost)                                                                                            
     •Market correction affecting permanent fund earnings                                                                       
     •Overdrawing the fund today, increases the gap in the                                                                      
     future:                                                                                                                    
          Assuming $500.0 million/year in excess draw:                                                                          
          •Over 5 years: this will cost $153 million in                                                                         
          annual revenue forever.                                                                                               
          •Over 10 years: this will cost $368.5 million in                                                                      
          annual revenue forever.                                                                                               
                                                                                                                                
Ms.  Pitney informed  that both  LFD and  OMB were  doing an                                                                    
initial analysis on healthcare  costs. If healthcare grew at                                                                    
3.5 percent (analysis  showed a 5.25 increase  over the past                                                                    
10 years), there  would be a $100 million  difference in the                                                                    
budget in five  years. The forecast budgeted  a 2.25 percent                                                                    
increase.  She   emphasized  that  in  order   to  not  have                                                                    
healthcare taking a larger share  of the budget, containment                                                                    
efforts needed to be put in place.                                                                                              
                                                                                                                                
11:03:40 AM                                                                                                                   
                                                                                                                                
Senator  Micciche thought  that all  the assumptions  on the                                                                    
slide  8 and  slide 9  addressed an  increase to  the budget                                                                    
gap. He wondered  at the absence of items  that might reduce                                                                    
the fiscal  gap; such as production,  price, or efficiencies                                                                    
in  government.  He  considered that  the  presentation  was                                                                    
showing that  the administration thought the  status quo was                                                                    
correct. He discussed reductions.  He thought there was good                                                                    
news  in the  state and  considered that  there should  be a                                                                    
balance of considering positive  and negative effects on the                                                                    
budget.                                                                                                                         
                                                                                                                                
Ms.  Pitney stated  that a  subsequent  slide would  address                                                                    
healthcare cost  containment, which was a  huge cost driver.                                                                    
She detailed that an initial  look at the budget showed that                                                                    
about  $1.2  billion  came  through  the  state  budget  for                                                                    
healthcare.  She discussed  the  combined healthcare  costs,                                                                    
and  rising  cost  pressure of  healthcare  over  time.  She                                                                    
thought  the  state could  avoid  $200  million in  cost  if                                                                    
healthcare growth  could be contained  at 2.25  percent. She                                                                    
stated that other  groups had considered that  a 3.5 percent                                                                    
growth rate would be a boon.                                                                                                    
                                                                                                                                
Ms.  Pitney continued  discussing increases  to the  cost of                                                                    
healthcare. She  emphasized that the state  would need major                                                                    
reform initiatives  to limit the  healthcare growth  rate to                                                                    
2.25 percent.  She mentioned  the controversy  in healthcare                                                                    
reform.  She advised  that the  5.25 historical  growth rate                                                                    
was   not  built   into  the   projections.  She   discussed                                                                    
administrative efficiencies such as  shared services, and IT                                                                    
and facilities  maintenance consolidations  as a way  to cut                                                                    
costs.  She thought  that there  had  already been  dramatic                                                                    
cuts.  She reminded  that there  was still  $360 million  in                                                                    
known  increases  to overcome.  She  stressed  the need  for                                                                    
administrative efficiencies.                                                                                                    
                                                                                                                                
11:09:48 AM                                                                                                                   
                                                                                                                                
Senator Micciche  concurred that the reality  of budget cuts                                                                    
was  difficult.  He asked  if  the  administration had  gone                                                                    
through  the exercise  of considering  right-sizing services                                                                    
to the  size of  available revenue. He  asked if  Ms. Pitney                                                                    
had  an assumption  of  what kind  of  government the  state                                                                    
could  afford, and  if she  had  engaged in  an exercise  to                                                                    
determine the size of government  the state could afford. He                                                                    
felt   the   legislature's   job  was   to   challenge   the                                                                    
administration to find places to reduce.                                                                                        
                                                                                                                                
Ms.  Pitney  answered  in the  affirmative  and  stated  the                                                                    
administration had  done the exercise  for three  years. She                                                                    
drew attention  to slide 4  and emphasized that half  of the                                                                    
state funding  of the  UGF budget was  payments sent  out to                                                                    
communities, providers, oil  companies, and individuals. She                                                                    
questioned where  the burden  would fall  if items  that the                                                                    
state could  not afford were  identified. She  detailed that                                                                    
the  administration   had  looked  through   every  program,                                                                    
statutes that were  assigned to programs; to  question if it                                                                    
was a value to the state.                                                                                                       
                                                                                                                                
Ms.  Pitney   discussed  the  administration's   process  of                                                                    
considering the right size of  government. She asserted that                                                                    
education was key to the future of the state.                                                                                   
                                                                                                                                
11:12:47 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Bishop  looked at  slide  9  and commented  that                                                                    
there  were different  ways  to comment  on  the budget.  He                                                                    
asserted  that  the state  was  not  locked into  a  certain                                                                    
amount  of  budget  increase,  and that  the  matter  was  a                                                                    
subject for debate.                                                                                                             
                                                                                                                                
Co-Chair  Hoffman  referred  to  the  'compromise  dividend'                                                                    
listed on  the slide. He  referenced slide 8  and considered                                                                    
the Senate  Permanent Fund plan  versus the  House Permanent                                                                    
Fund plan. He stated that  the difference between the plans'                                                                    
deficits  was   $250  million,  but   slide  9   listed  the                                                                    
difference  of the  compromise dividend  as  $80 million  to                                                                    
$100 million.  He asked  Ms. Pitney  if she  could reconcile                                                                    
the differences.                                                                                                                
                                                                                                                                
Ms. Pitney  stated that  the $100 million  was based  on the                                                                    
$1100 PFD from the Senate plan.                                                                                                 
                                                                                                                                
Co-Chair Hoffman  thought that  the $1250  dividend proposed                                                                    
in the House did not equate  to $225 million. He stated that                                                                    
the $225  million difference  in the  Senate and  House plan                                                                    
was higher than he had anticipated.                                                                                             
                                                                                                                                
Ms.  Pitney  stated  that  the  amount  was  the  difference                                                                    
between a 25 percent draw and a 33 percent draw.                                                                                
                                                                                                                                
Co-Chair   Hoffman   asked   what  population   number   the                                                                    
administration  had  used  when   calculating  slide  9.  He                                                                    
thought Senator Micciche had used  a state population number                                                                    
of 735,000.                                                                                                                     
                                                                                                                                
Ms.  Pitney  informed  that   the  administration  had  used                                                                    
735,000 as a population number,  and about 85 percent of the                                                                    
population applied for the PFD.                                                                                                 
                                                                                                                                
11:15:40 AM                                                                                                                   
                                                                                                                                
Senator von Imhof discussed the  private sector, and thought                                                                    
employees had good  ideas as to where  to find efficiencies.                                                                    
She  wanted to  visit each  state department  unannounced in                                                                    
order  observe productivity  and see  what kind  of activity                                                                    
was  being measured.  She noted  that  there were  component                                                                    
detail  reports for  every department  and budget  item, but                                                                    
talking  with  individuals  provided more  information.  She                                                                    
felt that talking to the  Department of Revenue Commissioner                                                                    
could be helpful.                                                                                                               
                                                                                                                                
Department  of Revenue  Commissioner Sheldon  Fisher was  in                                                                    
the gallery  and indicated that  Senator von Imhof  would be                                                                    
welcome to visit the department.                                                                                                
                                                                                                                                
Co-Chair MacKinnon noted that  the conversation was stalling                                                                    
the  advancement  of  the   presentation.  She  agreed  with                                                                    
Senator Micciche that a list  of priority programs should be                                                                    
presented to  the committee. She  agreed that  education was                                                                    
valuable   and  mentioned   low  performance   results.  She                                                                    
acknowledged  that  there  was   a  disagreement  about  the                                                                    
numbers and felt  that change needed to  happen. She thought                                                                    
that there were statutorily  mandated programs that could be                                                                    
eliminated in an effort to  curb spending. She mentioned the                                                                    
Alaska   Performance  Scholarship   (APS),  and   escalating                                                                    
healthcare costs. She referenced  public testimony on change                                                                    
to  the  APS.  She  reiterated  that  the  committee  valued                                                                    
education.                                                                                                                      
                                                                                                                                
Co-Chair  MacKinnon continued  her remarks.  She added  that                                                                    
the  state was  offering services  that it  could no  longer                                                                    
afford and directly mentioned the  AMHS. She asked about the                                                                    
Atwood  Building  that  the   legislature  was  renting  and                                                                    
wondered if consolidation had occurred.                                                                                         
                                                                                                                                
Ms.  Pitney replied  that the  state  had been  consolidated                                                                    
lease space over  the previous three years.  She stated that                                                                    
higher leases were being  reconsidered for lower-cost leases                                                                    
or state-owned properties. She recalled  that there had been                                                                    
a $4 million decrease in lease  space cost between FY 17 and                                                                    
18.                                                                                                                             
                                                                                                                                
Co-Chair  MacKinnon  asked to  see  examples  of lower  cost                                                                    
lease  spaces for  the Atwood  building  in particular.  She                                                                    
stated that  the administration had interjected  itself into                                                                    
a conversation about lease space for the legislature.                                                                           
                                                                                                                                
11:22:16 AM                                                                                                                   
                                                                                                                                
Co-Chair MacKinnon commented  that the pension appropriation                                                                    
of $3  billion had been  used for healthcare rather  than to                                                                    
reduce  unfunded pension  liability.  She  wondered how  the                                                                    
change would affect the long-term funding ratio.                                                                                
                                                                                                                                
SHELDON  FISHER, COMMISSIONER,  DEPARTMENT OF  REVENUE, said                                                                    
that  he  would   need  to  research  the   matter.  He  had                                                                    
previously  been  the  commissioner for  the  Department  of                                                                    
Administration (DOA),  which included the management  of the                                                                    
Division  of  Retirement  and Benefits.  He  said  that  the                                                                    
Alaska Retirement  Management (ARM) Board had  allocated the                                                                    
money  had  been  according to  the  recommendation  of  the                                                                    
actuarials,  and that  he had  seen dramatic  improvement in                                                                    
the funding level of healthcare  over the past few years. He                                                                    
said that as  there had been improvements  and reductions in                                                                    
the actuary assumption, healthcare  costs had climbed up. He                                                                    
thought  there was  a future  opportunity  to allocate  more                                                                    
money  toward  the  pension  side,   which  was  an  ongoing                                                                    
conversation within the department.                                                                                             
                                                                                                                                
11:25:47 AM                                                                                                                   
                                                                                                                                
Co-Chair MacKinnon  believed that when the  legislature made                                                                    
the  appropriation, it  was made  to  the retirement  system                                                                    
rather than  to healthcare. She  thought that if  the health                                                                    
side of  the funding was  at 95  percent, and the  wage side                                                                    
was lower; then  the ARM board was able to  make choices for                                                                    
improved  healthcare  for  retirees.   She  thought  if  the                                                                    
legislature  acted   to  make  the  funding   side  for  the                                                                    
retirement system  whole, there was  different implications.                                                                    
She  discussed   the  ARM  board's  flexibility   to  change                                                                    
benefits and  recalled that the legislative  intent had been                                                                    
to  fund the  pension side  rather than  health. She  stated                                                                    
that  payments   to  retirement  were  affecting   state  in                                                                    
different ways.                                                                                                                 
                                                                                                                                
Commissioner  Fisher clarified  that the  ARM board  did not                                                                    
weigh  in  on  benefits  provided to  retirees,  which  were                                                                    
defined in  statute. He stated  that the $3 billion  came in                                                                    
immediately prior to his role at  DOA. He had not focused on                                                                    
the issue  of the legislative  intent for the deposit  to go                                                                    
the wage side  rather than the benefit side.  He stated that                                                                    
he would get  back to Co-Chair MacKinnon's  office with more                                                                    
information on the matter.                                                                                                      
                                                                                                                                
Co-Chair  MacKinnon   thought  that  the  matter   could  be                                                                    
interpreted in  different ways. She reiterated  that she had                                                                    
understood the deposit  was going toward the  wage side. She                                                                    
reiterated that the court system  had become involved in the                                                                    
question  of  healthcare  and restrained  the  legislature's                                                                    
ability to do things. She  had been to meetings with retired                                                                    
state workers and discussed healthcare benefits.                                                                                
                                                                                                                                
11:30:46 AM                                                                                                                   
                                                                                                                                
Ms. Pitney went  back to slide 9. She drew  attention to the                                                                    
last  item  on  the  slide,  "Overdrawing  the  fund  today,                                                                    
increases  the  gap  in  the future."  She  thought  it  was                                                                    
important to  understand that taking  $500 million  per year                                                                    
in excess  of a sustainable  draw (as accepted by  the House                                                                    
and  Senate)  for five  years  would  cost $153  million  in                                                                    
annual  revenue   from  the  ERA  forever.   She  thought  a                                                                    
potential  overdraw   would  diminish  flexibility   in  the                                                                    
future.                                                                                                                         
                                                                                                                                
Co-Chair  MacKinnon thought  it was  an important  component                                                                    
and  suggested that  reduction of  the budget  would provide                                                                    
the same  opportunity to  grow the  fund. She  reminded that                                                                    
the governor had the power to  veto. She thought that if the                                                                    
governor considered that the  legislature was not adequately                                                                    
responding or drawing inappropriately  from the ERA, then he                                                                    
could reduce the budget.                                                                                                        
                                                                                                                                
Ms. Pitney  highlighted slide 10, "Budget  Gap: State Budget                                                                    
Overview," which  showed a data  table entitled  'Budget Gap                                                                    
Under  Various Assumptions.'  The slide  provided a  view of                                                                    
the budget gap under  different circumstances. She looked at                                                                    
range of estimated budget gaps  from $371 million up to $900                                                                    
million. She noted that the CBR was a tool.                                                                                     
                                                                                                                                
Ms. Pitney  turned to  slide 11,  "Budget Gap:  State Budget                                                                    
Overview," which  showed a bar  graph that  trended forward.                                                                    
The  slide  was  based  on  the  forecast  and  the  revenue                                                                    
projections. She  observed the  deficit trend over  time for                                                                    
various  scenarios as  outlined on  the graph.  She observed                                                                    
that  under  the  'Compromise with  Revenue'  plan,  it  was                                                                    
possible  to get  the deficit  below $200  million by  2025.                                                                    
Under the  same compromise with a  market crash (considering                                                                    
2007 to 2015 actual returns) would bring up the deficit.                                                                        
                                                                                                                                
11:36:33 AM                                                                                                                   
                                                                                                                                
Senator Micciche looked at the  slide, which he thought also                                                                    
represented the  status quo.  He asked why  there was  not a                                                                    
representation  of  a  significant market  upside  or  other                                                                    
positive  scenario.  He  thought  there  was  potential  for                                                                    
substantial improvement  under all the  outcomes reprsented.                                                                    
He thought it was important to represent the upside.                                                                            
                                                                                                                                
Ms.  Pitney  displayed  slide  12,  "Savings:  State  Budget                                                                    
Overview," which  showed a line graph  entitled 'FY2010-2018                                                                    
State  Revenue  and  Expenditure  (Without  Dividend).'  The                                                                    
slide  showed state  revenues  relative  to the  expenditure                                                                    
decline. The  state had been  in deficit since 2013  and had                                                                    
drawn $14  billion from state  savings. She argued  that the                                                                    
Permanent Fund  as a revenue  stream over a  savings account                                                                    
would be much less valuable to the future of the state.                                                                         
                                                                                                                                
Ms.  Pitney  looked  at slide  13,  "Savings:  State  Budget                                                                    
Overview:"                                                                                                                      
                                                                                                                                
     • The gap between revenue and spending has been funded                                                                     
     primarily from the Constitutional Budget Reserve (CBR)                                                                     
     -- Alaska's rainy day fund                                                                                                 
     • By the end of FY2018, we will have drawn over $14.0                                                                      
     billion from savings                                                                                                       
     • The constitution requires that any borrowing from                                                                        
     the CBR fund be repaid                                                                                                     
     • CBR spend and non-repayment provisions require a                                                                         
     three-quarter vote                                                                                                         
                                                                                                                                
The slide showed a bar  graph entitled 'Unrestricted General                                                                    
Fund  Budget.'  Ms.  Pitney  pointed   out  that  the  slide                                                                    
demonstrated how  the state had  spent down the CBR  and the                                                                    
SBR over time.  The green represented how much  of the total                                                                    
budget in a given year  was taken from savings. She observed                                                                    
that  2016 was  by far  the highest  proportion of  spending                                                                    
from savings,  although even  with reductions  the following                                                                    
years also  showed huge spending  from savings.  She thought                                                                    
the slide demonstrated the structural deficit.                                                                                  
                                                                                                                                
Co-Chair MacKinnon  asked about  the $14 billion  drawn from                                                                    
savings  as listed  on the  slide  and asked  if the  amount                                                                    
included the $3 billion that  was invested in the retirement                                                                    
system.                                                                                                                         
                                                                                                                                
Ms. Pitney answered in the affirmative.                                                                                         
                                                                                                                                
11:39:55 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney   viewed  slide   14,  "Savings:   State  Budget                                                                    
Overview,":                                                                                                                     
                                                                                                                                
    • Alaska has the most volatile revenue of any state                                                                         
     • Any plan that leaves a fiscal gap depletes the                                                                           
     state's reserves                                                                                                           
     • Maintaining sufficient savings is prudent to hedge                                                                       
     against low oil prices, stock market volatility or                                                                         
     other unforeseen events                                                                                                    
                                                                                                                                
The slide also showed a  bar graph entitled 'State of Alaska                                                                    
Savings Balance (SBR & CBR),'  which showed the depletion of                                                                    
state savings.                                                                                                                  
                                                                                                                                
Ms.  Pitney observed  that the  significant drop  in savings                                                                    
from FY  14 to FY 15  was due to the  deposit to retirement.                                                                    
She reminded  that the state  had the CBR and  the Statutory                                                                    
Budget Reserve (SBR)  because Alaska was the  state with the                                                                    
most volatile  revenue. The standard deviation  of change in                                                                    
the  state's  revenue  (on  the  national  scale)  was  34.4                                                                    
percent and six  times the national average;  while the next                                                                    
closest state was  Wyoming or North Dakota,  with 11 percent                                                                    
volatility. When  another state  looked at a  budget crisis,                                                                    
it considered a  1 percent to 3 percent  decrease in revenue                                                                    
projections;  versus an  80  percent  reduction in  Alaska's                                                                    
revenue over the time period examined.                                                                                          
                                                                                                                                
Senator von Imhof  referenced the third bullet  point on the                                                                    
slide and agreed  that it was important to  keep saving. She                                                                    
considered subsequent  slides that addressed  the governor's                                                                    
wage tax proposal and pondered  that the proposal would take                                                                    
cash from working Alaskan's so  that the state could protect                                                                    
its own cash.                                                                                                                   
                                                                                                                                
Ms.  Pitney would  not say  that  she was  referring to  the                                                                    
state's "own cash," but it  was Alaskan's revenue to protect                                                                    
operations going forward. She suggested  that if there was a                                                                    
market  crash  over  time,  funds  preserved  in  a  savings                                                                    
account could be used to manage volatility.                                                                                     
                                                                                                                                
Senator  von  Imhof  relayed that  the  committee  would  be                                                                    
hearing  from  Alaska   Permanent  Fund  Corporation  (APFC)                                                                    
Director  Angela  Rodell  the  following day  and  would  be                                                                    
asking questions about how to  hedge against market crashes.                                                                    
She mentioned SB  26 [a bill related to  using the Permanent                                                                    
Fund]  in  which the  committee  had  added a  provision  to                                                                    
consider the  average market value  of five of  the previous                                                                    
six  years to  help  balance things  out.  She considered  a                                                                    
historical  look at  the market  and thought  market crashes                                                                    
generally did  not last  more than two  or three  years. She                                                                    
did not think  the state should budget  for potential market                                                                    
crash when  it had been  safeguarded against it  through the                                                                    
structure of SB 26.                                                                                                             
                                                                                                                                
11:43:36 AM                                                                                                                   
                                                                                                                                
Co-Chair Hoffman  referred to slide  14 and  considered that                                                                    
the last column on the graph  indicated there was no plan to                                                                    
draw from the  SBR and the CBR. He referred  back to slide 8                                                                    
and observed that the projected  deficit for FY 19 was $2.73                                                                    
billion.  He   considered  that  the  governor   planned  on                                                                    
expanding the  deficit by adding additional  prosecutors and                                                                    
other items. He  thought it was extremely  difficult to fill                                                                    
the deficit, and  he agreed that the CBR and  SBR should not                                                                    
be used. He noted that  the Senate still needed to negotiate                                                                    
with the  House on SB  26, and  there was a  revenue measure                                                                    
proposed  by the  governor. He  thought that  even with  the                                                                    
House  number for  the Senate's  Permanent Fund  plan, there                                                                    
was still a  gap of $300 million. He assumed  that the state                                                                    
would  not be  able to  achieve one-third  of the  amount in                                                                    
cuts. He anticipated that burden would fall on the ERA.                                                                         
                                                                                                                                
Ms.  Pitney stated  that  the administration's  expectation,                                                                    
considering best practice and  volatility (even when the ERA                                                                    
was  incorporated), was  that  it was  prudent  to target  a                                                                    
balance for  the CBR. She  thought it was reasonable  to use                                                                    
the  CBR as  a  bridge. The  reason the  state  needed a  $2                                                                    
billion  balance in  the CBR  was that  cash payments  often                                                                    
necessitated early  draws of up  to $1 billion.  She thought                                                                    
there  should  be  a  balance  in  the  CBR  for  unforeseen                                                                    
circumstances such  as extremely low oil  prices. She stated                                                                    
that  was  that  there  were  often  funds  drawn  for  cash                                                                    
payments early  in the year. If  $2 billion was left  in the                                                                    
account, there would be returns to the state.                                                                                   
                                                                                                                                
11:47:34 AM                                                                                                                   
                                                                                                                                
Ms. Pitney showed slide 15,  "Savings: State Budget Overview                                                                    
- Other Fund  Balances," which showed a  data table entitled                                                                    
'Selected  Fund Balances  ($millions).' She  noted that  the                                                                    
combination   of   all   the   other   fund   balances   was                                                                    
approximately $2.1  billion - all  the funds  had associated                                                                    
programs that would  be damaged if the funds  were used. She                                                                    
drew attention to the other  fund balances on the slide, and                                                                    
qualified that  the numbers listed  were all  projected fund                                                                    
balances at the end of FY 18.                                                                                                   
                                                                                                                                
Senator   Micciche   thought   some  of   the   funds   were                                                                    
overcapitalized and  wondered if Ms. Pitney  had intended to                                                                    
use the word "damaged."                                                                                                         
                                                                                                                                
Ms.  Pitney  stated that  there  was  more funding  in  cost                                                                    
equalization and the Higher Education  Fund necessary to run                                                                    
the program. She  stated that there was money  that could be                                                                    
preserved to fulfill the original intent of the program.                                                                        
                                                                                                                                
Co-Chair Hoffman  thought the  PCE fund  could be  viewed as                                                                    
potentially  overcapitalized because  of  the  high rate  of                                                                    
return   that  the   state   had   enjoyed.  He   referenced                                                                    
legislation that proposed using  the excess fund earnings to                                                                    
the greatest benefit.  He thought there would  be times that                                                                    
the fund  was undercapitalized.  He thought  the legislature                                                                    
envisioned  using  additional  (overcapitalized)  funds  for                                                                    
Community Revenue Sharing other energy projects.                                                                                
                                                                                                                                
Vice-Chair  Bishop relayed  that  he had  sat  on a  pension                                                                    
trust  for 20  years  and  did not  think  a  fund could  be                                                                    
overcapitalized.                                                                                                                
                                                                                                                                
11:50:59 AM                                                                                                                   
                                                                                                                                
Ms.  Pitney  looked  at slide  16,  "Revenue:  State  Budget                                                                    
Overview -  Alaska Permanent Fund Earnings,"  which showed a                                                                    
line  graph  entitled  'Permanent   Fund  vs.  General  Fund                                                                    
Revenues.' The  slide reflected that  the earnings  from the                                                                    
Permanent Fund were the state's  largest revenue stream. The                                                                    
blue  line  showed the  earnings  and  the red  line  showed                                                                    
normal  General Fund  (GF) revenue.  She commented  that the                                                                    
graph would predict  the next 10 years  looking very similar                                                                    
to FY 17.                                                                                                                       
                                                                                                                                
Co-Chair MacKinnon  asked about  the assumed rate  of return                                                                    
on the Permanent Fund.                                                                                                          
                                                                                                                                
Ms. Pitney shared  that the graph on slide  16 was backward-                                                                    
looking from  FY 13  to FY 17  and reflected  actual returns                                                                    
and state revenue.                                                                                                              
                                                                                                                                
Ms.  Pitney  spoke  to  slide  17,  "Revenue:  State  Budget                                                                    
Overview - Permanent Fund Earnings Over Draw Impact":                                                                           
                                                                                                                                
     •Maintaining the CBR balance at $2 billion minimum                                                                         
     level is crucial but leaves little flexibility.                                                                            
     •An additional  $500.0 million annually taken  from the                                                                    
     ERA  above the  structured draw  reduces the  Permanent                                                                    
     Fund  balance by  $5 billion  compared to  a structured                                                                    
     draw with additional revenues                                                                                              
     •That $5 billion left in the PF generates $250.0                                                                           
     million annually - reducing future tax.                                                                                    
                                                                                                                                
Ms.  Pitney  referenced  the  bar graph  on  slide  17.  She                                                                    
thought  that the  structured draw  from the  Permanent Fund                                                                    
earnings  (as presented  in SB  26) was  very important  and                                                                    
preserved the  value of the  fund. She noted that  the slide                                                                    
reflected an assumed 6.95 rate  of return, but that APFC had                                                                    
dropped the expectation to 6.5  percent. She stated that the                                                                    
graph demonstrated  the value  of the  fund, over  a 10-year                                                                    
period. She  discussed the  difference in  the value  of the                                                                    
fund considering  a structured  draw versus  a draw  with an                                                                    
additional $500 million taken from the ERA.                                                                                     
                                                                                                                                
11:53:46 AM                                                                                                                   
                                                                                                                                
Senator von Imhof appreciated seeing  the chart on slide 17.                                                                    
She  referred to  the "turduckhen"  maneuver,  in which  the                                                                    
House had passed an operating  budget containing a Permanent                                                                    
Fund bill as  well as the capital budget.  She asserted that                                                                    
the Senate  had been thoughtful and  careful in deliberating                                                                    
SB  26. She  had  not seen  a slide  that  reflected how  an                                                                    
income  tax could  affect  growth, productivity,  employment                                                                    
and  confidence in  the  state. She  wished  there was  more                                                                    
acknowledgement  and modelling  of income  tax proposals  to                                                                    
have a fairer comparison of fiscal plan choices.                                                                                
                                                                                                                                
Senator Micciche thought  the state had to do  better on the                                                                    
CBR return, so  there was not such a fiscal  gap. He thought                                                                    
if  the structured  draw  became a  long-term  plan and  the                                                                    
state worked on rebuilding the  CBR, it was important to get                                                                    
a better  return for  the savings account.  He asked  if Ms.                                                                    
Pitney  had  any  statements   pertaining  to  reducing  the                                                                    
earnings between the ERA and the CBR in out years.                                                                              
                                                                                                                                
Ms. Pitney  noted that there  was only $2.1 billion  left in                                                                    
the CBR. She considered that  if there was only a structured                                                                    
draw, and nothing  else, the state would consume  all of the                                                                    
CBR  within five  years and  would not  have an  appropriate                                                                    
savings balance. She concluded that  there was no way to get                                                                    
a higher  return on the  CBR when statute dictated  that the                                                                    
funds stay in an  investment option appropriate to near-term                                                                    
spending.                                                                                                                       
                                                                                                                                
11:57:55 AM                                                                                                                   
                                                                                                                                
Senator Micciche asked if the  administration had a plan for                                                                    
a better  return on  the CBR  balance once  there was  a gap                                                                    
between  one year  of spending  and an  amount needed  for a                                                                    
safety margin.                                                                                                                  
                                                                                                                                
Co-Chair  MacKinnon thought  the  question  might be  better                                                                    
directed towards Commissioner Fisher.                                                                                           
                                                                                                                                
Commissioner Fisher had  not taken a hard look  at the asset                                                                    
allocation  of the  CBR and  how  it should  be managed.  He                                                                    
thought  it  made  sense to  examine  optimizing  the  asset                                                                    
allocation once the steady balance was known.                                                                                   
                                                                                                                                
Senator Micciche reminded that  the legislature had wanted a                                                                    
level  of flexibility  with the  CBR but  had a  pretty good                                                                    
idea of  how much of it  would be spent. He  considered that                                                                    
consequently,  the state  had lost  hundreds of  millions or                                                                    
more in potential earnings.                                                                                                     
                                                                                                                                
Co-Chair MacKinnon  had spoken  against confirmation  of the                                                                    
previous DOR  commissioner, who  had put  $3 billion  on the                                                                    
market and sold it in a  very short time period. She relayed                                                                    
that  she was  told  that state  statute  dictated that  any                                                                    
funds needed  within five years  had to be  monetized, which                                                                    
created a lower  rate of return. She had  read media reports                                                                    
about  the  legislature's  inability   to  make  a  decision                                                                    
regarding the draw. She questioned  why the APFC board would                                                                    
have to  sell off or keep  funds. She referred to  the House                                                                    
inserting the  capital budget into the  operating budget and                                                                    
taking  money from  the ERA.  She asked  why the  APFC board                                                                    
would  change its  management style  for liquidity  if there                                                                    
was a  bridge in the CBR.  She thought media had  blamed the                                                                    
legislature.                                                                                                                    
                                                                                                                                
12:03:11 PM                                                                                                                   
                                                                                                                                
Commissioner Fisher did not  argue with Co-Chair MacKinnon's                                                                    
characterization.  He thought  that there  was a  sense that                                                                    
the legislature had  been looking to the ERA as  a source of                                                                    
funding;  and   rather  than  disposing  of   assets  in  an                                                                    
accelerated fashion, it made more  sense to liquidate assets                                                                    
as opportunities were  presented. He did not want  to try to                                                                    
lay blame  on any  organization. He  thought all  shared the                                                                    
view  that if  the  state  knew the  rules,  it allowed  all                                                                    
parties to  operate in a  more efficient way.  He referenced                                                                    
conversations  with  businesses  about  uncertainty  in  the                                                                    
fiscal  situation preventing  investment  in  the state.  He                                                                    
thought  if  the  uncertainty gap  could  be  reduced,  more                                                                    
optimal decisions could be made managing state assets.                                                                          
                                                                                                                                
Co-Chair MacKinnon appreciated  the commissioner's response.                                                                    
She reminded that  the commissioner was on the  board of the                                                                    
Permanent  Fund.  She   thought  increased  uncertainty  was                                                                    
causing  uncertainty   in  investment  opportunity   in  the                                                                    
private sector.  She hoped  that if  the CBR  was used  as a                                                                    
bridge,  the  APFC  board  would   understand  there  was  a                                                                    
backstop so  that there  could be  good decisions  made with                                                                    
Permanent Fund assets.                                                                                                          
                                                                                                                                
Co-Chair MacKinnon  referenced a House proposal  to withdraw                                                                    
$5  billion,  at  which  time   the  Senate  leadership  had                                                                    
responded forcefully. She referred  to a press conference on                                                                    
the   matter.  She   believed  the   legislature  had   been                                                                    
responsive to the issue.                                                                                                        
                                                                                                                                
Senator Micciche stated  that the reason the  Senate had not                                                                    
supported the House  fiscal plan was because it  had felt it                                                                    
was too mulch a  draw on the ERA and because  of the loss of                                                                    
earnings. He  was surprised, considering  the amount  of the                                                                    
Permanent  Fund that  was somewhat  liquid.  He thought  the                                                                    
Senate was stepping  lightly when it came to use  of the ERA                                                                    
and wanted only positive effects on the fund.                                                                                   
                                                                                                                                
12:08:33 PM                                                                                                                   
                                                                                                                                
Co-Chair  MacKinnon  commented  that  when  the  state  when                                                                    
through   a  government   shut-down,   there   had  been   a                                                                    
conversation on the issue of  an APFC shutdown. She wondered                                                                    
if  there was  something that  the legislature  could do  to                                                                    
ensure that  the investment managers  got paid in  the event                                                                    
of a  government shutdown. She  thought most  Alaskans would                                                                    
understand the importance of making  sure that APFC managers                                                                    
would  be paid.  She  recalled that  the  Department of  Law                                                                    
(LAW) had  struggled with the ramifications  of a government                                                                    
shut-down. She hoped  there would be a better  plan in place                                                                    
in the future.                                                                                                                  
                                                                                                                                
Commissioner  Fisher recalled  an  active conversation  with                                                                    
LAW about the  safety of the Permanent Fund.  He thought the                                                                    
department  had  opined  that the  governor  could  continue                                                                    
life,  health  and   safety  functions  notwithstanding  the                                                                    
absence  of a  budget. He  thought that  the department  had                                                                    
struggled with the idea that  money management fell into the                                                                    
same  category. He  was  hopeful that  the  issues would  be                                                                    
addressed and the topic of  a shut-down would no longer have                                                                    
to be addressed.                                                                                                                
                                                                                                                                
Co-Chair MacKinnon thought  the matter was a  good topic for                                                                    
the following  day when  the director of  the APFC  would be                                                                    
present.  She  discussed  the importance  of  wise  resource                                                                    
management, and the need to move past uncertainty.                                                                              
                                                                                                                                
12:12:30 PM                                                                                                                   
                                                                                                                                
Ms.  Pitney  reviewed  slide   18,  "Revenue:  State  Budget                                                                    
Overview  - Market  Correction Impact,"  which showed  a bar                                                                    
graph that illustrated  the market experience from  FY 07 to                                                                    
FY 15. The slide demonstrated  a $600 million decline in the                                                                    
structured draw of the Permanent  Fund if there was a market                                                                    
experience such  as between 2007  and 2015. She  thought the                                                                    
slide emphasized the need for a  CBR balance that was at the                                                                    
target level  and stressed  the need  of being  cognizant of                                                                    
fund levels so as to not overdraw the ERA.                                                                                      
                                                                                                                                
Ms.  Pitney  discussed  slide  19,  "Revenue:  State  Budget                                                                    
Overview - Market Correction Impact":                                                                                           
                                                                                                                                
     Ten Year Forecasts:                                                                                                        
     Average Return and Market Correction                                                                                       
                                                                                                                                
     •Scenario 1. Compromise Version SB26 combined with                                                                         
     various other actions - 6.95% annual returns                                                                               
     •Scenario 2. Compromise Version SB26 combined with                                                                         
     various other actions -FY07-FY15 market returns                                                                            
                                                                                                                                
     *see two-page spreadsheet                                                                                                  
                                                                                                                                
Ms.  Pitney  noted  that  the   slide  had  an  accompanying                                                                    
document  "Budget   Forecast  Scenario   1  and   2,"  which                                                                    
contained two data tables (copy  on file). She discussed the                                                                    
table  entitled  'Scenario  1   -  Compromise  Version  SB26                                                                    
combined  with various  other  actions  ($millions) -  6.95%                                                                    
annual  returns.'   She  drew  attention  to   the  'Planned                                                                    
Permanent Fund Value  (EOY)' on on the  Scenario 1 document.                                                                    
She  explained  that if  there  was  a 6.95  percent  return                                                                    
annually  along with  a structured  draw, there  would be  a                                                                    
Permanent Fund Value  of $80 billion in 2027.  She looked at                                                                    
the 'Planned  Draw' on the  document, which showed  the draw                                                                    
growing to  $3.6 billion under  the assumptions  of Scenario                                                                    
1.                                                                                                                              
                                                                                                                                
12:15:55 PM                                                                                                                   
                                                                                                                                
Ms.  Pitney continued  discussing Scenario  1 of  the budget                                                                    
forecast  document,  and   considered  the  forecasted  draw                                                                    
combined with  GF revenue, which showed  a remaining deficit                                                                    
of $727 million under the  compromise plan. She commented on                                                                    
additional royalties due  to changes from SB  26. Scenario 1                                                                    
also assumed  a motor  fuels tax. She  informed that  if the                                                                    
remaining deficit  was drawn  from the  ERA, instead  of the                                                                    
Permanent  Fund  being valued  at  $80  billion, the  future                                                                    
value of the fund would be $74.8 billion.                                                                                       
                                                                                                                                
Ms.  Pitney measured  the effects  of  implementation of  SB                                                                    
4001  as shown  on Scenario  1 of  the budget  forecast. She                                                                    
discussed changes to the balance  of the Permanent Fund. She                                                                    
thought that the  scenario pointed out that  the ERA balance                                                                    
was healthy due to no  volatility in the annual return under                                                                    
the assumption.  The scenario showed a  dividend starting at                                                                    
$1100 and growing to almost $1400.                                                                                              
                                                                                                                                
12:18:31 PM                                                                                                                   
                                                                                                                                
Ms. Pitney looked  at 'Scenario 2 -  Compromise Version SB26                                                                    
combined  with  various  other actions  ($millions)  (Actual                                                                    
FY07-15  returns)'  on  page  2  of  the  forecast  scenario                                                                    
document, which co. She drew  attention to the middle of the                                                                    
page, to  the 'ERA  Balance' line. She  noted that  under an                                                                    
actual returns assumption,  from 2021 to 2024  there was not                                                                    
sufficient funding in the ERA.  She contrasted the line with                                                                    
the ERA  assuming a  broad-based tax,  which showed  the ERA                                                                    
with a low balance in only 2024 and 2025.                                                                                       
                                                                                                                                
Ms. Pitney  continued to speak  to Scenario 2.  She asserted                                                                    
that with a targeted $2  billion CBR, the state could manage                                                                    
through a  shortfall. She considered  that without  a broad-                                                                    
based  tax on  top  of  the Motor  Fuels  Tax proposal,  the                                                                    
impact  of  a market  reduction  could  be significant.  She                                                                    
reiterated  that a  broad-based revenue  source made  a huge                                                                    
difference  over the  time of  market  volatility, and  also                                                                    
helped  avoid an  unstructured draw  in the  near term.  She                                                                    
mentioned the  significant effects  of an  unstructured draw                                                                    
on the revenue from the ERA.                                                                                                    
                                                                                                                                
12:21:10 PM                                                                                                                   
                                                                                                                                
Co-Chair Hoffman  thought the document had  an assumption of                                                                    
$1000  PFDs  and  suggested  that the  matter  was  not  yet                                                                    
resolved. He continued  that the assumed rate  of return was                                                                    
possibly going to be adjusted.  He thought that the document                                                                    
had an  optimistic viewpoint. He  wanted to see an  array of                                                                    
scenarios with rates  of return and PFD  amounts. He thought                                                                    
it   would  be   helpful  to   members  of   the  committee,                                                                    
legislature, and the general public.                                                                                            
                                                                                                                                
Ms. Pitney agreed to provide the information.                                                                                   
                                                                                                                                
Senator  von   Imhof  discussed  focusing  on   expenses  in                                                                    
addition  to   revenues.  She  referenced   general  expense                                                                    
increases and  asserted that education and  healthcare would                                                                    
grow at  a higher  rate. She discussed  potential reductions                                                                    
such as  healthcare reform  as a way  to further  reduce the                                                                    
budget  deficit.   She  wondered   if  a   budget  reduction                                                                    
component  would  be a  good  idea  to consider  within  the                                                                    
scenarios Co-Chair Hoffman had requested.                                                                                       
                                                                                                                                
Co-Chair MacKinnon  stated that  adding Senator  von Imhof's                                                                    
idea to the request would be helpful.                                                                                           
                                                                                                                                
Senator Micciche  did not support  the use of FY  07 through                                                                    
FY 15  actual returns as  a market return assumption  in the                                                                    
model. He thought  it was more realistic to look  at a trend                                                                    
of  longer  than  eight  years. He  suggested  that  a  6.95                                                                    
percent rate  of return  had a  layer of  conservatism built                                                                    
in. He  emphasized the importance  of long-term  term trends                                                                    
and   thought  there   should  be   an  adequate   level  of                                                                    
conservatism used on the model.                                                                                                 
                                                                                                                                
Commissioner Fisher  stated he would engage  in conversation                                                                    
with Director Rodell the following  day. He relayed that the                                                                    
change from  an assumed 6.95  percent to a 6.5  percent rate                                                                    
of return had  been recommended by a  consultant (Callan and                                                                    
Associates) and  was consistent with  advice that  was being                                                                    
given worldwide as  well as what the  department was hearing                                                                    
from many other  funds. He thought the  topic was important,                                                                    
so that everyone felt comfortable  with the assumptions that                                                                    
underlie the models.                                                                                                            
                                                                                                                                
12:26:35 PM                                                                                                                   
                                                                                                                                
Co-Chair MacKinnon stated that  when the committee discussed                                                                    
SB 26  (which proposed a  sustainable draw from the  ERA) it                                                                    
considered  a  5.25 percent  rate  of  return, which  had  a                                                                    
trailing  three-year trend  with  an actual  rate of  return                                                                    
that was even lower.                                                                                                            
                                                                                                                                
Co-Chair MacKinnon  referred to questions from  the previous                                                                    
days  meeting regarding  indirect  expenses  and changes  to                                                                    
foregone  revenue. She  discussed evaluation  of Cook  Inlet                                                                    
tax credits, and investment on  the North Slope. She thought                                                                    
it was prudent to look at  whether the state was getting the                                                                    
return   it  wanted   from  the   foregone  revenue   before                                                                    
considering a tax on Alaskans.                                                                                                  
                                                                                                                                
Co-Chair MacKinnon  recalled that Ms. Pitney  had alluded to                                                                    
a reinterpretation  of the  motor fuels  tax. She  wanted to                                                                    
understand  why  the  administration  considered  the  funds                                                                    
dedicated  and asked  for more  clarity on  the matter.  She                                                                    
asked about  the administration's  proposed decrease  of UGF                                                                    
and increase of DGF, and the  use of the revenue stream. She                                                                    
asked for a response from the administration in writing.                                                                        
                                                                                                                                
12:29:52 PM                                                                                                                   
                                                                                                                                
Ms. Pitney  stated that  there was  rationale to  looking at                                                                    
general  revenues differently  than  specific revenues.  She                                                                    
asserted that  a motor fuels  tax was  considered designated                                                                    
with a statute as opposed  to dedicated. She stated that the                                                                    
funds  were  reclassified due  to  a  decision by  LFD.  She                                                                    
believed   that  general   tax  revenue   items  should   be                                                                    
considered differently  than items that came  in as fee-for-                                                                    
service revenue. She used the  examples of a ferry ticket, a                                                                    
university  class, or  a vehicle  registration. She  thought                                                                    
there should be a discussion  about the merits of items that                                                                    
were GF-based  or tax-based, such  as the insurance  fund or                                                                    
the motor fuels tax.                                                                                                            
                                                                                                                                
Co-Chair MacKinnon  stated the  committee was happy  to have                                                                    
the  conversation.   She  recalled  that   previous  finance                                                                    
committees had  considered clarifying the process  of moving                                                                    
funds. She reiterated that clarity  in accounting was a best                                                                    
practice. She asked about the recommendation by LFD.                                                                            
                                                                                                                                
Ms.  Pitney relayed  that there  was a  statute that  was in                                                                    
place that designated the motor  fuels tax to transportation                                                                    
funding, which was brought to attention by LFD.                                                                                 
                                                                                                                                
12:33:06 PM                                                                                                                   
                                                                                                                                
Ms.  Pitney highlighted  slide  20,  "Revenue: State  Budget                                                                    
Overview - Tax Proposal":                                                                                                       
                                                                                                                                
     •1.5% tax on wages and self-employment income                                                                              
          •Does not tax investments, retirement income,                                                                         
          rental income, etc.                                                                                                   
     •Tax is capped at $2,200 or twice the PFD, whichever                                                                       
     is greater                                                                                                                 
          •Cap begins at $147,000/year                                                                                          
     •Targeted to generate $320.0 million                                                                                       
     •Without a cap, it would only generate $10.0 million                                                                       
     more                                                                                                                       
     •Including the PFD, most Alaskans will still receive a                                                                     
     net payment from the state                                                                                                 
     •Out-of-state residents will pay the highest rate                                                                          
     because they do not receive PFDs                                                                                           
                                                                                                                                
Ms. Pitney  stated that  the slide  was a  recap of  the tax                                                                    
proposal  that  would  produce  $320  million  once  it  had                                                                    
matured. She noted  that the tax would gather  15 percent of                                                                    
its revenue  from non-residents.  She drew attention  to the                                                                    
table on  the slide, which  showed that under  $50,000 there                                                                    
was no net  tax payment. The maximum net tax  for a resident                                                                    
was $1,000.  She considered the  tax proposal to  be modest,                                                                    
broad-based,  and   would  have  advantages   with  earnings                                                                    
growth.  She  noted that  there  was  a complete  disconnect                                                                    
between  economic growth  and state  revenue, excepting  oil                                                                    
business. The  tax provided a  connection between  the state                                                                    
economy and state services but was still modest.                                                                                
                                                                                                                                
12:36:02 PM                                                                                                                   
                                                                                                                                
Ms.  Pitney  turned  to slide  21,  "Revenue:  State  Budget                                                                    
Overview -  Tax Proposal." She emphasized  that the proposed                                                                    
tax  would pick  up  a  very small  portion  of the  overall                                                                    
burden  of government.  She noted  that with  such a  broad-                                                                    
based tax, Alaska  still remained the lowest  taxed state in                                                                    
the nation. She  pointed out that the items  below the black                                                                    
bar on the graph were  largely alcohol tax, tobacco tax, and                                                                    
motor  fuels  tax.  She   reiterated  that  the  broad-based                                                                    
connection  to the  economy was  an important  component for                                                                    
the future.                                                                                                                     
                                                                                                                                
Senator  von Imhof  referred to  slide 20  and asked  if the                                                                    
proposal considered self-taxes  by individual municipalities                                                                    
around the state.                                                                                                               
                                                                                                                                
Ms.  Pitney stated  that the  proposal  considered a  state-                                                                    
level tax and did not include city taxes.                                                                                       
                                                                                                                                
Co-Chair  MacKinnon thanked  the  testifiers. She  commented                                                                    
that the  testimony would help the  committee understand the                                                                    
budgeting  process  as it  moved  forward,  as well  as  the                                                                    
administration's  planning. She  asserted that  some members                                                                    
believed there  was other  options on  the table  aside from                                                                    
income tax or a payroll tax,  and the governor had the power                                                                    
to  review budgets.  She  relayed that  she  had received  a                                                                    
message questioning  the administration's  prioritization of                                                                    
programs, which was a statutory requirement.                                                                                    
                                                                                                                                
Co-Chair MacKinnon  asked about  the budgeting  process with                                                                    
the administration.  She referenced  the proposed  draw from                                                                    
the ERA  and thought  the entire  committee wondered  if the                                                                    
administration had  prioritized state  programs so  that the                                                                    
legislature  could   decide  to  change  statute   and  stop                                                                    
programs.                                                                                                                       
                                                                                                                                
12:40:21 PM                                                                                                                   
                                                                                                                                
Ms.   Pitney   stated   that  the   administration   had   a                                                                    
prioritization matrix,  and considered whether  programs had                                                                    
constitutional, statutory,  or discretionary considerations.                                                                    
She stated  that many program  factors were  reviewed during                                                                    
the  subcommittee  process  the previous  year.  She  looked                                                                    
forward  to  engaging  in the  process  again.  She  thought                                                                    
familiarity  with  every  budget   item  was  becoming  more                                                                    
prevalent after the previous four years.                                                                                        
                                                                                                                                
Co-Chair MacKinnon referred to a  question she had asked two                                                                    
years previously  and felt she  had not received  an answer.                                                                    
She  discussed  services  provided in  different  geographic                                                                    
regions, and the question of  how many people were receiving                                                                    
the  services in  each  area.  She used  food  stamps as  an                                                                    
example and  wondered how many people  were receiving public                                                                    
assistance. She  wanted to quantify  how much the  state was                                                                    
contributing  to families  as opposed  to what  was received                                                                    
from the  federal government.  She discussed  the connection                                                                    
between federal  taxes and  federal services.  She mentioned                                                                    
income  taxes  versus  taking  a portion  of  the  PFD;  and                                                                    
questioned  the  amount  of  services  being  consumed.  She                                                                    
looked forward  to more detailed information  on the matter.                                                                    
She  did not  think the  legislature had  a full  picture of                                                                    
what the state was spending on services.                                                                                        
                                                                                                                                
Co-Chair MacKinnon  discussed the  schedule for the  rest of                                                                    
the  week.  She  referenced  the motor  fuels  tax  and  the                                                                    
alcohol tax. She emphasized the need for transparency.                                                                          
                                                                                                                                
Co-Chair  MacKinnon discussed  the  idea  of various  fiscal                                                                    
proposals.                                                                                                                      
                                                                                                                                
ADJOURNMENT                                                                                                                   
12:46:37 PM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 12:46 p.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
103117 Budget Forecast Scenario 1 and 2.pdf SFIN 10/31/2017 10:00:00 AM
OMB Budget Projections
103117 Ten Year Budget Forecast RElative to Preliminary Fall 2017 Revenue Projections (002).pdf SFIN 10/31/2017 10:00:00 AM
OMB Budget Projections
103117 Special Session House Sen Finance Pres_Final (003).pdf SFIN 10/31/2017 10:00:00 AM
OMB Budget Projections