Legislature(2005 - 2006)SENATE FINANCE 532

02/16/2005 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SJR 6 FEDERAL MEDICAL ASSISTANCE REDUCTION TELECONFERENCED
Heard & Held
+= SB 97 SUPPLEMENTAL APPROPRIATIONS/CBR TELECONFERENCED
Scheduled But Not Heard
+= SB 98 SUPPLEMENTAL APPROPRIATIONS: FAST TRACK TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
9:17:01 AM                                                                                                                    
                                                                                                                                
Co-Chair Wilken chaired the remainder of the meeting.                                                                           
                                                                                                                                
     SENATE BILL NO. 98                                                                                                         
     "An   Act   making    supplemental   appropriations,    capital                                                            
     appropriations,  other  appropriations,  and reappropriations;                                                             
     amending  appropriations; making  appropriations to  capitalize                                                            
     funds; and providing for an effective date."                                                                               
                                                                                                                                
This was  the second  hearing for  this bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
The Committee  continued hearing presentations  from departments  on                                                            
the  budget requests  of  both  bills. The  Committee  referenced  a                                                            
spreadsheet  prepared by the Office  of Management and Budget  dated                                                            
February 7, 2005, outlining each request [copy on file].                                                                        
                                                                                                                                
Alaska Court System                                                                                                           
                                                                                                                                
     Item: 62                                                                                                                   
     Section: 16                                                                                                                
     Request Delivery Unit (RDU): Trial Courts                                                                                  
     Supplemental Need:  Therapeutic court funding coming from NCADD                                                            
     $18,900,   Technical  Improvement   grant  from  Alaska   Legal                                                            
     Services  $18,100, Youth for Justice grant $7,500  and Color of                                                            
     Justice grant $5,000.                                                                                                      
     $49,500 Statutory Designated Program Receipts                                                                              
                                                                                                                                
CHRIS  CHRISTENSEN,  Deputy Administrative  Director,  Alaska  Court                                                            
System, testified that  the requests would provide receipt authority                                                            
for  four grants  of  non-federal  funds. The  timing  is such  that                                                            
approval  could  not  be  addressed  through  the  normal  budgeting                                                            
process.                                                                                                                        
                                                                                                                                
Mr. Christensen  spoke to the Youth  for Justice grant sponsored  by                                                            
the  Constitutional  Rights  Foundation  that would  provide  travel                                                            
funds to  allow teachers  to attend  the 2005  Educating on  Law and                                                            
Democracy Conference  in Fairbanks.  The Foundation trains  teachers                                                            
how to teach civic courses to students.                                                                                         
                                                                                                                                
Mr. Christensen  next addressed  the travel  funds provided  through                                                            
the Color of Justice  grant. These funds would be  utilized to allow                                                            
Alaskan  Native students  to attend  a Color of  Justice program  in                                                            
Anchorage in  2005 to learn of career  opportunities in the  justice                                                            
system.  The National  Association  of  Women Judges  sponsors  this                                                            
program with  the intent  to encourage minority  students to  pursue                                                            
careers in  the justice field. The  program targets students  in the                                                            
seventh through the twelfth grades.                                                                                             
                                                                                                                                
Mr. Christensen  stated the technical  improvement grant  is a pass-                                                            
through from  the Alaska  Legal Services and  would provide  for the                                                            
installation  of  six  computers  at  superior  court  locations  in                                                            
Fairbanks,  Palmer,  Kenai,  Ketchikan,  Juneau and  Kodiak.  People                                                            
involved in family law  cases, such as divorce and child custody who                                                            
do not have legal  representation, could access the  Family Law Self                                                            
Help Center to obtain forms and other assistance as necessary.                                                                  
                                                                                                                                
Mr. Christensen  concluded  with the Juneau  Wellness Project  grant                                                            
that is also a pass through  of funding from the Juneau affiliate of                                                            
the National  Council on Alcoholism  and Drug Dependence  in support                                                            
of  the Juneau  Wellness  Court. A  wellness  court  similar to  the                                                            
Anchorage Wellness  Court is being established in  Juneau to address                                                            
misdemeanor offenses involving alcohol.                                                                                         
                                                                                                                                
Department of Law                                                                                                             
                                                                                                                                
     Item: 40                                                                                                                   
     Section: 10(b)                                                                                                             
     RDU: 1st Judicial District                                                                                                 
     Supplemental  Need:  Contractual  costs  for  a  prosecutor  to                                                            
     represent  the  Department  of Law  in the  Therapeutic  Courts                                                            
     program                                                                                                                    
     $21,400 SDPR                                                                                                               
                                                                                                                                
DAVID MARQUEZ, Acting Deputy Attorney General, Civil Division,                                                                  
Department of Law, read a statement into the record as follows.                                                                 
                                                                                                                                
     The Juneau affiliate  of the National Council on Alcoholism and                                                            
     Drug Dependence  has applied for and received  a grant from the                                                            
     United  States Department  of Transportation,  State  Community                                                            
     and  [indiscernible]  to develop  a wellness  court in  Juneau.                                                            
     These  therapeutic and wellness  courts are designed  to reduce                                                            
     recidivism  rate of  drunk drivers  and  other alcohol  related                                                            
     offenders.  The  program   features  a  diversion  in  process,                                                            
     treatment   and  monitoring  through  close  case  management.                                                             
     Wellness  courts  have  proven effective  in  reducing  alcohol                                                            
     related  fatalities  and  injuries.  The  mutual  goal  of  the                                                            
     Highway  Safety  Program  of  the federal  government  and  the                                                            
     NCADD.  Reductions are alcohol-related  injury [indiscernible]                                                             
     mission  and would result  in the further  benefit of  reducing                                                            
     costs  to the  criminal  justice system.  This  request is  for                                                            
     $21,312.50  in statutory designated program receipts  from this                                                            
     grant   and   would  fund   the   services   of  approximately                                                             
     [indiscernible]  contractor to represent the  Department of Law                                                            
     in the program.                                                                                                            
                                                                                                                                
     Item: 39                                                                                                                   
     Section: 10(a)                                                                                                             
     RDU: Criminal Appeals/Special Litigation Component                                                                         
     Supplemental  Need:  Outside counsel  for appeal  costs in  the                                                            
     Murtaugh  case related  to defense  of victim's  rights;  FY 06                                                            
     lapse date.                                                                                                                
     $50,000 general funds                                                                                                      
                                                                                                                                
Mr. Marquez read a statement into the record as follows.                                                                        
                                                                                                                                
     This is  a class action lawsuit  brought by several  members of                                                            
     the    [indiscernible]    of    Anchorage    challenging    the                                                            
     constitutionality  of the statutory rights of victims in Alaska                                                            
     with regard to disclosure  and notice when contacted by defense                                                            
     attorneys  and their  investigators. The  plaintiffs argue  the                                                            
     victims  rights statutes violate  the equal protection  and due                                                            
     process  rights of  defendants  and defense  council. It  had a                                                            
     trial in  Superior Court completed this past  summer a decision                                                            
     is  expected very  soon. They  will result  in an appeal  we're                                                            
     sure no matter who  wins. The legislature appropriated $175,000                                                            
     for the Criminal Division  [to employ] outside counsel for this                                                            
     case as well  other matters. The original appropriation  is now                                                            
     exhausted.  We are requesting $50,000 be added  to the original                                                            
     appropriation  with  a  lapse extension  to  FY 06  or  another                                                            
     appropriation be made to achieve the same end.                                                                             
                                                                                                                                
Senator Hoffman  asked if the requested amount is  anticipated to be                                                            
the total needed for this case in the future.                                                                                   
                                                                                                                                
DEAN  GUANELI,  Chief Assistant  Attorney  General,  Legal  Services                                                            
Section-Juneau,  Criminal  Division,  Department  of Law,  testified                                                            
this request is to fund  the total amount billed to date. It has yet                                                            
to be determined  whether the Department  of Law or outside  council                                                            
would  handle  the  appeals  process. The  trial  went  longer  than                                                            
anticipated.                                                                                                                    
                                                                                                                                
Senator Hoffman  noted this appropriation would lapse  to FY 06, and                                                            
asked whether additional funding would be required for FY 06.                                                                   
                                                                                                                                
Mr. Guaneli replied that additional funds could be required.                                                                    
                                                                                                                                
Senator Olson asked the  cost in the event the State did not prevail                                                            
in this case and  if another request were filed the  following year.                                                            
                                                                                                                                
Mr. Guaneli responded that  the costs in question are related to the                                                            
appeal to the  Supreme Court, which  would be "significantly  less."                                                            
                                                                                                                                
Department of Revenue                                                                                                         
                                                                                                                                
     Item: 42                                                                                                                   
     Section: 12                                                                                                                
     RDU: Tax Division                                                                                                          
     Supplemental Need: Increased tobacco tax enforcement costs                                                                 
     $395,500 general funds                                                                                                     
                                                                                                                                
SUSAN  TAYLOR,  Director,   Division  of  Administrative   Services,                                                            
Department  of Revenue, outlined  her testimony  into the record  as                                                            
follows.                                                                                                                        
                                                                                                                                
     Background                                                                                                                 
        · Legislature included fiscal note funding for the                                                                      
          Governor's  initial Tobacco  tax, licensing and  penalties                                                            
          bill  that  was included  during the  regular legislative                                                             
          session  in  the  amount  of  $828,100  to  implement  the                                                            
          provisions  in the  new law. However,  the bill failed  to                                                            
          pass  the legislature  thereby  voiding  that fiscal  note                                                            
          appropriation.                                                                                                        
        · The Governor called the legislature into special session                                                              
          and during the special session the tobacco tax, licensing                                                             
          and  penalties bill did pass with some changes made to the                                                            
          Governor's  original bill. However, a  fiscal note did not                                                            
          pass during the special session.                                                                                      
        · This request would fund the department's existing tobacco                                                             
          tax  enforcement program  and reconcile the legislature's                                                             
          actions.                                                                                                              
        · Based on past experience in Alaska and in other states,                                                               
          the  department is concerned  that if it does not  have an                                                            
          effective   cigarette  tax   stamp  enforcement   program,                                                            
          cigarette bootlegging will flourish in Alaska.                                                                        
        · When the state of Michigan raised its tax rate, revenues                                                              
          actually decreased due to lack of enforcement.                                                                        
        · When the state of Hawaii enacted cigarette tax stamp                                                                  
          legislation  it hired 11  new enforcement officers.  After                                                            
          one  year of active  enforcement,  Hawaii's cigarette  tax                                                            
          revenue  increased  nearly  50 percent  from the  previous                                                            
          year.                                                                                                                 
     The Department is asking for this funding to be annualized in                                                              
     its FY 06 budget request.                                                                                                  
                                                                                                                                
Senator  Hoffman  understood it  was  expected that  revenues  would                                                            
decrease because the higher  tax would cause people to quit smoking.                                                            
                                                                                                                                
Ms. Taylor affirmed the  intent was that cigarette consumption would                                                            
decline as a result  of the higher tax; however, it  was anticipated                                                            
that the increased tax would generate more revenue.                                                                             
                                                                                                                                
Senator Hoffman asked the  amount the additional tax would generate.                                                            
                                                                                                                                
Ms. Taylor listed the initial  estimates of $6.3 million increase in                                                            
FY 05, $20.8  million in  FY 06, $27.4 million  in FY 07,  and $33.8                                                            
million in FY 08 and thereafter.                                                                                                
                                                                                                                                
Senator Hoffman  noted these were  the amounts that the legislature                                                             
"approved". He asked the  revenue amounts if enforcement legislation                                                            
were not adopted.                                                                                                               
                                                                                                                                
Ms. Taylor deferred to the next witness.                                                                                        
                                                                                                                                
JOHANNA BALES,  Program Manager for Tobacco taxes,  and Excise Audit                                                            
Manager,  Tax  Division,   Department  of  Revenue,   testified  via                                                            
teleconference  from an offnet location to the anticipated  12 to 13                                                            
percent consumption  decrease as a  result the tobacco tax  increase                                                            
implemented  in 1997.  She stressed  that the  anticipated  revenues                                                            
decreased  22 percent,  which  could not  be justified  solely  from                                                            
people  quitting  smoking.   Instead  it  was  determined  that  the                                                            
additional  nine percent decline  was the  result of bootlegging  of                                                            
cigarettes.  She expected the same  would occur with the  recent tax                                                            
increase if  enforcement measures  were not taken. This occurred  in                                                            
other states  that implemented  tobacco tax  increases, such  as New                                                            
Jersey, which  realized a 14 percent higher decrease  than projected                                                            
due to bootlegging activities.   An enforcement program is necessary                                                            
to prevent these declines.                                                                                                      
                                                                                                                                
Senator Hoffman  asked if all six of the proposed  new positions are                                                            
expected to be temporary or ongoing.                                                                                            
                                                                                                                                
Ms. Bales expected funding of the positions to be ongoing.                                                                      
                                                                                                                                
Co-Chair Green asked whether  collection enforcement for other types                                                            
of taxes is funded  from the revenue of those taxes,  in the form of                                                            
statutory designated  program receipts.  She asked if this  could be                                                            
done with the tobacco tax program.                                                                                              
                                                                                                                                
Ms. Taylor  responded  that the  director  of the  Tax Division  has                                                            
advocated  for this. Currently,  tax receipts  are not budgeted  for                                                            
receipt  supported services.  Ms.  Taylor expressed  willingness  to                                                            
make necessary changes to accomplish this.                                                                                      
                                                                                                                                
Co-Chair Wilken cautioned  against the possible diversion of tobacco                                                            
funds from the school fund.                                                                                                     
                                                                                                                                
Ms. Taylor informed  that a portion of the tobacco  tax receipts are                                                            
designated  to  the  school  fund,   a practice   implanted  in  the                                                            
territorial  days. A statutory change  would be required  to utilize                                                            
the revenues differently.                                                                                                       
                                                                                                                                
Co-Chair Wilken assured that the matter would be addressed.                                                                     
                                                                                                                                
Co-Chair  Green  compared  this  situation   to funding   litigation                                                            
efforts  to increase  royalties from  oil development,  as both  are                                                            
attempts to increase revenue.                                                                                                   
                                                                                                                                
Senator  Stedman questioned  the  "timing  of the  cash flows"  with                                                            
regard to  the supplemental  appropriations.  It "seemed to  be more                                                            
beneficial"  to appropriate  funds in  the FY 06  budget as  much as                                                            
possible.                                                                                                                       
                                                                                                                                
Ms. Taylor  responded  that the  Department is  currently  expending                                                            
funds over the amount authorized  for tobacco tax enforcement for FY                                                            
05.  Staff  has been hired, additional  stamps have been  purchased,                                                            
and a  reimbursable services  agreement has  been entered into  with                                                            
the Department  of  Public Safety.  Therefore,  the requested  funds                                                            
must be appropriated for  FY 05 expenditure. In addition, funds must                                                            
be "annualized or appropriated" in the FY 06 budget.                                                                            
                                                                                                                                
Senator Stedman  asked the amount  of the requested funding  already                                                            
expended, and  the amount anticipated  would be expended  before the                                                            
end of  the current  fiscal  year. He also  asked the  plan if  this                                                            
supplemental appropriation were not approved.                                                                                   
                                                                                                                                
Ms. Taylor  replied that  the Department has  spent $83,600  to date                                                            
and  "projects"  spending  an additional  $341,700  in  FY 05.  This                                                            
amount is  higher than  the requested $395,000  with the  Department                                                            
intending  to "manage that  spending down".  If the legislature  did                                                            
not approve  the supplemental funding  request or the FY  06 funding                                                            
request,  the  Department  would   be required   to  reevaluate  its                                                            
actions. She remarked,  "We would be in a difficult  spot" given the                                                            
lateness  of the fiscal year.  She continued,  "The earlier  you can                                                            
plan to manage down a shortfall the better it is."                                                                              
                                                                                                                                
9:39:39 AM                                                                                                                    
                                                                                                                                
The  Committee   next  addressed   the  supplemental  appropriation                                                             
requests related to the proposed natural gas pipeline.                                                                          
                                                                                                                                
STEVE  PORTER,  Deputy  Commissioner,   Department  of  Revenue  and                                                            
Member, and  member of  the State's Stranded  Gas negotiating  team,                                                            
testified  via teleconference   from Anchorage  into  the record  as                                                            
follows.                                                                                                                        
                                                                                                                                
     First  I want to  thank you  for your  previous investment  and                                                            
     support  of  the State's  team  in  the  development  of a  gas                                                            
     pipeline.  Negotiating  a contract that will result in bringing                                                            
     the State  of Alaska's stranded  gas to market is every  bit as                                                            
     large  a project  as  anyone  estimated it  to  be. Perhaps  no                                                            
     estimate fully appreciated  the scope of what success requires.                                                            
     The  tasks are  huge  and multi-layered,  and  the numbers  are                                                            
     profoundly  large.  The  total sales value  of just the  proven                                                            
     North  Slope natural gas  reserves would  be $210 billion  at a                                                            
     price of $6/mmcfg.                                                                                                         
                                                                                                                                
     We have a  prepared presentation to support the  budget request                                                            
     being discussed today.   However we first want to tell you what                                                            
     progress has been  made with the money you have appropriated to                                                            
     the  project thus far.   SB241 appropriated  $1.7 million,  and                                                            
     that   funding   was   very   timely.    Subsequent   to   that                                                            
      appropriation, SB283 appropriated another $10 million.                                                                    
                                                                                                                                
     With  that funding  we began  our research  regarding the  many                                                            
     ways  we could enhance  the prospect  of bringing Alaska  North                                                            
     Slope  gas to market.  The primary areas  of research  centered                                                            
     around  sharing risk through  various financial structures  and                                                            
     different  levels  and types  of ownership  participation.  Our                                                            
     effort  at expanding  and  identifying the  additional  options                                                            
     available  to us was quite successful.  We called this  portion                                                            
     of our research  "Defining the Boundaries". From  that Defining                                                            
     the   Boundaries   research   we   identified   a   number   of                                                            
     opportunities  for  sharing  risk and  increasing  the  overall                                                            
     chances  of moving  an Alaska  North  Slope Gas  pipeline  to a                                                            
     successful  conclusion.   Based on  the  issues  identified  we                                                            
     conducted  research  on  the  following  areas during  what  we                                                            
     called the Risk Assessment and Analysis Phases.                                                                            
                                                                                                                                
     Gas  price. We obtained  gas price forecasts,  created  our own                                                          
     forecast  and modeled  the range  of impacts  that could  occur                                                            
     based  on  those   forecasts.    Because  of  the  substantial                                                             
     volatility of future  gas prices we needed to know the risks of                                                            
     what occurs in a low  price scenario and the potential benefits                                                            
     we would  receive from gas ownership in a high  price scenario.                                                            
     And we needed to determine  what we thought the expected future                                                            
     price  of gas was going to be.  We also realized that  whatever                                                            
     price  we  projected  we would  be wrong.  So  our negotiation                                                             
     strategy should take that into consideration.                                                                              
                                                                                                                                
     Risk Analysis - (shipper risk)                                                                                           
     Taking  a risk position  in ownership  of the gas. The  shipper                                                            
     risk needs  to be well understood  by the state.     There is a                                                            
     substantial  amount of risk in converting our  rights to gas in                                                            
     value  to  gas  in  kind  and  having  the  responsibility   of                                                            
     marketing   that  gas.    Recognizing  there  are  significant                                                             
     potential  financial impacts, both positive and  negative, from                                                            
     taking  a shipper risk position,  we have focused a  portion of                                                            
     our research on that risk.                                                                                                 
                                                                                                                                
     Risk Analysis - (Pipeline ownership)                                                                                     
     Taking  a risk  position in ownership  of the  gas pipeline  is                                                            
     substantially  different  from risk in  shipping the gas.  They                                                            
     are  two  independent  issues. We  can  take an  ownership  and                                                            
     marketing position  of our gas (take in kind) without taking an                                                            
     ownership position  in the pipeline. The opposite is also true.                                                            
     We  can take  an ownership  position  in the  pipeline  without                                                            
     taking  a risk position  on the  gas (take  in value).  We have                                                            
     conducted  a substantial  amount of  research regarding  owning                                                            
     the  pipeline. There  are both political  and economic  reasons                                                            
     for doing so. But  there is the risk of owning some part of the                                                            
     pipeline.  That  risk  is  compounded  by  the  uncertainty  of                                                            
     ownership  potentially  for an extended  period of time  during                                                            
     which  any number of market changes  can be expected  to occur.                                                            
     We  also conducted  research on  the impacts  of taking  a risk                                                            
     position  in  both  pipeline  ownership  and  as an  owner  and                                                            
     marketer of gas.                                                                                                           
                                                                                                                                
     Cost Overrun Risk                                                                                                        
     There  are several  issues that  could result  in an  increased                                                            
     risk of  cost overrun, e,g.,  cost of steel (volatility  of the                                                            
     price of steel), labor  costs (labor negotiations and strikes),                                                            
     time  delays due  to regulatory,  environmental,  or  logistics                                                            
     problems,  etc. The state must have a reasonable  understanding                                                            
     of each  of these issues to understand  the risk it  would take                                                            
     if it  decided to take an ownership  position in the  pipeline.                                                            
     It must also  understand the potential for cost  overruns as it                                                            
     examines its position on tariff structure.                                                                                 
                                                                                                                                
     Tariff structure and the FERC process                                                                                    
      As   you  are  aware,   we  were  quite   successful   in  our                                                            
     presentation  of our positions  and concerns to the  FERC. They                                                            
     were very  responsive to our  proposals. We need to  spend time                                                            
     understanding the  recently published FERC regulations and then                                                            
     apply  them to  what we should  negotiate in  any stranded  gas                                                            
     contract.                                                                                                                  
                                                                                                                                
      Tariff  issues are still an  important element of each  of the                                                            
     Stranded Gas Contract  negotiations and will require additional                                                            
     contractual  support  in  determining  the  proper negotiating                                                             
     position   the  State   needs   to  take  in   each  of   these                                                            
     negotiations.                                                                                                              
                                                                                                                                
     Alaska State Gas Entity                                                                                                  
     If the  state takes an ownership  position in the pipeline,  it                                                            
     will  also become  a co-owner  of a pipeline  company with  the                                                            
     applicant.  We  need  to determine  the  form of  ownership  in                                                            
     addition  to the amount of ownership. Should  Alaskans be given                                                            
     an opportunity  to participate  in the  pipeline? What  form of                                                            
     ownership  should  that take?  We  have conducted  research  on                                                            
     these  issues  and will  need to  continue to  fund  additional                                                            
     research  as the form and amount of ownership  becomes clearer.                                                            
                                                                                                                                
     Pipeline Funding                                                                                                         
     If we determine  that we want to take an ownership  position in                                                            
     the  pipeline,  we need  to develop  a  plan for  funding  that                                                            
     participation.  How do the federal  loan guarantees  affect our                                                            
     financing  plan? Can  we maintain  our tax  exempt status?  All                                                            
     these questions and  more need to be answered in a success case                                                            
     scenario.                                                                                                                  
                                                                                                                                
     Socio-economic Report                                                                                                    
     We  budgeted  $250 thousand  for  the  socio-economic  analysis                                                            
     being  conducted  on  behalf  of  the  municipalities  for  the                                                            
     ExxonMobil/ConocoPhillips/BP   proposal. That  report has  been                                                            
     completed  and we have extended the contract  for an additional                                                            
     $50  thousand to  support  and coordinate  the municipalities'                                                             
     participation  in  the  public review  process.    We have  not                                                            
     requested the contractor  to complete a socio-economic analysis                                                            
     of  the TransCanada  proposal because  TransCanada has  not yet                                                            
     approved it as a reimbursable item.                                                                                        
                                                                                                                                
     Alberta Government                                                                                                       
     We have  met with and  will continue  to meet with the  various                                                            
     Canadian  government entities  to see if there are ways  we can                                                            
     jointly support positions  or actions that will have a positive                                                            
     effect on the success of getting a pipeline built.                                                                         
                                                                                                                                
     Canada Pipeline Issues                                                                                                   
     There has  been quite a bit of information in  the public media                                                            
     regarding  the conflict in Canada over ownership  and rights to                                                            
     build  the  Canadian  portion  of  an Alaska  North  Slope  Gas                                                            
     pipeline.  The issues surrounding Canadian ownership  fall into                                                            
     the  following categories:  1)  the conflict  over who has  the                                                            
     ability/right  to build the pipeline,  2) if the state  has the                                                            
     right  to participate as an owner  of the pipeline -  what form                                                            
     of ownership  should that take,  3) legal and regulatory  risks                                                            
     of building  the pipeline, e.g.,.  aboriginal land claims  etc.                                                            
     Those  are all issues the state  will need to understand  as we                                                            
     move the Canadian portion of the project.                                                                                  
                                                                                                                                
     Understand the applicant's perspective on economics                                                                      
     This  is probably  one  of the  most  important  pieces of  our                                                            
     research.  We have  heard the  legislature and  public say  "We                                                            
     want  to provide  the applicant  with sufficient  incentive  to                                                            
     move  the project  forward,  but  no more."  To  come close  to                                                            
     meeting  that  standard we  need  sufficient knowledge  of  the                                                            
     economic  capabilities  of the applicant,  where their  margins                                                            
     are, and  what the applicant has accepted as  economic in other                                                            
     parts of  the world.  What is their cost of capital?   How much                                                            
     risk do they  perceive and how much can they  absorb? What will                                                            
     the credit rating  agencies say about any investment they make?                                                            
      What alternative  investments will they be required  to forego                                                            
     if they make  a commitment to participate in  this project? And                                                            
     we need to be able  to apply that information to a mega project                                                            
     that  is  so  large  that  there  are  no comparable   projects                                                            
     anywhere  else in the  world. This is  a large undertaking  and                                                            
     requires  a substantial amount  of analysis. Most of  this work                                                            
     has been done because  we needed this perspective to be able to                                                            
     put a proposal on the table in the producer negotiations.                                                                  
                                                                                                                                
     Contractor support for negotiations                                                                                      
     There are three forms  of support that we have used thus far in                                                            
     the  negotiations:   1)  negotiations  support  -  1)  we  have                                                            
     contracted  for and continue to use the expertise  of Dr. Pedro                                                            
     Van  Meurs   and  his  team   to  support  us  in  the   actual                                                            
     negotiations.  2)  Expert analysis  and modeling.  We have  and                                                            
     will  continue to use  analytical experts  as we fine-tune  our                                                            
     negotiating position  in each of the contract negotiations. And                                                            
     3) We are now at a  stage where each side's lawyers are regular                                                            
     participants  in  the negotiations.  We  expect  each of  these                                                            
     forms of negotiations  support to continue. We would expect the                                                            
     legal  support  to  increase  and our  request  for  additional                                                            
     funding recognizes that need.                                                                                              
                                                                                                                                
     Alternative proposal analysis                                                                                            
     While  we are negotiating with  the applicants under  the SGDA,                                                            
     we also have  a responsibility as the sovereign  of encouraging                                                            
     and supporting  any other proposal that may bring  Alaska North                                                            
     Slope Gas  to market. That encouragement and  support generally                                                            
     has  taken the  form of economic  evaluation  and analysis  and                                                            
     feedback  to  the parties  to  help  them move  their  projects                                                            
     forward.  A good example of this support is the  Alaska Gasline                                                            
     Port Authority  proposal. We  have volunteered to review  their                                                            
     project  proposal   and  give  them  feedback  on  the  overall                                                            
     economics of their  proposal as well as express any concerns we                                                            
     have with the overall viability of their project.                                                                          
                                                                                                                                
     In addition  we are supporting  the work of the Alaska  Natural                                                            
     Gas Development  Authority in their evaluation  of the economic                                                            
     viability  of bringing Alaska North Slope Gas  to tidewater and                                                            
     developing  an LNG project.  They are  also doing the  leg work                                                            
     necessary  to make sure a spur gas pipeline to  Cook Inlet will                                                            
     be permitted  and ready for any  alternative that successfully                                                             
     brings Alaska North Slope Gas to market.                                                                                   
                                                                                                                                
     Reimbursement                                                                                                            
     One of the goals of  the State was to make sure we received the                                                            
     maximum  amount  we could  from  project applicants  under  the                                                            
     reimbursement  provisions of  the SGDA. We billed and  received                                                            
     in reimbursement from  ExxonMobil/ConocoPhillips/BP the maximum                                                            
     amount  available  under the  Act of  $1.5 million.  The  state                                                            
     continues  to be  reimbursed also  by Transcanada,  and DNR  is                                                            
     tracking that reimbursement.                                                                                               
                                                                                                                                
     Now  that  we  have  generally  discussed   what  the  previous                                                            
     appropriations  have  been used  for, I  would like  to take  a                                                            
     couple  of minutes  to explain  where we  are conceptually.  We                                                            
     have  talked  about  understanding  risks,   understanding  the                                                            
     applicants' economic  perspective, understanding the volatility                                                            
     of price and cost  elements. Think of this timeframe as getting                                                            
     the State  to the point of being able to put  a proposal on the                                                            
     table  with  the  project  applicants.  And  we have  placed  a                                                            
     proposal   on   the  table   in  the   Exxon/ConocoPhillips/BP                                                             
     negotiations and received  a counter proposal from them. We are                                                            
     also  developing a  proposal  with TransCanada.  Each of  these                                                            
     negotiations  will  require  a substantial  amount  of work  to                                                            
     bring a SGDA contract to the legislature.                                                                                  
                                                                                                                                
     In  the near  term  the  current activities  in  support  these                                                            
     negotiations   will  include   substantial  legal  support   in                                                            
     negotiating   the  fiscal   contracts   and  other   associated                                                            
     contracts  and exhibits necessary to bring a  contract proposal                                                            
     to the legislature.  In addition each variation  of fiscal term                                                            
     negotiations  may require  additional  analytical support  from                                                            
     our contractors.                                                                                                           
                                                                                                                                
     Once we have  a contract to present to the legislature  we need                                                            
     to prepare  a Commissioner's  finding  that the contract  is in                                                            
     the fiscal  interests of the State. All of the  reports we have                                                            
     generated   will  be  used  to  support  the   finding  of  the                                                            
     Commissioner of Revenue.   This finding will go out for 30 days                                                            
     of public comment  period along with the proposed contract. The                                                            
     Commissioner will  then respond to those comments and bring the                                                            
     final fiscal finding  and contract to you for ratification. The                                                            
     process  may well  entail  going back  to the  applicant for  a                                                            
     refinement of the  agreement. The request we have placed before                                                            
     you today  will provide the funding  for us to accomplish  this                                                            
     process.                                                                                                                   
                                                                                                                                
     If we are successful,  we also must consider what happens next.                                                            
     If we decide to take  an ownership interest in the pipeline, we                                                            
     could  almost  immediately  find  ourselves  in  a partnership                                                             
     relationship with  an applicant attempting to build a pipeline.                                                            
     In  order  to  be  effective  in  that  new  entity  the  state                                                            
     representatives  need to be ready  to make financial  and other                                                            
     decisions  necessary to move  the project forward timely.  That                                                            
     is  why we  have  requested funding  to  begin  to develop  the                                                            
     State's  organization  that will  need  to be  in place  almost                                                            
     immediately upon ratification of any contract.                                                                             
                                                                                                                                
     As  a closing point  that needs  to be made,  we hope  everyone                                                            
     understands   that   capital   funding   of  state   gas   line                                                            
     participation  cannot  be  determined  at this  time.   When  a                                                            
     determination   is  made  regarding  the  type   and  level  of                                                            
     participation  that the state  will take in a gas pipeline,  we                                                            
     will come  back to the legislature  with a financing  structure                                                            
     and  a corresponding  appropriation request.  Depending  on the                                                            
     level   of   state  participation    that  request   could   be                                                            
     substantial.                                                                                                               
                                                                                                                                
     Thank   you  for  your   continued  support   of  the   State's                                                            
     participation in the Stranded Gas negotiations.                                                                            
                                                                                                                                
Co-Chair Wilken noted the requests for supplemental appropriations                                                              
related to the development of a natural gas pipeline total                                                                      
approximately $18 million.                                                                                                      
                                                                                                                                
Department of Law                                                                                                             
                                                                                                                                
     Item: 25                                                                                                                   
     Section: 7(b)                                                                                                              
     RDU: Civil Division, Oil, Gas and Mining                                                                                   
     Supplemental  Need: Legal costs  for work related to  the state                                                            
     gas  pipeline  and  to  bringing North  Slope  natural  gas  to                                                            
     market, and other oil and gas projects for FY 05 and FY 06                                                                 
     $9,000,000 general funds                                                                                                   
                                                                                                                                
PHILLIP REEVES, Assistant Attorney General, Oil, Gas and Mining                                                                 
Section, Civil Division, Department of Law, read the following                                                                  
statement into the record.                                                                                                      
                                                                                                                                
     The Department  of Law is dependent on a substantial  amount of                                                            
     assistance from outside  legal council in the on-going stranded                                                            
     gas negotiations.                                                                                                          
                                                                                                                                
     As the senators  are aware, the State is currently  involved in                                                            
     two,  parallel  negotiations  under the  Stranded  Gas Act  (AS                                                            
     43.82)                                                                                                                     
                                                                                                                                
     Both  of  those  negotiations  contemplate   a  possible  State                                                            
     ownership  interest  in  the  pipeline  project.  We  are  thus                                                            
     drafting and negotiating  terms of the several legal agreements                                                            
     that  would  be required  for  the State  to participate  as  a                                                            
     partner in the pipeline project.                                                                                           
                                                                                                                                
     The individual agreements will include at least:                                                                           
          The Stranded Gas Agreement                                                                                            
          A Business Entity Agreement                                                                                           
          A Project Financing Agreement                                                                                         
          A Construction Agreement                                                                                              
          An Operating Agreement, and                                                                                           
          A Gas Balancing Agreement                                                                                             
                                                                                                                                
     The  Stranded   Gas  Agreement(s)   and  the  Business   Entity                                                            
     Agreement(s)  [and Project Financing  Agreement(s)]  (currently                                                            
     anticipated  to form and LLC owned jointly by  the Stranded Gas                                                            
     sponsor  company  and  the  State]  are the  current  focus  of                                                            
     intensive  contract development  work and negotiations  at this                                                            
     time.                                                                                                                      
                                                                                                                                
     Necessity for "Fast-Track" Supplemental Funding                                                                            
                                                                                                                                
     The  Department of  Law has  already expended  essentially  its                                                            
     entire Oil  and Gas contract services appropriation  for fiscal                                                            
     year  2004 -  2005, due to  the unanticipated  additional  work                                                            
     arising from:                                                                                                              
        · Participation in two simultaneous Stranded Gas                                                                        
          negotiations; and                                                                                                     
        · Consideration of State partnership in the NS gas pipeline                                                             
          project, which necessitates development of the Business                                                               
          Entity and Financing Agreements.                                                                                      
                                                                                                                                
     The early  expenditure of the  contract services appropriation                                                             
     work on  the NS gas pipeline  has also depleted contract  funds                                                            
     that  were  earmarked   for use  on  other,  non-gas   pipeline                                                            
     projects.  Those  contract  services  funds:  utilized  on  oil                                                            
     royalty reopeners,  TAPS oil pipeline matters, and in-state gas                                                            
     pipeline  matters, also need to be supplemented  in this fiscal                                                            
     year.                                                                                                                      
                                                                                                                                
     The Department  of Law is therefore  asking for a supplemental                                                             
     appropriation   of  $9,000,000  for  legal  services   on  work                                                            
     relating  primarily to the NS  gas pipeline project.  (Intended                                                            
     to cover needs through the end of the next fiscal year.)                                                                   
                                                                                                                                
Senator  Hoffman asked  how much of  $9 million  requested would  be                                                            
utilized for FY 05 expenditures.                                                                                                
                                                                                                                                
Mr. Reeves replied  that the amounts are not delineated  because the                                                            
projects   are   ongoing.   A  significant   amount   is   necessary                                                            
immediately, as the Department  has exhausted available funding. The                                                            
intent  is  to submit  a  proposal  to the  legislature  during  the                                                            
current session  and therefore  more funds  would be expended  in FY                                                            
05.                                                                                                                             
                                                                                                                                
Co-Chair Wilken asked the  consequences if the $27 million requested                                                            
for  pipeline-related  supplemental   and  FY  06  expenditure  were                                                            
appropriated  to  the Legislative  Budget  and Audit  Committee  for                                                            
distribution.                                                                                                                   
                                                                                                                                
Ms. Taylor replied  that the Department of Revenue  would not oppose                                                            
receiving   funding  through  the   Legislative  Budget   and  Audit                                                            
Committee. However, the  programs operate with limited staff and the                                                            
process  of receiving allocations  from the  Legislative Budget  and                                                            
Audit  Committee   would  create   an  administrative  burden.   The                                                            
Department has developed  a comprehensive tracking method to account                                                            
all   expenditures.   She  advocated   against   Co-Chair   Wilken's                                                            
suggestion and recommended  instead that the funding be appropriated                                                            
directly to  the departments. She  suggested a management  reporting                                                            
system could  be implemented  to keep the  legislature appraised  of                                                            
all expenditures.                                                                                                               
                                                                                                                                
10:00:17 AM                                                                                                                   
                                                                                                                                
Department of Natural Resources                                                                                               
                                                                                                                                
     Item: 26                                                                                                                   
     Section: 7(c)(1)                                                                                                           
     RDU: Capital                                                                                                               
     Supplemental Need: Gas pipeline risk analysis and royalty                                                                  
     issues                                                                                                                     
     $2,500,000 general funds                                                                                                   
                                                                                                                                
NICO BUS, Acting Director,  Division of Support Services, Department                                                            
of Natural  Resources, testified via  teleconference from  an offnet                                                            
location that $1 million  of this request would be utilized for risk                                                            
analysis.  The  Department   would  contract  for  assistance   with                                                            
commercial  marketing  and mitigation  of  the ownership  risk.  The                                                            
remaining $1.5 million  would be expended to address royalty issues.                                                            
                                                                                                                                
MARK  MYERS,  Director,  Division  of Oil  and  Gas,  Department  of                                                            
Natural  Resources,  testified  via teleconference  from  an  offnet                                                            
location  that  many  of the  negotiations  relate  to  the  State's                                                            
ownership  and physical  possession  of the  natural gas  up to  the                                                            
point of  actual marketing  of the gas. This  mitigates risk  to the                                                            
producers and  owners of the pipeline.  Under those structures,  the                                                            
State  is a  "commercial entity"  unlike  any previous  practice  in                                                            
Alaska. It is  important to fully understand the risks  involved and                                                            
to develop  a commercial structure.  The State would be responsible                                                             
for the gas  and must consider the  conversion of uncertain  royalty                                                            
rates  as a  net profit  share  and determine  the  capacity of  the                                                            
pipeline, the  amount of gas that  must be contracted and  marketed.                                                            
This requires  the State to change  the lease contracts procedures.                                                             
                                                                                                                                
     Item: 27                                                                                                                   
     Section: 7(c)(2)                                                                                                           
     RDU: Capital                                                                                                               
     Supplemental Need: Gas pipeline corridor geologic hazards and                                                              
     resource evaluation                                                                                                        
     $2,000,000 general funds                                                                                                   
                                                                                                                                
Mr. Bus  explained  this is  a $6 million  general  fund request  to                                                            
allow  the Department  to  assess the  geological  hazards,  mineral                                                            
potential  and  construction   needs  for  a  natural  gas  pipeline                                                            
corridor   from  Delta  Junction   to  the   Canadian  border.   The                                                            
information  garnered from  this study would  aid in the design  and                                                            
construction  of  the  pipeline  and  would  be  useful  for  future                                                            
development,  such as  the proposed  Alaska Railroad  extension  and                                                            
other  public and  private development.  The study  would include  a                                                            
peer-reviewed  report that  would evaluate  an approximate  ten-mile                                                            
wide corridor.                                                                                                                  
                                                                                                                                
Co-Chair Wilken  noted the amount  requested for this purpose  is $2                                                            
million appropriated  in FY 05, and $2 million appropriated  each in                                                            
FY 07 and FY 08.                                                                                                                
                                                                                                                                
Mr. Bus confirmed.                                                                                                              
                                                                                                                                
ROD COMMBELLICK,  Associate  Director  for Operations,  Division  of                                                            
Geological   and  Geophysical   Surveys,   Department   of   Natural                                                            
Resources,  testified via teleconference  from Fairbanks,  that this                                                            
funding would  allow the Division to conduct an airborne  geological                                                            
study to collect  data to use to compile detailed  maps and identify                                                            
potential  engineering  problems related  to the  construction  of a                                                            
natural gas pipeline.  He understood that the proposed  corridor has                                                            
not  been finalized  as  the location  of  a natural  gas  pipeline;                                                            
however other developments  would occur along the 200-mile corridor,                                                            
including the  Pogo Mine and missile  defense activities.  Currently                                                            
geophysical   knowledge  of   the  corridor   is  limited   and  the                                                            
information  garnered from the study  would become public  knowledge                                                            
for  multiple  uses.   The  intent  is  to  conduct   the  study  in                                                            
conjunction  with the proposed  natural gas  pipeline, in the  event                                                            
the  pipeline  is  constructed  along this  route.  The  project  is                                                            
anticipated to take approximately three years to complete.                                                                      
                                                                                                                                
Senator Hoffman  asked the percentage  of the affected lands  are in                                                            
private  ownership and  what notification  would  be given to  those                                                            
landowners  of the  possibility of  the establishment  of a  10-mile                                                            
wide corridor.                                                                                                                  
                                                                                                                                
Mr. Commbellick  replied  the corridor crosses  primarily state  and                                                            
privately  owned land.  As  with all  geological  mapping and  field                                                            
studies, the Department  would make proper contacts  with landowners                                                            
with the  exception  of the land  located near  the missile  defense                                                            
systems. Those lands would not be mapped in detail.                                                                             
                                                                                                                                
     Item: 28                                                                                                                   
     Section: 7(c)(3)                                                                                                           
     RDU: Capital                                                                                                               
     Supplemental Need: Gas pipeline Bullen Point Road right-of-way                                                             
     permitting                                                                                                                 
     $3,200,000 general funds                                                                                                   
                                                                                                                                
DICK   LEFEBVRE,  Deputy   Commissioner,   Department   of   Natural                                                            
Resources,  testified  via teleconference  from  an offnet  location                                                            
about the request  for proposals (rfp) the Department  has issued to                                                            
secure  professional services  to undertake  a study  to identify  a                                                            
corridor  or corridors between  Prudhoe Bay  and Point Thomson.  The                                                            
intent is to  undertake environmental  studies and engineering  work                                                            
necessary for  a possible construction of a road and  permitting for                                                            
a right-of-way for a pipeline.                                                                                                  
                                                                                                                                
     Item: 29                                                                                                                   
     Section: 7(c)(4)                                                                                                           
     RDU: Capital                                                                                                               
     Supplemental Need: Division of Oil and Gas increased workload                                                              
     for gas pipeline                                                                                                           
     $2,700,000 general funds                                                                                                   
                                                                                                                                
Mr. Myers noted earlier  reference to increased risk analysis, which                                                            
involved outside  consulting assistance. The Department  anticipated                                                            
additional  risk  analysis  would  occur  as the  State  develops  a                                                            
commercial  structure.  In  reviewing  the  workload  involving  the                                                            
proposed natural gas pipeline,  it was determined that approximately                                                            
25  percent  of  the Division  staff  time  was  dedicated  to  this                                                            
purpose.  The percentage  of  time is expected  to  increase in  the                                                            
future and  therefore the Division  requests funding for  additional                                                            
positions to address gas line issues.                                                                                           
                                                                                                                                
Mr. Myers explained  this funding  request also involves  regulatory                                                            
issues.  The Department  and  the Alaska  Oil and  Gas Conservation                                                             
Commission (AOGCC) have  regulatory responsibilities associated with                                                            
gas and oil development  at Prudhoe Bay and Point Thomson. Extensive                                                            
reservoir  engineering analysis  and detailed  economic analysis  on                                                            
the physical and  economic waste related to timing  of production is                                                            
required.  The Division must  also ensure that  the project  has the                                                            
maximum amount of gas available.                                                                                                
                                                                                                                                
Mr. Myers  noted a legislative  resolution  pertaining to  potential                                                            
gas hydrates.  This supplemental appropriation  requests  funding to                                                            
add positions that would  work with federal agencies to promote this                                                            
development.  He detailed  the geo-technical  work necessary  in the                                                            
proposed pipeline  corridor as well  as the Foothills region.  These                                                            
efforts would benefit other development in these areas as well.                                                                 
                                                                                                                                
Co-Chair  Wilken   clarified  the  request  would   be  utilized  to                                                            
implement 13  new positions plus provide  funding for the  increased                                                            
workload of existing staff.                                                                                                     
                                                                                                                                
Mr. Myers affirmed  and added this would be utilized  in conjunction                                                            
with the funding  requested in Item  #26 to employ outside  support.                                                            
                                                                                                                                
     Item: 30                                                                                                                   
     Section: 7(c)(5)                                                                                                           
     RDU: Capital                                                                                                               
     Supplemental Need: Commissioner's Office increased workload                                                                
     for gas pipeline                                                                                                           
     $200,000 general funds                                                                                                     
                                                                                                                                
Mr. Bus  remarked  that existing  staff  has been  "working day  and                                                            
night" with  the deputy  commissioner unable  to accomplish  all the                                                            
work  necessary.  This  funding  would  be utilized  to  create  two                                                            
project assistant positions  dedicated to the pipeline negotiations.                                                            
One  position  would focus  on  planning  and the  other  logistical                                                            
support during negotiations.                                                                                                    
                                                                                                                                
Co-Chair Green  asked if any portion  of the requested $200,000  for                                                            
FY 05 has  been expended  to date and whether  the additional  staff                                                            
has been hired.                                                                                                                 
                                                                                                                                
Mr. Bus corrected  the funds are requested for expenditure  in FY 05                                                            
and FY 06  and would not  lapse prior to the  end of FY 06.  None of                                                            
the funds have been expended  and no new positions have been filled.                                                            
                                                                                                                                
Mr. Bus  commented to  the productive working  relationship  between                                                            
the  Department and  the  Legislative  Budget and  Audit  Committee.                                                            
However, appropriations  made to the  Committee for distribution  to                                                            
the Department  would cause delays  during the legislative  interim.                                                            
                                                                                                                                
Co-Chair  Green  asked  if  the  proposed  new  positions  would  be                                                            
temporary.                                                                                                                      
                                                                                                                                
Mr. Bus replied  that the positions  would not be guaranteed  beyond                                                            
FY  06, but  would  be  assured  until  then if  this  request  were                                                            
granted. At the end of  FY 06, the Department would re-determine the                                                            
need.                                                                                                                           
                                                                                                                                
Senator Hoffman asked if the positions would be contracted.                                                                     
                                                                                                                                
Mr. Bus  responded that  the staff  would be appointed  to serve  at                                                            
pleasure  of the  Governor for  the period  of time  the funding  is                                                            
available and the projects are necessary.                                                                                       
                                                                                                                                
Department of Revenue                                                                                                         
                                                                                                                                
     Item: 31                                                                                                                   
     Section: 7(d)                                                                                                              
     RDU: Capital                                                                                                               
     Supplemental Need: Commissioner's Office - Work related to the                                                             
     State gas pipeline and to bringing North Slope natural gas to                                                              
     market                                                                                                                     
     $5,300,000 general funds                                                                                                   
                                                                                                                                
Co-Chair Wilken  asked this request  differs from that contained  in                                                            
item #30.                                                                                                                       
                                                                                                                                
Ms. Taylor  spoke  to the  need for  an Alaska  natural gas  entity.                                                            
Several  natural  gas  pipeline  project  proposals   include  State                                                            
participation.  This entity  would "Shepard  the State's  interest."                                                            
The funding request  includes $1.5 million for that  effort and $3.8                                                            
million for contractual services, as detailed by Mr. Porter.                                                                    
                                                                                                                                
     Item: 32                                                                                                                   
     Section: 7(e)                                                                                                              
     RDU: Capital                                                                                                               
     Supplemental Need: Alaska Natural Gas Development Authority                                                                
     increased workload for gas pipeline                                                                                        
     $2,170,000 general funds                                                                                                   
                                                                                                                                
HAROLD  HEINZE,   Chief  Executive   Officer,  Alaska  Natural   Gas                                                            
Development  Authority,  Department of  Revenue,  testified that  $2                                                            
million of  the requested amount would  be utilized for "continuing                                                             
contractor work  related broadly to the issues of  in-state gas use.                                                            
Specifically, this pertains  to the "spur line connecting Glennallen                                                            
to  Palmer."  Currently,  five  Alaskan  contractors  are  preparing                                                            
applications  for  the right-of-way  segment  of this  project.  The                                                            
applications  would be submitted by  April 1, 2005 and the  "process                                                            
can work through  the summer and into  the fall" with completion  of                                                            
the right-of-way  scheduled  for September  1.  These efforts  would                                                            
secure  an option to  transport natural  gas "into  Cook Inlet".  He                                                            
detailed the processes involved and created from this project.                                                                  
                                                                                                                                
Senator Bunde surmised  that these efforts would not duplicate other                                                            
work done by the State.                                                                                                         
                                                                                                                                
Mr. Heinze  responded  that the  Authority  is not  included in  the                                                            
Stranded  Gas Act;  although  as a  State  entity, it  receives  the                                                            
benefit  of the  knowledge  obtained from  other  State efforts  and                                                            
shares it's  knowledge with the legislature  and other parties.  The                                                            
emphasis of the Authority  is "how to do things", such as delivering                                                            
energy  to rural  communities.  The Authority  is  not charged  with                                                            
conducting   studies,  but   rather  with   implementing   practical                                                            
solutions.                                                                                                                      
                                                                                                                                
Senator  Stedman  understood  that  the  contract  negotiations  are                                                            
"fluid, dynamic  and difficult  to budget  in advance"; however,  he                                                            
questioned  appropriating funding  for FY 05 that would be  expended                                                            
in FY 06.                                                                                                                       
                                                                                                                                
Co-Chair Wilken agreed.                                                                                                         
                                                                                                                                
10:22:39 AM                                                                                                                   
                                                                                                                                
Co-Chair  Wilken  noted written  public  testimony  on supplemental                                                             
budget items has been received  and would be included in the record.                                                            
                                                                                                                                
10:23:06 AM                                                                                                                   
                                                                                                                                
Department of Health and Social Services                                                                                      
                                                                                                                                
     Item: 34                                                                                                                   
     Section: 9(a)                                                                                                              
     RDU: Alaskan Pioneer Homes: Pioneer Homes                                                                                  
     Supplemental  Need:  Replacing  unrealizable  federal  Medicaid                                                            
     funds  with receipt supported  services. Lower receipts  is due                                                            
     to the  voluntary nature of residents  signing up for  Medicaid                                                            
     -$1,200,000 federal funds                                                                                                  
     $1,200,000 Receipt Supported Services funds                                                                                
     $0 Total Funds                                                                                                             
                                                                                                                                
JANET  CLARKE,  Director,   Division  of  Administrative   Services,                                                            
Department of  Health and Social Services, testified  to the efforts                                                            
begun in  FY 05 to  enroll the  Alaska Pioneers'  Homes as  Medicaid                                                            
providers  to  offset  some  general  fund  expenditures.   Resident                                                            
participation  is voluntary and fewer  residents opted to  apply for                                                            
Medicaid  assistance  during this  first year.  This  item does  not                                                            
involve  general  funds,  rather  would  utilize  receipts  paid  by                                                            
residents to receive care.                                                                                                      
                                                                                                                                
Ms.  Clarke noted  the  Department  of Health  and  Social  Services                                                            
budget subcommittee would  address the issue of voluntary enrollment                                                            
for  Medicaid  assistance.  Other nursing  homes  require  residents                                                            
apply for all  eligible assistance before receiving  subsidies. This                                                            
would be considered for the Pioneers' Homes as well.                                                                            
                                                                                                                                
Ms. Clarke  relayed that the residents  of the Sitka Pioneers'  Home                                                            
have  enjoyed  the   intergenerational  interaction   with  the  Mt.                                                            
Edgecumbe students  living at the Pioneers' Home.  She informed that                                                            
children attending  the Sitka Fine Arts Festival also  stayed at the                                                            
Home.                                                                                                                           
                                                                                                                                
Co-Chair Wilken  commented that the language governing  the Medicaid                                                            
eligibility for nursing home residents is cumbersome.                                                                           
                                                                                                                                
Ms.  Clarke spoke  to  the next  three  items relating  to  Medicaid                                                            
supplemental   requests.  The   previous  two   fiscal  years,   the                                                            
Department   has   presented   "significant   cost   contained   and                                                            
refinancing  opportunities  and  very  aggressive  ways to  try  and                                                            
contain  Medicaid." In  FY 04 the  Department  reduced general  fund                                                            
expenditures  by "$129". In FY 05,  the presented budget  would have                                                            
reduced almost  $67 million general  funds. However, the  Department                                                            
has  been  unable  to fulfill  the  entire  cost  containment  goal;                                                            
instead approximately $47 million has been realized.                                                                            
                                                                                                                                
     Item: 35                                                                                                                   
     Section: 9(b)                                                                                                              
      RDU: Behavioral Health: Behavioral Health Medicaid Svc                                                                    
     Supplemental Need: Medicaid caseload growth above FY 05 budget                                                             
     projections. At current expenditure rate, the existing                                                                     
     appropriation will be gone in April or May.                                                                                
     $2,653,700 general funds                                                                                                   
     $3,517,700 federal funds                                                                                                   
     $6,171,400 Total Funds                                                                                                     
                                                                                                                                
Ms. Clarke  informed  that this  program has  experienced an  annual                                                            
average rate of growth  of 14 percent in the last "couple of years",                                                            
in  particular  out  of  state  care  for  children  in residential                                                             
psychiatric  treatment  centers.  The Department  is  attempting  to                                                            
control  this   growth  rate  through   the  Bring  the   Kids  Home                                                            
Initiative. All  components of the initiative have  been implemented                                                            
to date and therefore  the entire anticipated savings  have not been                                                            
realized. A "gate  keeping" component would be implemented  on March                                                            
1, 2005  to ensure  that those children  sent  to facilities  out of                                                            
state require  this treatment.  In previous  years, the majority  of                                                            
the children covered by  this funding program were in State custody;                                                            
however,  currently   most  children  involved  are   not,  although                                                            
eligible for Medicaid assistance.                                                                                               
                                                                                                                                
BILL HOGAN, Director,  Division of Behavioral Health,  Department of                                                            
Health and  Social Services,  testified via  teleconference  from an                                                            
offnet  location, an  implemented  care coordination  mechanism  was                                                            
implemented  as a result  of SB  157 that passed  in 2003.  However,                                                            
this allowed  for only one position,  which focused on children  who                                                            
have been receiving treatment  out of state for 300 days or more. As                                                            
a  result   of  renegotiating  the   "first  health  contract"   two                                                            
additional  care coordinator positions  would be added beginning  in                                                            
March 2005.  The additional staffing  would allow for review  of the                                                            
out of state placement  of 60 days or longer. Also, funding provided                                                            
by  the  Alaska  Mental  Health  Trust  Authority  would  facilitate                                                            
enhanced "gate  keeping or diversion mechanism."   Not only must the                                                            
Department  proactively  monitor  the  length  of stay  of  children                                                            
already placed  out of state, but  also must better ensure  that all                                                            
instate options  are reviewed before  a child is transferred  out of                                                            
state.                                                                                                                          
                                                                                                                                
Senator Olson  asked if all the children  are leaving the  State for                                                            
psychiatric reasons.                                                                                                            
                                                                                                                                
Mr. Hogan  affirmed,  explaining that  these  patients have  serious                                                            
emotional disturbance as well as function difficulties.                                                                         
                                                                                                                                
Senator Olson  asked if any of the children have physical  issues as                                                            
well.                                                                                                                           
                                                                                                                                
Mr. Hogan replied that  some have accompanying physical disorders as                                                            
well  as the  psychiatric  illnesses.  He  gave  an example  of  the                                                            
physical problems related to eating disorders.                                                                                  
                                                                                                                                
Senator Olson asked if  psychologists or "mid-level providers" would                                                            
treat the children remaining in Alaska.                                                                                         
                                                                                                                                
Mr. Hogan answered  that several types of providers  would treat the                                                            
patients;  some  would  enter  group  homes  or  small in-treatment                                                             
facilities  if unable to  return home.  All  patients would  receive                                                            
ongoing psychology treatment  plus family and other counseling. Also                                                            
patients would  receive support, some of which would  be provided by                                                            
mid-level providers.                                                                                                            
                                                                                                                                
Senator Olson  understood the challenges the Fairbanks  hospital has                                                            
had in securing  a full-time psychiatrist.  He asked if it  would be                                                            
difficult to hire a psychiatrist for this program as well.                                                                      
                                                                                                                                
Mr.  Hogan  agreed  it is  difficult  to  attract  psychiatrists  to                                                            
Alaska. The Department  is using a telemedicine approach to evaluate                                                            
and  monitor patients  and  is  expanding  the instate  capacity  in                                                            
conjunction  with  the University  of  Alaska. There  is  a need  to                                                            
develop staff in entry-level positions through psychiatrists.                                                                   
                                                                                                                                
Senator Olson asked if  the Division anticipated spending the entire                                                            
$2.6 million requested for behavioral health programs in FY 05.                                                                 
                                                                                                                                
Ms. Clarke informed  that the $72.6 has been expended  as of January                                                            
2005, and projections indicate  that a total of $124.5 million would                                                            
be expended in the fiscal year.                                                                                                 
                                                                                                                                
Co-Chair Green expressed  concern that a "gate keeping" mechanism is                                                            
not  in place  given that  legislation  passed several  years  prior                                                            
provided  for these  measures. The  intent was that  a gate  keeping                                                            
mechanism  would  be enacted  before  the  program was  expanded  to                                                            
include Medicaid.  She noted the number  of cases in which  Medicaid                                                            
funds  paid for  treatment  for children  not in  State-custody  and                                                            
therefore  the  Department   had not  oversight   authority  in  the                                                            
determination of appropriate  treatment. Most of these cases involve                                                            
the  Denali KidCare  Program.  She  remarked  that in  creating  the                                                            
Denali KidCare  Program, the  State has allowed  patients to  "skirt                                                            
the process". The gate keeping issue must be addressed.                                                                         
                                                                                                                                
Co-Chair  Green asked if  the program is  cross-referenced  with the                                                            
Department  of Education and Early  Development since the  states in                                                            
which  the children  are receiving  treatment  bill  Alaska for  the                                                            
education costs.                                                                                                                
                                                                                                                                
Ms. Clarke  replied that  for those children  in State custody,  the                                                            
departments have a contractual  agreement for education costs. These                                                            
costs  have  remained  steady.  The  increases  are  the  result  of                                                            
treatment for  those children not in State custody.  She was unaware                                                            
how the educational costs were paid for those children.                                                                         
                                                                                                                                
Co-Chair   Green   recalled   an   increment   in   a  supplemental                                                             
appropriation  request  of  a  previous  fiscal  year  requesting  a                                                            
$700,000 chargeback  for educational programs for  children in State                                                            
custody receiving treatment out of state.                                                                                       
                                                                                                                                
Ms. Clarke remembered  that pertained to children  in State custody.                                                            
                                                                                                                                
Mr.  Hogan  furthered  that  not  all  Alaskan  children   receiving                                                            
treatment out-of-state  have an individual education plan. For those                                                            
that do, the Department  of Education and Early Development, through                                                            
deductions  from the child's  resident local  school district,  must                                                            
provide  the  out  of  state  education  costs.  The  Department  of                                                            
Education  and  Early   Development  is  not  responsible   for  the                                                            
education  expenses  for those  receiving  education  through  their                                                            
treatment  program,  he  would verify  that  Medicaid  covers  those                                                            
costs.                                                                                                                          
                                                                                                                                
Senator Hoffman was alarmed  at the increase of this program, noting                                                            
the  average  annual   increase  of  nine  percent.   He  asked  the                                                            
percentage  of children receiving  treatment  outside of Alaska  who                                                            
are Alaskan Natives. Average increase annual is 9 percent.                                                                      
                                                                                                                                
Mr. Hogan  replied that  an average  of 40 percent  of the  children                                                            
receiving out  of state treatment  through this program are  Alaskan                                                            
Native.                                                                                                                         
                                                                                                                                
Senator Stedman  commented that 40  percent is substantially  higher                                                            
than the general population.  He spoke to the difficulty in planning                                                            
budget  cycles given  the  substantial growth  in  this program  and                                                            
others.  He  asked  if the  growth  in  this  program  represent  an                                                            
"unraveling"  of the State's social  structure, or repercussions  of                                                            
actions of past generations becoming more apparent.                                                                             
                                                                                                                                
Mr. Hogan  replied that  the growth  in the  community programs  has                                                            
been approximately three  and one-half to four percent annually. The                                                            
growth of the acute inpatient  treatment services has been less than                                                            
three percent  annually, although a larger increase  has occurred in                                                            
the current fiscal  year. The substantial growth "distorting  all of                                                            
our numbers" is the out  of state residential psychiatric treatment.                                                            
In some  years,  the growth  of this  program has  been 30  percent,                                                            
although it has stabilized somewhat.                                                                                            
                                                                                                                                
Mr. Hogan  spoke to increased  pressures  on children and  families.                                                            
The Division attempts  to intervene in situations  early, but is not                                                            
always successful  and subsequently,  some  children require  longer                                                            
and more intensive treatment for recovery.                                                                                      
                                                                                                                                
Senator  Stedman  asked  how  the  legislature  is  to  obtain  cost                                                            
containment  if  large  supplemental  appropriations  are  requested                                                            
after  the initial  budget  has been  determined.  The supplemental                                                             
appropriation  for this program  differs from  the funding  requests                                                            
for a natural  gas pipeline project, which would accelerate  a large                                                            
capital project.  This situation appears to demonstrate  an "erosion                                                            
of our ability to control appropriations."                                                                                      
                                                                                                                                
Co-Chair  Wilken suggested  Senator  Stedman  ponder this  as it  is                                                            
true.  The  Committee   continually  struggles   with  the  task  of                                                            
developing  an  appropriate   budget  and  addressing  supplemental                                                             
funding requests.                                                                                                               
                                                                                                                                
Senator Olson  asked the  involvement of  the federal Indian  Health                                                            
Services agency  to assist with payment  for these services  for the                                                            
Native patients.                                                                                                                
                                                                                                                                
Mr.  Hogan  replied   that  the  Division  cooperates   with  Native                                                            
"partners" to develop local treatment options.                                                                                  
                                                                                                                                
Senator  Olson  asked  how the  State  is  reimbursed  for  services                                                            
provided  to   patients  otherwise   eligible  for  federally   paid                                                            
services.                                                                                                                       
                                                                                                                                
Mr.  Hogan  explained the  payment  process  for  behavioral  health                                                            
services provided  to a Medicaid eligible  person who is  Native. It                                                            
preferable,  both culturally  and financially,  that Alaska  Natives                                                            
are served by Native Health organizations.                                                                                      
                                                                                                                                
Ms. Clarke furthered  that one strategy is to develop  programs with                                                            
entities  classified as "638"  to allow the  State to be  reimbursed                                                            
100  percent.  However,   the  out  of  state  facilities   are  not                                                            
classified  as 638,  and  therefore  the State  is unable  to  claim                                                            
reimbursement.                                                                                                                  
                                                                                                                                
Senator  Hoffman  asked if  the goal  is  to provide  treatment  for                                                            
Native children  locally. He  noted the 35  to 40 beds available  in                                                            
the Yukon-Kuskokwim  region and asked if this is the  same number of                                                            
children currently receiving treatment out of state.                                                                            
                                                                                                                                
Ms. Clarke did not have  details of the residency of these children.                                                            
                                                                                                                                
Mr. Hogan totaled  approximately 350  children receive out  of state                                                            
residential treatment at  any given date. Approximately 150 of those                                                            
children are Alaskan Native.                                                                                                    
                                                                                                                                
Senator  Hoffman  questioned  the  attainment   of  providing  local                                                            
treatment if the local residency of patients is unknown.                                                                        
                                                                                                                                
Mr. Hogan indicated he would provide this information.                                                                          
                                                                                                                                
Co-Chair  Wilken  also  requested  an  estimate  of  the  number  of                                                            
children who are expected  to return to Alaska and the level of care                                                            
that would be required for them.                                                                                                
                                                                                                                                
     Item: 36                                                                                                                   
     Section: 9(c)                                                                                                              
     RDU: Health Care Services: Women's and Adolescents Services                                                                
     Supplemental  Need: Feds reduced  FFY 05 funding in  the Breast                                                            
     and Cervical  Cancer screening program. The fund  source change                                                            
     will  allow  services to  1600  enrolled women  that  otherwise                                                            
     would  not be served due to federal  funding reductions.  Funds                                                            
     will be required  by late March or early April  to continue the                                                            
     program.                                                                                                                   
     $500,000 general funds                                                                                                     
     -500,000 federal funds                                                                                                     
     $0 Total Funds                                                                                                             
                                                                                                                                
Ms.  Clarke corrected  that  the  backup  material stated  that  the                                                            
Department  did not  know of  the loss  of the  federal funds  until                                                            
receipt of  the grant notification  in September 2004; however  some                                                            
managers were  aware in June 2004  that the funds would be  reduced.                                                            
This request  would allow  the Department to  continue to serve  the                                                            
number  of women planned.  Without  funds 1600 women  would not  get                                                            
served.  She referenced  the  back up  documentation  detailing  the                                                            
history of this program.                                                                                                        
                                                                                                                                
DR.  RICHARD  MANDSAGER,   Director,  Division  of  Public   Health,                                                            
Department of Health and  Social Services, added that enrollment has                                                            
accelerated  across the  State beyond  what was  anticipated if  the                                                            
program were fully  funded. If not funded, enrollment  would stop to                                                            
allow current patients  to receive services and existing funds would                                                            
not fully fund services for current patients.                                                                                   
                                                                                                                                
Co-Chair Wilken  clarified this request  represents a "backfill"  of                                                            
federal funds for FY 05 and again for FY 06.                                                                                    
                                                                                                                                
Dr. Mandsager affirmed.                                                                                                         
                                                                                                                                
Co-Chair Wilken  commented this should  receive further review.  The                                                            
legislature would  be faced with making decisions  regarding funding                                                            
programs  that  have  been  historically  federally  funded  as  the                                                            
federal funding  is eliminated or reduced. The State  must determine                                                            
whether to  continue these programs  utilizing State funding.  These                                                            
decisions would impact future legislatures.                                                                                     
                                                                                                                                
Senator  Bunde  asked  the fiscal  consequences   to the  State  for                                                            
providing Medicaid-funded  treatment  for cancers not detected  as a                                                            
result of the elimination of the screening program.                                                                             
                                                                                                                                
Dr. Mandsager  replied that  it is impossible  to identify  a direct                                                            
cause and effect. However,  the Medicaid cost of treatment for those                                                            
with breast or cervical  cancer has decreased $2,300 per case during                                                            
the same time  period that the number  of women receiving  screening                                                            
has increased.  He predicted  that if  the State  did not invest  in                                                            
screening,  it would pay for increased  treatment costs later.  This                                                            
is  a policy  call  that  the  State  must make.  The  Division  has                                                            
determined  that if  this funding  were not provided  by either  the                                                            
federal  government  or the  State, screening  would  be limited  to                                                            
women aged  50 to 64, which is the  ages recommended by the  Centers                                                            
for Disease  Control.  The current  program provides  screening  for                                                            
women aged 18 to 64.                                                                                                            
                                                                                                                                
Senator   Olson  asked   if  detected   malignancy   has   increased                                                            
significantly  as  a  result  of  the  screening   program  and  the                                                            
incidences of false positive and negative test results.                                                                         
                                                                                                                                
Dr.  Mandsager  responded  that the  rate  of cancer  diagnosis  has                                                            
remained constant;  however, the implementation of  this program has                                                            
occurred  incrementally and  has yet  to reach rural  areas.  If the                                                            
funding requested for FY  06 were appropriated, the program would be                                                            
expanded to the entire State.                                                                                                   
                                                                                                                                
Senator Olson  asked if other types  of cancer screening  activities                                                            
occur through the Medicaid program.                                                                                             
                                                                                                                                
Dr. Mandsager would provide this information.                                                                                   
                                                                                                                                
10:59:55 AM                                                                                                                   
                                                                                                                                
Co-Chair  Wilken   directed  attention  to  charts  indicating   the                                                            
increases  of the following  programs of 184  percent over  the past                                                            
nine years [copy on file.]                                                                                                      
                                                                                                                                
     Item: 37                                                                                                                   
     Section: 9(d)                                                                                                              
     RDU: Health Care Services: Medicaid Services                                                                               
     Supplemental   Need:  Unable  to  implement  cost  containment                                                             
     measures   as  quickly   or  to  the   extent  planned:   e.g.,                                                            
     Prescription  Drug List  delay, Transportation,  Rate  Setting,                                                            
     Cost   Avoidance  of   Medicare  Covered   Drugs.  At   current                                                            
     expenditure  rate, the existing  appropriation will  be gone in                                                            
     April or May                                                                                                               
     $13,821,400 general funds                                                                                                  
     $16,888,300 federal funds                                                                                                  
     $30,709,700 Total Funds                                                                                                    
                                                                                                                                
Ms.  Clarke explained  this  request is  directly  related to  those                                                            
expenses  the Department had  expected to reduce  in FY 05,  but was                                                            
unable to accomplish.  The Department  had expected to save  a total                                                            
of $41.5 mill, but was  only able to realize $11 million in savings.                                                            
She  noted the  Department  had anticipated  saving  $11 million  in                                                            
Medicaid-related  transportation costs.  The projected amount  could                                                            
not be achieved, although  some savings would be realized. She noted                                                            
that additional  savings would be realized in FY 06.  The Department                                                            
had also anticipated  savings through  the preferred drug  list, but                                                            
based on feedback  from providers and patients, the  entire list has                                                            
not been implemented.  Additional efforts would be  made though this                                                            
program to increase savings.                                                                                                    
                                                                                                                                
     Item: 38                                                                                                                   
     Section: 9(e)                                                                                                              
     RDU:  Senior/Disabilities  Svcs: Senior/Disabilities   Medicaid                                                            
     Svc                                                                                                                        
     Supplemental   Need:  Unable  to  implement  cost  containment                                                             
     measures  as quickly or to the  extent planned: e.g.,  Contract                                                            
     Waiver   Assessments,   Medicaid  Waivers,   Reducing   Respite                                                            
     Utilization, Nursing  Homes Preadmission Care Plans, $7,084,400                                                            
     general  funds  and $7,606,300  federal  funds  = $16,690,700.                                                             
     Formula  growth  over  budgeted amount  will  cost $15,487,800                                                             
     general  funds and  $20,930,200  federal funds  = $36,418,100.                                                             
     Primary  growth  is in  Personal  Care Attendant  Services.  At                                                            
     current expenditure rate, the existing appropriation will be                                                               
     gone in March.                                                                                                             
     $22,572,200 general funds                                                                                                  
     $30,536,600 federal funds                                                                                                  
     $53,108,800 Total Funds                                                                                                    
                                                                                                                                
Ms. Clarke  noted this  is the largest  Medicaid supplemental  item.                                                            
The Department was unable  to realize $7.1 million of projected cost                                                            
containment in  two areas. This item also represents  program growth                                                            
above projected  rates, particularly in the Personal  Care Attendant                                                            
Services program.  Other unrealized  savings relates to the  nursing                                                            
home preadmission care  plans. The Department is developing detailed                                                            
information, including  programs implemented in other  states, which                                                            
would be shared with the budget subcommittee.                                                                                   
                                                                                                                                
Co-Chair Wilken  remarked this is a significant issue  that would be                                                            
addressed further.                                                                                                              
                                                                                                                                
Senator  Bunde  recalled an  attempt  to  change the  Personal  Care                                                            
Attendant Services  program, specifically  the payment to  relatives                                                            
of patients  for care provided to  those patients. He asked  if this                                                            
was accomplished.                                                                                                               
                                                                                                                                
Co-Chair Wilken  directed attention  to back up documentation  [copy                                                            
on file.]                                                                                                                       
                                                                                                                                
Co-Chair  Wilken  noted  expenses  for  this  program  are  consumer                                                            
directed,  and the growth  began in the years  2001 and 2002,  as it                                                            
became more widely known.                                                                                                       
                                                                                                                                
Senator Bunde  remarked that the State  is paying people  to perform                                                            
family "duties".                                                                                                                
                                                                                                                                
Co-Chair Wilken understood  the program expense would be $70 million                                                            
for FY 05.                                                                                                                      
                                                                                                                                
Ms. Clarke  reiterated this  program is growing  the fastest  of all                                                            
Medicaid  programs. The  Department requires  policy direction  from                                                            
the legislature on how to control these costs.                                                                                  
                                                                                                                                
Co-Chair Wilken  would discuss the  matter directly with  Ms. Clarke                                                            
with the Committee's permission.                                                                                                
                                                                                                                                
Senator Olson  stressed his is a strong proponent  of the breast and                                                            
cervical cancer screening program.                                                                                              
                                                                                                                                
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
                                                                                                                                

Document Name Date/Time Subjects