Legislature(2015 - 2016)ANCHORAGE LIO

08/24/2015 10:30 AM House FINANCE

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Audio Topic
10:36:09 AM Start
10:38:23 AM Discussion: Fiscal Situation & Economic Analysis
12:13:52 PM Institute of Social and Economic Research Presentation: Economic Impacts of Alaska Fiscal Options: a Study Iser is Starting Some of What We Already Know
12:52:27 PM Institute of Social and Economic Research Presentation: a Few Observations on Alaska's Fiscal Choices
01:05:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Location: 1st Floor Auditorium
+ Discussion: Fiscal Situation & Economic Analysis TELECONFERENCED
-Pat Pitney, Director, Office of Management &
Budget, Office of the Governor
-Gunnar Knapp, Director & Professor of Economics,
Institute of Social & Economic Research
-Randall Hoffbeck, Commissioner, Dept. of Revenue
**Streamed live on AKL.tv**
**Streaming available in JNU in TS Bldg Rm 105**
                  HOUSE FINANCE COMMITTEE                                                                                       
                      August 24, 2015                                                                                           
                        10:36 a.m.                                                                                              
10:36:09 AM                                                                                                                   
CALL TO ORDER                                                                                                                 
Co-Chair Neuman  called the House Finance  Committee meeting                                                                    
to order at 10:36 a.m.                                                                                                          
MEMBERS PRESENT                                                                                                               
Representative Mark Neuman, Co-Chair                                                                                            
Representative Steve Thompson, Co-Chair                                                                                         
Representative Dan Saddler, Vice-Chair                                                                                          
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lynn Gattis                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Lance Pruitt                                                                                                     
MEMBERS ABSENT                                                                                                                
Representative Cathy Munoz                                                                                                      
ALSO PRESENT                                                                                                                  
Pat  Pitney,  Director,  Office of  Management  and  Budget,                                                                    
Office  of   the  Governor;   Gunnar  Knapp,   Director  and                                                                    
Professor  of Economics,  Institute of  Social and  Economic                                                                    
Research,  University  of Alaska  Anchorage;  Representative                                                                    
Charisse    Millett;     Representative    Lora    Reinbold;                                                                    
Representative   Andy    Josephson;   Representative   Craig                                                                    
PRESENT VIA TELECONFERENCE                                                                                                    
Representative   Scott   Kawasaki;   Representative   Tammie                                                                    
Wilson; Representative Chris Tuck.                                                                                              
DISCUSSION: FISCAL SITUATION & ECONOMIC ANALYSIS                                                                                
Co-Chair Neuman discussed the agenda for the meeting.                                                                           
10:38:23 AM                                                                                                                   
^DISCUSSION: FISCAL SITUATION & ECONOMIC ANALYSIS                                                                             
10:38:23 AM                                                                                                                   
PAT  PITNEY,  DIRECTOR,  OFFICE  OF  MANAGEMENT  AND  BUDGET                                                                    
(OMB),  OFFICE  OF  THE  GOVERNOR,  discussed  that  it  was                                                                    
unusual  to  have a  discussion  on  the budget  in  August;                                                                    
however,   she  believed   the   state's  fiscal   situation                                                                    
warranted   early    and   frequent    communications.   The                                                                    
administration's  intent was  to  provide an  update on  its                                                                    
actions over  the summer,  its plan  going forward,  and the                                                                    
framework it was sharing across the state.                                                                                      
10:39:03 AM                                                                                                                   
RANDALL  HOFFBECK,   COMMISSIONER,  DEPARTMENT   OF  REVENUE                                                                    
introduced  a  PowerPoint  presentation titled  "Building  a                                                                    
Sustainable  Future:  A  Conversation with  Alaskans"  dated                                                                    
August  24,  2015 (copy  on  file).  He explained  that  the                                                                    
presentation  was  essentially  the  same  as  the  one  the                                                                    
administration had  presented throughout the state  over the                                                                    
summer. He detailed that the  message had begun in June with                                                                    
a fiscal  sustainability workshop  in Fairbanks.  The intent                                                                    
of the Fairbanks workshop was  to discuss the current budget                                                                    
shortfalls  and  revenue  options  that  could  be  used  to                                                                    
balance the budget;  however, it had become  very clear that                                                                    
people  were  not  convinced  that   there  was  a  problem.                                                                    
Therefore, the  administration had been working  to increase                                                                    
the  public's understanding  about  what the  administration                                                                    
and  the legislature  was facing  presently. He  shared that                                                                    
after the  workshop concluded  the administration  felt that                                                                    
it  had  been successful  and  had  received good  feedback;                                                                    
however,  in a  taxi  the  following day  a  portion of  his                                                                    
discussion had been playing on  the radio, to which the taxi                                                                    
driver responded "that  guy's an idiot." He  stated that the                                                                    
experience had  made him realize  that there was a  long way                                                                    
to  go in  getting the  gravity of  the problem  out to  the                                                                    
Commissioner Hoffbeck explained that  the presentation was a                                                                    
companion   presentation  to   several  items   on  Governor                                                                    
Walker's  webpage.  The  website included  a  whitepaper  on                                                                    
potential  revenue and  fiscal options.  He noted  the paper                                                                    
was not  all inclusive,  but provided  a good  background on                                                                    
the  issues. Additionally,  the webpage  included a  revenue                                                                    
and expenditure model,  which he would address  later in his                                                                    
presentation; the  model could be  manipulated by a  user to                                                                    
balance the  budget. He  acknowledged David  Teal [Director,                                                                    
Legislative  Finance Division]  for  many of  the ideas.  He                                                                    
added that  there were several  short videos he  intended to                                                                    
show later in the presentation  related to the Alaska fiscal                                                                    
situation.  He read  a quote  by Teddy  Roosevelt from  1910                                                                    
(slide 3):                                                                                                                      
     It  is not  the  critic  who counts;  not  the man  who                                                                    
     points out  how the strong  man stumbles, or  where the                                                                    
     doer of deeds  could have done them  better. The credit                                                                    
     belongs to the man who  is actually in the arena, whose                                                                    
     face is marred by dust and  sweat and blood… who at the                                                                    
     best knows in  the end the triumph  of achievement, and                                                                    
     who at  the worst,  if he fails,  at least  fails while                                                                    
     daring greatly, so  that his place shall  never be with                                                                    
     those  cold and  timid souls  who neither  know victory                                                                    
     nor defeat.                                                                                                                
Commissioner  Hoffbeck  stated  that  there  would  be  many                                                                    
people throwing stones in the  current year. He believed the                                                                    
people who deserved applause were  those who were willing to                                                                    
have an  intellectually honest discussion about  the state's                                                                    
situation.  He noted  that there  may be  disagreement about                                                                    
the solutions, but he did  not think people should be afraid                                                                    
of  the conversation.  He had  encouraged people  throughout                                                                    
the state  to support legislators  who were willing  to have                                                                    
the conversation; it was not  helpful to throw stones at the                                                                    
people who were trying to put the situation on the table.                                                                       
Commissioner Hoffbeck  addressed that it was  clear that the                                                                    
state had  certain opportunities  to work  the process  in a                                                                    
systematic  and diligent  way, given  the savings  set aside                                                                    
over the  last few  years. He  communicated that  there were                                                                    
real  challenges  that had  only  worsened  over the  summer                                                                    
including  oil prices  in  the  low $40  range  and a  stock                                                                    
market  that was  beginning to  correct. He  elaborated that                                                                    
there  was currently  very little  revenue  coming into  the                                                                    
state;  if the  current  environment  continued the  revenue                                                                    
situation would  actually be worse  than it had  been during                                                                    
legislative  session.   However,  opportunities   were  also                                                                    
presented as well.                                                                                                              
10:44:31 AM                                                                                                                   
Commissioner  Hoffbeck stated  that there  was really  not a                                                                    
crisis  unless action  was  not taken.  He  relayed that  if                                                                    
nothing was  done, the state would  be taken to the  edge of                                                                    
the  fiscal  cliff  and  would not  take  advantage  of  the                                                                    
savings  that had  been established  over  the past  several                                                                    
years. He  emphasized the  importance of  acting immediately                                                                    
instead  of waiting  until  the state  was  heading off  the                                                                    
10:45:06 AM                                                                                                                   
Ms. Pitney addressed that  the administration had frequently                                                                    
talked  with the  public  about the  makeup  of the  state's                                                                    
budget. She pointed  to a budget pie chart  slide 5: "Fiscal                                                                    
Challenge." The  budget was  made up  of 27  percent federal                                                                    
funds;  19 percent  Permanent  Fund  inflation proofing  and                                                                    
dividends;  13 percent  other state  and Designated  General                                                                    
Funds  (DGF);  and  41 percent  Unrestricted  General  Funds                                                                    
(UGF). She detailed that the  problem primarily existed with                                                                    
Co-Chair  Neuman  pointed to  the  $3.3  billion in  federal                                                                    
funds and asked if the  administration had heard whether the                                                                    
amount would  increase, decrease,  or remain static.  He had                                                                    
recently  been in  Washington D.C.  and had  been told  that                                                                    
federal  highway funds  coming  to Alaska  were expected  to                                                                    
maintain  at  the  same  level   or  increase  slightly.  He                                                                    
mentioned work on state matching funds.                                                                                         
Ms. Pitney responded that there  were federal funds that ran                                                                    
through  the  state  budget in  addition  to  federal  funds                                                                    
coming  into the  state through  military  and other,  which                                                                    
impacted  the greater  economy. She  relayed that  there was                                                                    
continued pressure  on federal  spending due to  the federal                                                                    
environment,  but  the  amount  running  through  the  state                                                                    
budget would  remain the  same or  increase slightly  due to                                                                    
inflation.  She  elaborated  that  she  did  not  anticipate                                                                    
growth  or decline  in  federal  funding. However,  Medicaid                                                                    
expansion would  increase the number  by $150 million  or so                                                                    
in the  near-term and  slightly more  in the  long-term. The                                                                    
additional funds  would only increase  the federal  funds to                                                                    
around 28 or 29 percent of the budget.                                                                                          
10:47:20 AM                                                                                                                   
Representative Gattis  asked what portion of  the 27 percent                                                                    
federal funds  were dependent on  state matching  funds. Ms.                                                                    
Pitney responded that about 70  percent or more was based on                                                                    
state  matching   funds.  She  expounded  that   there  were                                                                    
different levels  and types of  matching funds.  The federal                                                                    
money  had a  90/10 match  depending on  certain things  and                                                                    
health funds  were 50/50 on  existing and would be  90/10 on                                                                    
the Medicaid expansion population.                                                                                              
Representative  Gattis  observed   that  without  the  state                                                                    
matching funds,  the 27  percent in  federal funds  shown on                                                                    
slide 5 could be reduced to  as low as 10 percent. She noted                                                                    
that  the state  still had  to participate  if it  wanted to                                                                    
access the  federal funds. She  believed one  question going                                                                    
forward was how  much the state had to  participate and what                                                                    
it received from the federal government.                                                                                        
Ms.  Pitney  answered  that Professor  Knapp  [Director  and                                                                    
Professor  of Economics,  Institute of  Social and  Economic                                                                    
Research, University of Alaska  Anchorage] would address the                                                                    
question  about  what  federal  funding  meant  to  Alaska's                                                                    
overall economy. She stated that  it would be a major driver                                                                    
in the health of the  state's economy at the business level,                                                                    
even more so than it was at the state conversation.                                                                             
Ms. Pitney turned  to a pie chart on slide  6 titled "Fiscal                                                                    
Challenge:  Unrestricted  General  Funds Gap."  The  largest                                                                    
focus was  on the UGF  gap ($2.7 billion); the  funding that                                                                    
the  state had  the choice  to prioritize  among all  of the                                                                    
competing services  it provided.  The $2.7 billion  under an                                                                    
oil price of $65 or $66 per  barrel of oil was the best case                                                                    
scenario. She  furthered that under  the current  per barrel                                                                    
price  of $40  to $45,  the gap  could increase  up to  $3.2                                                                    
billion  to $3.3  billion. She  noted that  the gap  did not                                                                    
account  for  any  supplemental budget  needs,  any  gasline                                                                    
issues, or other.                                                                                                               
10:50:21 AM                                                                                                                   
Ms.  Pitney   advanced  to   slide  7:   "Fiscal  Challenge:                                                                    
Executive  Branch Agencies  and Payments  and Obligations  -                                                                    
Unrestricted  General Funds."  She detailed  that education,                                                                    
payments   and  obligations,   debt,  retirement,   oil  tax                                                                    
credits,  and  health  and  social  services  accounted  for                                                                    
nearly 80  percent of  the budget.  In order  to demonstrate                                                                    
the order  of magnitude of  budget costs the  slide included                                                                    
the capital budget,  which was the eighth bar  on the chart.                                                                    
She noted  that one of  the major  choices made in  the past                                                                    
year was to reduce the  capital budget; it had declined from                                                                    
$2 billion  to $118 million.  She relayed that if  the state                                                                    
wanted  to assure  its federal  matching funds,  the capital                                                                    
budget was not  an area the state had to  utilize. She noted                                                                    
that the  remaining agencies shown  on the chart  were small                                                                    
in terms of expenditures.                                                                                                       
Co-Chair Neuman wanted to better  understand what portion of                                                                    
the  funds for  education, health  and social  services, and                                                                    
social security was made up  of general fund (GF) grants. He                                                                    
requested  the information  divided by  grants, grants  with                                                                    
matching funds (and the match  percentage), and what portion                                                                    
of the  funds were  required. He asked  for the  breakout of                                                                    
the different expenditures within the various departments.                                                                      
Co-Chair Thompson wondered if the  cost shown for health and                                                                    
social  services (slide  7) was  inclusive  or exclusive  of                                                                    
Medicaid  expansion funding.  Ms.  Pitney  replied that  the                                                                    
chart was before and after  Medicaid expansion funds because                                                                    
it represented FY 16 and GF only.                                                                                               
Co-Chair Thompson  had read that other  states with Medicaid                                                                    
expansion  had seen  significant  acceleration  in state  GF                                                                    
costs.  He  noted that  other  states  were having  problems                                                                    
determining how  to balance their  budgets; a couple  of the                                                                    
states had  pulled out of  Medicaid expansion.  He addressed                                                                    
that the governor proposed adding  27 employees to cover the                                                                    
administrative  side,   but  he   noted  that   the  federal                                                                    
government  required the  state  to pay  50  percent of  the                                                                    
administrative  costs  of  expansion. He  wondered  how  the                                                                    
issue  fit  into the  budget  picture.  He wondered  if  the                                                                    
numbers available took everything into account.                                                                                 
Ms. Pitney replied that  the administration felt comfortable                                                                    
that  its  numbers  were  real  at  the  startup  phase  [of                                                                    
Medicaid  expansion].   She  detailed  that  as   the  match                                                                    
increased  from zero  up  to 10  percent  the numbers  would                                                                    
move.  Additionally, the  administration  was aggressive  on                                                                    
reform efforts and  hoped to see the  changes translate into                                                                    
ongoing savings.                                                                                                                
10:53:54 AM                                                                                                                   
Representative Gara asked for  verification that the biggest                                                                    
portion  of the  Department  of Health  and Social  Services                                                                    
(DHSS)  budget  related  to  the  state  match  for  regular                                                                    
Ms. Pitney replied by directing  attention to a bar chart on                                                                    
slide  10,   which  showed  the   top  three   UGF  spending                                                                    
categories. She pointed to the  third bar, which showed both                                                                    
formula and  nonformula components  of the DHSS  budget. She                                                                    
detailed that  the formula  funds included  Medicaid, senior                                                                    
benefits, foster  care, and  subsidized adoption  (over $600                                                                    
million was related to Medicaid matching funds).                                                                                
Representative Gara  asked for  verification that  less than                                                                    
$400 million  in the  DHSS budget  was associated  with non-                                                                    
federal match  programs. Ms. Pitney  agreed, but  noted that                                                                    
some formula programs were driven by the state legislature.                                                                     
Co-Chair  Neuman  requested  a  breakout of  the  costs.  He                                                                    
discussed that  when dental and  other similar  programs had                                                                    
been expanded, it had been made mandatory via legislation.                                                                      
10:56:00 AM                                                                                                                   
Representative  Gara  followed  up  on  Co-Chair  Thompson's                                                                    
question  related  to   administrative  staff  for  Medicaid                                                                    
expansion.  He  wondered  if the  administration  maintained                                                                    
that  Medicaid   expansion  alone   would  save   the  state                                                                    
approximately  $6  million in  the  first  year. Ms.  Pitney                                                                    
replied  in  the  affirmative;   savings  were  expected  to                                                                    
increase to $16 million in the second year.                                                                                     
Co-Chair Neuman  communicated that  the committee  would not                                                                    
delve into Medicaid expansion and  related issues during the                                                                    
current  meeting. The  meeting was  intended to  address the                                                                    
state's fiscal situation.                                                                                                       
Ms.  Pitney continued  to discuss  slide  10. She  addressed                                                                    
spending  for   the  Department   of  Education   and  Early                                                                    
Development  (DEED)  and  explained that  the  K-12  formula                                                                    
accounted  for  money  that  went to  school  districts  and                                                                    
communities. Any reduction in the formula would mean a cost-                                                                    
shift to  communities. She pointed out  that the non-formula                                                                    
UGF spending  was significantly  smaller and had  reduced in                                                                    
the last year due to tremendous reductions.                                                                                     
Co-Chair  Neuman referred  to  a  current education  lawsuit                                                                    
with Ketchikan. He  asked if the state would  be expected to                                                                    
backfill the  $220 million to  $225 million if the  law suit                                                                    
moved  forward. Ms.  Pitney answered  that the  plan was  to                                                                    
cross the bridge when necessary.                                                                                                
Co-Chair  Neuman remarked  that the  lawsuit pertained  to a                                                                    
significant amount  of money.  He noted  the issue  would be                                                                    
saved for another day. He  requested that the administration                                                                    
keep the committee informed on the issue.                                                                                       
Ms.  Pitney continued  to address  slide 10.  She reiterated                                                                    
that the  K-12 formula was significant  and DEED non-formula                                                                    
funds were  declining. She detailed that  roughly two-thirds                                                                    
of the non-formula  spending went to grant  programs and Mt.                                                                    
Edgecumbe; and  one-third went  to DEED  administration. She                                                                    
referred   to  the   bar   associated   with  payments   and                                                                    
obligations,  which was  broken into  debt, retirement,  and                                                                    
oil tax  credits. The state's  existing debt  commitment was                                                                    
$200 million;  the figure  was solid  for the  upcoming five                                                                    
years and would decrease slightly over time.                                                                                    
10:59:01 AM                                                                                                                   
Co-Chair Neuman believed the state  had paid $228 million in                                                                    
debt obligations the  prior year. He wondered if  any of the                                                                    
obligations  were  expected  to  be paid  off  in  the  near                                                                    
future,  which would  result in  a decrease  in the  overall                                                                    
Ms.  Pitney  responded  that   debt  obligations  would  not                                                                    
significantly decline in the near  future. She surmised that                                                                    
the amount could  decrease by $1 million to  $2 million, but                                                                    
the range would remain between  $200 million to $220 million                                                                    
over the  course of  the coming five  years. There  would be                                                                    
some sharp decreases 5 to  7 years in the future accompanied                                                                    
by some balancing opportunities.                                                                                                
Ms. Pitney  continued to address slide  10. Retirement costs                                                                    
were  $262 million  in the  current year.  She relayed  that                                                                    
with a recent $3 billion  investment, retirement would be in                                                                    
the $200  [million] to  $250 [million]  range if  a straight                                                                    
cash  basis was  continued.  She elaborated  that a  pension                                                                    
obligation bond  opportunity may provide some  relief in the                                                                    
right environment. She  stated that it would not  be a "slam                                                                    
dunk" but it  was a consideration that may  be worthwhile in                                                                    
the  event of  a significant  market correction.  She stated                                                                    
that the commitment was ongoing and long-term.                                                                                  
Co-Chair  Neuman  remarked  that when  the  legislature  had                                                                    
appropriated  $3 billion  out of  the Constitutional  Budget                                                                    
Reserve (CBR) in  2014 it had reduced  the Public Employees'                                                                    
Retirement  System (PERS)  and  Teachers' Retirement  System                                                                    
(TRS)  retirement costs.  He elaborated  that actuaries  had                                                                    
estimated the state's payments would  have been between $700                                                                    
million to $1.2 billion;  however, [given the cash infusion]                                                                    
the state's payments were about  $268 million in the current                                                                    
year. He  wondered if  there would  be any  significant debt                                                                    
reduction if  the legislature  allocated another  $1 billion                                                                    
from the CBR towards the PERS and TRS pension obligation.                                                                       
Ms. Pitney  answered that OMB  could price the  scenario out                                                                    
for the committee. She stated  that given that the state was                                                                    
burning $3 billion  annually in CBR funds,  taking money off                                                                    
the table should be thoroughly considered.                                                                                      
Co-Chair Neuman  observed that having  $700 million  less to                                                                    
pay [towards  the retirement liability] in  the current year                                                                    
had  been  helpful.  Ms.  Pitney agreed  that  it  had  been                                                                    
11:01:35 AM                                                                                                                   
Ms. Pitney continued to address  payments and obligations on                                                                    
slide  10. Another  large obligation  pertained  to how  the                                                                    
state continued  with oil tax  credits. She stated  that the                                                                    
governor's veto of $200 million  was to start the discussion                                                                    
on the  long-term. She expounded that  the current unbounded                                                                    
program was  unsustainable. She added  that all of  the "big                                                                    
ticket" items on slide 10 were tough to move.                                                                                   
Ms.  Pitney  moved back  in  the  presentation to  slide  8:                                                                    
"Fiscal  Challenge:  Agency  Reductions FY  15-FY  16."  She                                                                    
relayed  that on  a percentage  basis, the  most significant                                                                    
reductions (20 to  35 percent) had been  made to: Department                                                                    
of  Commerce, Community  and  Economic Development  (DCCED);                                                                    
Department of  Military and Veterans Affairs;  Department of                                                                    
Labor  and  Workforce  Development;  Department  of  Natural                                                                    
Resources; and  the Office of  the Governor. She  added that                                                                    
DCCED  had  grant  programs,  tourism,  and  Alaska  Seafood                                                                    
Marketing Institute and  some of the reductions  had been to                                                                    
its  grant program.  She  noted that  the  decrease did  not                                                                    
translate  directly  to  people.  Reductions  of  12  to  20                                                                    
percent had been made to  the following agencies, which were                                                                    
more  people   oriented:  Department   of  Fish   and  Game;                                                                    
Department  of Revenue;  Department  of  Law; Department  of                                                                    
Administration;  Department  of  Transportation  and  Public                                                                    
Facilities   (DOT);   and    Department   of   Environmental                                                                    
Conservation (DEC).                                                                                                             
11:03:34 AM                                                                                                                   
Vice-Chair  Saddler  asked what  portion  of  the 20  to  35                                                                    
percent reduction in  the Office of the  Governor budget was                                                                    
based on one-time  reductions from elections, redistricting,                                                                    
and other related items versus  ongoing programs. Ms. Pitney                                                                    
replied  that 17  percent of  the  reduction was  associated                                                                    
with ongoing  programs. One time reductions  were associated                                                                    
with  the Council  on Domestic  Violence and  Sexual Assault                                                                    
and elections.  She noted that  the state would  be entering                                                                    
an election  year and  the costs  would increase  again. She                                                                    
stated  that the  ongoing  versus  one-time reductions  were                                                                    
about 50/50.                                                                                                                    
Co-Chair  Neuman   believed  there   needed  to   be  better                                                                    
discussions on  the numbers. He  remarked that a  portion of                                                                    
the decrease to DCCED was  related to Alaska Travel Industry                                                                    
Association (ATIA)  and had nothing  to do with  the day-to-                                                                    
day  administrative costs  of the  department. He  wanted to                                                                    
see  the cuts  associated with  the departments'  day-to-day                                                                    
operations not  including other  reductions. He  stated that                                                                    
the  20 percent  reduction to  DCCED  shown on  slide 8  was                                                                    
Ms. Pitney  continued to  address significant  reductions on                                                                    
slide  8. Compared  to the  prior year  the DHSS  budget had                                                                    
been  reduced  by  $88  million, the  DOT  budget  had  been                                                                    
reduced by $34 million,  the Department of Corrections (DOC)                                                                    
and University  of Alaska budgets  had both been  reduced by                                                                    
$20 million.  The figures did  not count the  elimination of                                                                    
the fuel trigger mechanism that  had an additional impact on                                                                    
each  of  the  departments  (primarily  DOT).  Although  oil                                                                    
prices had decreased, the price  of gas had not decreased to                                                                    
the same  degree, which had resulted  in another significant                                                                    
Co-Chair Neuman remarked that the  fuel trigger was a result                                                                    
of oil  below $80  per barrel.  He stated  that subsequently                                                                    
"you should  be expected to pay  less for the price  of fuel                                                                    
whether it's  heating fuel or  transportation fuels  for the                                                                    
cost of these  departments as opposed to recall  them in the                                                                    
reduction in the budget."                                                                                                       
Ms. Pitney replied that the  price of oil had not translated                                                                    
to the same reduction in heating and motor fuel costs.                                                                          
11:06:23 AM                                                                                                                   
Ms.  Pitney addressed  efficiency  efforts on  slide 9.  She                                                                    
relayed that  the initiatives would  not redefine  the price                                                                    
of government,  but they would  increase its  efficiency and                                                                    
effectiveness. She  detailed that  some of the  efforts were                                                                    
further along such  as smart justice reforms  and Pew group;                                                                    
whereas others  were at the  beginning. She  elaborated that                                                                    
the statewide information  technology (IT) consolidation had                                                                    
begun in the spring and  was moving forward. Procurement and                                                                    
lease  contracts efficiencies  had  begun in  late May.  The                                                                    
remaining items  on the list  were in the  development phase                                                                    
and  would produce  savings over  a two  to three  year time                                                                    
period. She reiterated that the  savings would not be major,                                                                    
but they would  enable the state to  manage attrition forced                                                                    
through cost reductions. Every agency  was moving forward on                                                                    
internal savings efforts  to absorb as much of  the costs as                                                                    
possible. She  added that  from December  2014 to  July 2015                                                                    
there were  500 fewer  full-time permanent  state employees,                                                                    
which did not  count the University of Alaska  or the Alaska                                                                    
Court System.                                                                                                                   
Co-Chair  Neuman  asked  for further  detail  on  the  smart                                                                    
justice  reform efforts.  He  requested  information on  the                                                                    
cost to different agencies.                                                                                                     
Commissioner   Hoffbeck   pointed    to   slide   11:   "The                                                                    
Conversation:  Options."  He   stated  that  four  different                                                                    
options  had been  addressed.  The first  option  was to  do                                                                    
nothing. He  believed there was a  fairly large constituency                                                                    
who felt that doing nothing  was the correct answer; that if                                                                    
nothing was  done, eventually the problem  would work itself                                                                    
out  as  it  had  in   the  1980s,  1990s,  and  2000s.  The                                                                    
administration was  working hard  to try to  convince people                                                                    
that the  option was  not workable.  The option  to continue                                                                    
making reductions  to government spending was  on the table.                                                                    
He  stated that  people had  made it  clear that  additional                                                                    
expenditure   reductions  were   needed;  people   were  not                                                                    
convinced that  government was  as small as  it could  be or                                                                    
that it  had the right focus.  The administration recognized                                                                    
the option as  a valid part of the process.  He relayed that                                                                    
another option people brought up  was that oil and gas would                                                                    
bail the state out  again. Finally, the administration would                                                                    
discuss some potential revenue options.                                                                                         
11:10:07 AM                                                                                                                   
Ms. Pitney discussed a bar  chart on slide 12: "Options (Cut                                                                    
Government)."  She  pointed  out that  the  legislature  had                                                                    
significantly reduced  the size of government  by roughly $1                                                                    
billion  per year  since 2013.  The FY  16 was  currently at                                                                    
$4.9 billion; including transfers  from one-time sources the                                                                    
FY 16 budget was closer to $5.1 billion.                                                                                        
Representative Pruitt asked if  the figure included capital.                                                                    
Ms. Pitney  responded affirmatively.  She detailed  that the                                                                    
figure  included all  UGF commitments;  the majority  of the                                                                    
decrease was due to reduced  capital budgets. The difference                                                                    
between  FY  15  and  FY  16 was  about  50/50  capital  and                                                                    
operating budget decreases.                                                                                                     
Co-Chair  Thompson  acknowledged  that  spending  reductions                                                                    
were  necessary;   however,  he   wondered  at   what  point                                                                    
reductions  would  begin to  cause  the  state's economy  to                                                                    
crash. Ms. Pitney stated that  Professor Knapp would address                                                                    
the question  later in the presentation.  She explained that                                                                    
he would  discuss how each  of the options would  affect the                                                                    
Commissioner Hoffbeck added that  the conversation was about                                                                    
more than  just numbers. He  stated that it was  possible to                                                                    
calculate  how to  balance the  budget, but  the impacts  of                                                                    
various decisions needed to be  discussed. He furthered that                                                                    
each  of  the  options  had  some  impact  and  accompanying                                                                    
Representative  Gara   asked  Ms.  Pitney  how   much  state                                                                    
services  would   be  cut  due  to   population  growth  and                                                                    
inflation  if  the budget  was  kept  at $4.9  billion.  Ms.                                                                    
Pitney used an  inflation estimate of 2  percent. She stated                                                                    
that much of  the discussion about population  was about the                                                                    
choices  the state  made; there  could be  modest population                                                                    
increases similar  to the past  20 years or the  state could                                                                    
make  choices that  would impact  the growth.  She furthered                                                                    
that  population was  an important  thing  to consider  when                                                                    
making choices that might impact it in the future.                                                                              
11:13:57 AM                                                                                                                   
Vice-Chair Saddler asked for the  Consumer Price Index (CPI)                                                                    
and  the  population growth  in  Alaska  over the  past  ten                                                                    
years. Ms. Pitney did not have the data on hand.                                                                                
Co-Chair  Neuman  noted  that   Mr.  Knapp  would  have  the                                                                    
Vice-Chair  Saddler  asked  what   number  OMB  assumed  for                                                                    
inflation in  its budget. Ms.  Pitney replied that  OMB used                                                                    
an inflation of approximately  2.25 percent. She stated that                                                                    
the figure  had been higher 5  to 8 years back  and had been                                                                    
closer to 1 percent a couple of the years as well.                                                                              
Commissioner  Hoffbeck relayed  that  the long-term  average                                                                    
inflation  used in  the  budget was  3.25  percent, but  the                                                                    
current number used was 2.25 percent.                                                                                           
Representative Guttenberg  observed that  the state  had not                                                                    
begun to feel the impacts  of the reductions. He wondered if                                                                    
the administration was  tracking the impacts of  the cuts on                                                                    
various  things like  the backlogs  at the  state Recorder's                                                                    
Office, or lines at the Division of Motor Vehicles (DMV).                                                                       
Ms.   Pitney  replied   that  to   a   certain  degree   the                                                                    
administration  would have  the  ability to  talk about  the                                                                    
differences.  The  administration   was  working  diligently                                                                    
through streamlining and efficiency  efforts to avoid direct                                                                    
impacts  as  much  as  possible;  however,  there  would  be                                                                    
impacts and programs that would be discontinued.                                                                                
Co-Chair  Neuman  requested  any  information  on  potential                                                                    
delays for administrative services within the departments.                                                                      
11:16:00 AM                                                                                                                   
Representative  Gattis  referred  to  the  500  fewer  state                                                                    
employees discussed  on slide  9. She  wondered how  many of                                                                    
the positions  had been vacant.   Ms. Pitney  responded that                                                                    
the number  pertained to 500 fewer  full-time employees. She                                                                    
acknowledged  that the  deletion of  unfilled positions  did                                                                    
not  mean a  reduction  in employees.  The  number shown  on                                                                    
slide 9 accounted for an  actual reduction of employees from                                                                    
December 2014  to July  2015. She stated  that less  than 60                                                                    
people  had  been  laid  off;  much  of  the  reduction  was                                                                    
associated  with  employees  who retired  or  resigned.  She                                                                    
stated  that  given  the information  systems  it  would  be                                                                    
difficult,  but she  was working  to  move the  conversation                                                                    
away  from vacancies  to address  what  reductions meant  in                                                                    
terms of people delivering services.                                                                                            
Co-Chair  Neuman recognized  that government  services would                                                                    
take  longer  under  a reduced  budget.  He  reiterated  his                                                                    
request for information on potential delays.                                                                                    
Ms.  Pitney turned  to a  graph on  slide 14:  "Options (Cut                                                                    
Government): Real State Budget,  Adjusted for Population, in                                                                    
Thousands." The graph showed a  significant reduction to the                                                                    
capital  budget in  2016 (represented  in green).  She noted                                                                    
that  the capital  budget expenditure  was so  small it  was                                                                    
almost nonexistent  on the graph.  She added  that statewide                                                                    
operations  continued  to  be  a  driver  with  all  of  the                                                                    
payments  and obligations  (shown in  red). She  highlighted                                                                    
that the budget  was currently lower than  most years during                                                                    
the   post-pipeline   boom.   The  budget   picture   looked                                                                    
considerably different when it  did not factor in population                                                                    
adjustments (slide 13 compared to slide 14).                                                                                    
11:19:28 AM                                                                                                                   
Ms.  Pitney discussed  a chart  on slide  15: "Options  (Cut                                                                    
Government):  Average FY2009-2013  Total State  Expenditures                                                                    
by Population." She  discussed that much time  had gone into                                                                    
considering how  Alaska looked relative  to other  states. A                                                                    
line on  the chart  represented overall  government spending                                                                    
based   on   the   national   average.   Alaska   had   been                                                                    
significantly above  the line in  2009 to 2013;  however, it                                                                    
would  be touching  the line  in  2016. More  time would  be                                                                    
spent  looking  at  other  states   to  determine  how  they                                                                    
operated at their  given levels. For example,  50 percent of                                                                    
the   school  funding   in  North   Dakota  came   from  its                                                                    
communities.  The issue  was  important  to explore  because                                                                    
government  spending in  Alaska  was a  major  issue in  the                                                                    
Ms. Pitney  turned to slide  16: "Options  (Cut Government):                                                                    
Governor Protected  Life, Health, and Safety  ($2 Billion)."                                                                    
She discussed  that the  hope was to  cut government  to fit                                                                    
into $2.2  billion for the year  (if oil prices held  at the                                                                    
predicted average of $66 per  barrel). She detailed that the                                                                    
administration had  presented a  new budget bill  of roughly                                                                    
$2  billion  when the  CBR  [draw]  was not  passed  [during                                                                    
regular  session].   The  bill  had  included   funding  for                                                                    
troopers, DOC, half of DHSS,  and one-quarter of the funding                                                                    
for  the  education foundation  formula.  The  bill had  not                                                                    
included the  retirement contribution,  any oil and  gas tax                                                                    
credits, and  only included one-quarter  of the  funding for                                                                    
all  other  state agencies.  She  stated  that "it's  a  big                                                                    
difference between  where we  are and  a $2  billion revenue                                                                    
11:22:10 AM                                                                                                                   
Representative  Pruitt   expressed  his  concern   that  the                                                                    
discussion  would   fall  short  of   addressing  government                                                                    
reductions.  He  discussed  that  during  his  campaign  the                                                                    
governor  had  stated  he  would   cut  government  by  16.7                                                                    
percent;   however,  the   governor's  amended   budget  had                                                                    
actually increased  over the  FY 15  management plan  by 0.3                                                                    
percent. He detailed  that in the end,  after the governor's                                                                    
veto, the budget  had ended up with a  4.6 percent decrease.                                                                    
He believed the ideas for  cuts had barely been highlighted.                                                                    
He observed that  the issue had been generalized  to how the                                                                    
cuts  may  impact  people and  that  efficiencies  would  be                                                                    
looked for.  He believed  that before  the state  took money                                                                    
from   its   residents  that   it   cut   its  own   budgets                                                                    
sufficiently;  he stated  that  there had  not  been a  real                                                                    
discussion  how to  make it  happen. He  addressed what  the                                                                    
administration  would  present  to the  legislature  in  the                                                                    
current year  would allow the  legislature to  determine its                                                                    
comfort  level with  the  size of  government  and with  the                                                                    
discussion  about  what  role  the  public  would  play  and                                                                    
provide   with  its   own   pocketbook.   He  believed   the                                                                    
presentation was glossing over the issue.                                                                                       
Commissioner  Hoffbeck replied  that  when the  presentation                                                                    
had  been developed  the administration  had  spent as  much                                                                    
time on cuts  as it did on the revenue  aspects. The goal of                                                                    
the  presentation   was  to  outline  the   various  options                                                                    
available. The  administration recognized  that cuts  were a                                                                    
part of the discussion going  forward; however, if the state                                                                    
became bogged  down in cuts  it would  not get to  the final                                                                    
answer.  He  stressed  that  it  was  not  possible  to  cut                                                                    
government   enough  to   get  to   the  final   answer.  He                                                                    
acknowledged that  although it was necessary  to continue to                                                                    
have  expenditure  reductions  and the  discussions  on  the                                                                    
table,  it could  not  be the  only  discussion because  the                                                                    
numbers did not add up. He  shared that the first day of the                                                                    
workshop in  Fairbanks had been  spent on  discussions about                                                                    
what  people were  willing  to  cut out  of  the budget.  He                                                                    
detailed  that  the  participants  had  only  been  able  to                                                                    
identify  $20 million  to cut  from government  programs. He                                                                    
agreed that it was a  pertinent part of the discussion going                                                                    
forward, but the  answer would not be  achieved without work                                                                    
in other areas.                                                                                                                 
11:25:25 AM                                                                                                                   
Representative  Pruitt understood;  however, he  believed it                                                                    
was much easier to take money  from someone else than it was                                                                    
"to  look in  your  own life  and  determine whether  you're                                                                    
doing the right thing with  your own budget." He asked about                                                                    
the goal  of cuts  and the size  of government.  He wondered                                                                    
what  the legislature  should expect  to see  in the  coming                                                                    
year. He  was frustrated that  in the past the  governor had                                                                    
been willing  to make a  statement about what  percentage he                                                                    
wanted to see  cut from the budget and  although that figure                                                                    
had  not been  met, the  governor had  not communicated  how                                                                    
much  would be  cut in  the future.  He believed  that there                                                                    
were two sides  to the coin, but it appeared  more focus was                                                                    
being given to the income side.                                                                                                 
Ms. Pitney  responded that  the administration  would likely                                                                    
have an  early indication in  the beginning of  October. She                                                                    
detailed   that  the   administration  was   into  continued                                                                    
constraint. She  stated that "16.7  percent is a  number. We                                                                    
actually cut  19 percent in unrestricted  general funds last                                                                    
year to this year." She  relayed that the cut from executive                                                                    
agencies   (excluding  Medicaid,   the  education   formula,                                                                    
courts,  and the  legislature) was  an average  reduction of                                                                    
13.5 percent. She noted that  the legislature and courts had                                                                    
not been cut  quite as much. She pointed out  that there had                                                                    
been some significant  reductions, which were as  high as 20                                                                    
and 30  percent. She emphasized that  the administration was                                                                    
interested  in  continued  constraints.  She  conceded  that                                                                    
there  were  some  things  working  against  the  goal.  For                                                                    
example, it  would be difficult  to keep the  capital budget                                                                    
at  $118   million,  which  had   been  funded   largely  by                                                                    
reappropriations.  Additionally,  oil tax  credits  exceeded                                                                    
the  amount of  funding in  the particular  pot. She  stated                                                                    
that  there   were  many  things   and  many   drivers.  She                                                                    
reiterated  the   administration's  interest   in  continued                                                                    
11:28:22 AM                                                                                                                   
Representative  Pruitt  clarified  that he  had  been  using                                                                    
figures  that included  total General  Funds.  He had  found                                                                    
that in  the past year  the legislature had focused  so much                                                                    
on UGF, that  it had glossed over DGF, yet  it had moved UGF                                                                    
into  DGF.   He  had  felt   that  it  was  not   an  honest                                                                    
conversation  with the  public because  he believed  General                                                                    
Fund was the whole pot.                                                                                                         
Co-Chair  Neuman  asked  committee members  to  think  about                                                                    
their operating  budget questions in  terms of what  part of                                                                    
the  budget was  made  up of  grants,  state General  Funds,                                                                    
required, and additional due to legislation.                                                                                    
Representative  Gattis referred  to  Ms. Pitney's  statement                                                                    
about  the plan  to  have budget  information  out in  early                                                                    
October.  She asked  for verification  that  Ms. Pitney  had                                                                    
stated the  governor intended  to have a  budget out  in the                                                                    
first  part  of October  and  planned  another cut  of  16.7                                                                    
Ms. Pitney replied  in the negative. She  clarified that the                                                                    
administration  planned to  have a  budget framework  out in                                                                    
early October; it  would not have a change  record and other                                                                    
items. She  detailed that it would  include targets, revenue                                                                    
expectations,  and so  forth. The  administration's interest                                                                    
was continued  spending constraint;  it would  do everything                                                                    
it could  to keep the  budget as low as  possible, hopefully                                                                    
below the current year's budget,  but there were things that                                                                    
were tough  to control such  as the earned oil  tax credits.                                                                    
Items with a  General Fund obligation made  the total number                                                                    
difficult.  The  administration  planned to  make  continued                                                                    
reductions in  agency operations; the  cuts would not  be in                                                                    
the 20  to 30 percent  range from  the prior year.  The cuts                                                                    
could be around  2 to 5 percent; some could  be larger based                                                                    
on a choice in the change of service.                                                                                           
Representative  Gattis remarked  that there  were people  in                                                                    
her district  who believed the  state had not even  begun to                                                                    
scratch the surface of the problem.                                                                                             
11:31:27 AM                                                                                                                   
Co-Chair Neuman reported  that he had recently  met with the                                                                    
governor who had  committed to try to get the  budget to the                                                                    
legislature up to  30 days prior to the  December 15 release                                                                    
date   to  the   best   of  his   ability.   He  noted   the                                                                    
administration had  done pretty well  in its efforts  to get                                                                    
the  budget out  early the  prior year.  He stated  that the                                                                    
sooner  the  legislature  received   an  indication  on  the                                                                    
administration's  budget,  the  sooner it  could  begin  its                                                                    
Representative  Gara  recalled  that   the  prior  year  the                                                                    
administration had  stated that firing every  state employee                                                                    
would  only cut  the  budget deficit  in  half. He  wondered                                                                    
about the status  of the analysis given  the state's current                                                                    
revenue  and the  expected budget.  Ms. Pitney  replied that                                                                    
the  UGF component  for state  workers was  in the  range of                                                                    
$1.4  billion to  $1.5  billion.  There was  a  gap of  $2.7                                                                    
billion  or  $3.2  billion  depending   on  oil  price;  the                                                                    
termination of all  state employees would reduce  the gap by                                                                    
less than half.                                                                                                                 
Commissioner  Hoffbeck highlighted  slide 17:  "Options (Oil                                                                    
Taxes):  FY 16  General Fund  Revenue." The  chart addressed                                                                    
whether  oil and  gas could  bail  the state  out again.  He                                                                    
detailed  that   the  chart  showed  price   and  production                                                                    
sensitivity.  The red  portions of  the chart  showed prices                                                                    
and production  that were not sufficient  to generate enough                                                                    
revenue to balance the budget.  The white cells in the chart                                                                    
indicated a balanced budget with  little to spare; the green                                                                    
cells indicated  a budget surplus.  In order to  balance the                                                                    
budget at the current production  of 500,000 barrels per day                                                                    
the oil  price would need to  be $109 per barrel.  He stated                                                                    
that the most  optimistic price forecast was $60  to $80 per                                                                    
barrel  as a  stabilized price.  He detailed  that at  those                                                                    
prices shale oil and others  started getting turned back on.                                                                    
Subsequently,  the increase  in supply  capped how  much the                                                                    
price  could  rise. The  less  optimistic  forecast was  for                                                                    
stabilized oil  prices between  $40 and  $60 per  barrel. He                                                                    
recalled speaking with a price  forecasting agency the prior                                                                    
year that  had projected  a price of  $40 per  barrel, which                                                                    
had  been  pretty  accurate.  He  reported  that  there  was                                                                    
nothing  on the  horizon  indicating that  oil prices  would                                                                    
increase up  to $109 again  in the near future.  He reasoned                                                                    
an  increase of  that magnitude  would  not be  a result  of                                                                    
supply  and   demand,  but   would  take   an  international                                                                    
disruption  that would  possibly  create  a temporary  price                                                                    
11:35:13 AM                                                                                                                   
Co-Chair Neuman asked if DOR  had a fall oil price forecast.                                                                    
Commissioner  Hoffbeck responded  that the  revenue forecast                                                                    
would be  substantially lower than the  spring forecast. The                                                                    
department was  preparing to generate the  forecast in early                                                                    
October.  He added  that experts  from "all  over" would  be                                                                    
brought in to get ideas on the prices.                                                                                          
Co-Chair Neuman  asked for an  oil price  forecast estimate.                                                                    
Commissioner Hoffbeck  believed that optimistically  the oil                                                                    
price would  be $60  per barrel, but  probably lower  in the                                                                    
Co-Chair  Neuman  asked  for verification  that  the  figure                                                                    
would  be  down  from  the current  $66  price  per  barrel.                                                                    
Commissioner Hoffbeck replied in the affirmative.                                                                               
11:35:51 AM                                                                                                                   
Representative Guttenberg referred to  slide 17 and believed                                                                    
500,000 barrels of oil per  day was the long-term production                                                                    
forecast. He asked where 600,000  to 800,000 barrels per day                                                                    
on  the chart  had  been  derived. He  did  not believe  the                                                                    
numbers represented reality.                                                                                                    
Commissioner  Hoffbeck answered  that the  numbers had  been                                                                    
included  on the  chart in  response to  the belief  of some                                                                    
individuals  that increased  oil production  would bail  the                                                                    
state out. The goal had been  to show what could be expected                                                                    
with various increments of  additional production. There was                                                                    
nothing  on the  horizon  indicating  that production  would                                                                    
increase to  800,000 barrels  per day.  He stated  that when                                                                    
the chart had been developed,  oil prices had been about $55                                                                    
per barrel; at that price  it would take 1.6 million barrels                                                                    
per day to  balance the budget. He  stressed that production                                                                    
would not bail the state out.                                                                                                   
Vice-Chair  Saddler  discussed  that   the  state  had  seen                                                                    
reductions in  oil throughput of  about 6 to 7  percent over                                                                    
the past several  years. He asked if tax  credits offered to                                                                    
the  oil industry  to incentivize  drilling exploration  had                                                                    
made a difference in maintaining the production level.                                                                          
Commissioner Hoffbeck replied that  it was difficult to make                                                                    
a definitive  statement on the effectiveness  of the credits                                                                    
on the production  level. He stated there was  no doubt that                                                                    
the  state  had  seen  more activity  due  to  the  credits.                                                                    
However,  he did  not believe  the state  had seen  the "big                                                                    
score" that  would indicate  it was on  the winning  side of                                                                    
the equation.  He expounded that  there were  some potential                                                                    
oil fields that  could be brought online  that if attributed                                                                    
entirely  to credits  would indicate  the  credits had  been                                                                    
successful.  He  added  that the  larger  issue  related  to                                                                    
credits was about  what the state could  afford. He remarked                                                                    
that there were  a multitude of many good  programs, but the                                                                    
reality was there was a limited budget.                                                                                         
Co-Chair  Neuman  relayed  that  the  committee  would  have                                                                    
discussions on the  credits in the future.  He asked members                                                                    
to  provide associated  questions to  his office  or to  Co-                                                                    
Chair Thompson.                                                                                                                 
11:38:13 AM                                                                                                                   
Representative Edgmon  asked what amount would  be needed to                                                                    
backfill the  budget under the scenarios  presented on slide                                                                    
17. He  noted that  the FY  16 budget was  based on  $66 per                                                                    
barrel. He  spoke to a  scenario in which the  average price                                                                    
was  closer to  $50 per  barrel. He  remarked the  state was                                                                    
looking  at  $3 billion  for  FY  17  to make  things  work;                                                                    
however, it may need to backfill the existing budget.                                                                           
Ms.  Pitney responded  that $50  per  barrel would  generate                                                                    
$1.8 billion. The projected price  was $66 per barrel, which                                                                    
would  generate  $2.2  billion.   The  difference  was  $400                                                                    
million. At  a price of  $40 per barrel, revenue  could drop                                                                    
by as  much as $700,000,  which would need to  be backfilled                                                                    
for FY 16 before a discussion on FY 17 even began.                                                                              
Commissioner   Hoffbeck  added   that  revenue   would  drop                                                                    
approximately  $120 million  with  every $5  decline in  oil                                                                    
price (at  the lower oil  prices). He skipped over  slide 18                                                                    
titled   "Options  (Increase   Revenue),"  which   showed  a                                                                    
screenshot of the interactive budget balancing model.                                                                           
Co-Chair Neuman remarked that the  administration had used a                                                                    
model  developed by  LFD and  had reworked  it to  fit their                                                                    
scenarios.  The model  had been  brought to  the public  and                                                                    
looked  at different  prices of  oil,  different taxes,  and                                                                    
generated revenue under the scenarios.                                                                                          
Commissioner   Hoffbeck  turned   to   slide  19:   "Options                                                                    
(Increase  Revenue): Modify  Oil and  Gas Taxes."  He stated                                                                    
that at  $40 per  barrel there  was not  significant revenue                                                                    
for anyone  within the  tax system. He  stated that  some of                                                                    
the  items shown  on the  slide had  more pertinence  in the                                                                    
discussion going forward with  various gasline scenarios. He                                                                    
noted that the list encompassed  the main tax structures for                                                                    
modifying the existing oil and gas taxes:                                                                                       
     · Base Rate                                                                                                                
     · Minimum Tax                                                                                                              
     · GVR (New Oil Rate)                                                                                                       
     · Cook Inlet Production Taxes                                                                                              
     · Hazardous Release Surcharge                                                                                              
     · Natural Gas Reserves Tax                                                                                                 
Commissioner  Hoffbeck  noted  that  the  hazardous  release                                                                    
surcharge  had been  done  in  the past  year  and had  been                                                                    
included because  it provided an  idea of how  difficult the                                                                    
discussions would  be. He elaborated that  the surcharge was                                                                    
almost one  penny, but nearly  did not pass  the legislature                                                                    
because it  was a new tax.  He discussed that there  had not                                                                    
been a new tax in 10 years  other than oil and gas taxes (10                                                                    
years back the new tax  had been on alcohol and cigarettes).                                                                    
The  department recognized  that the  appetite for  taxes in                                                                    
Alaska was not high.                                                                                                            
11:41:52 AM                                                                                                                   
Representative  Gara   discussed  one  of  the   reasons  he                                                                    
believed the state needed to take  a look at oil tax reform.                                                                    
He pointed to  GVR [gross value reduction] oil  on slide 19.                                                                    
He  explained  that GVR  related  to  fields unitized  after                                                                    
2002.  When  oil  had  been   $110  per  barrel,  Dr.  Scott                                                                    
Goldsmith  [Institute  of   Social  and  Economic  Research,                                                                    
University of Alaska Anchorage] had  put out a chart showing                                                                    
that the state's production tax  for new oil provided a near                                                                    
zero or negative net present  value. He surmised it would be                                                                    
a negative net present value  at current prices. He wondered                                                                    
if the  administration had done  any analysis on  the issue.                                                                    
He agreed  with incentivizing  new oil  production; however,                                                                    
he wondered  if it was  a wise  investment if the  state was                                                                    
spending  significant  money  to   achieve  a  negative  net                                                                    
present value under the oil tax.                                                                                                
11:42:59 AM                                                                                                                   
Co-Chair Neuman  did not want  to get  too far into  oil and                                                                    
gas during the current meeting.                                                                                                 
Commissioner  Hoffbeck  replied  that the  analysis  by  Dr.                                                                    
Goldsmith was accurate.                                                                                                         
Commissioner   Hoffbeck  turned   to   slide  21:   "Options                                                                    
(Increase  Revenue):  Modify  Non-oil  and  Gas  Taxes."  He                                                                    
relayed that Senator Cathy  Giessel was currently assembling                                                                    
a  panel to  begin an  active  discussion on  the issue.  He                                                                    
elaborated  that  the  administration had  done  significant                                                                    
work on the topic over the  summer; it had been meeting with                                                                    
the investment community  and smaller producers/explorers to                                                                    
get an  idea of some  plausible answers. He relayed  that it                                                                    
would be  an active discussion  in the coming year.  He read                                                                    
the various non-oil and gas taxes shown on slide 21:                                                                            
     · Corporate Income Tax Rate                                                                                                
     · Mining Taxes                                                                                                             
     · Fisheries Taxes                                                                                                          
     · Motor Fuel Taxes                                                                                                         
     · Sin Taxes                                                                                                                
Commissioner Hoffbeck noted that  the state's motor fuel tax                                                                    
was  the lowest  in  the  country at  $0.08  per gallon.  He                                                                    
believed the average was approximately  $0.30 per gallon. He                                                                    
reasoned that there was some room  to move some of the taxes                                                                    
without becoming  onerous in the  state's tax  structure. He                                                                    
commented that  no one  liked taxes, but  some of  the taxes                                                                    
were  substantially  lower  than   those  in  other  states.                                                                    
However, Alaska had  some of the higher  alcohol and tobacco                                                                    
taxes (sin taxes) in the country.                                                                                               
Co-Chair Neuman  requested current  information on  how much                                                                    
each of the taxes (shown on  slide 21) brought in and recent                                                                    
history  related  to  any  structure  changes.  Commissioner                                                                    
Hoffbeck agreed and relayed that  the information was on the                                                                    
department's  website and  was included  in the  interactive                                                                    
model as well.                                                                                                                  
Co-Chair Neuman  asked Commissioner Hoffbeck to  provide the                                                                    
information to the co-chair offices.                                                                                            
Representative  Gattis referred  to Commissioner  Hoffbeck's                                                                    
statement that Alaska's  sin taxes were some  of the highest                                                                    
in the nation. She asked  if the department had compared the                                                                    
state's taxes to the average of those in the Lower 48.                                                                          
Commissioner     Hoffbeck    asked     for    clarification.                                                                    
Representative Gattis  clarified that  she was  referring to                                                                    
the non-oil and  gas taxes shown on slide  21, excluding sin                                                                    
taxes. Commissioner  Hoffbeck replied  that it had  done the                                                                    
comparisons where the data was available.                                                                                       
Co-Chair  Neuman   asked  the  department  to   include  the                                                                    
information with the other materials he had requested.                                                                          
11:45:22 AM                                                                                                                   
Representative  Edgmon followed  up  on  the statement  that                                                                    
there  had been  no  new taxes  in the  past  ten years.  He                                                                    
remarked that  the previous  year in  particular had  seen a                                                                    
multitude of license and fee  increases within the agencies,                                                                    
including fees  for the Whittier  Tunnel, parks,  and other.                                                                    
He added that  the legislature had increased the  gas tax by                                                                    
$0.009 for the Spill Prevention and Response (SPAR) Fund.                                                                       
Commissioner   Hoffbeck   discussed   slide   22:   "Options                                                                    
(Increase Revenue): Repurposing Financial Assets":                                                                              
     · Pension Obligation Bonds                                                                                                 
     · Permanent Fund Earnings                                                                                                  
     · Permanent Fund Dividend Cap                                                                                              
     · Collateralization & Securitization                                                                                       
Commissioner  Hoffbeck elaborated  that  the department  was                                                                    
looking at  pension obligation bonds  in more detail  as the                                                                    
market had begun  to correct. He detailed that  DOR had been                                                                    
looking  for an  opportunity  within the  market, which  may                                                                    
have  begun to  form. He  addressed Permanent  Fund earnings                                                                    
such as  a percent of  market value (POMV) model  that would                                                                    
require legislative  action or use of  earnings, which would                                                                    
be an appropriation. He stated  that Permanent Fund earnings                                                                    
represented  the biggest  option available  to the  state in                                                                    
terms of  bringing additional money  in for  government use.                                                                    
He stated that  the use of earnings would  be most effective                                                                    
as a cap, but could be done  as a percentage to the state as                                                                    
well.  He  addressed collateralization  and  securitization,                                                                    
meaning the  state would borrow against  its existing assets                                                                    
to  "supersize"   the  Permanent  Fund  and   generate  more                                                                    
revenues  in  order to  spin  more  revenues off  for  state                                                                    
purposes.  He noted  that the  option  related to  borrowing                                                                    
would come with some risk.                                                                                                      
Representative Wilson wanted to  clarify that the motor fuel                                                                    
tax   included   heating   oil  and   not   just   gasoline.                                                                    
Commissioner Hoffbeck  responded that a tax  program had not                                                                    
been  developed  for  the  motor fuel  tax;  it  had  simply                                                                    
compared  motor fuel  tax to  other  places in  the U.S.  He                                                                    
furthered  that  if the  tax  was  included in  the  package                                                                    
brought forward  by the administration, it  would detail the                                                                    
information out.                                                                                                                
Representative   Wilson  stated   that   if   there  was   a                                                                    
conversation  about   heating  oil  it  needed   to  include                                                                    
gasoline. She  stated that  some people  did not  heat their                                                                    
homes "that way"  and she wanted to ensure  things were kept                                                                    
on a fair level.                                                                                                                
11:48:18 AM                                                                                                                   
Vice-Chair   Saddler  asked   for   clarification  on   what                                                                    
collateralization   and   securitization  may   look   like.                                                                    
Commissioner Hoffbeck  responded that the  program discussed                                                                    
earlier  in  the  year  related  to  borrowing  against  the                                                                    
state's  existing  financial  assets  and  reinvesting.  The                                                                    
difference  between what  Alaska  could borrow  and what  it                                                                    
could achieve in  the investments would enable  the state to                                                                    
increase the  size of  its revenues and/or  the size  of the                                                                    
Permanent Fund.  Securitization would then mean  selling the                                                                    
future revenue for a one-time  infusion into the budget, but                                                                    
then the state would not pay out the ongoing revenues.                                                                          
Vice-Chair  Saddler  asked   if  Commissioner  Hoffbeck  was                                                                    
talking  about using  the Permanent  Fund  in an  "arbitrage                                                                    
play." Commissioner  Hoffbeck replied that  essentially that                                                                    
was how it would work. He  communicated that it would not be                                                                    
a true arbitrage play, but  because of the state's advantage                                                                    
as  a  government  entity  it  could  borrow  taxable  money                                                                    
against what  it could return in  investments. He reiterated                                                                    
that  there was  some  associated risk;  however, there  was                                                                    
risk in doing  nothing as well. He believed  the lead option                                                                    
on slide 22  would be pension obligation bonds,  which was a                                                                    
similar play.                                                                                                                   
Co-Chair  Neuman  requested  an  analysis  of  stock  market                                                                    
projections.  He  remarked  that  the market  was  not  very                                                                    
secure at  present. He asked  the department to  provide the                                                                    
committee  with its  idea related  to collateralization  and                                                                    
Commissioner  Hoffbeck  responded  in  the  affirmative.  He                                                                    
assured the  committee that the  concept would be  vetted by                                                                    
the best minds before action was taken.                                                                                         
Ms. Pitney clarified that the  options on the list were only                                                                    
options and  did not mean  the administration  was endorsing                                                                    
Representative  Gara  asked  for  an estimate  on  how  much                                                                    
pension  obligation bonds  would help  towards the  deficit.                                                                    
Ms.  Pitney  answered that  it  depended  on the  myriad  of                                                                    
assumptions  and risk  tolerance.  Currently  the state  was                                                                    
paying  roughly $265  million in  past service  obligations.                                                                    
Additionally, the state was paying  $0.22 on every $1.00 for                                                                    
PERS  employees  (including  every municipality  and  school                                                                    
district).  She  stated that  it  would  be helpful  to  the                                                                    
degree  that  either of  the  components'  payment into  the                                                                    
retirement  system. She  continued  that the  administration                                                                    
would look at  what the state was currently  paying, what it                                                                    
could  offset  in  the ongoing  operating  budget,  and  the                                                                    
associated risk.                                                                                                                
Commissioner Hoffbeck elaborated that  whether the money was                                                                    
used to cover the state's "on  behalf" payment or to allow a                                                                    
lower employer  contribution depended  on who would  get the                                                                    
11:52:34 AM                                                                                                                   
Co-Chair  Neuman  thought  the  state  paid  24  percent  as                                                                    
opposed to  22 percent [related to  PERS contributions}. Ms.                                                                    
Pitney  responded that  each employer  paid  $0.22 on  every                                                                    
employee whether  they were in  the Defined  Contribution or                                                                    
Defined  Benefit  plan.  She  noted  she  had  forgotten  to                                                                    
include  TRS, which  the  state paid  a  larger "on  behalf"                                                                    
payment on.  The actuarial rate  through the prior  year was                                                                    
35  percent  and employers  picked  up  22 percent;  the  on                                                                    
behalf  payment was  the difference  between the  22 and  35                                                                    
percent  for PERS.  On the  TRS side  it was  the difference                                                                    
between the employer  payment for TRS of 12  percent and the                                                                    
roughly 30 percent.                                                                                                             
Co-Chair Neuman  interjected that the committee  would delve                                                                    
further into the issue.                                                                                                         
Ms.  Pitney  continued  that  the  pension  obligation  bond                                                                    
option had  more potential  than other  items, but  it would                                                                    
require significant analysis and discussion.                                                                                    
Co-Chair Neuman noted that for  many of the different issues                                                                    
it  came down  to  how  much of  the  load  the state  could                                                                    
continue to carry.                                                                                                              
Commissioner  Hoffbeck  pointed  to  a chart  on  slide  23:                                                                    
"Options  (Increase Revenue):  Per-Capita Broad-Based  State                                                                    
Tax Revenues,  by State, 2014."  The chart  included various                                                                    
revenue generating  taxes used  by each state.  For example,                                                                    
if the  state implemented a  state income tax at  15 percent                                                                    
of federal earnings,  it would bring in  about $550 million.                                                                    
He  estimated that  at 700,000  residents it  would increase                                                                    
the  per capita  state tax  burden by  $800, which  would be                                                                    
about  $1,300 per  person.  He explained  that  even with  a                                                                    
personal income  tax the  state would  be the  second lowest                                                                    
taxed  state in  the nation.  Additionally, residents  would                                                                    
continue  to receive  a Permanent  Fund Dividend.  He stated                                                                    
that "the sky  was not falling," the state  taxes could look                                                                    
different,  but   it  would  not   resemble  a   state  like                                                                    
Connecticut [with very  high taxes] in order  to balance the                                                                    
11:54:48 AM                                                                                                                   
Commissioner Hoffbeck  highlighted options for new  taxes on                                                                    
slide 24:                                                                                                                       
     · Health Care Provider Tax                                                                                                 
     · Business License/Gross Receipts Tax                                                                                      
     · Income Tax                                                                                                               
     · Capital Gains Tax                                                                                                        
     · Payroll/School Tax                                                                                                       
     · Sales Tax                                                                                                                
     · Statewide Property Tax                                                                                                   
Commissioner  Hoffbeck elaborated  that all  of the  options                                                                    
(on  slide 24)  had  been talked  about  by the  legislature                                                                    
within the past  few years. He addressed  slide 25: "Options                                                                    
(Increase Revenue): Lottery/Gaming":                                                                                            
     · State Lottery                                                                                                            
     · Permanent Fund Lottery                                                                                                   
     · Gaming Rates                                                                                                             
     · Card Rooms                                                                                                               
     · Casinos                                                                                                                  
Commissioner  Hoffbeck  expounded  that  he  had  given  two                                                                    
Powerball interviews  in Fairbanks.  He relayed  that people                                                                    
were  interested  in  the  idea, but  it  did  not  generate                                                                    
significant  revenue.  He  noted   that  it  could  generate                                                                    
between $12 million to $15 million in revenue.                                                                                  
Co-Chair  Neuman  asked  what  it  would  cost  to  operate.                                                                    
Commissioner  Hoffbeck  replied  that  initially  the  state                                                                    
would  probably have  a contract  with the  corporation that                                                                    
ran Powerball  nationally. He surmised  the cost would  be a                                                                    
percentage. He did not have the information.                                                                                    
Representative  Gara   believed  there  was   an  unintended                                                                    
loophole in  the state's corporate  tax. He detailed  that C                                                                    
Corporations paid  a corporate tax, but  S Corporations only                                                                    
paid a  $100 license fee  and no  tax. He wondered  how much                                                                    
revenue would  be generated if S  Corporations were included                                                                    
under the corporate  income tax. In the distant  past he had                                                                    
heard that revenue would be approximately $40 million.                                                                          
Commissioner Hoffbeck did not  have the information on hand;                                                                    
however,  the administration  was looking  at what  it would                                                                    
take  to introduce  an S  Corporation  or Limited  Liability                                                                    
Company tax. He noted that the number was not huge.                                                                             
Co-Chair Thompson relayed  that his office was  looking at S                                                                    
Corporations  and was  working with  the administration.  He                                                                    
offered to  work on getting  answers to  questions committee                                                                    
members may have on the subject.                                                                                                
Ms. Pitney addressed  a flow chart on slide  27 titled "Path                                                                    
to  Fiscal   Stability."  She   explained  that   the  chart                                                                    
represented the  administration's road  map to  session. She                                                                    
relayed  that  the  administration was  focused  on  raising                                                                    
public  awareness.  She  moved  to  slide  28:  "Sustainable                                                                    
Future Dialogues"  and relayed  that the  administration had                                                                    
held 17 events to date. The  largest had been the June 5 and                                                                    
6  kick-off  meeting.  She noted  that  multiple  department                                                                    
heads  had been  involved in  the events  including herself;                                                                    
Commissioner   Hoffbeck;    Chris   Hladick,   Commissioner,                                                                    
Department    of   Commerce,    Community,   and    Economic                                                                    
Development; and  Governor Walker. Additionally,  there were                                                                    
a minimum of 25 upcoming  events. She thanked members of the                                                                    
business  community  and  public  who  were  hosting  events                                                                    
including Commonwealth  North, Institute  of the  North, the                                                                    
Rasmuson Foundation,  and others. She discussed  the goal of                                                                    
developing  a framework  for discussion  to provide  more in                                                                    
depth analysis about  a proposal from the  governor that was                                                                    
expected  in  early October.  She  noted  that the  proposal                                                                    
would not include detail on  change records and the specific                                                                    
number of  people, but it  would include targets  and levels                                                                    
it would propose to the  legislature. She continued that the                                                                    
proposal  could   be  refined   throughout  the   fall;  the                                                                    
administration  intended   to  participate  at   the  Alaska                                                                    
Federation  of Natives  (AFN)  and  Alaska Municipal  League                                                                    
annual conferences to continue  moving the dialogue forward.                                                                    
The  formal  submission would  be  made  in December,  which                                                                    
would not be  a surprise. She discussed that  there would be                                                                    
such  a change  for the  state  and the  decisions would  be                                                                    
impactful,  but  the  more  people who  were  on  board  the                                                                    
Co-Chair Neuman  referred to  the final  column in  the road                                                                    
map  on slide  27 pertaining  to finalizing  legislation and                                                                    
reporting  to the  legislative  leadership  for vetting.  He                                                                    
asked  if the  administration was  considering any  specific                                                                    
legislation and what  it would be. For example,  a change to                                                                    
tax credits, a POMV for the Permanent Fund, or other.                                                                           
Ms. Pitney replied that the  information would be made clear                                                                    
in   the  October   timeframe.  She   elaborated  that   the                                                                    
administration   was  actively   having  the   conversations                                                                    
internally  and wanted  to bring  a solid  framework forward                                                                    
that would result in robust conversations.                                                                                      
12:01:07 PM                                                                                                                   
Representative  Gara referred  to  the  list of  sustainable                                                                    
future dialogues on  slide 28. He agreed that  the groups on                                                                    
the list were all good;  however, it was important to engage                                                                    
the general public  as well. He asked  if the administration                                                                    
had any focus  on getting out to the general  public who did                                                                    
not  attend Chamber  of Commerce,  Commission on  Aging, and                                                                    
other meetings. He  wanted to hear thoughts  from the public                                                                    
on everything, including oil taxes.  He wanted the debate to                                                                    
include all options.                                                                                                            
Ms. Pitney  replied that  based on  the slides,  all options                                                                    
were on the table.  She communicated that the administration                                                                    
was working to  engage the public in the  discussion as much                                                                    
as  possible. She  stated that  the Rasmuson  Foundation was                                                                    
moving  forward   on  a   larger  education   campaign.  The                                                                    
administration was committed to  getting as much information                                                                    
out as possible; it was  open to providing whatever it could                                                                    
to  legislators  or  groups  to  enable  them  to  take  the                                                                    
conversation to "their world."                                                                                                  
Commissioner Hoffbeck added that  the administration had not                                                                    
limited  the discussions;  it had  worked  to accommodate  a                                                                    
discussion with anyone who had  asked. He noted there were a                                                                    
couple of  YouTube videos  available for  a "meeting  in the                                                                    
box"   idea  for   people  to   utilize  in   smaller  group                                                                    
Co-Chair  Neuman commented  that individual  legislators had                                                                    
all be  talking to their  constituents. He detailed  that he                                                                    
would work with finance  committee members on visiting their                                                                    
communities  to hear  what  the  public had  to  say on  the                                                                    
state's direction.                                                                                                              
12:03:35 PM                                                                                                                   
Vice-Chair  Saddler  referred to  slide  27,  column 5  that                                                                    
related  to  finalizing  a  recommendation  on  a  preferred                                                                    
option. He requested to receive  the information as early as                                                                    
possible, which  would benefit the conversation  between the                                                                    
legislature   and   the   administration.   He   asked   the                                                                    
administration not to  wait until it had "it  all wrapped up                                                                    
in  a  bow"  in  October.   He  stated  that  receiving  the                                                                    
information  in  advance would  allow  time  to work  out  a                                                                    
better deal.                                                                                                                    
Co-Chair   Neuman   communicated   Representative   Pruitt's                                                                    
request  for information  on  where  the administration  saw                                                                    
reductions in the current budget.                                                                                               
Representative  Edgmon  felt   differently  than  the  prior                                                                    
speakers.  He  was  less  concerned   with  the  detail  the                                                                    
administration  would provide  the  legislature  on what  it                                                                    
proposed  for the  next legislative  session because  he did                                                                    
not believe  any of the  options would go forward  until the                                                                    
public bought  in. He discussed  that the first part  of the                                                                    
presentation had been titled "fiscal  challenges" but in his                                                                    
world it could be  labeled "political challenges." He stated                                                                    
that everyone  involved understood  that new  revenue needed                                                                    
to come  from someplace and  that the legislature  would not                                                                    
act  until  the  general  public felt  the  same  thing.  He                                                                    
recommended  consulting AFN  as he  believed the  federation                                                                    
planned to address the topic  of a sustainable future during                                                                    
their upcoming  convention. He  thanked Co-Chair  Neuman for                                                                    
holding  the meeting  and communicated  his appreciation  to                                                                    
the  administration   for  a  presentation  well   done.  He                                                                    
believed the approach  would take time and would  need to be                                                                    
a layer by layer method.                                                                                                        
Co-Chair Neuman referred to recent  news coverage related to                                                                    
the  U.S.  stock  market.  He remarked  that  the  value  of                                                                    
Chinese currency  had significantly impacted the  market. He                                                                    
stated  that  Standard  and  Poor's  had  recently  provided                                                                    
thoughts related  to downsizing  Alaska's credit  rating. He                                                                    
asked for information on how the situation impacted Alaska.                                                                     
Commissioner  Hoffbeck  replied  that there  would  be  some                                                                    
impact,  particularly if  the state  decided to  begin using                                                                    
the  Permanent Fund  earnings  as a  source  of revenue  for                                                                    
state government.  He detailed that Permanent  Fund earnings                                                                    
would  suffer like  anything else  in the  event of  a major                                                                    
downturn in the  market. He relayed that the  CBR was pretty                                                                    
well  protected; money  had been  moved from  the subaccount                                                                    
into safe investments  in the main account  in the preceding                                                                    
year in  order to protect  the funds. He qualified  that the                                                                    
money would  decline if the  market went down, but  it would                                                                    
not decrease  as dramatically as  the market. The  state had                                                                    
very  little revenue  coming in  at present  due to  low oil                                                                    
prices and  a market  that was  appearing to  correct, which                                                                    
would probably exacerbate  the problem going into  the FY 17                                                                    
budget.  However,  a  correction   in  the  market  provided                                                                    
numerous  opportunities that  were  not  available when  the                                                                    
market was high; the correction  would allow the state to be                                                                    
more  aggressive  with  investing. He  communicated  that  a                                                                    
couple  of weeks  earlier Standard  and Poor's  had let  the                                                                    
state know  it would take  Alaska's bond rating back  to its                                                                    
credit committee. He noted that  the practice was concerning                                                                    
and  highly   unusual.  Subsequently,  the   department  had                                                                    
traveled to  meet with the  agency and had relayed  that the                                                                    
state was on  track with plans outlined by  the governor the                                                                    
prior February.  He furthered that  due to  substantial cuts                                                                    
made by  the legislature  the prior  session, the  state was                                                                    
ahead  of  expenditure  reductions  it  had  discussed.  The                                                                    
department  had  shared  that the  administration  had  been                                                                    
traveling  around the  state preparing  to  bring a  revenue                                                                    
package forward. He relayed that  the agency was comfortable                                                                    
that the  state was on track  with its plans, but  it made a                                                                    
strong  statement that  if they  did not  see a  substantial                                                                    
closing of the revenue and  expenditure gap that the state's                                                                    
bond rating was  in jeopardy going forward.  He believed the                                                                    
end  of  the  legislative  session  would  probably  trigger                                                                    
another response from the rating  agencies. He hoped that at                                                                    
that point  the agency would  be comfortable that  the state                                                                    
was continuing to  move forward. He noted  that the problems                                                                    
would not  all be  solved in the  current year;  the process                                                                    
would be ongoing.                                                                                                               
12:09:00 PM                                                                                                                   
Co-Chair Neuman spoke to work  committee members had done to                                                                    
reduce the  state's operating budget.  He believed  the work                                                                    
had to  be recognized by Wall  Street. Commissioner Hoffbeck                                                                    
replied that it had been recognized.                                                                                            
12:09:24 PM                                                                                                                   
AT EASE                                                                                                                         
12:13:52 PM                                                                                                                   
^INSTITUTE  OF SOCIAL  and  ECONOMIC RESEARCH  PRESENTATION:                                                                  
ECONOMIC IMPACTS OF  ALASKA FISCAL OPTIONS: A  STUDY ISER IS                                                                  
STARTING SOME OF WHAT WE ALREADY KNOW                                                                                         
12:13:52 PM                                                                                                                   
GUNNAR   KNAPP,  DIRECTOR   AND   PROFESSOR  OF   ECONOMICS,                                                                    
INSTITUTE   OF   SOCIAL   AND  ECONOMIC   RESEARCH   (ISER),                                                                    
UNIVERSITY  OF  ALASKA   ANCHORAGE,  provided  a  PowerPoint                                                                    
presentation  titled  "Economic  Impacts  of  Alaska  Fiscal                                                                    
Options: A  Study ISER is  Starting Some of What  We Already                                                                    
Know"  (copy   on  file).  He   discussed  that   there  was                                                                    
significant interest  as the legislature  and administration                                                                    
spoke about  all of  the possible ways  of dealing  with the                                                                    
fiscal situation. He relayed that  ISER was starting a study                                                                    
that would  finish in the  fall related to  economic impacts                                                                    
of  Alaska fiscal  options. His  primary message  was making                                                                    
the  study  as  useful  as  possible  for  decision  makers;                                                                    
therefore,  ISER   was  interested  in  any   questions  the                                                                    
committee may have about economic  impacts. He added that if                                                                    
time permitted  he would talk  about what was  already known                                                                    
from past ISER studies. He  addressed that Alaska was facing                                                                    
difficult  choices between  difficult fiscal  options (slide                                                                    
     · We have been running very big deficits                                                                                   
     · We have been using reserve funds to pay for the                                                                          
     · Our reserve funds are running out                                                                                        
     · Within a few years, we will have to reduce the                                                                           
     · Our only options are:                                                                                                    
          o More spending cuts                                                                                                  
          o New revenues                                                                                                        
          o Using Permanent Fund earnings                                                                                       
     One of the issues in making these choices is how                                                                           
     different options would affect our economy.                                                                                
Co-Chair Neuman  suggested making an addition  to the slide.                                                                    
He  stated that  there  were plenty  of  laws directing  the                                                                    
state.  He  communicated  that   the  committee  would  look                                                                    
heavily at passed legislation that  increased the budget. He                                                                    
elaborated  the   intent  to   review  the   legislation  to                                                                    
determine whether  all of  the projected  costs had  come to                                                                    
fruition and  whether all of  the employees were  needed. He                                                                    
believed the  legislature needed  to take  a look  at taking                                                                    
some  laws  off  the  books and  refining  statutes  guiding                                                                    
Mr. Knapp  agreed and viewed the  option as a method  to get                                                                    
spending  under  control.  He  would add  the  idea  to  the                                                                    
options  considered  in the  study.  He  turned to  slide  3                                                                    
titled "ISER is doing a  study of economic impacts of Alaska                                                                    
fiscal options":                                                                                                                
     · $60,000 study funded by DOR and OMB                                                                                      
     · Study is just beginning                                                                                                  
     · Timeline                                                                                                                 
          o Mid-September: Preliminary report                                                                                   
          o Mid-December: Draft final report                                                                                    
          o Early January: Final report                                                                                         
Mr.  Knapp  expounded  that  the  preliminary  report  would                                                                    
summarize  the past  analyses  on the  topic  and the  draft                                                                    
final  report would  include new  information. He  turned to                                                                    
slide 4:                                                                                                                        
     We welcome your advice about this study                                                                                    
     · We want the study to be helpful to Alaskans                                                                              
          o Particularly to the legislature which has to                                                                        
             make the hard choices                                                                                              
     · We welcome your advice:                                                                                                  
          o Today or any other time                                                                                             
          o By email, phone, meetings                                                                                           
          o What fiscal options do you want to know about?                                                                      
          o What economic impacts do you want to know                                                                           
     · We will form an informal study advisory group:                                                                           
          o Looking for a wide range of perspectives                                                                            
          o Will meet by teleconference two or three times                                                                      
              ƒ To advise about study design                                                                                    
               ƒ To review preliminary and draft final                                                                          
          o We would welcome legislative participation                                                                          
Mr. Knapp  elaborated that ISER  was interested  in learning                                                                    
about the  kinds of economic  impacts that were  of interest                                                                    
to the legislature (e.g. employment, jobs, and others).                                                                         
12:18:44 PM                                                                                                                   
Mr. Knapp  addressed slide  5 and  emphasized that  ISER was                                                                    
not advocating for  or against any options. The  goal of the                                                                    
study  was to  help  inform the  discussion  and to  compare                                                                    
impacts  of different  options  in  a consistent,  objective                                                                    
way. He  moved to slide 6  and relayed that the  study would                                                                    
look at economic impacts of  a broad range of fiscal options                                                                    
including spending cuts, bringing  in new revenues, or using                                                                    
Permanent Fund earnings.                                                                                                        
Representative  Guttenberg asked  if the  ISER analysis  was                                                                    
connected with DOR's  view and analysis of  tax credits. Mr.                                                                    
Knapp answered  that the ISER  study was independent  of any                                                                    
analysis done  by the department;  however, it would  try to                                                                    
use similar  names and basic  assumptions. He  detailed that                                                                    
if  the department  looked at  a specific  income tax,  ISER                                                                    
would analyze  the impacts of  the same kind of  income tax.                                                                    
He explained  that ISER would try  to look at the  same kind                                                                    
of  thing if  the department  looked at  how much  a certain                                                                    
option may raise.                                                                                                               
Representative Guttenberg  referred to  oil and  gas credits                                                                    
and taxes.  He wondered  where new economic  benefitted jobs                                                                    
went and  who got  the jobs  when there  was talk  about new                                                                    
jobs and production. He wondered  if the jobs would actually                                                                    
benefit  the Alaskan  economy. Mr.  Knapp  replied that  the                                                                    
question was important and was  of interest to ISER and many                                                                    
Co-Chair Neuman  replied that  the committee  would continue                                                                    
to explore the question. He  relayed that he had spoken with                                                                    
Mr. Knapp about how the oil  and gas industry would react to                                                                    
oil  and  gas taxes.  He  noted  that  there had  been  many                                                                    
applications  for the  current  credits, which  did not  pay                                                                    
anything unless money  was spent. He questioned  how the oil                                                                    
and   gas  industry   would  react   if  the   credits  were                                                                    
Mr. Knapp answered that the  specific issue was particularly                                                                    
difficult  and  complex  with  significant  uncertainty.  He                                                                    
elaborated that part of the  economic impact of changing oil                                                                    
taxes or credits was related  to how the industry may react,                                                                    
which  was  uncertain  to  start   with.  Secondly,  if  the                                                                    
industry changed its exploration or  behavior as a result of                                                                    
the changes to taxes or  credits, how it could impact future                                                                    
production was  also uncertain. He  stated that some  of the                                                                    
issues  were  inherently  complex or  uncertain;  therefore,                                                                    
ISER would try to lay out a way to think about the issues.                                                                      
12:23:00 PM                                                                                                                   
Co-Chair  Neuman asked  members  to  consider any  questions                                                                    
they  may  have related  to  the  issues  so they  could  be                                                                    
included in  the presentation.  He relayed  that one  of the                                                                    
concepts  he had  discussed with  Mr. Knapp  was what  would                                                                    
happen if  the influx of  cash did  not go into  the state's                                                                    
economy  under a  POMV methodology.  He explained  that many                                                                    
businesses depended  on the Permanent  Fund Dividend  for up                                                                    
to  30 percent  of their  annual revenue.  He wondered  what                                                                    
would happen  if the money  no longer went into  the state's                                                                    
economy to  private industry or small  businesses. He wanted                                                                    
to spur committee members to  come up with similar questions                                                                    
to refine  the direction of the  conversations the committee                                                                    
would have on the subject.                                                                                                      
Co-Chair Thompson pointed to slide  6 and stated that he had                                                                    
heard  that many  people would  prefer  to see  a sales  tax                                                                    
instead of  income tax.  He believed  there were  already 90                                                                    
communities  that  had  a  sales tax.  He  wondered  how  an                                                                    
additional sales tax would impact those communities.                                                                            
Co-Chair  Neuman  added  that  the  topic  was  of  interest                                                                    
particularly with the loss of revenue sharing.                                                                                  
Representative  Gattis  addressed  new revenues.  She  asked                                                                    
whether  money taken  from private  business for  government                                                                    
operations  would make  it back  into the  hands of  private                                                                    
industry.  Mr.  Knapp  replied that  ISER  would  definitely                                                                    
explore  the  topic.  He  noted  that  some  of  his  slides                                                                    
addressed ISER's past research on the topic.                                                                                    
Vice-Chair  Saddler wondered  if  ISER planned  to create  a                                                                    
complex  model  based  on  the interaction  of  all  of  the                                                                    
different  options.  He  asked  whether  the  impacts  of  a                                                                    
combination of approaches would  be considered together. For                                                                    
example,  spending cuts  combined  with the  creation of  an                                                                    
income tax. Alternatively, he asked  if the study would only                                                                    
consider options on a one by one basis.                                                                                         
Mr.  Knapp answered  that the  study would  do two  kinds of                                                                    
things. The first goal was  to determine the relative effect                                                                    
different options  would have on  the economy.  For example,                                                                    
if the goal  was to reduce the deficit by  $500 million, the                                                                    
study would  look at  how various  changes would  impact the                                                                    
state  (e.g.  cuts  to capital  spending,  school  spending,                                                                    
through  a  sales  or income  tax,  or  through  dividends).                                                                    
Secondly,  the study  would look  at  how utilizing  various                                                                    
options simultaneously  would add up together  to impact the                                                                    
economy as a whole.                                                                                                             
Co-Chair Neuman  relayed that he  and Co-Chair  Thompson had                                                                    
been talking with  ISER and OMB. He  asked committee members                                                                    
to provide  specific questions to the  co-chairs and relayed                                                                    
that  they would  look  at putting  together  a contract  or                                                                    
proposal  for  ISER from  the  House  Finance Committee.  He                                                                    
wanted to ensure  that members were as  informed as possible                                                                    
on the  economics. He  had asked  Mr. Knapp  to look  at the                                                                    
impacts  of  the budget  reductions  in  terms of  jobs.  He                                                                    
elaborated that  every $100  million reduction  in operating                                                                    
funds  equated  to  about  866  jobs,  whereas,  every  $100                                                                    
million  reduction in  capital  funds equated  to about  950                                                                    
jobs. He  stated that the  reductions made the  past session                                                                    
could mean 8,000  to 10,000 existing jobs.  He addressed how                                                                    
the impact  would affect  the economy. He  spoke to  a long-                                                                    
term sustainable budget between  $4 billion and $4.5 billion                                                                    
and how it impacted the economy.                                                                                                
12:28:18 PM                                                                                                                   
Representative Gara did  not believe the state  was close to                                                                    
fixing the problem. He noted  there were many people looking                                                                    
at oil  tax reform, income  tax, sales tax, and  cutting the                                                                    
budget; however, he believed the  best thing the state could                                                                    
be doing was  to hear from people. He thanked  Mr. Knapp for                                                                    
the work. He  thought it was important to debate  all of the                                                                    
options.  He addressed  income tax  and asked  Mr. Knapp  to                                                                    
provide information  on its impact.  He provided  a scenario                                                                    
of a 15 percent state  income tax, which would be deductible                                                                    
from a  person's federal  taxes. He  surmised that  with the                                                                    
federal  deduction  the income  tax  may  provide a  smaller                                                                    
number to the state. He  addressed oil taxes and credits. He                                                                    
discussed that  Mr. Goldsmith had  done a net  present value                                                                    
(NPV) analysis the preceding year  using a price of $110 per                                                                    
barrel for  new oil. He  asked for  an NPV analysis  of what                                                                    
the production  tax was bringing  in for new oil  at current                                                                    
expected prices.  He remarked  that the  analysis on  an oil                                                                    
price of $110 per barrel was probably no longer relevant.                                                                       
Mr. Knapp  answered that the  study would  certainly include                                                                    
the first  item mentioned by Representative  Gara. He agreed                                                                    
that  a  state  income  tax   was  slightly  offset  by  the                                                                    
reduction  in the  federal income  tax. On  the other  hand,                                                                    
studies of things like the NPV  of an income tax was a whole                                                                    
different topic. He recognized  the importance of the topic,                                                                    
but  it  was  not  part   of  the  planned  ISER  study.  He                                                                    
elaborated that  ISER was  not studying  how much  money the                                                                    
different options  would generate  or whether the  state was                                                                    
gaining  or losing  money from  tax credits.  The study  was                                                                    
simply addressing how the changes  would impact jobs and the                                                                    
economy in Alaska.                                                                                                              
Co-Chair  Neuman  asked  members  to get  questions  to  the                                                                    
committee chairs.                                                                                                               
Representative Pruitt asked about  the overall impact to the                                                                    
housing  market  in  Anchorage  if  a  person's  income  was                                                                    
affected by  a change made by  the state. He noted  that any                                                                    
impacts  would  have  secondary ramifications  of  affecting                                                                    
property  tax  values.  He  was  interested  in  the  "finer                                                                    
things" that could potentially have longer-term impacts.                                                                        
Mr.  Knapp answered  that ISER  had received  a set  funding                                                                    
amount  from  OMB and  DOR  for  the  study. Given  the  set                                                                    
funding,  ISER had  set its  focus on  jobs and  income-type                                                                    
impacts. He agreed that the  effects different changes would                                                                    
have  on  the housing  market  was  clearly very  important;                                                                    
however, it  was beyond the  scope of the current  study. He                                                                    
relayed that if additional  funding was provided, ISER could                                                                    
expand the study.                                                                                                               
12:33:45 PM                                                                                                                   
Representative  Pruitt  wondered  if the  study  included  a                                                                    
discussion on  salaries. He asked  how changes in  the state                                                                    
would trickle  down through the  economy. For example,  if a                                                                    
person  was currently  making $70,000,  but  changes in  the                                                                    
state meant that jobs would remain albeit at a lower wage.                                                                      
Mr. Knapp replied  that he had not considered  the issue. He                                                                    
observed that another  effect could be on  the labor market,                                                                    
which could  end up impacting  wages. He had not  planned to                                                                    
study the topic, but it could  be added on. He added that he                                                                    
would need to think about how the topic would be included.                                                                      
Co-Chair Neuman  stated that the  presentation was  aimed at                                                                    
inspiring the questions.                                                                                                        
Representative Edgmon asked if the  study would help him (as                                                                    
a representative  of smaller communities)  better understand                                                                    
the economic multiplier  impact of budget cuts.  He spoke to                                                                    
potential  cuts  of $500  million  to  $700 million  by  the                                                                    
legislature in the next legislative  session. He stated that                                                                    
many of the cuts would  hit smaller communities much harder.                                                                    
He   believed   that  the   state   was   currently  in   an                                                                    
unprecedented chapter  in Alaska's  history and if  so, that                                                                    
the cuts  would be  sustained. He  elaborated that  it would                                                                    
not be possible to backfill  a school that was shutdown, the                                                                    
Village Public Safety Officer (VPSO)  that left, or a public                                                                    
radio  station  that  was  closed  down.  He  noted  that  a                                                                    
symbiotic   relationship   existed.    He   asked   if   the                                                                    
relationship  could be  measured by  ISER's analysis  to the                                                                    
extent that many of the  cuts would land statewide, but many                                                                    
would be borne proportionately more by small communities.                                                                       
Mr.  Knapp replied  that it  was the  goal of  the study  to                                                                    
address  the  topic, albeit  perhaps  not  as completely  as                                                                    
Representative  Edgmon would  like. He  referred to  slide 7                                                                    
and  explained that  the  study would  look  at how  various                                                                    
things  like spending  cuts,  taxes,  and cutting  dividends                                                                    
would impact  different sectors of the  economy, industries,                                                                    
regions,  and  income  groups. He  pointed  to  cities  like                                                                    
Juneau and Fairbanks  where state government jobs  made up a                                                                    
significant part of  the economy. He pointed  to rural areas                                                                    
where local  government and school  districts made up  a big                                                                    
part  of the  economy; much  of  which was  funded by  state                                                                    
spending. The  study would try  to show how  different kinds                                                                    
of  places were  affected in  different ways.  He elaborated                                                                    
that [Permanent Fund]  dividends were a much  larger part of                                                                    
residents' incomes  in rural areas of  the state; therefore,                                                                    
a change  in the dividend  would be a relatively  larger hit                                                                    
in  those  regions.  Likewise,  an income  tax  would  be  a                                                                    
relatively  bigger  hit  in   cities  like  Anchorage  where                                                                    
incomes were  higher. The study would  address how different                                                                    
kinds  of  things  would  impact  different  communities  in                                                                    
different ways.                                                                                                                 
Co-Chair  Neuman asked  for presentation  highlights due  to                                                                    
time limitations.                                                                                                               
Vice-Chair Saddler remarked that  there was distance between                                                                    
what was good  for the state's economy versus  what was good                                                                    
for  the  state's financial  cash  flows.  He reasoned  that                                                                    
making more jobs  could be a good thing on  one hand, but it                                                                    
could cost  more services, schools,  and roads on  the other                                                                    
Mr. Knapp  replied that the  goal of  the study was  look at                                                                    
how different fiscal options might  affect people, which the                                                                    
legislature and administration could  then factor into their                                                                    
equation when making decisions.                                                                                                 
12:39:11 PM                                                                                                                   
Vice-Chair Saddler had heard the  "rhetoric" that the budget                                                                    
could  not be  balanced on  the backs  of state  workers. He                                                                    
reasoned that  it was  also not  possible to  insulate state                                                                    
workers at the expense of the rest of the state's economy.                                                                      
Mr. Knapp addressed how ISER  would conduct the study (slide                                                                    
     · Review major findings of past ISER studies                                                                               
     · Update past ISER studies using current data                                                                              
     · Review other studies                                                                                                     
     · Use "input-output" modeling" to estimate short-run                                                                       
        job and income impacts of different options                                                                             
     · Use ISER's Alaska Economic and Demographic Model to                                                                      
        estimate long-term economic and demographic impacts                                                                     
     · Use IRS income data to estimate how fiscal options                                                                       
        would affect different income groups                                                                                    
Mr.  Knapp discussed  limits to  the study  on slide  10. He                                                                    
relayed that  ISER could not  provide precise  answers about                                                                    
exactly what  would happen  under different  fiscal options.                                                                    
He communicated that there  was significant uncertainty. For                                                                    
example, the effect  of budget cuts depended  largely on how                                                                    
the cuts  were made  (e.g. reduced employees,  reduced rent,                                                                    
reduced photo copy bills,  and other). Additionally, longer-                                                                    
term  "feedback" impacts  of fiscal  options on  investment,                                                                    
migration, and  economic development were harder  to project                                                                    
and  analyze. He  relayed that  ISER  would do  the best  it                                                                    
could to provide the information.                                                                                               
Co-Chair  Neuman noted  that the  committee  was looking  at                                                                    
different administrative budgets  by department. He wondered                                                                    
if there was a way to  look at reductions in certain budgets                                                                    
and  how they  would impact  the economy.  For example,  the                                                                    
Department of Natural Resources  (DNR) was responsible for a                                                                    
substantial amount  of the  state permitting,  which created                                                                    
more jobs.                                                                                                                      
Mr. Knapp  replied that  a function  such as  permitting was                                                                    
essential to  the functioning  of many  different industries                                                                    
such as mining,  construction, and other. He  stated that if                                                                    
the  budget was  cut too  much  and permitting  slowed as  a                                                                    
result,  it  could  slow  a large  segment  of  the  state's                                                                    
economy. He believed it may  a different effect than cutting                                                                    
a school  budget, which  may not  have an  immediate impact,                                                                    
but could  slow the  economy later. The  study would  try to                                                                    
address  the  issues,  but it  involved  significant  detail                                                                    
given the difference between each of the departments.                                                                           
Co-Chair Neuman  relayed that  the committee  members needed                                                                    
to  know  what  the  information would  look  like  for  the                                                                    
different   departments   in    their   roles   as   finance                                                                    
subcommittee  chairs.  For  example,  Representative  Pruitt                                                                    
looked at  the DNR budget  to determine how it  would impact                                                                    
other  businesses and  their ability  to operate  within the                                                                    
Mr.  Knapp  replied  that  the items  were  outside  of  the                                                                    
current  scope of  the study.  He relayed  that an  expanded                                                                    
budget  would enable  ISER to  study  additional things.  He                                                                    
pointed  to  a  1987  ISER  study  on  slide  11  titled  "A                                                                    
comparative Analysis  of the Economic Effects  of Reimposing                                                                    
Personal  Income Taxes,  Reducing Permanent  Fund Dividends,                                                                    
or Reducing  State Spending." He communicated  that ISER had                                                                    
been  studying the  issue for  a long  time. He  pointed out                                                                    
that  the topic  of  the  paper was  eerily  similar to  the                                                                    
questions  the   state  was   considering  at   present.  He                                                                    
addressed what  had been  learned in  past studies  on slide                                                                    
     · There are no painless options                                                                                            
     · All our fiscal options would affect Alaska's economy                                                                     
     · Different options have different economic impacts                                                                        
          o Different impacts on industries, income groups                                                                      
             and regions                                                                                                        
          o Different effects on investment, development                                                                        
             and future revenues                                                                                                
Mr.  Knapp  elaborated that  any  fiscal  option would  have                                                                    
economic impacts.  He stated that  it was a matter  of "what                                                                    
kind of pain  do you want to take." He  referred to language                                                                    
from  the  1987  study  (slide  14):  "...either  reimposing                                                                    
income taxes  or reducing dividends would  reduce purchasing                                                                    
power of Alaskans and, therefore,  cost the economy jobs and                                                                    
income." He expounded that because  people had less money to                                                                    
spend,  jobs and  income would  be impacted.  The study  had                                                                    
also considered  whether implementing a personal  income tax                                                                    
or  cutting Permanent  Fund dividends  would  have a  bigger                                                                    
impact on the state's economy.  It had found that a personal                                                                    
income tax  would have a  lesser impact on the  economy than                                                                    
cuts  to  dividends  because dividend  money  tended  to  go                                                                    
directly  into  spending,  whereas, income  taxes  generally                                                                    
came from  wealthier residents  who tended  to save  more of                                                                    
their income. He explained that  it was necessary to analyze                                                                    
whether the  evidence still pointed to  the same conclusion.                                                                    
Additionally, the  1987 study had  found that  cutting state                                                                    
spending  could have  an even  greater impact  on jobs  than                                                                    
imposing taxes or cutting dividends,  but it depended on the                                                                    
type of spending.                                                                                                               
Mr. Knapp addressed  a question on slide 17:  "How many jobs                                                                    
are created by $1 million  in state spending?" He noted that                                                                    
the  question could  be run  in reverse  by asking  how many                                                                    
jobs  would  be  lost  if  $1 million  was  cut  from  state                                                                    
spending.  He noted  that the  estimates shown  on slide  17                                                                    
were from 1999.  He pointed out that "you get  the most jobs                                                                    
for your dollar from  hiring people directly." He elaborated                                                                    
that state workers  spent their income and  injected it into                                                                    
the  economy;  therefore,  in a  job  sense,  cutting  state                                                                    
spending  would cost  more jobs  than cutting  the dividend.                                                                    
However, there was a larger  impact on residents' incomes if                                                                    
they  were directly  given  a  dividend because  individuals                                                                    
tended to spend the money,  thereby creating more income for                                                                    
other people.                                                                                                                   
12:46:02 PM                                                                                                                   
Mr.  Knapp addressed  how different  ways of  state spending                                                                    
impacted jobs (slide 21). He stated  that how a cut was made                                                                    
to spending really impacted the  effect. For example, if the                                                                    
number of employees  were kept at the same  level, but their                                                                    
pay was  cut (jobs  had not  been cut,  but income  had gone                                                                    
down),  the amount  of money  recirculating  in the  economy                                                                    
would  decrease. Additionally,  different  types of  options                                                                    
had very different distributional  effects in terms of "rich                                                                    
people,  poor people."  He noted  that Alaska  residents had                                                                    
widely varying incomes. He pointed  to estimates from a 1993                                                                    
ISER study  on slide 22.  The study addressed  how different                                                                    
fiscal options would impact how  much income residents would                                                                    
give  up.   He  elaborated  that  an   income  tax  impacted                                                                    
wealthier people more,  while eliminating dividends impacted                                                                    
poorer  people more.  Slide  23  illustrated that  different                                                                    
parts  of the  state  varied tremendously  in how  dependent                                                                    
they  are on  state and  local government  as part  of their                                                                    
economy. For example, state spending  cuts to something like                                                                    
education  that   supports  a  significant  part   of  local                                                                    
government  would  have  a   different  relative  impact  in                                                                    
different places.  He remarked  that all of  the information                                                                    
needed to  be updated for  the present. He added  that there                                                                    
were also many more questions  to be answered in addition to                                                                    
information   included  in   the  past   ISER  studies.   He                                                                    
reiterated  that in  addition to  studying the  information,                                                                    
ISER's goal  was to help the  legislature and administration                                                                    
answer questions that mattered to them.                                                                                         
Representative Gattis  observed that federal  government had                                                                    
not been included  in the chart related to  "State and Local                                                                    
Government as a Share of  Total Employment" on slide 23. Mr.                                                                    
Knapp replied  that the study  could include the  portion of                                                                    
federal  government spending  that  was  dependent on  state                                                                    
matching funds.  Representative Gattis believed "it  makes a                                                                    
difference in different regions on  what type of income that                                                                    
they have." She  surmised that if state  government was cut,                                                                    
the local and  federal government would have to  pick up the                                                                    
slack if available.                                                                                                             
Representative  Gara  remarked that  the  past  20 years  of                                                                    
ISER's  work had  looked at  cuts and  spending, income  and                                                                    
sales tax, and dividend cuts;  however, it had not looked at                                                                    
oil taxes. He hoped that  would not continue and believed if                                                                    
it did that the public would become alienated.                                                                                  
Co-Chair  Neuman  asked Mr.  Knapp  to  briefly address  his                                                                    
second presentation.                                                                                                            
AT EASE                                                                                                                         
12:50:55 PM                                                                                                                   
12:52:27 PM                                                                                                                   
^INSTITUTE OF  SOCIAL and ECONOMIC RESEARCH  PRESENTATION: A                                                                  
FEW OBSERVATIONS ON ALASKA'S FISCAL CHOICES                                                                                   
12:52:27 PM                                                                                                                   
Mr. Knapp addressed a PowerPoint  presentation titled "A Few                                                                    
Observations on Alaska's Fiscal  Choices" (copy on file). He                                                                    
relayed that over the past six  months he had been trying to                                                                    
figure out how to help  explain the state's difficult fiscal                                                                    
challenge to Alaskans. He had  recently given a presentation                                                                    
to the Fairbanks  Chamber of Commerce and  had taken several                                                                    
slides  from that  presentation to  help frame  some of  the                                                                    
items under  discussion by the  legislature. He  stated that                                                                    
it  was well  known that  the lower  the price  of oil,  the                                                                    
larger  the funding  gap became.  He pointed  to a  chart on                                                                    
slide 2 illustrating what the  funding gap would be based on                                                                    
different oil  prices. At  $100 per  barrel the  funding gap                                                                    
would  be  $1.4  billion,  whereas at  $60  per  barrel  the                                                                    
funding gap would  be $3.2 billion; the lower  the price the                                                                    
bigger  the  problem. He  noted  that  the state  faced  two                                                                    
different choices (slide 3):                                                                                                    
     When will we fill the funding gap?                                                                                         
     How will we fill the funding gap?                                                                                          
Mr. Knapp expounded that the  state faced a tradeoff between                                                                    
acting  later  and  acting  sooner.  The  longer  the  state                                                                    
delayed, the  longer the  immediate pain  and effect  on the                                                                    
economy  would be  put off  (slide  4). Additionally,  there                                                                    
would  be less  unnecessary  pain if  oil prices  recovered.                                                                    
However,  there were  negative repercussions  of waiting  to                                                                    
act (slide 4):                                                                                                                  
     The sooner we risk draining our reserves                                                                                   
     The bigger the risk of facing drastic immediate                                                                            
     The greater the risk to our credit rating                                                                                  
     The greater the risk to investor confidence                                                                                
     The lower our future investment earnings from savings                                                                      
     The less savings we leave for future generations                                                                           
Mr. Knapp  addressed how  the state  would fill  the funding                                                                    
gap on  slide 5. He remarked  that none of the  options were                                                                    
easy  or popular.  He turned  to  slide 7  titled "How  Much                                                                    
Could  Spending Cuts  Fill the  Funding  Gap." The  vertical                                                                    
bars  illustrated how  much  money the  state  may get  from                                                                    
taking  certain actions.  Three of  the bars  showed savings                                                                    
that may be achieved from  different levels of spending cuts                                                                    
and  one showed  what may  be  saved by  some approaches  to                                                                    
changes to  oil and  gas taxes  that DOR  had looked  at. He                                                                    
mentioned  revenue that  could be  generated from  statewide                                                                    
income, sales,  or property taxes  (slide 10).  He addressed                                                                    
different ways of using Permanent  Fund earnings (slide 15).                                                                    
He stressed that  if oil prices remained low,  it would take                                                                    
a multitude of things to fill the funding gap.                                                                                  
Co-Chair Neuman remarked that legislators  needed to look at                                                                    
how much government  the state could afford.  He stated that                                                                    
ISER  and  Institute of  the  North  had  both looked  at  a                                                                    
sustainable  budget scenario  where  expenditures were  $4.1                                                                    
billion  to $4.5  billion.  He wondered  if  the amount  was                                                                    
still accurate.                                                                                                                 
Mr. Knapp  replied that  the analysis had  been done  by Dr.                                                                    
Goldsmith who  had determined that  with all of  the revenue                                                                    
sources   combined  (e.g.   oil,  gasline,   and  investment                                                                    
revenues  from  Permanent  Fund earnings)  the  state  could                                                                    
sustain  a   spending  level  of  about   $4.5  billion.  He                                                                    
qualified that  the state could  only sustain the  amount if                                                                    
it  was   willing  to  use  investment   revenues  from  the                                                                    
Permanent Fund,  which had  not been done  in the  past. Dr.                                                                    
Goldsmith  updated the  information  annually  based on  the                                                                    
current estimate of future  resource revenues and investment                                                                    
earnings.  He  communicated that  the  analysis  was not  an                                                                    
official   ISER  recommendation.   He   reasoned  that   the                                                                    
legislature  could decide  how  useful the  analysis was  in                                                                    
informing its decisions about the direction it would take.                                                                      
1:00:02 PM                                                                                                                    
Co-Chair   Neuman   stated   that   the   information   from                                                                    
organizations like  Institute of the North  and the business                                                                    
industry  was  helpful for  the  legislature  find a  target                                                                    
Co-Chair Thompson observed that  the estimates were all high                                                                    
compared  to  the current  oil  prices.  He thought  it  was                                                                    
prudent to look  at what would happen if oil  prices did not                                                                    
increase. He  believed contingency plans were  necessary and                                                                    
did not foresee the situation being a short-term problem.                                                                       
Mr.  Knapp  shared the  concern.  He  was scared  about  oil                                                                    
markets  and  some  of  the  recent  analysis.  He  believed                                                                    
everyone had  been hoping  that low oil  prices seen  in the                                                                    
prior  year  were  a very  short-term  phenomenon;  however,                                                                    
recent  news did  not make  it  look like  oil prices  would                                                                    
Representative   Gara  bristled   at  the   fact  that   Dr.                                                                    
Goldsmith's  analysis   always  left  out  oil   taxes  when                                                                    
considering a sustainable amount  of expected state revenue.                                                                    
He  agreed  that it  was  a  number,  but  it was  a  number                                                                    
assuming that industry  was not asked to  contribute more of                                                                    
its share.                                                                                                                      
Mr.  Knapp believed  Representative  Gara's observation  was                                                                    
correct. The number [in Dr.  Goldsmith's analysis] was based                                                                    
on assumptions  about the way  the state taxed oil  and what                                                                    
would  be possible.  He believed  that  the observation  was                                                                    
fair.  He  reasoned  that perhaps  a  different  sustainable                                                                    
number could  be achieved if  another way of taxing  oil was                                                                    
assumed. On  the other hand,  changing oil  taxes introduced                                                                    
how it  would impact  future production.  He stated  that of                                                                    
course how  much money  the state would  have in  the future                                                                    
depended on  what kind of taxes  the state had and  how they                                                                    
were structured.  However, he stated  that "it  doesn't mean                                                                    
that you could  just sort of change the tax  in some way and                                                                    
just choose a higher future  number because there are limits                                                                    
to how much you can get."                                                                                                       
Co-Chair Neuman  wanted the  presentation to  spur different                                                                    
questions   from  committee   members.   He  mentioned   the                                                                    
possibility  of entering  into  a  contract or  negotiations                                                                    
with  ISER and  was  interested in  the  types of  questions                                                                    
committee members  may have. He  noted that  questions could                                                                    
be  targeted  to   members'  specific  finance  subcommittee                                                                    
budgets. He  remarked that the  committee had  good regional                                                                    
balance. He relayed that he  had asked Ms. Pitney to provide                                                                    
information  on where  a  proposed  $30 million  unallocated                                                                    
reduction that  covered the cost  of increases  for salaries                                                                    
for union employees  would come from. He  wondered where the                                                                    
various  departments had  taken the  reduction. He  asked if                                                                    
the  reduction was  really $30  million or  $60 million.  He                                                                    
noted  that Representative  Munoz had  sponsored legislation                                                                    
that  increased funding  for  the SPAR  Fund  under DEC.  He                                                                    
communicated  that SPAR  Director Kristin  Ryan had  assured                                                                    
him  that  the  increased  funding  had  not  been  used  to                                                                    
backfill reductions to the department.                                                                                          
1:05:37 PM                                                                                                                    
The meeting was adjourned at 1:05 p.m.                                                                                          

Document Name Date/Time Subjects
Fiscal Stability House Finance 8-24-15 FINAL Revised.pdf HFIN 8/24/2015 10:30:00 AM
Gunnar Knapp-a few observations on Alaska fiscal choices.pdf HFIN 8/24/2015 10:30:00 AM
HFIN Fiscal Stability ISER
Gunnar Knapp-Testimony for House Finance Committee Economic Impacts of Alaska Fiscal Options - Aug 8 2014.pdf HFIN 8/24/2015 10:30:00 AM
HFIN Fiscal Stability ISER
Final response with attachments.pdf HFIN 8/24/2015 10:30:00 AM
Interim OMB - HFIN - Response