Legislature(2017 - 2018)HOUSE FINANCE 519

01/25/2017 01:30 PM FINANCE

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Audio Topic
01:31:20 PM Start
01:32:11 PM HB57 || HB59
01:47:32 PM Presentation: Modeling Alaska Fiscal Proposals: Implications of Different Fiscal Assumptions and Choices Over Time by Gunnar Knapp, Professor Emeritus of Economics, University of Alaska Anchorage Institute of Social and Economic Research (iser)
03:32:40 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 57 APPROP: OPERATING BUDGET/LOANS/FUNDS TELECONFERENCED
Heard & Held
*+ HB 59 APPROP: MENTAL HEALTH BUDGET TELECONFERENCED
Heard & Held
+ Presentation: Modeling Alaska Fiscal Proposals: TELECONFERENCED
Implications of Different Fiscal Assumptions &
Choices Over Time by Gunnar Knapp, Professor
Emeritus of Economics, University of Alaska
Anchorage Institute of Social & Economic
Research (ISER)
HOUSE BILL NO. 57                                                                                                             
                                                                                                                                
     "An  Act making  appropriations for  the operating  and                                                                    
     loan  program  expenses  of state  government  and  for                                                                    
     certain   programs;    capitalizing   funds;   amending                                                                    
     appropriations;   repealing    appropriations;   making                                                                    
     supplemental  appropriations and  reappropriations, and                                                                    
     making  appropriations  under   art.  IX,  sec.  17(c),                                                                    
     Constitution  of   the  State   of  Alaska,   from  the                                                                    
     constitutional budget  reserve fund; and  providing for                                                                    
     an effective date."                                                                                                        
                                                                                                                                
HOUSE BILL NO. 59                                                                                                             
                                                                                                                                
     "An  Act making  appropriations for  the operating  and                                                                    
     capital    expenses   of    the   state's    integrated                                                                    
     comprehensive mental health  program; and providing for                                                                    
     an effective date."                                                                                                        
                                                                                                                                
1:32:11 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton  conveyed that the committee  substitute was                                                                    
strictly a version with technical corrections.                                                                                  
                                                                                                                                
Co-Chair  Foster  MOVED  to  ADOPT  the  proposed  committee                                                                    
substitute for HB 57, Work Draft (30-GH1855\J).                                                                                 
                                                                                                                                
There being NO OBJECTION, it was so ordered.                                                                                    
                                                                                                                                
Co-Chair Seaton  invited Mr.  Teal to  the table  to explain                                                                    
the technical corrections in the bill.                                                                                          
                                                                                                                                
DAVID TEAL, DIRECTOR,  LEGISLATIVE FINANCE DIVISION, pointed                                                                    
to  the document  comparison (copy  on  file). He  explained                                                                    
that the document comparison was  derived after working with                                                                    
Legal Services and the chairman's  office. He reported there                                                                    
was  nothing  significantly  different from  the  governor's                                                                    
version of  the bill.  He would not  be going  through every                                                                    
change, but confirmed there were  no transaction changes. He                                                                    
noted  there  were  a  few   date  corrections  and  editing                                                                    
changes.  Essentially, the  governor's bill  was in  a Legal                                                                    
Services  format, providing  a  clean  start. The  committee                                                                    
substitute would become the basis for amendments.                                                                               
                                                                                                                                
Co-Chair Seaton  asked Mr. Teal  to remain at the  table and                                                                    
invited Pat Pitney to verify  that there were no substantial                                                                    
changes  other than  wording,  technical,  and date  changes                                                                    
from the Office of Management and Budget's perspective.                                                                         
                                                                                                                                
PAT  PITNEY,  DIRECTOR,  OFFICE OF  MANAGEMENT  AND  BUDGET,                                                                    
OFFICE OF THE  GOVERNOR, confirmed that she  agreed that the                                                                    
bill  represented  the  governor's intent  of  the  original                                                                    
version.  There  were  no material  changes,  only  clean-up                                                                    
changes.                                                                                                                        
                                                                                                                                
Co-Chair  Foster  MOVED  to  ADOPT  the  proposed  committee                                                                    
substitute for HB 59, Work Draft (30-GH1856\D).                                                                                 
                                                                                                                                
There being NO OBJECTION, it was so ordered.                                                                                    
                                                                                                                                
Co-Chair  Seaton  asked  Mr. Teal  to  address  the  process                                                                    
related to the changes in the committee substitute.                                                                             
                                                                                                                                
Mr. Teal  reported that the  process regarding the  bill was                                                                    
identical to  the one used  for the operating  budget. House                                                                    
Bill 59  was the mental health  bill. There were only  a few                                                                    
changes to the bill most of  which were noted in the margins                                                                    
of  the document  and had  to do  with formatting.  He would                                                                    
have liked to have tracked the  changes to make it easier to                                                                    
see  the  ones that  were  more  significant. He  encouraged                                                                    
members to review  the changes that were  made. He commented                                                                    
that items may have been reordered.                                                                                             
                                                                                                                                
Co-Chair   Seaton  asked   Ms.  Pitney   if  the   committee                                                                    
substitute  was  the bill  submitted  by  the governor  with                                                                    
technical realignment. Ms. Pitney responded affirmatively.                                                                      
                                                                                                                                
Vice-Chair Gara  understood the need  for a  separate mental                                                                    
health budget  and that it  started based on a  court order.                                                                    
He wondered how certain items  ended up in the mental health                                                                    
budget  rather than  in the  operating budget.  He mentioned                                                                    
that in  the prior year  there was a disabilities  item that                                                                    
was  funded with  undesignated general  funds  (UGF) in  the                                                                    
mental health  budget. He recognized  that things  funded by                                                                    
the  Alaska  Mental Health  Trust  ended  up in  the  mental                                                                    
health  budget. He  also  was  aware of  how  it related  to                                                                    
mental  health  issues. He  asked  about  the dividing  line                                                                    
between  what mental  health items  ended up  in the  mental                                                                    
health budget  versus the operating  budget. He  provided an                                                                    
example  from   the  previous  year's  budget.   Ms.  Pitney                                                                    
responded  that there  had been  a tradition  built up.  She                                                                    
spoke of  base plus increments  and decrements. Over  time a                                                                    
distinction had  been made. She thought  discretion was used                                                                    
but  she deferred  to Mr.  Teal  as to  the boundaries.  She                                                                    
noted that the priorities of  the Alaska Mental Health Trust                                                                    
Authority Board  were represented  in the  distinctions. She                                                                    
did not believe there were any hard and fast rules.                                                                             
                                                                                                                                
Vice-Chair   Gara   would   take    her   answer,   as   the                                                                    
administration  did  not know.  He  commented  that he  knew                                                                    
priorities were not the only part of the equation.                                                                              
                                                                                                                                
Mr.  Teal remarked  that  the  reason he  did  not know  was                                                                    
because  it was  all  done by  computer.  [members could  be                                                                    
heard laughing in the background].                                                                                              
                                                                                                                                
Vice-Chair Gara made a humorous remark.                                                                                         
                                                                                                                                
Mr. Teal answered that the  budget was divided by fund codes                                                                    
related to  mental health. He mentioned  mental health trust                                                                    
receipts. He  confirmed that  there were  UGF in  the mental                                                                    
health bill that were coded  with gf/mh. He surmised that if                                                                    
the item  in question was part  of a mental health  group it                                                                    
would automatically  switch over  to the mental  health bill                                                                    
which explained  why there  were mental  health allocations.                                                                    
He suggested that  the same allocations would  appear in the                                                                    
regular  operating budget  and  the mental  health bill.  It                                                                    
took  the   mental  health  fund  group   from  the  regular                                                                    
operating budget placing it into  the mental health bill. He                                                                    
relayed  that  with  capital  the  dividing  line  was  less                                                                    
certain  because  there  might be  different  fund  sources.                                                                    
However,  the projects  were proposed  by the  Alaska Mental                                                                    
Health  Trust Board.  The governor  was required  to forward                                                                    
them to  the Legislature  or provide a  letter to  the AMHTA                                                                    
explaining  why he  did  not  forward them.  At  the end  of                                                                    
session,  the legislature  had  to write  a  letter for  the                                                                    
chairman's  signature describing  what was  left out  of the                                                                    
AMHTA  request and  the reasoning  behind that  decision. It                                                                    
was  a requirement  in  statute  that the  bills  had to  be                                                                    
separated,  although they  were taken  up together,  amended                                                                    
simultaneously,  and were  heard  together  in a  conference                                                                    
committee. He  was certain  that if there  was not  a statue                                                                    
requiring separate bills there would only be one bill.                                                                          
                                                                                                                                
Representative Wilson  referred to page  2 and asked  if the                                                                    
collective  bargaining  of the  state's  unions  was in  the                                                                    
mental health  budget. Mr. Teal responded  affirmatively. He                                                                    
furthered   that   anytime   members   of   the   bargaining                                                                    
association  were funded  with  mental  health dollars,  the                                                                    
same language  that appeared in  the regular  operating bill                                                                    
was repeated  in the  mental health bill.  Since it  was not                                                                    
always  clear  where  the  bargaining  units  appeared,  the                                                                    
legislature has  repeated all the  bargaining units  even if                                                                    
it was irrelevant to the mental health fund group.                                                                              
                                                                                                                                
1:44:52 PM                                                                                                                    
                                                                                                                                
Representative Wilson  asked about  whether the  wording was                                                                    
the same  in each budget including  reducing proportionately                                                                    
the  amount for  the bargaining  agreements if  an agreement                                                                    
had not been reached.                                                                                                           
Mr. Teal answered, "That's correct."                                                                                            
                                                                                                                                
Co-Chair Seaton thanked the presenters for coming forward.                                                                      
                                                                                                                                
1:45:38 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
1:47:32 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair  Seaton indicated  that  the meeting  would end  at                                                                    
3:30 PM.                                                                                                                        
                                                                                                                                
^PRESENTATION:    MODELING    ALASKA    FISCAL    PROPOSALS:                                                                  
IMPLICATIONS  OF DIFFERENT  FISCAL  ASSUMPTIONS AND  CHOICES                                                                  
OVER TIME BY GUNNAR  KNAPP, PROFESSOR EMERITUS OF ECONOMICS,                                                                  
UNIVERSITY  OF  ALASKA  ANCHORAGE INSTITUTE  OF  SOCIAL  AND                                                                  
ECONOMIC RESEARCH (ISER)                                                                                                      
                                                                                                                                
1:47:32 PM                                                                                                                    
                                                                                                                                
GUNNAR  KNAPP, PROFESSOR  EMERITUS OF  ECONOMICS, UNIVERSITY                                                                    
OF  ALASKA  ANCHORAGE  INSTITUTE   OF  SOCIAL  AND  ECONOMIC                                                                    
RESEARCH (ISER),  introduced himself. He wanted  to continue                                                                    
to  be  useful.  He  spoke   of  his  work  currently  being                                                                    
voluntary in retirement as listed on slide 2: "About Me…":                                                                      
                                                                                                                                
   · Former Director and Professor of Economics at ISER                                                                         
   · Studied Alaska fiscal issues                                                                                               
   · Retired end of June 2016                                                                                                   
   · Now a "Professor Emeritus"                                                                                                 
   · All of my work on fiscal issues is voluntary                                                                               
   · Not being paid by anyone                                                                                                   
   · My attempt at public service                                                                                               
   · All opinions are my own                                                                                                    
                                                                                                                                
Mr.  Knapp reported  being a  Professor Emeritus  because he                                                                    
retired at  the end  of June.  He was in  Juneau due  to his                                                                    
interest  in the  fiscal issue  and  because he  had done  a                                                                    
significant amount of work over  the previous several years.                                                                    
He wanted  to remain involved  in studying the issue  and to                                                                    
be  helpful  if possible.  He  stressed  that his  work  was                                                                    
completely  voluntary, he  was  not  receiving payment  from                                                                    
anyone, and all his opinions were his own.                                                                                      
                                                                                                                                
Mr. Knapp turned to slide 3:  "My main goal is to illustrate                                                                    
a  way of  comparing fiscal  proposals." His  main objective                                                                    
was to come up with a  way he could compare different fiscal                                                                    
proposals under  discussion. He  made a model  to do  so. He                                                                    
had  several  legislators approach  him  to  assist them  in                                                                    
modeling their  proposals. As  a result, he  came up  with a                                                                    
complicated  model and  was invited  to  the legislature  to                                                                    
discuss it.                                                                                                                     
                                                                                                                                
Mr. Knapp advanced  to slide 4 highlighting that  he was not                                                                    
advocating for  or against  a fiscal  proposal. There  was a                                                                    
wide  range of  things  people were  talking  about. He  was                                                                    
interested  in running  numbers  and looking  at what  would                                                                    
happen.                                                                                                                         
                                                                                                                                
Mr. Knapp discussed  slide 5: "My focus  is on: Unrestricted                                                                    
General  Fund (UGF)  revenues  and  spending Permanent  Fund                                                                    
earnings   and   draws."   His  focus   was   primarily   on                                                                    
unrestricted general  fund (UGF) spending and  the potential                                                                    
use of Permanent Fund (PF) earnings.                                                                                            
                                                                                                                                
Mr. Knapp  turned to  slide 6:  "I will  not talk  about oil                                                                    
credits or  oil taxes."  He clarified that  he would  not be                                                                    
addressing  other parts  of  the budget  or  talk about  oil                                                                    
credits or oil  taxes. He explained that  his models handled                                                                    
those  items such  that  if oil  credits  were changed,  the                                                                    
model would reflect a change  in spending. If oil taxes were                                                                    
changed, the model would reflect a change in revenues.                                                                          
                                                                                                                                
1:51:30 PM                                                                                                                    
                                                                                                                                
Mr. Knapp turned to the graph  on slide 6: "A long-term look                                                                    
at our  UGF revenues and spending  . . .". The  graph showed                                                                    
what the  state's revenues and  spending have been on  a per                                                                    
capita  basis   adjusted  for  inflation  since   oil  began                                                                    
flowing. He  noted that  the revenue  part was  reflected by                                                                    
the  blue  and red  lines  at  the  bottom. The  blue  lines                                                                    
represented non-oil  revenues and  the red  line represented                                                                    
oil  revenues. It  was clear  there  had been  two huge  oil                                                                    
booms: one in the early 80s  and one in 2008-2013. They were                                                                    
similar in  terms of the  value per Alaskan. There  had been                                                                    
periods where  the state had  a significant amount  of money                                                                    
and then periods where it had much less money.                                                                                  
                                                                                                                                
Mr.  Knapp  drew the  committee's  attention  to two  lines.                                                                    
First,  the  yellow  line showed  the  agency  spending  per                                                                    
capita. Second,  the purple line denoted  the total spending                                                                    
per capita.  The difference  between the  two lines  was the                                                                    
capital  budget and  statewide  operations. Alaska's  fiscal                                                                    
policy over  the historical  period noted  on the  chart was                                                                    
that when the state had more  money it spent more. The state                                                                    
would  typically grow  both the  operating  and the  capital                                                                    
budgets, but  particularly the capitol budget.  He continued                                                                    
that  when the  state had  less money  it cut  back on  both                                                                    
budgets, but  particularly the capital  budget. Over  a long                                                                    
period of  time the agency  budgets were squeezed  down, and                                                                    
capital spending was reduced. At  a certain point, the state                                                                    
went from  running surpluses  to running  deficits. Everyone                                                                    
was panicking  in the late  90s and early 2000s  because the                                                                    
state  had been  running  progressive  deficits and  drawing                                                                    
down  savings.  He  added that  the  cycle  repeated  itself                                                                    
bringing the state to its  present circumstance. In terms of                                                                    
the difference,  the state's revenues  had fallen to  a much                                                                    
lower  level with  less of  a prospect  of coming  back. The                                                                    
state was left  with the question of what to  do. He thought                                                                    
it would be  impossible to squeeze the spending  down to the                                                                    
expected level of revenues.                                                                                                     
                                                                                                                                
1:54:01 PM                                                                                                                    
                                                                                                                                
Mr.  Knapp reviewed  slides 8  and 9.  He reported  that the                                                                    
state  had been  paying  the deficits  by  drawing down  its                                                                    
savings.   Alaska's   Permanent   Fund  had   been   growing                                                                    
substantially  and   generating  money.   Historically,  the                                                                    
savings had  been used to pay  dividends, to inflation-proof                                                                    
the  fund, and  to  build up  the  earnings reserve  account                                                                    
(ERA). Clearly,  the state  was not  using all  its earnings                                                                    
which accounted for why the  PF had been growing so quickly.                                                                    
Presently, the question  was whether it was  time for Alaska                                                                    
to  start  using the  PF  earnings  to address  the  deficit                                                                    
issue.                                                                                                                          
                                                                                                                                
Mr.  Knapp spoke  to slide  12: "Key  issues in  the current                                                                    
fiscal  situation." He  continued that  part of  the state's                                                                    
fiscal  debate  had to  do  with  how  much of  the  state's                                                                    
spending should be  cut or how many taxes  should be raised.                                                                    
Another question  he presented was  to what extent  could or                                                                    
should the  state solve the  fiscal problem by using  the PF                                                                    
earnings. He wondered  what way the funds should  be used if                                                                    
the state decided to use  them. Several proposals were being                                                                    
developed to look at the issue.                                                                                                 
                                                                                                                                
Mr.  Knapp  advanced  to  slide  13: "My  model  is  only  a                                                                    
starting  point for  thinking  about  fiscal proposals."  He                                                                    
reported developing a model that  would allow him to compare                                                                    
them.  He emphasized  that there  was nothing  magical about                                                                    
his model,  as it was  a large Excel  spreadsheet containing                                                                    
several formulas  that tracked specific things.  He designed                                                                    
the  model,  so  he  could  quickly change  a  number  or  a                                                                    
variable to  look at  the effects of  tweaking it  a certain                                                                    
way or another.                                                                                                                 
                                                                                                                                
Mr. Knapp  detailed slide 14:  "My model is only  a starting                                                                    
point for  thinking about fiscal proposals."  He thought his                                                                    
model was  simplistic. The  way the  budget worked  was very                                                                    
complicated.  He suggested  that his  model was  good for  a                                                                    
first start, big picture  comparison of different proposals.                                                                    
However, he emphasized that it  was not a substitute for the                                                                    
detailed  models put  together  by  organizations with  that                                                                    
responsibility and  expertise. It  was not a  substitute for                                                                    
what  the Legislative  Finance Division  (LFD)  was able  to                                                                    
model. He would always differ to LFD for specifics.                                                                             
                                                                                                                                
Mr. Knapp scrolled  to slide 15: "All  the model projections                                                                    
are in  millions of dollars"  He clarified that  his numbers                                                                    
were reflected in millions of dollars.                                                                                          
                                                                                                                                
Mr.  Knapp  turned  to  slide  16:  "My  model  is  work  in                                                                    
progress."  His  model was  a  work  in progress  and  might                                                                    
contain errors.                                                                                                                 
                                                                                                                                
Mr. Knapp explained slide 17:  "My model's projections, like                                                                    
any fiscal  projections, depend critically  on assumptions."                                                                    
He   illuminated  that   anytime   projections  were   made,                                                                    
assumptions  were  critical.  In   the  state's  model,  the                                                                    
assumptions  had  to  do  with  what  would  happen  to  oil                                                                    
revenues and  what would  happen to PF  rates of  return. If                                                                    
the  state  had  a  model that  included  what  the  state's                                                                    
finances would look like, the  assumptions the state took on                                                                    
about  oil  revenues  and  its  return  on  investment  were                                                                    
critical to the type of results the state would get.                                                                            
                                                                                                                                
Mr. Knapp continued to slide  18: "What should we assume for                                                                    
comparing  different fiscal  proposals?" He  argued that  if                                                                    
the state made  optimistic assumptions, it would  not have a                                                                    
problem.  Conversely,  if  the state  made  its  assumptions                                                                    
pessimistic  enough,  it  would  have  a  huge  problem.  He                                                                    
wondered how a  state planned when it did not  know what its                                                                    
revenues would be.                                                                                                              
                                                                                                                                
Mr.  Knapp  reviewed  slide 19:  "Most  analyses  of  fiscal                                                                    
proposals rely on  a single set of  assumptions." He pointed                                                                    
out that  the most convenient  assumptions for the  state to                                                                    
use  (the most  recent DOR  projections and  the current  PF                                                                    
assumptions   from  advisor   recommendations)  were   magic                                                                    
numbers  to   use  for  planning.   The  state   would  plan                                                                    
everything  based on  those numbers.  However, historically,                                                                    
neither  of the  assumptions  were likely  to  come true  or                                                                    
remotely true.                                                                                                                  
                                                                                                                                
1:58:33 PM                                                                                                                    
                                                                                                                                
Mr. Knapp pointed  to slide 20: "Historically,  we have done                                                                    
very poorly  at projecting  future oil  prices, particularly                                                                    
over the  longer term."  He reported  that most  analyses of                                                                    
fiscal proposals relied on a  single set of assumptions. The                                                                    
state had done  a poor job of projecting  future oil prices.                                                                    
He noted  the bars on  the chart  showed what came  true and                                                                    
the  different  lines  showed what  had  been  projected  in                                                                    
different  years  about  the state's  future  revenues.  His                                                                    
objective  was not  to criticize  the people  that made  the                                                                    
projects,  but  rather  to  show how  difficult  it  was  to                                                                    
predict future oil  prices. He posed the  question about why                                                                    
the state would do better  currently. Two or Three years out                                                                    
the price  assumptions would  probably be  way off  from the                                                                    
official ones.                                                                                                                  
                                                                                                                                
Mr. Knapp  explained slide 21:  "We have also not  done very                                                                    
well  at  projecting North  Slope  oil  production over  the                                                                    
longer  term."  He opined  that  it  was also  difficult  to                                                                    
project  future oil  production for  more than  a few  years                                                                    
out. Historically,  there had been  periods where  the state                                                                    
had been overly  optimistic and times where it  had been the                                                                    
opposite.                                                                                                                       
                                                                                                                                
Mr. Knapp  advanced to slide  22: "Because we have  not done                                                                    
well at  projecting oil  prices or  production, we  have not                                                                    
done well  at projecting  state revenues,  particularly over                                                                    
the  longer   term."  He  suggested  that   if  the  state's                                                                    
inability  to  guess future  prices  was  combined with  its                                                                    
inability  to predict  future  production,  the state  would                                                                    
have  a  difficult  time accurately  projecting  its  future                                                                    
revenues.                                                                                                                       
                                                                                                                                
Mr. Knapp advanced  to slide 23: "Historically,  after a few                                                                    
years, our actual revenues have  usually been much higher or                                                                    
lower  than the  revenues  which we  projected  a few  years                                                                    
earlier."  He   indicated  that  in  looking   at  projected                                                                    
unrestricted  general fund  (UGF)  revenues, typically,  the                                                                    
projections were off  by about 30-40 percent one  way or the                                                                    
other.                                                                                                                          
                                                                                                                                
Mr. Knapp scrolled to slide 24:                                                                                                 
                                                                                                                                
     "In  modeling fiscal  proposals,  we should  look at  a                                                                    
     range  of assumptions  about  future  oil revenues  and                                                                    
     make sure that we're  comfortable with the implications                                                                    
     of  those assumptions  given the  likelihood that  they                                                                    
     might come true."                                                                                                          
                                                                                                                                
Mr.  Knapp  encouraged  members  to   look  at  a  range  of                                                                    
assumptions rather than relying on one.                                                                                         
                                                                                                                                
Mr. Knapp  discussed slide  25: "What  range of  oil revenue                                                                    
assumptions should we  be looking at?" He  wondered what the                                                                    
range of assumptions should be.  He did not know the correct                                                                    
range.  He suggested  going beyond  the  point estimate.  He                                                                    
could tweak his model in  several different ways to show the                                                                    
effect  of different  oil prices.  However,  it was  already                                                                    
known that  if oil  prices were  higher, the  state received                                                                    
more money.                                                                                                                     
                                                                                                                                
2:01:02 PM                                                                                                                    
                                                                                                                                
Mr. Knapp pointed to slide  26: "For today's presentation, I                                                                    
only  show projections  based on  the most  recent DOR  Fall                                                                    
2017 revenue  projections, because…" He relayed  that it was                                                                    
unlikely  for oil  prices to  go high  enough to  generate a                                                                    
significantly larger  amount of money  to get the  state out                                                                    
of its fiscal problems.                                                                                                         
                                                                                                                                
Mr. Knapp turned to slide  27: "Historically, Permanent Fund                                                                    
rates   of  return   have  fluctuated   widely.  Projections                                                                    
assuming a  constant rate of  return may be very  wrong." He                                                                    
noted that  it was also  true that, historically,  the state                                                                    
had seen real changes over time in 10-year averages.                                                                            
                                                                                                                                
Mr.  Knapp advanced  to slide  28: "Historically,  Permanent                                                                    
Fund average earnings over longer  periods of time have also                                                                    
fluctuated widely. Assumptions about  future rates of return                                                                    
won't  necessarily  come true."  He  argued  that the  state                                                                    
could not assume that the  projection of the PF earnings was                                                                    
going to come  true on a year-to-year basis  or in earnings.                                                                    
In terms  of what the state  could do, he suggested  that as                                                                    
legislators thought  about different fiscal  proposals, they                                                                    
should consider  how they would  play out if the  PF returns                                                                    
were lower or if they varied significantly.                                                                                     
                                                                                                                                
Mr. Knapp turned to slide 29:  "I use three sets of modeling                                                                    
assumptions for  future Permanent Fund rates  of return." He                                                                    
used  3  sets  of  assumptions.  First,  he  used  what  the                                                                    
Permanent  Fund  Corporation  was  projecting  for  returns.                                                                    
Second, he  showed the  effect if the  return was  1 percent                                                                    
less than  the projection. Third,  he used an  arbitrary 10-                                                                    
year period in  history from FY 06 to FY  16 using the rates                                                                    
of return for those years.                                                                                                      
                                                                                                                                
Co-Chair Seaton interjected with  a question regarding slide                                                                    
28.  He was  confused  about  the colors  on  the chart.  He                                                                    
commented that  the colors  did show  up. He  mentioned fund                                                                    
total revenues, real return, and inflation.                                                                                     
                                                                                                                                
Mr. Knapp  detailed slide 30:  "If we don't  inflation proof                                                                    
or draw  any PF earnings…"  He mentioned a few  basics about                                                                    
the PF. He indicated the  information was important in terms                                                                    
of thinking about  any proposal that involved the  use of PF                                                                    
earnings. He asked  what would happen if  nothing were taken                                                                    
from  the PF.  Assuming  the projections  were correct,  the                                                                    
fund would grow to $113 billion  by FY 27. That would be the                                                                    
maximum size of the PF if the  state did not draw from it at                                                                    
all. On the other hand, the  more the state drew from it for                                                                    
dividends and for government, the  less the fund would grow.                                                                    
He  pointed to  the graph  on the  right of  the slide.  The                                                                    
realized earnings  were shown in  blue. He had  not included                                                                    
inflation proofing  in the  example. He  ran the  model with                                                                    
the assumptions  that all earnings  were accumulated  in the                                                                    
realized earnings where the grow would appear.                                                                                  
                                                                                                                                
Mr.  Knapp  highlighted  slide   31:  "Effect  of  1%  lower                                                                    
earnings…"  He continued  that  if the  rate  of return  was                                                                    
lowered  by 1  percent,  the  state would  end  up with  $13                                                                    
billion less  in the  fund in  FY 27.  Every percent  of the                                                                    
rate of return on average made a significant difference.                                                                        
                                                                                                                                
2:05:00 PM                                                                                                                    
                                                                                                                                
Mr. Knapp continued  to slide 32: "Effect of  the same rates                                                                    
of return as for  FY 06-FY 17…" He spoke to  the effect of a                                                                    
varying rate  of return like  in FY 06  - FY 16.  The amount                                                                    
still grew but was significantly more varied.                                                                                   
                                                                                                                                
Mr. Knapp turned  to slide 33: "If  we fully inflation-proof                                                                    
but don't  draw any PF  earnings." He explained that  in the                                                                    
graph  he  showed  what happened  if  the  state  inflation-                                                                    
proofed.  He continued  that inflation  proofing was  taking                                                                    
money from one part of the  PF and placing into another part                                                                    
of  the  PF.  Money  was taken  from  the  earnings  reserve                                                                    
account (ERA)  from which the  legislature could  spend, and                                                                    
placed   into  the   principal   account   from  which   the                                                                    
legislature was not allowed to  spend. It did not change how                                                                    
much the PF earned or the  fund value, but it kept it safer.                                                                    
He posed the question as to  how much money the state wanted                                                                    
to take off the table to  ensure that the principle was safe                                                                    
from being spent. By inflation  proofing the fund it did not                                                                    
make the  PF any larger,  it just moved  money to a  part of                                                                    
the fund the legislature could not  get at as easily. In the                                                                    
remainder of  his presentation assumed that  the state would                                                                    
not inflation proof the fund.                                                                                                   
                                                                                                                                
Mr.  Knapp advanced  to slide  34: "If  we don't  inflation-                                                                    
proof  and   draw  only  dividends  based   on  the  current                                                                    
formula." He  reported that  if the  fund was  not inflation                                                                    
proofed, there  were no government  draws, and  the dividend                                                                    
formula was  kept the  same the  PF would  only grow  to $82                                                                    
billion  by FY  27. His  point was  that dividends  were not                                                                    
using  the entire  PF earnings.  There was  extra money  the                                                                    
state could potentially use and  still have a very large PF.                                                                    
The more  the state dipped  into that extra money,  the less                                                                    
the PF would generate in earnings in the future.                                                                                
                                                                                                                                
Mr.  Knapp   detailed  slide  35:   "I'll  show   the  model                                                                    
projections  for 5  "fiscal  proposals"  (2 hypothetical,  3                                                                    
approximations  of actual  proposals)".  He  would walk  the                                                                    
committee    through   5    fiscal   proposals    reflecting                                                                    
combinations of  things that could  be applied  to spending,                                                                    
revenues,  drawing money  from the  ERA, and  dividends. The                                                                    
first 2 proposals were  completely hypothetical for purposes                                                                    
of illustration. The last 3  were his attempts to model Sen.                                                                    
Dunleavey's proposals,  the proposal in HB  365 [Legislation                                                                    
introduced  in 2016  - Short  Title:  INCOME TAX;  PERMANENT                                                                    
FUND   TAX  CREDIT],   and  the   Governor's  proposal.   He                                                                    
emphasized that  his attempt to  model the last  3 proposals                                                                    
represented his  understanding, which might not  be correct,                                                                    
of  how  these  proposals   worked.  His  objective  was  to                                                                    
illustrate  in contrast  the approaches  that the  different                                                                    
proposals took.                                                                                                                 
                                                                                                                                
2:09:14 PM                                                                                                                    
                                                                                                                                
Representative Wilson asked for  clarification about HB 365.                                                                    
Mr. Knapp  indicated it was Co-Chair  Seaton's proposal. Co-                                                                    
Chair Seaton clarified  that HB 365 was a  proposal from the                                                                    
previous  year presented  in  House Finance.  Representative                                                                    
Wilson wanted clarification for the public.                                                                                     
                                                                                                                                
Mr. Knapp reviewed his first  hypothetical proposal on slide                                                                    
36: "Cut  and Tax Only  Projections." The parameters  of the                                                                    
proposal  included eliminating  the deficit  immediately and                                                                    
leaving  the Permanent  Fund earnings  intact. The  proposal                                                                    
involved  cutting  spending and  raising  taxes  in a  50/50                                                                    
proportion.  In  other  words, he  would  take  the  current                                                                    
deficit compared with current  revenue sources and split the                                                                    
difference.  He would  get rid  of  half of  the deficit  by                                                                    
cutting  spending  and  half  of it  by  raising  taxes.  He                                                                    
explained that  the model  was depicted  in the  upper left-                                                                    
hand graph.  It showed what  the state was spending  and how                                                                    
it  was funded.  The  top  [dark] green  line  in the  graph                                                                    
represented  what   the  state  was  spending.   The  yellow                                                                    
[horizontal]  line in  the  middle  represented the  current                                                                    
incoming  revenues. Current  oil revenues  were depicted  in                                                                    
black at  the bottom of  the graph. He highlighted  the blue                                                                    
portion  which  represented  the current  non-oil  revenues.                                                                    
These two  sources at the bottom  represented the Department                                                                    
of  Revenue's  (DOR)  projections  of  the  state's  current                                                                    
revenue  sources. In  the  model he  would  slash the  green                                                                    
spending  line by  half the  amount  of the  deficit and  he                                                                    
would add  a large amount of  new taxes. His point  was that                                                                    
without dipping  into the PF earnings  the legislature would                                                                    
either have  to implement very large  spending reductions or                                                                    
substantial  taxes  or a  combination  of  both. The  fiscal                                                                    
issue was  a large problem  and was difficult to  solve with                                                                    
just by implementing a combination  of cutting, spending, or                                                                    
new revenues. On  the other hand, with this  approach the PF                                                                    
would be  growing rapidly because  it would not  be touched.                                                                    
Hence,  the fund  would be  earning more,  and the  dividend                                                                    
payouts  would increase.  In  summation,  spending would  be                                                                    
reduced,  taxes   would  be  increased,  the   PF  would  go                                                                    
untouched, and  the dividends would increase.  Presumably it                                                                    
was why there  was a significant amount  of discussion about                                                                    
"Cut  and   Tax  Only"  being   too  harsh  and   about  the                                                                    
possibility of using the earnings.                                                                                              
                                                                                                                                
2:13:37 PM                                                                                                                    
                                                                                                                                
Mr.  Knapp stated  that  slide 37  showed  the "Do  Nothing"                                                                    
projections.  He   reemphasized  that   it  was   a  totally                                                                    
hypothetical scenario.  He suggested that if  the state were                                                                    
to leave spending  as it was and avoid  implementing any new                                                                    
revenues,  the  state would  first  draw  down the  use  the                                                                    
Constitutional  Budget  Reserve  (CBR) fund.  He  noted  the                                                                    
graph  on  the bottom  left  showed  the state's  3  savings                                                                    
accounts  including the  CBR,  the  Permanent Fund  Earnings                                                                    
Reserve account  (ERA), and  other funds  (the miscellaneous                                                                    
funds  with a  balance). The  constitutional budget  reserve                                                                    
would quickly be depleted to  fund the deficit. Once the CBR                                                                    
was gone  the state  would have  to turn  to the  only other                                                                    
source of money to pay for  it, which was the ERA. The state                                                                    
would be doing so without a plan.                                                                                               
                                                                                                                                
Mr. Knapp continued that there was  no plan in place such as                                                                    
Senator  Dunleavy's, Co-Chair  Seaton's,  or the  governor's                                                                    
plans. He  called the circumstance  a "forced  draw" denoted                                                                    
in  a  dashed  red  [vertical] line.  A  forced  draw  meant                                                                    
drawing from  the PF ERA and  was shown at the  middle graph                                                                    
at the  top of the  slide. It showed  how much the  PF would                                                                    
earn in realized earnings and  what kinds of money would the                                                                    
state  be taking  out  of  the account.  He  pointed to  the                                                                    
middle graph  at the top.  The money taken from  the account                                                                    
would  be  spent  to  pay   for  dividends  (shown  in  blue                                                                    
generated  from   the  same  formula  that   had  been  used                                                                    
previously) and  for the deficit.  By taking more  money out                                                                    
every year than what the  account was earning, the ERA would                                                                    
begin  to be  depleted. He  pointed to  the next  graph over                                                                    
[top right] that showed the  total amount of dividends being                                                                    
paid  shown in  blue. The  yellow line  showed the  dividend                                                                    
amount.  The dividend  would continue  to  rise because  the                                                                    
total value  of the  PF would still  be growing  slowly. Two                                                                    
things  would  be  added   including  royalty  deposits  and                                                                    
unrealized  earnings.  The  interesting  thing  about  doing                                                                    
nothing  was not  a total  disaster scenario  from a  fiscal                                                                    
viewpoint.  Projecting out  10 years,  the PF  ERA would  be                                                                    
going  down, but  Alaska would  not immediately  run out  of                                                                    
money. However,  the state  would be  spending more  than it                                                                    
was taking. The  "do nothing' plan could result  in going to                                                                    
the ERA. However,  he emphasized that the PF  was earning so                                                                    
much money  that it was  a way of  having a large  draw from                                                                    
the  fund. He  thought  this approach  was  a dangerous  way                                                                    
because unlike an of the  other plans people were proposing,                                                                    
it was  an uncontrolled way  in which  to do so.  He thought                                                                    
the scenario was  a default way of having  access to another                                                                    
source of cash.                                                                                                                 
                                                                                                                                
Representative  Ortiz asked  what  would happen  to the  PFD                                                                    
amount and the distribution to  Alaskans in the "do nothing"                                                                    
plan.  Mr. Knapp  responded that  he had  left the  dividend                                                                    
formula  intact. The  state's current  formula was  based on                                                                    
what the PF  earned. He suggested the because the  PF grew a                                                                    
little, the dividend also grew a little over time.                                                                              
                                                                                                                                
2:19:41 PM                                                                                                                    
                                                                                                                                
Mr. Knapp turned  to slide 38: "Do  Nothing Projections". He                                                                    
relayed  that the  slide  showed the  same  thing except  he                                                                    
assumed that  the PF earned  1 percent less.  Therefore, the                                                                    
funds would be  earning less and drawing down  the fund more                                                                    
rapidly. The dividends would no  longer increase, and the PF                                                                    
would become flat - not growing at all.                                                                                         
                                                                                                                                
Mr. Knapp  reviewed slide 39:  "Do Nothing  Projections". He                                                                    
indicated  that  the  slide showed  the  same  "do  nothing"                                                                    
scenario but with  varying rates of returns  (he referred to                                                                    
the scenario  as the FY  06-16 scenario). He  suggested that                                                                    
if the hypothetical  rates of return came  true, there would                                                                    
be widely  varying rates  of return.  He continued  that the                                                                    
state would  be drawing the  same amount from  the Permanent                                                                    
Fund that  was earning widely different  amounts every year.                                                                    
Therefore,  the ERA  balance  would go  up  and down.  Under                                                                    
certain scenarios  the state would  never fully  deplete the                                                                    
account.  There was  a  chance the  account  would be  fully                                                                    
depleted if the state encountered  enough bad years. He also                                                                    
noted that  the dividends  would fluctuate widely  just like                                                                    
they had in the past under the historic formula.                                                                                
                                                                                                                                
Representative Wilson  asked if  he was  assuming a  rate of                                                                    
return  based on  historical data.  She wondered  if he  was                                                                    
assuming that the  state would make a minimum of  3, 4, or 5                                                                    
percent.  Mr. Knapp  responded that  he had  no clue  of the                                                                    
rate of  return. There  would be  some variation.  His point                                                                    
with his  model was to  illustrate what would happen  if the                                                                    
returns varied.  If the returns  varied, the  dividend would                                                                    
vary, and the ERA would  bounce around. He claimed there was                                                                    
nothing  magical about  his numbers,  as he  was only  using                                                                    
them as an illustration.                                                                                                        
                                                                                                                                
2:22:44 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton asked about the  rate of return from 2006 to                                                                    
2017. He wondered if Mr.  Knapp was using a 10-year average.                                                                    
Mr.  Knapp  responded in  the  negative.  He wanted  to  use                                                                    
something that  he could use  to illustrate the  point about                                                                    
what  would happen  if the  state got  variable returns.  He                                                                    
randomly chose  a past historical  period. The  scenario was                                                                    
completely hypothetical.                                                                                                        
                                                                                                                                
Co-Chair  Seaton  asked  if Representative  Wilson  had  her                                                                    
question answered. Representative  Wilson responded that she                                                                    
was still  confused. She asked  for clarification  about the                                                                    
PF rate  or return assumptions.  Mr. Knapp would show  her 3                                                                    
slides [slide  37, 38, and  39] and suggested that  she look                                                                    
in  the  upper  right-hand  corner.  He  explained  that  he                                                                    
illustrated  the   proposals  with   3  different   sets  of                                                                    
assumptions  for each  scenario. He  indicated that  when he                                                                    
used APFC (Alaska Permanent Fund  Corporation) [slide 37] it                                                                    
meant he  used the assumptions  provided by the  advisors of                                                                    
APFC. He turned to slide 38  which used the numbers from the                                                                    
previous  slide less  1 percent.  He used  the third  slide,                                                                    
slide  39,   for  the  purposes  of   illustration  applying                                                                    
historical numbers to the model.                                                                                                
                                                                                                                                
Co-Chair Seaton asked about the  projected levelized rate of                                                                    
return for  the APFC proposals.  Mr. Knapp thought  the rate                                                                    
was a 6.9 percent total.                                                                                                        
                                                                                                                                
Co-Chair  Seaton asked  if, in  that  situation, an  average                                                                    
rate  of  return was  being  applied  every year.  The  same                                                                    
average rate  of return minus  1 percent was applied  to the                                                                    
other  slide. The  third slide  applied the  actual rate  of                                                                    
return over  a 10-year  period which  Mr. Knapp  happened to                                                                    
choose FY 06  - FY 17. Mr. Knapp added  that the average for                                                                    
the FY 06  - FY 17 was  about half a percent  lower than the                                                                    
average for APFC. The average was in between the others.                                                                        
                                                                                                                                
2:26:18 PM                                                                                                                    
                                                                                                                                
Mr.  Knapp   advanced  to   slide  40:   "Dunleavy  Proposal                                                                    
Projections."  He reviewed  Senator Dunleavy's  proposal. He                                                                    
proposed  a very  significant spending  cut.  He modeled  an                                                                    
$800 million cut  over three years. He pointed  to the green                                                                    
line  on  the upper  left-hand  chart  which went  down.  He                                                                    
suggested that cuts  of $300 million per year  for two years                                                                    
and  $200 million  for  one  year would  be  applied to  the                                                                    
budget, cutting  it by $800  million. The reductions  were a                                                                    
significant  part  of  his   proposal.  The  senator's  plan                                                                    
reflected no new revenues but  left the oil revenues and the                                                                    
non-oil revenues intact. There was  also a draw from the PF.                                                                    
Basically,  the same  amount would  be  drawn for  dividends                                                                    
calculated in the  same way. Historically, the  state used a                                                                    
formula to determine what to  draw from the ERA. The formula                                                                    
took the average  of the earnings over the  previous 5 years                                                                    
and spend half the amount.  In the Dunleavy proposal it took                                                                    
all the  earnings, keeping half  for dividends and  used the                                                                    
other half for state  government. That was his understanding                                                                    
of the  general concept  of the proposal.  There was  also a                                                                    
planned  draw down  of the  CBR and  a draw  down from  some                                                                    
other state funds. He pointed  to the upper left-hand corner                                                                    
drawing  attention   to  the  red   portion  of   the  chart                                                                    
indicating the revenues  from the draw from the  PF equal to                                                                    
the  dividend amount.  The money  was added  to the  general                                                                    
fund to be used to  fund government. Those revenues combined                                                                    
with the suggested spending cuts  would provide enough money                                                                    
to eliminate the deficit and  begin to run a surplus because                                                                    
of rising  oil revenues. The  surplus would then be  used to                                                                    
build up the CBR shown in the bottom left-hand graph.                                                                           
                                                                                                                                
Representative  Pruitt noticed  that  the  planned draw  was                                                                    
more than the  spending based on the  formula being applied.                                                                    
Mr. Knapp checked the senator's  projections and they showed                                                                    
a surplus close to Mr. Knapp's projections.                                                                                     
                                                                                                                                
Representative  Pruitt wanted  to confirm  that Mr.  Knapp's                                                                    
plan placed the  surplus in the CBR. Mr.  Knapp thought that                                                                    
was  the senator's  intention.  The CBR  grew  to about  the                                                                    
amount listed on the slide.                                                                                                     
                                                                                                                                
Mr.  Knapp explained  that the  surplus was  a result  of an                                                                    
$800 million  spending cut  and a draw  amount equal  to the                                                                    
dividends from the  ERA. He suggested that  because, so much                                                                    
was drawn from  the ERA, the ERA would not  grow as rapidly.                                                                    
He directed  the committee's attention  to the graph  on the                                                                    
bottom  right which  showed  the components  of  the PF.  He                                                                    
pointed to shaded parts  which represented unrealized gains.                                                                    
The state was  only allowed to spend the  realized gains. He                                                                    
explained  that if  a  person bought  stocks  which grew  to                                                                    
twice the  value, the earnings  would not be  realized until                                                                    
the  stock was  sold.  In all  his  models, growth  occurred                                                                    
partly because  every year the state  was getting unrealized                                                                    
gains.                                                                                                                          
                                                                                                                                
2:32:13 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt understood  that it  was a  matter of                                                                    
shifting some of the state's money  from the ERA to the CBR.                                                                    
Simply put,  it was a fund  transfer. He asked if  it was an                                                                    
advisable move.  He estimated  that if  the funds  were left                                                                    
within the PF the  power of being a part of  the PF would be                                                                    
better.                                                                                                                         
                                                                                                                                
Mr. Knapp relayed  that the state was not taking  it out and                                                                    
placing it into  the CBR. The money was being  taken out and                                                                    
used to pay for government and  some of the funding would be                                                                    
left over and  placed in the CBR. He agreed  that it did not                                                                    
make  much sense  to take  more  money out  than needed  and                                                                    
putting into  a fund  that did  not earn  as much  money. He                                                                    
thought  it was  important  to consider.  He  added that  an                                                                    
interesting feature of the plan  was that it was simple. The                                                                    
state would  only use  money that  was acquired  as realized                                                                    
earnings.                                                                                                                       
                                                                                                                                
Vice-Chair Gara spoke to realized  earnings of the Permanent                                                                    
Fund  that were  arbitrary. He  reasoned that  if government                                                                    
was being run on volatile  earnings, revenue would go up and                                                                    
down as well. Mr. Knapp concurred with Vice-Chair Gara.                                                                         
                                                                                                                                
2:35:35 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  suggested that realized earnings  of the PF                                                                    
were not  6.9 percent  per year. He  provided an  example of                                                                    
unrealized earnings.  He relayed that the  realized earnings                                                                    
were somewhat  arbitrary in terms  of when they  were cashed                                                                    
out. He  wondered, if  the government  and the  PF dividends                                                                    
were  based on  the  realized earnings  that were  radically                                                                    
going  up and  down,  whether the  government and  dividends                                                                    
would also go radically up and down under the plan.                                                                             
                                                                                                                                
Mr. Knapp  offered to  skip ahead 2  slides [slide  42]. The                                                                    
slide showed  the same plan but  also showed the FY  06 - FY                                                                    
16 rate  of return assumptions.  He indicated that  both the                                                                    
dividend formula  and the  general fund  draw were  based on                                                                    
earnings  that were  changing. They  both went  up and  down                                                                    
frequently. There  was a significant variation  in the money                                                                    
available. He thought Vice-Chair Gara was correct.                                                                              
                                                                                                                                
Vice-Chair  Gara   spoke  to   another  issue.   The  Alaska                                                                    
Permanent  Fund  Corporation would  be  forced  to sell  its                                                                    
stock to  create realized  earnings if  the state  wanted to                                                                    
ensure a $3000 dividend every  year. He thought the PF would                                                                    
be unable  to maximize its  return. If the dividend  was set                                                                    
high, the  APFC would have  to cash out investments  that it                                                                    
would  otherwise keep.  Over the  long term  it would  start                                                                    
earning less. He wondered if it was a possibility.                                                                              
                                                                                                                                
Mr.  Knapp  would  modify   slightly  what  Vice-Chair  Gara                                                                    
stated.  He  relayed that  in  the  past  there had  been  a                                                                    
certain  dividend  formula  with  a  significant  amount  of                                                                    
variation  over  the  years, which  Alaskans  had  grown  to                                                                    
accept. He  thought Alaskans would  be much less  willing to                                                                    
have a variable  budget than a flexible  dividend. The state                                                                    
was  currently faced  with a  complicated  issue for  people                                                                    
managing Alaska's  incredibly valuable  asset. If  the state                                                                    
needed  access  to  more  cash,  it  would  change  the  way                                                                    
investments were  made. He  questioned what  it would  do to                                                                    
investment strategy  and whether  earnings would  be reduced                                                                    
over time. He thought the  legislature would have to grapple                                                                    
with the complex issue. He  conveyed that for reasons he did                                                                    
not  quite understand  there was  supposed to  be less  of a                                                                    
concern if a  Percent of Market Value (POMV)  type of payout                                                                    
was used.                                                                                                                       
                                                                                                                                
2:38:54 PM                                                                                                                    
                                                                                                                                
Representative  Ortiz  thought  that   none  of  the  models                                                                    
assessed  the  impact  on the  overall  economy.  Mr.  Knapp                                                                    
responded  that  his models  only  looked  at the  financial                                                                    
feasibility  of each  of the  scenarios.  They said  nothing                                                                    
about how  any of the  different proposals would  affect the                                                                    
economy  or the  demographics  of the  state. He  encouraged                                                                    
members to  use his models as  a starting point to  check to                                                                    
see if a  plan really worked financially.  He also suggested                                                                    
that  as legislators  debated they  would need  to get  into                                                                    
larger  philosophical  questions  such   as  what  role  the                                                                    
dividend would play. In other  words, what kind of dividends                                                                    
did  Alaskans want  versus  government  spending or  keeping                                                                    
taxes  low.  Anyone looking  at  the  plans could  determine                                                                    
which would  help the economy or  certain demographics more.                                                                    
He  remarked that  his  presentation  just contained  boring                                                                    
numbers.                                                                                                                        
                                                                                                                                
Co-Chair Seaton  commented that the first  part was modeling                                                                    
$800 million cut over 3 years  resulting in a surplus in the                                                                    
out years.  He suggested that  if the  state were to  cut $2                                                                    
billion  over 3  years then  the state  would have  a bigger                                                                    
surplus. He  concluded that the  committee could  review the                                                                    
financial effect  on a system,  but it did not  show whether                                                                    
it was feasible within a vibrant Alaskan economy.                                                                               
                                                                                                                                
Mr.  Knapp suggested  that one  person might  like the  $800                                                                    
million in cuts. Another person  might disagree with certain                                                                    
cuts. It  was not just  an exercise in changing  the numbers                                                                    
drawing  the  green  line  lower.  The  argument  was  about                                                                    
another subject.                                                                                                                
                                                                                                                                
2:42:28 PM                                                                                                                    
                                                                                                                                
Representative Wilson repeated the  plan. She indicated that                                                                    
half of  the earnings  would be used  to pay  dividends, the                                                                    
other half would be used  for government. She noted the lack                                                                    
of  a  set  dividend  and  the  five-year  average  used  to                                                                    
calculate the  dividend amount. She asked  about having more                                                                    
funding  coming out  of the  ERA  than what  was needed  for                                                                    
government  and whether  it would  be better  to invest  any                                                                    
surplus into something  like the CBR. The  earnings would be                                                                    
lower, but the funds  would be more accessible. Alternately,                                                                    
leaving the  unused surplus in  the ERA would  generate more                                                                    
profit.                                                                                                                         
                                                                                                                                
Mr. Knapp thought  that 5 or 6 years down  the road when the                                                                    
deficit was  fixed, and the legislature  realized that money                                                                    
was being  taken out  of a high  income earning  account and                                                                    
being placed  into a  low income  earning account,  it would                                                                    
want to  take less out  of the  account. He did  not believe                                                                    
the plan would work exactly in the manner suggested.                                                                            
                                                                                                                                
Mr. Knapp detailed slide 43:  "HB 365 Projections". He Noted                                                                    
that HB 365  was a bill Representative  Seaton introduced in                                                                    
2016.  He  highlighted  that  in  the  model  there  was  an                                                                    
increase in  spending equal to  $4.65 billion.  The increase                                                                    
was  due  to  an  assumption  about  the  need  to  increase                                                                    
payments to pay off oil tax credits that were due.                                                                              
                                                                                                                                
Mr. Knapp posed the question  about how to pay for spending.                                                                    
The  model  was  built  on  having  a  budget  increase.  He                                                                    
reported  that without  a budget  increase  the state  would                                                                    
have less of a deficit. He  pondered how the state would pay                                                                    
for spending. The plan had a  feature that none of the other                                                                    
plans  had -  it introduced  a new  source of  revenue -  an                                                                    
income tax providing $650 million  in revenue every year. In                                                                    
addition,  there would  be  a 2.3  Percent  of Market  Value                                                                    
(POMV)  draw  from the  Permanent  Fund.  The model  kept  a                                                                    
dividend program but cut it  in half. The same formula would                                                                    
be used to calculate the  dividend, but a smaller percentage                                                                    
of the earnings would be paid out.                                                                                              
                                                                                                                                
Mr. Knapp  continued to explain  that the Percent  of Market                                                                    
Value approach, the average market  value of the PF over the                                                                    
proceeding  5   years,  would  be  used   to  calculate  the                                                                    
government draw (shown in red  on the charts). He pointed to                                                                    
the upper left  chart on slide 43. In  combination, the $650                                                                    
million from  new revenues from  an income tax and  the POMV                                                                    
draw  would  fill  a  significant   portion  of  the  budget                                                                    
deficit. However, it  would be necessary to  draw some extra                                                                    
money  from the  PF. He  suggested that  because the  amount                                                                    
being drawn would  be less relative to what  it was earning,                                                                    
the ERA would increase in the model.                                                                                            
                                                                                                                                
2:47:47 PM                                                                                                                    
                                                                                                                                
Mr. Knapp  pointed to  slide 44:  "HB 365  Projections." The                                                                    
slide showed  different assumptions about the  PF earnings -                                                                    
they dropped by 1 percent.  The dividends would be less over                                                                    
time. However, the draw for  government would not go down as                                                                    
much because it was based  on the market value. He suggested                                                                    
that if  earnings went down  by 1 percent, the  market value                                                                    
would not  go down by 1  percent and there would  be less of                                                                    
an  immediate effect  on the  size  of the  draw. The  state                                                                    
would be able to draw a similar amount for government.                                                                          
                                                                                                                                
Mr. Knapp continued  to slide 45: "HB  365 Projections." The                                                                    
third version  of his model  had a variable rate  of return.                                                                    
The  dividend  would  be  variable and  half  the  size.  He                                                                    
thought  that  because  the  PF   draw  for  government  was                                                                    
determined by  a POMV  model, there would  be a  more stable                                                                    
draw for  government. However,  the value  of the  ERA would                                                                    
fluctuate  significantly.  He   was  aware  the  Legislative                                                                    
Finance  Division had  conducted some  detailed analysis  of                                                                    
the  proposal.  He recommended  that  members  defer to  the                                                                    
division's numbers.                                                                                                             
                                                                                                                                
Co-Chair  Seaton  added  that  the  assumption  was  out  of                                                                    
character for where the proposal  was because the budget had                                                                    
not been  increased to $4.6  billion. He asserted  that when                                                                    
the budget did not increase,  the draws would not take place                                                                    
and  the CBR  would be  maintained  over time.  It would  be                                                                    
discussed at a different time.                                                                                                  
                                                                                                                                
Mr. Knapp  did not mean to  characterize that Representative                                                                    
Seaton was advocating  a large budget increase.  He had seen                                                                    
a model version run by LFD.  A larger problem would arise if                                                                    
the state spent more money.                                                                                                     
                                                                                                                                
Co-Chair  Seaton  suggested that  he  had  been one  of  the                                                                    
strongest  proponents  of  reducing   the  oil  tax  credits                                                                    
instead of  extending them indefinitely and  paying them off                                                                    
annually.                                                                                                                       
                                                                                                                                
Mr.  Knapp did  not treat  the  proposal fairly.  He used  a                                                                    
higher level of spending. He  suggested that it was a hybrid                                                                    
way  of calculating  dividends and  the Permanent  Fund draw                                                                    
for government in  different ways. The dividend  went up and                                                                    
down like  it always  had, though it  was a  smaller amount.                                                                    
However,  the  draw  for   government  was  more  stabilized                                                                    
because of the POMV concept.                                                                                                    
                                                                                                                                
Mr.  Knapp   highlighted  slide  46:   "Governor's  Proposal                                                                    
Projections." He indicated that  the governor's proposal was                                                                    
the  most complex  of all  of them  because it  changed more                                                                    
things.  He modeled  it  as  if spending  was  held at  $4.3                                                                    
billion. He clarified  that he was not  making any statement                                                                    
about what the governor was proposing for spending.                                                                             
                                                                                                                                
2:51:42 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara wondered if Mr.  Knapp was talking about the                                                                    
governor's proposal in  the current year or  in the previous                                                                    
year.  Mr. Knapp  responded that  he was  talking about  the                                                                    
proposal the  governor put forward  in December at  the time                                                                    
he announced  the budget for  the current year.  His general                                                                    
understanding  was that  the  governor's  proposal had  some                                                                    
similarities to things that were  talked about at the end of                                                                    
session  in   the  previous  year.  He   read  the  language                                                                    
introduced in the present year.                                                                                                 
                                                                                                                                
Representative  Wilson asked  if the  increase on  the motor                                                                    
fuel  tax  was  included.  Mr.  Knapp  understood  that  the                                                                    
governor proposed  an increase in  the motor fuel  tax which                                                                    
would add millions  of dollars. However, he  did not include                                                                    
it in  the model. He suggested  that if the increase  in the                                                                    
motor fuel tax was added it  would be reflected in the green                                                                    
bar showing new revenues. He  reemphasized that in his model                                                                    
was  not  an exact  characterization  of  what the  governor                                                                    
proposed.  He thought  the governor  had suggested  that the                                                                    
motor fuel  tax would  be a  start, but  additional revenues                                                                    
would be necessary.  He clarified that if  new revenues were                                                                    
added, the deficit would be smaller.                                                                                            
                                                                                                                                
Representative Wilson  responded that it was  already in the                                                                    
budget  for the  current  year. Items  had  been moved  from                                                                    
undesignated  funds to  designated funds  as if  legislation                                                                    
had  already  passed  increasing  the motor  fuel  tax.  The                                                                    
monies were reflected  in the budget. She  suggested that an                                                                    
additional  $80  million would  have  to  be added  to  $4.3                                                                    
billion. It was already in the budget.                                                                                          
                                                                                                                                
Mr.  Knapp reported  that the  projections he  used did  not                                                                    
include the tax.  He could add the numbers to  his model and                                                                    
show what would change if there  was more time. His goal was                                                                    
to  demonstrate a  general concept.  He wanted  to emphasize                                                                    
how the governor's proposal would  use the PFD. It reflected                                                                    
more of a change of how the earnings would be used.                                                                             
                                                                                                                                
Mr.  Knapp   turned  to   slide  47:   "Governor's  Proposal                                                                    
Projections." He explained that  there were several parts to                                                                    
using  the   Permanent  Fund  earnings  in   the  governor's                                                                    
proposal. First,  there would  be a  large single  draw from                                                                    
the  PF  based  on  a  POMV  concept  of  5.25  percent.  He                                                                    
continued that 20  percent of the draw would be  used to pay                                                                    
dividends. The other  80 percent would be used  to help fund                                                                    
government.  In addition,  the share  of oil  royalties that                                                                    
got deposited  into the  PF would be  reduced from  about 31                                                                    
percent to  the constitutionally mandated 25  percent. Thus,                                                                    
more oil royalties  would go to government  and oil revenues                                                                    
would be  higher. Also, 25  percent of the  unrestricted oil                                                                    
royalties  the  state  received  would be  used  to  add  to                                                                    
dividends. He  pointed to the  upper right-hand  graph which                                                                    
showed  that the  dividend payout  for Alaskans  would be  a                                                                    
combination  of 20  percent of  the 5.25  percent POMV  draw                                                                    
plus  20  percent  of the  unrestricted  oil  royalties.  If                                                                    
either the draw  or the oil royalties  changed, the dividend                                                                    
would  change. The  model resulted  in  a smaller  dividend,                                                                    
roughly about $1000. There were  some other features that he                                                                    
did  not think  he modeled  right which  proposed a  minimum                                                                    
dividend at start  up. He relayed that the draw  from the PF                                                                    
was  based  on a  POMV.  The  Percent  of Markey  Value  was                                                                    
driving  part of  the  dividend. The  other  portion of  the                                                                    
dividend was  coming from royalties.  Under the plan  the PF                                                                    
earnings  were  not  all  being spent  because  the  PF  was                                                                    
earning approximately 6.9 percent.  The Permanent Fund would                                                                    
still be growing in value.                                                                                                      
                                                                                                                                
Mr.   Knapp   detailed   slide  48:   "Governor's   Proposal                                                                    
Projection". He discussed a  variable earnings scenario. The                                                                    
Permanent  Fund earnings  would vary,  but the  use of  them                                                                    
would be driven  by the 5.25 percent draw.  There were other                                                                    
complicated features that were  important. The draw from the                                                                    
PF would  be reduced if the  oil revenues rose by  a certain                                                                    
amount. The  state would not take  as much out if  there was                                                                    
another  oil boom.  Another feature  would be  if a  certain                                                                    
amount was  accumulated in  the ERA, then  some of  it would                                                                    
automatically be  placed into  the principle.  He reiterated                                                                    
the  inaccurate  characterization   and  referred  committee                                                                    
members to  consult with  LFD or  the Office  Management and                                                                    
Budget. He was only presenting a general concept.                                                                               
                                                                                                                                
Mr. Knapp moved to slide  49: "What is a 'Sustainable' level                                                                    
of state spending?". He wanted  to address the question of a                                                                    
sustainable level  of state spending.  He thought  the issue                                                                    
was subtler and  did not have a specific  answer. His answer                                                                    
to the questions  about a sustainable level  of spending was                                                                    
that it depended on several assumptions.                                                                                        
                                                                                                                                
2:59:53 PM                                                                                                                    
                                                                                                                                
Mr.  Knapp  addressed slide  50:  "What  is a  'Sustainable'                                                                    
level of state spending?":                                                                                                      
                                                                                                                                
   · The time period we are planning for                                                                                        
   · What we assume about future oil revenues and                                                                               
     investment returns                                                                                                         
   · How much we want to preserve or grow our assets                                                                            
   · How much we want to pay in dividends                                                                                       
   · How much we're willing to raise in new revenues                                                                            
   · Whether we want to keep the same buying power of our                                                                       
     spending and savings by adjusting for inflation                                                                            
   · Whether we want to keep the same per-capita buying                                                                         
     power of our spending and savings by adjusting for                                                                         
     population growth                                                                                                          
                                                                                                                                
Mr.   Knapp  posed   the  question   about  the   length  of                                                                    
sustainability. Assumptions  around future oil  revenues and                                                                    
investment   returns   were    critical.   He   provided   a                                                                    
hypothetical  scenario.  He  did not  believe  the  question                                                                    
about  what  was  sustainable   could  be  answered  without                                                                    
addressing how  much money the  state would have.  The state                                                                    
did  not have  the answers  about  how much  oil revenue  it                                                                    
would have or  what the returns would be. All  that could be                                                                    
provided were estimates.  The fact was that no  one knew the                                                                    
truth. He  used the example  of getting ready to  retire and                                                                    
looking  at  a  sustainable   level  of  spending  based  on                                                                    
investments. It depended on how  certain the state wanted to                                                                    
be.                                                                                                                             
                                                                                                                                
Representative Guttenberg  thought Mr. Knapp could  answer a                                                                    
few  of   the  questions  listed  on   the  slide  regarding                                                                    
planning.  He asked  about an  appropriate  timeframe and  a                                                                    
relevant equation.                                                                                                              
                                                                                                                                
Mr.  Knapp would  go  through his  bullet  list quickly.  He                                                                    
thought the state should consider  a 10-year time horizon. A                                                                    
longer time  horizon would be  difficult. He had no  clue as                                                                    
to  what  the  state  should assume  about  its  future  oil                                                                    
revenues and investment returns.  He would trust the experts                                                                    
at  DOR   and  APFC  to  provide   reasonable  estimates  of                                                                    
averages. He suggested coming up  with something that worked                                                                    
in a low case scenario.  He believed a critical question had                                                                    
to do  with preserving  and growing  the state's  assets and                                                                    
deciding  what   the  state  wanted  to   leave  for  future                                                                    
generations. An individual that  was retiring would consider                                                                    
what they  wanted to  leave for their  kids. He  thought the                                                                    
minimum standard should be to  leave future generations with                                                                    
the same real buying power as the state's current assets.                                                                       
                                                                                                                                
Mr. Knapp addressed  the question about whether  to keep the                                                                    
money  the  same or  keeping  it  the  same per  capita.  He                                                                    
suggested that  if Alaska's population grew  50 percent over                                                                    
the following  10 years and the  state needed to be  as rich                                                                    
per capita, it would have to  save more. He offered that the                                                                    
state should be striving for  a level of spending that would                                                                    
leave  the inflation  adjusted value  of the  state's assets                                                                    
the same after  10 years. It meant that the  state needed to                                                                    
spend no  more than what it  was taking in in  terms of real                                                                    
value.  He thought  the issue  could be  debated for  a long                                                                    
time.                                                                                                                           
                                                                                                                                
3:06:58 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara asked  about budget cuts and  job losses. He                                                                    
wondered  if  Mr.  Knapp  had updated  his  studies  on  the                                                                    
impacts of  spending cuts  on jobs and  the impact  of other                                                                    
revenue  measures  on  jobs.  He  wondered  if  someone  had                                                                    
further  refined his  reports by  someone who  was currently                                                                    
working  at the  Institute of  Social and  Economic Research                                                                    
(ISER).                                                                                                                         
                                                                                                                                
Mr. Knapp  reported that  he had  worked on  a study  in the                                                                    
prior  year that  tried to  look  at the  different ways  of                                                                    
reducing  the deficit  and their  economic implications.  He                                                                    
reported that  after having finished  his report he  had not                                                                    
done any more work on the  subject. He noted that he had not                                                                    
been following  what others at  ISER were doing. He  was not                                                                    
aware of any changes to it  and did not have anything new to                                                                    
say about it.                                                                                                                   
                                                                                                                                
Vice-Chair Gara  understood there  was someone else  at ISER                                                                    
who had a projection concerning  how many jobs were lost for                                                                    
every $100 million in budget cuts.                                                                                              
                                                                                                                                
Mr. Knapp  relayed that his  former colleague,  Dr. Mouhcine                                                                    
Guettabi,  was one  of the  co-authors of  the study  he had                                                                    
worked  on.   He  believed  that  when   Mr.  Guettabi  said                                                                    
something  about  economic  effects  associated  with  doing                                                                    
various  things he  would have  been referring  to the  same                                                                    
study rather  than a new  work. He  had not talked  with Mr.                                                                    
Guettabi about it.                                                                                                              
                                                                                                                                
Mr. Knapp  reviewed slides 51  and 52. He suggested  that if                                                                    
the  state reached  sustainability,  it  faced the  question                                                                    
coming  up about  sustaining the  value of  its assets.  The                                                                    
question as  to which  assets needed  to be  sustained would                                                                    
need  to be  answered.  He posed  the  question whether  the                                                                    
state should sustain  its value of spendable  assets such as                                                                    
the CBR  and the ERA, or  if it should sustain  the value of                                                                    
all its  financial assets such  as the PF  principle amount.                                                                    
The  state was  adding 25  percent of  the royalties  to the                                                                    
principle of  the PF to  save for future Alaskans.  It could                                                                    
be  argued that  the  state should  sustain  even more.  His                                                                    
questions spoke to the point of sustainability.                                                                                 
                                                                                                                                
Mr. Knapp scrolled  to slide 53: "What the  nominal value of                                                                    
our  assets  would   need  to  be  at  the  end   of  FY  27                                                                    
to sustain their nominal value of  as of the beginning of FY                                                                    
18." He  explained that the  chart showed the  nominal value                                                                    
of  the  state's  assets  measured  in  different  ways.  He                                                                    
suggested that  if the committee followed  his standard, not                                                                    
depleting the assets, he would  look at the third column. He                                                                    
emphasized that  the chart showed the  nominal value without                                                                    
adjusting  for inflation.  He thought  the numbers  were too                                                                    
low. He  recommended projecting inflation and  expanding the                                                                    
numbers. The  money the  state could  spend depended  on oil                                                                    
revenues.                                                                                                                       
                                                                                                                                
3:11:55 PM                                                                                                                    
                                                                                                                                
Mr.  Knapp  proceeded to  slide  54:  "Sustainable on  paper                                                                    
isn't necessarily  the same as sustainable  in practice." He                                                                    
pointed out  that sustainable on  paper was  not necessarily                                                                    
the same as  sustainable in practice. He argued  that a plan                                                                    
was not sustainable  unless discipline was used  to stick to                                                                    
the plan. He  suggested there were two things for  a plan to                                                                    
be sustainable  not just  on paper  but in  practice. First,                                                                    
discipline to  not over project future  average revenues was                                                                    
necessary.  Second, the  temptation  to spend  a little  bit                                                                    
more had to be avoided. The  state's plan had to be built on                                                                    
average  revenues   coming  in.  He  referred   to  slide  7                                                                    
reflecting  Alaska's history.  He commented  that the  state                                                                    
had never had  the discipline to watch spending  in the good                                                                    
years. He reported that on  two occasions Alaska had spent a                                                                    
significant  amount of  money and  built many  things. As  a                                                                    
result,  Alaska  had to  go  through  a long  and  agonizing                                                                    
period  of  reducing  spending because  the  level  was  not                                                                    
sustainable  in practice.  He suggested  the state  consider                                                                    
building in ways that would allow  the state to stick to the                                                                    
plan.                                                                                                                           
                                                                                                                                
Mr.  Knapp highlighted  slide 55:  "It's  useful to  compare                                                                    
fiscal proposals." He assumed that the  goal was to get to a                                                                    
solution.  There   were  wildly  varying  opinions   in  the                                                                    
legislature about  the right solution and  about what should                                                                    
be done to  solve Alaska's fiscal problem. The  state had to                                                                    
get  past  an  impasse.  He suggested  looking  at  all  the                                                                    
proposals  running  the  same  graphs  and  using  the  same                                                                    
terminology to determine how each  played out. It would make                                                                    
it easier to have a discussion.                                                                                                 
                                                                                                                                
3:15:25 PM                                                                                                                    
                                                                                                                                
Mr. Knapp discussed  slide 56: "You can't  debate the merits                                                                    
of a fiscal  proposal by only talking  about that proposal."                                                                    
He thought the  state needed to be  comparing different ways                                                                    
of doing things.  All the proposals involved  a change. They                                                                    
all  involved  doing  something   painful  such  as  cutting                                                                    
spending,  adding taxes,  or  cutting  dividends. He  argued                                                                    
that although none of the  options were appealing, something                                                                    
had to be done to fix  the state's deficit. The question was                                                                    
which alternative or mix of  things should the state choose.                                                                    
He  thought  the  conversation had  to  be  about  comparing                                                                    
alternatives.  He thought  people needed  to move  away from                                                                    
complaining about a proposal to offering suggestions.                                                                           
                                                                                                                                
Mr. Knapp  pointed to  slide 57:  "There are  many potential                                                                    
ways   to  address   Alaska's  fiscal   challenge  and   end                                                                    
unsustainable  draws  on  our savings."  He  explained  that                                                                    
there were several ways to  approach the issue, but they all                                                                    
involved  a   combination  of  the  unpleasant   options  of                                                                    
reducing spending,  increasing revenues,  cutting dividends,                                                                    
or  saving  less of  the  PF  earnings.  He thought  it  was                                                                    
important  to understand  that  if one  option  was off  the                                                                    
table  then more  of  the  other options  would  have to  be                                                                    
imposed. He  thought a combination  needed to  be considered                                                                    
rather than  talking about an  option by itself.  He thought                                                                    
finding  the  best  combination  should  be  the  focus.  If                                                                    
someone did  not want to  do option A,  of options A,  B, C,                                                                    
and D,  then more of  options B, C, and  D would have  to be                                                                    
exercised.                                                                                                                      
                                                                                                                                
Mr. Knapp moved to slide  58: "Fiscal projections can't tell                                                                    
us which proposals are 'best'":                                                                                                 
                                                                                                                                
   · They can tell us whether proposals are feasible and/or                                                                     
     sustainable                                                                                                                
                                                                                                                                
   · They can't tell us about other things that matter:                                                                         
        · Short-run economic effects                                                                                            
        · Long-run economic effects                                                                                             
        · Effects on government services                                                                                        
       · Relative effects on different income groups                                                                            
        · Relative effects on different regions                                                                                 
                                                                                                                                
                                                                                                                                
Mr. Knapp  reported that none of  the projections determined                                                                    
which  proposal   was  best.  They  indicated   whether  the                                                                    
proposals penciled out. He thought  the issues listed at the                                                                    
bottom of the slide were  what really mattered. Alaskans had                                                                    
widely varying  opinions about the  items. He  believed that                                                                    
showing the numbers  was a starting point  for beginning the                                                                    
rest  of  the  conversation   about  how  to  associate  the                                                                    
proposals with the things that  mattered. He thanked members                                                                    
for the opportunity to appear before the committee.                                                                             
                                                                                                                                
3:19:31 PM                                                                                                                    
                                                                                                                                
Representative Wilson agreed with  Mr. Knapp about the math.                                                                    
She wondered  where to  get the data  for each  plan showing                                                                    
how Alaskans  would be affected. She  listed the financially                                                                    
challenged and  large corporations. She noted  hearing about                                                                    
people having to  go on public assistance or  having to seek                                                                    
other means to make up  the difference when the dividend was                                                                    
cut. She was  uncertain where to get the  data showing which                                                                    
solution was best.                                                                                                              
                                                                                                                                
Mr. Knapp  thought that all  the hearings,  discussions, and                                                                    
testimony gathered  from different groups  provided feedback                                                                    
to lawmakers. He  thought much of the  information was being                                                                    
gathered  in the  legislative  process.  He suggested  there                                                                    
were certain  studies that could  be conducted.  He reported                                                                    
ISER  having  done  a  study  regarding  short-run  economic                                                                    
impacts.  The  study  determined   that  if  dividends  were                                                                    
reduced or  if taxes were  raised it had certain  effects on                                                                    
jobs and income.  In terms of data regarding  the effects on                                                                    
government services  of cutting the  budget, it was  the sum                                                                    
of a  million different options  of how the budget  could be                                                                    
cut and how reductions would  play out on schools, troopers,                                                                    
and other  services. Collecting the  data could  take years.                                                                    
He suggested  that legislators pay attention  to constituent                                                                    
feedback to decide on the  right balance of services and how                                                                    
much Alaskans were willing to  give up in taxes or dividends                                                                    
to pay  for them.  He thought  it would  be useful  to study                                                                    
certain kinds  of things  such as the  affects on  rural and                                                                    
urban  Alaska.  He  provided  a  hypothetical  scenario.  He                                                                    
thought  that listening  to constituents  was a  way to  get                                                                    
more accurate input.                                                                                                            
                                                                                                                                
3:23:40 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  asked  if he  would  suggest  trying                                                                    
several  different things  to balance  the budget  or trying                                                                    
only a couple  of things to see how it  affected the economy                                                                    
before  doing  more  things.  She   indicated  that  in  the                                                                    
previous  year  there  had  been  several  suggestions.  She                                                                    
thought that it  would have been difficult to  know what did                                                                    
not work with implementing several things at once.                                                                              
                                                                                                                                
Mr.  Knapp thought  the state  was running  out of  time and                                                                    
stated  that  the  legislature had  been  adjusting  to  the                                                                    
"financial problem" for  4 or 5 years.  He acknowledged that                                                                    
the  legislature had  done many  things to  reduce spending.                                                                    
However, the savings  had been depleting at a  rate of about                                                                    
$10 million per  day. He voiced that  some legislators might                                                                    
not want to "go into the  water too fast" but cautioned that                                                                    
some action had to be  taken quickly. He emphasized that the                                                                    
longer the legislature  failed to act, the  less money would                                                                    
be available,  the lower the  future earnings, the  more the                                                                    
state would be at risk, and  the more Alaskans would be left                                                                    
uncertain  about the  future. He  continued that  ideally it                                                                    
would be  good to move  slowly and carefully.  However, time                                                                    
was running out.                                                                                                                
                                                                                                                                
3:25:21 PM                                                                                                                    
                                                                                                                                
Representative   Kawasaki  referred   to   when  Mr.   Knapp                                                                    
mentioned  spending differently,  preventing the  state from                                                                    
spending  in  high  years  and  saving  in  lower  year.  He                                                                    
remembered when  he started in  2007 the state owed  the CBR                                                                    
billions of  dollars because it  had been spent  down. After                                                                    
2009 there  were changes to  oil taxes  and in the  price of                                                                    
oil. The  state had  huge surpluses which  were used  to pay                                                                    
back the CBR. Some money was  spent on things that might not                                                                    
have  been necessary.  He mentioned  the legislature  having                                                                    
replaced Ryan  Middle School in his  neighborhood because it                                                                    
was going  to fall in  an earthquake. He thought  some items                                                                    
were  necessary to  fund  after years  of  lean budgets.  He                                                                    
mentioned that there  had been talk about  adding a spending                                                                    
limit. He wondered if it was a viable option.                                                                                   
                                                                                                                                
Mr. Knapp was  not an expert on spending  limits. He thought                                                                    
it was  well worth  having the  discussion. However,  he did                                                                    
not  know  that  it  was  the  only  way.  There  were  real                                                                    
operational  problems with  spending limits.  He provided  a                                                                    
hypothetical  scenario. He  thought a  spending limit  was a                                                                    
blunt tool. He would not assume it was the best option.                                                                         
                                                                                                                                
3:29:05 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara asked Mr. Knapp  his opinion. There had been                                                                    
several job losses.  He asked if he would now  do as much as                                                                    
possible to fix the deficit rather than waiting.                                                                                
                                                                                                                                
Mr. Knapp responded  that the state was currently  in a fix.                                                                    
He agreed  that the state  was in a troubling  recession and                                                                    
that   legislators  needed   to   be   concerned  with   not                                                                    
aggravating the  circumstances based  on the  current fiscal                                                                    
situation. He noted  that the money was running  out and the                                                                    
legislature needed to think about  the future and to come up                                                                    
with a stable  way of dealing with the  state's finances. He                                                                    
stressed that the  legislature had to live  with the state's                                                                    
fiscal reality. Alaska was not  the federal government. In a                                                                    
recession the  federal government could print  money to keep                                                                    
the economy going,  but Alaska did not have  that option. He                                                                    
indicated that  he could not  advise the legislature  on the                                                                    
correct  approach but  maintained  that cutting  government,                                                                    
cutting  dividends, or  adding  taxes would  all cost  jobs.                                                                    
Some  people argued  that certain  things  would cost  fewer                                                                    
jobs. He  stated that reducing  government cut real  jobs in                                                                    
an obvious way. He claimed that  a lack of investment in the                                                                    
state would also cost jobs.  He suggested that if people did                                                                    
not see  a future in  Alaska they might leave.  People might                                                                    
leave if they  felt schools were not up to  par, which might                                                                    
result in more  lost jobs in ways that were  not as obvious.                                                                    
The state was in a fix and he did not know the answer.                                                                          
                                                                                                                                
Co-Chair Seaton  hoped the legislature  would find a  fix to                                                                    
the problem. He reviewed the agenda for the day.                                                                                
                                                                                                                                

Document Name Date/Time Subjects
HB 57 OP LFD Summary of Changes - Doc Comp between Gov Tech and Move.pdf HFIN 1/25/2017 1:30:00 PM
HB 57
HB 57 CS WorkDraft J version 1-23-17.pdf HFIN 1/25/2017 1:30:00 PM
HB 57
HB 59 MH CS WorkDraft vD Legal and LFD tech changes 1-19-17.pdf HFIN 1/25/2017 1:30:00 PM
HB 59
170125-HFIN talk - Gunnar Knapp.pdf HFIN 1/25/2017 1:30:00 PM
ISER Fiscal Plan Presentation HFIN