Legislature(2017 - 2018)HOUSE FINANCE 519
02/03/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB61 | |
| HB95 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 61 | TELECONFERENCED | |
| *+ | HB 95 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 3, 2017
1:36 p.m.
1:36:01 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:36 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Dan Ortiz
Representative Lance Pruitt
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative Scott Kawasaki; Representative Steve
Thompson.
ALSO PRESENT
Randall Hoffbeck, Commissioner, Department of Revenue; Pat
Pitney, Director, Office of Management and Budget, Office
of the Governor.
SUMMARY
HB 61 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
HB 61 was HEARD and HELD in committee for further
consideration.
HB 95 APPROP:SUPP; CAP; REAPPROP; AMEND; REPEAL
HB 95 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster indicated that Representative Thompson and
Representative Kawasaki were excused. He reviewed the
agenda for the day.
HOUSE BILL NO. 61
"An Act relating to the Alaska Permanent Fund
Corporation, the earnings of the Alaska permanent
fund, and the earnings reserve account; relating to
the mental health trust fund; relating to deposits
into the dividend fund; relating to the calculation of
permanent fund dividends; relating to unrestricted
state revenue available for appropriation; and
providing for an effective date."
1:37:19 PM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced the PowerPoint presentation titled "PFPA
MODELING" (copy on file). He commented that on the previous
day the committee had covered a lot of ground on the
Permanent Fund Protection Act (PFPA). There had been
significant concern whether the 5.25 percent draw was
sustainable and durable. He indicated he would be walking
through some of the modeling that had been done to
determine the durability of the proposed draw amount. He
would also be discussing the impacts of some of the
decisions about other fiscal issues surrounding the PFPA
and their impacts on the durability of a restructured
Permanent Fund.
Commissioner Hoffbeck turned to slide 2: "Scenarios
Modeled":
1. Status Quo: ad hoc use of permanent fund earnings to
fill budget deficit
2. PFPA with $2.4 billion transfer to the CBR
• With Full Fiscal Solution
• With No Fiscal Solution for remaining budget
deficit.
3. PFPA without transfer to the CBR
• With Full Fiscal Solution
• With No Fiscal Solution for remaining budget
deficit.
Commissioner Hoffbeck explained that the committee would be
looking at three different modeling scenarios. The first
model reflected the status quo where no changes would be
made. The state would continue to spend the Constitutional
Budget Reserve (CBR), and when it was gone, begin to spend
from the Permanent Fund (PF) earnings reserve account
(ERA). The second scenario reflected the PFPA proposed in
the governor's bill, HB 61. A proposed effective date of FY
17, as proposed in the budget, would create a draw for FY
17 and replace the CBR draw using PF earnings to fund the
current year's budget. The committee would look at the
second scenario in two ways: One would reflect a full
fiscal solution closing the remainder of the budget gap,
and another would show a budget gap. The third scenario
reflected an effective date of July 1, 2018. The draws
would start for the FY 18 budget.
Representative Wilson had heard frequently that the
legislature was doing nothing. She opined that the
legislature had made several reductions and put two bills
forward in the prior year to help save the state money. She
did not think it was appropriate to tell the public that it
appeared the legislature would do the usual. She argued
that the legislature had taken significant steps to reach a
sustainable level of spending. Although the legislature
might not have made enough changes, it had worked
diligently to reduce costs.
1:41:01 PM
Vice-Chair Gara asked if the legislature had burned through
close to $6.5 billion or $7 billion in savings in the
previous 2 years. Commissioner Hoffbeck responded, "That is
correct."
Vice-Chair Gara asked what would be left in the CBR if the
legislature did nothing to address the revenue issue in the
current year. He asked for a number. Commissioner Hoffbeck
responded that the presentation did not contain many
numbers but there were some numbers on the charts.
Vice-Chair Gara asked what would be left in the CBR after
FY 18, under the governor's proposed budget, if the
legislature failed to adopt revenue measures in the current
year and had to use the CBR to pay the budget gap.
Commissioner Hoffbeck reported that it was about $2.1
billion.
Commissioner Hoffbeck continued to discuss slide 2. He
noted the critical test when looking at the modeling was to
maximize the use of the asset. The department wanted to be
able to extract as much revenue from the PF without putting
the corpus of the fund at risk. He suggested that leaving
any money on the table had the effect of limiting future
options for solving the fiscal crisis. He continued that
the idea was to find the "sweet spot" extracting as much as
possible while maintaining a durable fund into the future.
Commissioner Hoffbeck continued to slide 3: "Model
Sophistication and Vetting." He reviewed some of the key
aspects of the model. The model was probabilistic, as it
looked at a range of potential scenarios that could occur
over time rather than deterministic. Deterministic meant
choosing a single scenario and extrapolating it over time.
The model used thousands of iterations of multiple
scenarios and produced a range of potential outcomes. The
department looked at the median within the range. He
thought the modeling had been a robust process. The focus
was on how the money flowed between the PF, the general
fund, and the dividend to identify any potential failures
in the modeling. The modeling addressed questions such as
whether there was enough money to fund government services
and the dividend, whether the corpus of the fund would be
impacted, or whether there was enough money in the ERA to
make the annual payment. He reported using as many
objective resources as possible in calibrating the model to
remove any concern about the model being skewed. Later he
would be discussing some of the data the sources used in
the model.
Commissioner Hoffbeck reported that the department used
Monte Carlo simulations to get a range of results. In the
previous year there were multiple hearings in which the
modeling process was discussed. The department had been
asked to bring back a tremendous number of variations on
that modeling. The department hired the McKinsey and
Company, an international consulting firm that has worked
with all the sovereign wealth funds around the world, to
ensure that the modeling was robust. The company was asked
to review the department's modeling process for
reasonableness and accuracy. The company found that there
were no mechanical errors in the state's modeling and that
the assumptions were reasonable. The company approved the
Monte Carlos process and suggested some improvements to the
modeling, which the Department of Revenue had incorporated.
1:46:10 PM
Commissioner Hoffbeck reviewed the graph on slide 4 titled
"Budget Assumptions." He highlighted the yellow line at the
bottom that represented the fall forecasted revenues from
the 2006 Revenue Sources Book less unrestricted royalties
and production tax. Royalties and production taxes were
taken out because they were estimated within the modeling.
He further explained that they were removed from the
baseline numbers because they became a critical component
in the modeling. He pointed to the blue line which
represented the Office of Management and Budget's 10-year
budget plan. In the plan, the budget held flat for several
years, then increased with inflation going out in time.
Commissioner Hoffbeck scrolled to slide 5: "Status Quo:
Method, Inputs, And Assumptions" The slide showed how the
PF earnings performed overtime without changing the budget
or increasing revenues. The slide showed the list of
assumptions used in the process. The assumptions included a
PF starting balance of $54.9 billion (reflective of the
anticipated amount at the end of 2017), a 6.95 percent
geometric return with a 12.32 percent standard deviation
(the return could be 6.95 percent, as high as 19.3 percent,
or as low as -5.5 percent), and an inflation rate of 2.25
percent. He explained that about 90 percent of the
investment returns were realized within the statutory net
income payout.
Vice-Chair Gara referred to slide 5. He asked about the
6.95 percent return assumption on the PF and the 50 percent
probable 6.24 percent. Commissioner Hoffbeck responded that
the second line represented the realized returns - the
statutory net income. He further explained that of the 6.95
percent total fund return, 6.24 percent would be realized,
a 90 percent realization.
Commissioner Hoffbeck discussed slide 6: "Status Quo:
Method, Inputs, And Assumptions." He explained that
probabilistic modeling (used in generating the revenue
sources book) was applied to oil price production. Deposits
to the fund consisted of 31 percent of royalties, the
weighted average of the deposit that occurred. There was no
planned payout from [to] the general fund from the ERA, but
unplanned payouts would occur after the depletion of the
CBR. The balance of the CBR would be $4.4 billion at the
beginning of 2018 with a 2.25 percent rate of return
projected.
1:50:00 PM
Representative Pruitt referred to slide 6. He recalled that
in a meeting in the prior year the CBR was expected to have
a balance of $3.5 billion in 2018. He asked about the shift
to $4.4 billion.
Commissioner Hoffbeck answered that the original number was
$3.2 billion, but multiple things had happened. He
elaborated that the $4.4 billion number was a cash versus
accrual accounting number - the cash that would be in the
fund. There were some items such as capital projects that
had been approved but not funded that would show as a
decrement on an accrual basis. He continued that the $3.2
billion number was an accrual number rather than a cash
number. He continued that much of the shift was being
driven by the fact that in FY 16 the state had $100 million
less in draws than anticipated. Also, in FY 16 and FY 17
the state had received more revenues than anticipated. It
was a combination of some accounting issues and better-
than-projected returns from the time the number was
published in the previous year.
Representative Pruitt asked about the balance on an accrual
basis to compare apples-to-apples. He wondered if the
number would be $4.4 billion. He suspected it would not be
as low as $3.2 billion. Commissioner Hoffbeck would get
back to him with an answer.
Representative Pruitt asked about the statutory budget
reserve (SBR) balance. Commissioner Hoffbeck responded that
it was $200 million. He added that the $4.4 billion
included the balances of both the CBR and the SBR.
Commissioner Hoffbeck continued to slide 7: "Status Quo:
Method, Inputs, And Assumptions":
STATUS QUO: METHOD, INPUTS, AND ASSUMPTIONS
Dividend Calculation:
• Total distributed is equal to half of the sum of
the last 5 years' statutory net income multiplied
by 0.21 or half of the ERA, whichever is less
Inflation Proofing:
• The fund's principal is inflation proofed at the
predicted inflation rate.
Commissioner Hoffbeck reported the dividend calculation was
the last 21 percent of the previous 5 years' earnings -
essentially the average of the previous 5 years, just
slightly more. Inflation proofing was a direct
appropriation based on the measured inflation of the prior
year. He reiterated he was speaking of the status quo. He
noted that the dividend calculation was 21 percent of the
prior 5 years or half of the remaining ERA, which ever was
less. In other words, when the state started to deplete the
ERA the dividend would decrease because it could never be
more than half of the ERA balance.
Vice-Chair Gara did not agree with the term "status quo"
because in the previous year the legislature did not fund
inflation proofing. He asked if he was correct.
Commissioner Hoffbeck confirmed Vice-Chair Gara was
correct. The commissioner was explaining the statutory
status quo.
Representative Wilson had heard about a 50/50 plan. She
asked about what would have been left in the ERA had the
state paid the full dividend amount of approximately $1.2
billion. She wanted to know the figure for realized
earnings. Commissioner Hoffbeck asked her to repeat her
question.
Representative Wilson thought that the state would have
paid out about $1.2 billion in dividends had the amount not
been reduced. She surmised that there would have been
another $1.2 billion left to put in the ERA and utilized
with a 21 vote. Commissioner Hoffbeck indicated she was
correct. He furthered that the portion that had
historically been used for inflation proofing could have
been used in the previous year. He noted that the state
could have used any amount that was in the ERA balance,
about $8.0 billion, with a simple majority vote.
1:54:33 PM
Commissioner Hoffbeck advanced to the chart on slide 8:
"Status Quo, No Fiscal Plan: Dividend paid per Person." He
indicated that the slide showed the dividend that would be
paid per person under the status quo plan. He noted that
the 2018 value would be about $2400 based on the forecasted
PF returns. He reported that the 2041 median value, the end
of the modeling period, would be zero. He emphasized that
there would be no dividend. He explained that the yellow
bar represented between the median and a factor of 75
percent. The blue bar represented the median to a factor of
25 percent. The median fell between the yellow and blue
lines on the chart. The whiskers represented the total
range of the forecast. The chart showed how far the total
range could deviate over time. It fell off precipitously
after only a few years. He added that the status quo
without a fiscal plan would result in a median value of $67
billion in 2041. The real value would be $39.563 billion.
He redirected members' attention to the first slide of the
presentation that showed a real fund balance of $54.9
billion.
Commissioner Hoffbeck turned to the chart on slide 9:
"Status Quo, No Fiscal Plan: Nominal Fund Size." He
reported that the value of the fund would be significantly
degraded under the status quo. The ERA failure rate over 24
years was 98.24 percent. There was absolute surety that the
ERA would run out of money during the forecast period.
Commissioner Hoffbeck spoke to the chart on slide 10:
"Status Quo, No Fiscal Plan: Cumulative ERA Failure Rate."
He thought the graph provided a good visual of the ERA
failure rate. He stressed that the dividend was paid from
the ERA. Therefore, when the ERA failed, the dividend would
likely be reduced to zero. He highlighted that by 2023 or
2024 there would be a 50/50 chance of having no money in
the ERA and no dividend without a different plan in place.
It was clear that the status quo plan would lead to the
depletion and failure of the fund.
Commissioner Hoffbeck reviewed slide 11: "APFPA with CBR
Transfer: Method, Inputs, And Assumptions":
APFPA WITH CBR TRANSFER: METHOD, INPUTS, AND
ASSUMPTIONS
• Permanent Fund Starting Value: $53.4 billion
• Realized portion of corpus: $40.7 billion
• Realized portion of ERA: $6.3 billion
• Unrealized earnings held by the fund: $6.3
billion
• Starting value was estimated based on the
following:
• $54.9 billion estimated EOY 2017 balance
of PF under status quo
• Plus $0.8 billion from the difference in
the calendar year (CY) 2017 dividend
calculation
• Less $2.4 billon transfer to CBR (repaying
for last year's withdrawal as if we
started PFPA a year earlier)
• Investment Return: Callan Associate's 10-year
forecast
• Total return: 6.95 percent geometric,
12.32 percent standard deviation
• Statutory return: P10 = 3.70 percent, P50
= 6.24 percent, P90 = 8.14 percent
• Inflation rate: 2.25 percent
Commissioner Hoffbeck clarified that the Alaska Permanent
Fund Protection Act (APFPA) had a 2017 effective date,
essentially creating a transfer to the CBR. The
constitutional Budget Reserve draw would be replaced with
PF earnings. The Permanent Fund starting value would be
about $53.4 billion. He pointed to the middle of the slide
which showed the calculation of how to go down from $54.9
to $53.4. The investment returns were the same.
1:58:19 PM
Commissioner Hoffbeck spoke to slide 12: "APFPA with CBR
Transfer: Method, Inputs, And Assumptions":
• Petroleum Revenues:
• Oil price: Probabilistic analysis of ANS oil
prices using a PERT distribution from the fall
2016 price forecasting session.
• Production: Probabilistic analysis of ANS oil
prices using a PERT distribution from the DNR
provided Fall 2016 RSB
• Deposits: 25% of royalties deposited into the
permanent fund.
• Payout Calculation: 5.25% of the average of first 5 of
the last 6 years' total fund size. This value can then
be decreased if the combined royalty and production
tax revenues for the year are above $1.2 billion, by
the amount over $1.2 billion. This can not reduce the
payout amount by more than 80%.
• Unplanned Payouts: After depleting the CBR, budget
deficits are filled from the ERA.
• CBR: $6.8 billion BOY 2018 balance with Rate of Return
of 2.25%
• Initial Balance of $6.8 billion is estimated
based on a forecasted balance of $4.4 billion and
a $2.4 billion transfer from the ERA
Commissioner Hoffbeck reported that the petroleum revenue
calculations would be the same. However, the percentage of
royalties being deposited would be reduced to 25 percent
from 31 percent. He detailed that the only deposit that
would be made in the APFPA would be the constitutionally
required deposit. The plan did not include the additional
statutory deposit. He detailed the payout calculation which
would be 5.25 percent of the average of the first 5 years
of the previous 6 years. There was a $1.2 billion draw
limit. Once the state reached $1.2 billion in oil and gas
severance tax and royalties, the payout of the dividend
would be reduced dollar for dollar. He observed that
everything that had been discussed in the prior year would
be imbedded within the calculation. He continued that
unplanned payouts would come out of the ERA after the CBR
was entirely depleted. Although, under the scenario where a
full fiscal plan would be in place, it was anticipated that
the budget gap would be closed and, therefore, would not
require additional draws. He clarified that if additional
draws were necessary, the money would come out of the ERA.
He added that the CBR would begin with a higher balance of
$6.8 billion because the $2.4 billion draw from the CBR
would be replaced with a $2.4 billion draw from the ERA.
Commissioner Hoffbeck discussed slide 13: "APFPA with CBR
Transfer: Method, Inputs, And Assumptions":
• Dividend Calculation:
• The sum of:
• 20% of the POMV payout before any reduction, and
• 20% of the unrestricted royalties (about 15% of
total royalties) from the most recent FY ended
• Overwriting the above calculation there is a
fixed dividend of $1,000 per person for CY 2018.
• Inflation Proofing:
• If four times the 5.25% POMV payout (21% of the total
fund value) remains in the ERA after the POMV transfer,
the amount over the four times the POMV is transferred
into the corpus.
Commissioner Hoffbeck reviewed the dividend calculation
under the new 20/20 formula. It equaled 20 percent of the
percent of market value (POMV) payment and 20 percent of
unrestricted royalties. Inflation proofing would be tied to
the 4-times draw (once the ERA had 4-times the annual draw
money would flow back into the corpus of the PF). He noted
that the structure when doing the modeling had been
discussed in the previous day.
Co-Chair Seaton asked about the calculation. He reiterated
that if the POMV percentage was fixed and after it flowed
in, 20 percent of the POMV deposit would go out. He
wondered if it would go out prior to the money flowing back
to inflation proofing or whether the POMV draw would be
reduced. Commissioner Hoffbeck responded that the 20
percent of 5.25 percent would always be calculated against
the maximum draw. He continued that as the actual draw
started to be reduced, the dividend would not be reduced.
The dividend would always be calculated on the maximum draw
amount rather than the actual draw.
Vice-Chair Gara referred to slide 13 and asked about the 20
percent of unrestricted royalties. He wondered if the
amount would come out of the POMV or out of royalties.
Commissioner Hoffbeck responded that it would come directly
from royalties, the portion of the royalties not dedicated
in the constitution to the corpus of the fund (the other 75
percent).
Vice-Chair Gara stated that if the state had a deficit and
20 percent was taken from royalties instead of from the
ERA, it would come out of the CBR. It would not be
additional money until there was no deficit left. He asked
if he was accurate. Commissioner Hoffbeck did not
understand the representative's question.
Vice-Chair Gara restated his question. He suggested that if
the state was in a position where revenues did not approach
expenditures and the state wanted to take 20 percent of
royalties to pay for part of the PF, it would mean 20
percent less for general fund spending. It would require a
larger CBR draw. He continued that instead of taking money
from the ERA the money would be taken out of the CBR. He
asked if he was accurate. Commissioner Hoffbeck answered,
"yes." He added that the intent was for the monies to come
out of royalties first. The net effect was if there was not
enough in the general fund, a larger CBR draw would have to
be made. It did not make any mathematical difference
whether the money was used for the dividend or for covering
the remaining general fund expenditures.
2:03:06 PM
Commissioner Hoffbeck detailed slide 14: "APFPA with
Transfer, Full Fiscal Plan: Dividend paid per Person." He
reported that the plan had a guaranteed dividend of $1000
until 2041 when it would increase to $1416. Essentially,
the dividend amount would be about $1000 for the 24-year
life of the forecast.
Commissioner Hoffbeck advanced to slide 15: "APFPA with
Transfer, Full Fiscal Plan: Nominal Fund Size." He detailed
that the 2041 value of the PF would be $99.254 billion,
which would start at $53.4 billion. The real value of $99
billion would equal $58.188 million. The fund would be
growing at a rate greater than inflation. It would not only
protect the fund but would allow the fund to grow slightly
over time. The earnings reserve account failure rate would
be 1.2 percent. There would be very little chance of the
ERA being depleted to the point where the annual payment
would not be viable. The failure rate was reflected in the
following slide.
Commissioner Hoffbeck continued to slide 16: "APFPA with
Transfer, Full Fiscal Plan: Cumulative ERA Failure Rate."
He made the point that the chart did not show much because
the failure rate followed the same line as the base line.
Representative Ortiz returned to slide 14 that showed the
projected dividends until 2041. He asked about the factors
in play that would prevent the dividend from increasing in
value with at least inflation. He thought the commissioner
was saying that it would remain around $1000 into 2041. The
value would consistently go down. He wondered what was in
the formula that would prevent the dividend from keeping
pace with inflation. Commissioner Hoffbeck answered that it
was primarily the production forecast. The royalty side of
the equation was based on price and production. He
indicated the state did not see large price increases and
saw falling production over time. He commented, "That piece
is going to drop."
Commissioner Hoffbeck detailed slide 17: "APFPA with
Transfer, No Fiscal Plan: Dividend paid per Person." The
slide assumed that the current structural deficit would
remain in the budget. Once the CBR was depleted the state
would turn to the ERA to continue to fill the gap. He posed
the question about what impact it would have on the
durability of the PF and the size of the dividend. The
dividend would start out at $1000 and would grow to $1,239
over the 24-year projection which was about $200 less than
under a full fiscal plan. The real value was less than the
$1000.
2:07:03 PM
Commissioner Hoffbeck advanced to slide 18: "APFPA with
Transfer, No Fiscal Plan: Nominal Fund Size." In 2041 the
median value of the fund would be $76 billion which
provided a nominal value of $44.6 billion. The start value
was $53.4 billion. In the current scenario there would be
degradation of the fund itself over the period. There would
be an ERA failure rate of 45.38 percent. There was a very
good chance that at some point there would not be money in
the ERA to make the dividend payment or for funding
government expenditures.
Vice-Chair Gara commented that he had heard Commissioner
Hoffbeck state that without a fiscal plan the state would
run out of savings and earnings reserve money to pay a
dividend. He thought the commissioner was saying that with
no fiscal plan the state would still have a dividend. He
asked for clarity about the chart. Commissioner Hoffbeck
indicated that the chart reflected a permanent fund only
solution. All that would be done would be to restructure
the PF without any other changes.
Representative Wilson asked about the amount of the budget
and about the growth rate. She wondered about the starting
number without a fiscal plan. She wondered about the growth
rate and a percentage decrement. Commissioner Hoffbeck
directed members to slide 4 which showed the budget numbers
in a graph. The budget stayed flat through FY 20 and then
started to grow with inflation.
Representative Wilson clarified that flat meant no gain
whatsoever and no new contracts. She asked if he was
talking about the same amount until FY 20 at which time
inflation would be included. Commissioner Hoffbeck
responded that he could not drill down specifically, but
confirmed that the budget amount of
$4.2 billion would essentially be what it was currently
through 2020.
Representative Wilson thought it would be very helpful to
get further clarification about how the numbers worked.
Commissioner Hoffbeck commented that there was no dollar
growth in the budget through 2020. If there were contract
increases, they would be absorbed in other parts of the
budget. After 2020, growth would be seen at the rate of
inflation.
Commissioner Hoffbeck continued to slide 19: "APFPA with
Transfer, No Fiscal Plan: Cumulative ERA Failure Rate." The
chart showed when the state would start seeing the
potential for failure in the ERA without a fiscal plan. The
earnings reserve account would stay stable up to the late
2020s. The chance of failure would grow dramatically after
that time.
Commissioner Hoffbeck continued to slide 20 "APFPA with
Transfer, No Fiscal Plan: Median UGF Revenue/Budget." He
explained that the reason the chance of failure would grow
dramatically after 2028 was because, under the APFPA only
solution with the FY 17 transfer, there would be CBR money
available to fill the void until 2028, after which the ERA
would be tapped.
Co-Chair Seaton asked if "Other revenue Draws" included
only the CBR. He wondered if it included drawing from the
higher education fund or the Power Cost Equalization fund.
Commissioner Hoffbeck responded, "That's only the CBR."
Commissioner Hoffbeck relayed slide 21: "APFPA without CBRF
Transfer: Method, Inputs, And Assumptions":
Permanent Fund Starting Value: $55.8 billion (See
estimate below)
• Realized portion of corpus: $40.7 billion
• Realized portion of ERA: $8.7 billion
• Unrealized earnings held by the fund: $6.3 billion
• Starting value was estimated based on the following:
• $54.9 billion estimated EOY 2017 balance of PF under
status quo
• Plus $0.8 billion from the difference in the CY 2017
dividend calculation
Investment Return: Callan Associate's 10-year forecast
• Total return: 6.95% geometric, 12.32% standard
deviation
• Statutory return: P10 = 3.70%, P50 = 6.24%, P90 =
8.14%
• Inflation rate: 2.25%
Commissioner Hoffbeck indicated the slide reflected an FY
18 start. He reported that the scenario was very similar to
the previous two scenarios he had just discussed. The
difference was that there would not be an FY 17 draw. A
draw would begin in FY 18. The scenario would include a
full plan to fix everything as well as implementing the
APFPA. The Permanent Fund starting value would be higher
because of a lack of an FY 17 draw. The other significant
difference could be found on the following slide.
Commissioner Hoffbeck relayed slide 22: "APFPA without CBRF
Transfer: Method, Inputs, And Assumptions":
Permanent Fund Starting Value: $55.8 billion (See
estimate below)
• Realized portion of corpus: $40.7 billion
• Realized portion of ERA: $8.7 billion
• Unrealized earnings held by the fund: $6.3 billion
• Starting value was estimated based on the following:
• $54.9 billion estimated EOY 2017 balance of PF under
status quo
• Plus $0.8 billion from the difference in the CY 2017
dividend calculation
Investment Return: Callan Associate's 10-year forecast
• Total return: 6.95% geometric, 12.32% standard
deviation
• Statutory return: P10 = 3.70%, P50 = 6.24%, P90 =
8.14%
• Inflation rate: 2.25%
Commissioner Hoffbeck explained that the CBR would be lower
because of not including the payback to the CBR.
Commissioner Hoffbeck relayed slide 23: "APFPA without CBRF
Transfer: Method, Inputs, And Assumptions":
• Dividend Calculation:
• The sum of:
• 20% of the POMV payout before reductions, and
• 20% of the unrestricted royalties (about 15% of
total royalties) from the most recent FY ended
• Overwriting the above calculation, the dividend for
CY2018 is $1,000/person.
• Inflation Proofing:
• If four times the 5.25% POMV payout remains in the ERA
after the POMV transfer, the amount over the four
times the POMV is transferred into the corpus.
Commissioner Hoffbeck reported that the dividend
calculation would be the same as previously calculated.
2:12:31 PM
Commissioner Hoffbeck detailed slide 24: "APFPA without
Transfer, Full Fiscal Plan: Dividend paid per Person." He
detailed the impact on the dividend. He relayed that, with
a FY 18 starting date and a full fiscal plan, the dividend
would start at $1000 and grow to $1468. He added that with
an FY 17 draw it would equal $1416 - a difference of about
$50 without a FY 17 draw.
Co-Chair Seaton asked about slide 22. He was looking at the
CBR value of $4.4 billion. On slide 6 the CBR value was
listed at $4.4 billion. However, he thought that the
commissioner had stated that if the draw did not occur the
CBR would be higher. Commissioner Hoffbeck suggested that
rather than looking at slide 6, Co-Chair Seaton should look
at slide 12. It showed the CBR listed at $6.8 billion.
Slide 12 reflected an effective date of FY 17.
Commissioner Hoffbeck advanced to slide 25: "APFPA without
Transfer, Full Fiscal Plan: Nominal Fund Size." He reported
that the slide showed the effect on the PF with a FY 18
effective date. The fund would grow to $104,079 billion in
a 24-year period. The fund would have a real value of $61
billion. The fund would start out at $55.8 billion and
would grow to $61 billion. In the scenario with a full
fiscal plan the fund would grow at a rate greater than
inflation. The earnings rate estimated failure rate would
be 0.18 percent or less than one-fifth of 1 percent.
Commissioner Hoffbeck continued to slide 26: "APFPA without
Transfer, Full Fiscal Plan: Cumulative ERA Failure Rate."
He remarked that there would be little chance of failure
under the scenario.
Commissioner Hoffbeck detailed slide 27: "APFPA without
Transfer, No Fiscal Plan: Dividend paid per Person." He
explained that the slide reflected a scenario in FY 18
without solving any of the fiscal issues. The Permanent
Fund Dividend would go from $1468 under the full plan down
to $1271 over the life of the 24-year projection.
Commissioner Hoffbeck advanced to slide 28: "APFPA without
Transfer, No Fiscal Plan: Nominal Fund Size." He reported
that the nominal value of the fund would drop to $46.3
billion down from $55.8 billion. There would be a
degradation of the fund without fixing the remainder of the
fiscal problem as well as implementing the APFPA. The
failure rate of the ERA would be 44.61 percent.
Commissioner Hoffbeck continued to slide 29: "APFPA without
Transfer, No Fiscal Plan: Cumulative ERA Failure Rate." He
highlighted that the failure rate would start to climb in
the late 2020s.
Commissioner Hoffbeck continued to slide 30: "APFPA without
Transfer, No Fiscal Plan: Median UGF Revenue/Budget. He
emphasized that the CBR would start to run out in the late
2020s at which time the state would have to tap into the
ERA to fill the void.
2:16:36 PM
Commissioner Hoffbeck presented the conclusions listed on
slide 31 "Conclusions":
Status quo situation:
• Dividend will collapse
• Permanent Fund will be used to fill budget deficits,
depleting value
Permanent Fund Protection Act:
• Stabilizes the dividend and budget with or without CBR
transfer
• However, additional revenue measures or budget cuts
are required to protect the fund. Otherwise, the
remaining budget gap will lead to unplanned
withdrawals from the permanent fund that will degrade
its value.
Commissioner Hoffbeck concluded that there was very little
difference in durability with or without the FY 17 draw.
The fund would be slightly more durable, as it would grow
larger and the dividend would be slightly larger with a
start date in FY 18. He suggested that the 5.25 percent
draw worked under the modeling - it was durable and
sustainable. All models containing a full fiscal solution
worked. However, models without a full fiscal solution were
not sustainable. Stand-Alone models were not durable or
sustainable. A broader plan was necessary.
Co-Chair Foster would be passing the gavel to Co-Chair
Seaton to discuss the supplemental budget. He asked for
questions from the committee.
Commissioner Hoffbeck indicated Emma Pokon, Special
Assistant, Office of the Attorney General, Department of
Law, was available for anyone wanting more detail or to
walk through the various forecasts. She was happy to meet
with anyone one-on-one that wanted more information
regarding the modeling.
Co-Chair Seaton asked about the transfer of the PFD for
prisoners. He thought it was calculated based on the full
dividend. He wondered if there was a necessity for a
transfer from another account to fund the amount. He asked
how the amount was accounted. He wanted to get it on record
that there was a calculation or a fund transfer that the
legislature wanted to see.
Commissioner Hoffbeck would have to get back to Co-Chair
Seaton.
HB 61 was HEARD and HELD in committee for further
consideration.
2:19:15 PM
AT EASE
2:25:13 PM
RECONVENED
HOUSE BILL NO. 95
"An Act making supplemental appropriations, capital
appropriations, and other appropriations; making
reappropriations; amending appropriations; repealing
appropriations; and providing for an effective date."
2:25:13 PM
Co-Chair Seaton invited Ms. Pitney to come to the table.
PAT PITNEY, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, would be reviewing the components
of the supplemental budget request. She would highlight
some of the more significant items. The information packet
provided to members had a list of every change presented in
the "FY 2017 Supplemental Bill" (copy on file).
Ms. Pitney reviewed slide 2: "FY2017 Supplemental Summary."
She reported that the total supplemental request was $51.7
million unrestricted general funds (UGF) and $113 million
in total. The supplemental request under review was one of
the smaller requests in the past several years.
Ms. Pitney continued to slide 3: "UGF/DGF/Other/Fed Summary
by Department (1088)." She indicated that the slide showed
a breakout of the operating supplemental request by
department. The unrestricted general fund operating request
totaled $51.6 million and $95 million in total funds.
Ms. Pitney detailed slide 4: "Statewide Department Summary
- Capital Budget (1183)." The slide showed the capital
appropriations which totaled $75,000 UGF and $18 million in
total funds.
Ms. Pitney advanced to the detail sheet on slide 5: "FY2017
Supplemental Bill - Page 1 of 10." She would not review
every item but was happy to answer any questions about any
numbers she did not cover. She referred to line 2. The
first request was an increase which included UGF for a
health insurance rate increase. The rate would be
increasing from $1346 per month to $1555 per month. In the
previous year the administration had requested an amendment
for the FY 17 budget once it recognized that the state's
reserves were getting low and that the state would need to
have a rate increase for FY 17. She continued that rather
than a rate increase, there was a deposit into the working
reserve in FY 16 that bolstered the reserve amount. It
allowed the state to receive the same rate from July to
January. The Department of Administration had put in
savings measures and had increased the cost to all
employees for their health care premiums. All the actions
were not enough to keep the reserve healthy. Therefore, the
department had to impose a mid-year rate increase which was
out of the ordinary. It was the same rate that was in the
FY 18 budget request. The total came to $6.0 million of
which $5.3 million was UGF. She relayed that in the
previous year the UGF was not provided, but many of the
non-general fund components were provided for a health rate
increase. It was the reason the general fund was a larger
part currently.
Ms. Pitney moved to the item listed on line 3. She reported
that furlough days were negotiated into the supervisor
union contracts. The negotiation ended after the budget was
put together the previous year. The result was that the
budget was reduced in accordance with the mandated furlough
days.
Vice-Chair Gara commented that the court system had a
budget savings measure by offering their own voluntary
retirement incentive plan. If a person was 3 years past
retirement age they were offered 3 months pay. As a result,
several folks retired generating a significant cost
savings. He wondered if such a plan was in place in other
departments. Ms. Pitney thought the question would be
better answered another day.
2:31:41 PM
Ms. Pitney scrolled to slide 6 (Page 2): "FY2017
Supplemental Bill - Page 2 of 10." She pointed to line 6.
She explained that the Public Defender agency received
receipts from collections for representing clients. Often
those collections came from garnishing clients' PFDs. The
collections were down because of the lower dividend rate.
The supplemental request would replace the amount expected
from collections not materialized.
Representative Wilson asked when the last time the
administration reviewed the criteria for qualifying for a
public defender. She was aware that a formula was applied
based on income. There were some clients that would qualify
even though they did not have money immediately. She
thought that was the reason for the $455,000 request. She
wondered if the criteria needed updating. Ms. Pitney
responded that the amount a defendant paid was based on a
court decision. The issue concerning the criteria used by
judges to determine how much should be paid was currently
being addressed. She commented that conversations among the
different affected parties were some of the best outcomes
of the justice reform effort in the previous year.
Ms. Pitney reviewed item 7, a federal grant that would
allow the state to address some audit issues pertaining to
commercial driver's license examiners. The state would
incur an ongoing cost of $36,000 for the software that
would be implemented.
Ms. Pitney detailed that line 8 was an increase due to a
classification study completed in December of 2016.
Occupational licensing examiners would move from a range 13
to a range 14. There was also a corresponding amount in the
FY 18 budget.
Representative Pruitt asked for the amount. Ms. Pitney
responded that it was approximately $165,000 or $170,000.
She would provide the exact number later.
Ms. Pitney discussed slide 7: "FY2017 Supplemental Bill -
Page 3 of 10." The two items listed were technical in
nature.
Ms. Pitney spoke to slide 8: "FY2017 Supplemental Bill -
Page 4 of 10." Lines 11, 12, 13, and line 14 on page 5
[slide 8] were supplemental requests for the Medicaid
program. She recalled that in the prior summer the state
relayed payments in FY 16 pushing them into FY 17 because
the FY 16 budget was insufficient to cover the payments.
The state essentially wrote 2 checks in FY 17. The amount
requested reflected the 2 checks. The amount of money in
Medicaid was about $580 million. The total would be $27
million higher with the supplemental request. She reported
that the amount was just over $60 million less than it had
been in FY 15. In FY 17, not counting the expansion
population, there had been a 9 percent enrollment increase
and a 12 percent increase in utilization. Therefore, all
the reform efforts moving billing from state funding to
federal funding has allowed the Medicaid program to remain
steady and below where the state was in FY 15.
2:37:33 PM
Vice-Chair Gara asked her to repeat her previous comments
about the increase in utilization and the associated
increase in costs and the comparison between fiscal years.
Ms. Pitney reported that in 2017 the number of people
eligible for Medicaid increased 9 percent. The utilization
was up a total of 12 percent. She clarified she was
speaking of the regular Medicaid program, the non-expansion
program. She reported that there were reform efforts and
several savings initiatives occurring prior to the reform
efforts. The state was about $60 million below where it was
in FY 16 on an annual basis. It was a recurring savings.
Co-Chair Seaton asked if it was before or after the
supplemental request. Ms. Pitney responded after the
request.
Representative Wilson asked for an actual number of
participants. She wanted to know how many participants made
up the 9 percent she mentioned. She thought the percentage
was substantial. She wondered what the reason was for the
substantial increase. Ms. Pitney could provide the numbers
after the meeting. She thought the increase was reflective
of the economy and job losses and the number of Alaska's
aging population.
Representative Wilson was aware there was not a cap for the
regular Medicaid program. She thought that for the optional
portions of Medicaid a limit could be set. She thought the
legislature had set a limit. She wondered if she was
correct. Ms. Pitney would have to consult with the
Department of Health and Social Services.
Representative Wilson wanted the information. She was under
the impression that the optional programs were capped. She
knew the medical portion cold not be capped. However, the
dental and other programs could be capped.
Co-Chair Seaton asked if Representative Wilson was talking
about a dollar cap or a limitation of services.
Representative Wilson thought there was a dollar cap for
the optional plans. Co-Chair Seaton suggested asking HSS.
2:42:28 PM
Vice-Chair Gara was confused. He referred to pages 4 and 5
[slides 8 and 9] and noted that for each line item the
descriptions reflected FY 16 costs that the state delayed
paying until FY 17. He indicated there were 4 items with
various amounts including: $2.9 million, $219,000, $15.9
million, and $7.6 million. There were also unanticipated
costs associated with more people using Medicaid in FY 17.
He only saw delayed payments on the slides.
Ms. Pitney responded that the savings initiatives,
memorandum of agreements with providers allowing higher
billing on the federal side, and utilization management
initiatives put in place by the Department of Health and
Social Services (DHSS) would offset unanticipated growth.
The program was being managed to keep costs contained. She
suggested that, had the department not had to write the
checks in FY 17 from FY 16, it would have met the overall
budget target. They were doing many things and would be
very tight at the end of the year in meeting the
department's overall costs. She reported the department
believed it would "Squeak in under the wire" with the
savings initiatives and the reforms put into place.
Vice-Chair Gara stated that in terms of the unanticipated
increase in the number of people applying for Medicaid, the
state was not seeking a supplemental request because enough
savings had been generated. The savings would compensate
for the increase in the number of people qualifying for
Medicaid and who the state was paying for. He asked if he
was accurate. Ms. Pitney made one correction - 17.
Vice-Chair Gara asked why the line items were 4 separate
components. Ms. Pitney replied that each were different
allocations within the appropriation.
Ms. Pitney addressed to slide 9: "FY2017 Supplemental Bill
- Page 5 of 10." She noted that the rest of the items on
page 5 and the first few items on page 6 [slide 10] were
smaller grants or accounting technical changes.
Ms. Pitney explained to slide 10: "FY2017 Supplemental Bill
- Page 6 of 10." She referred to line 24, the first capital
supplemental request for the Whale Pass organizational
grant. She explained that when a new city was formed it was
entitled to a $75,000 grant from the Department of
Commerce, Community and Economic Development. The item
satisfied statute.
2:46:48 PM
Representative Guttenberg asked about the money provided to
new municipalities. He asked if calculations had been
created for second class cities. He mentioned student
enrollment counts and municipal assistance. Ms. Pitney
would have to get back to him. She noted that community
revenue sharing would be a factor.
Vice-Chair Gara stated that the previous year the
department had come to the legislature reporting they would
be getting more aggressive with leveraging extra federal
funds to try to replace state funds. He recalled that many
initiatives had been presented to reduce the FY 17 by
generating extra federal funds. Currently, more people had
applied for Medicaid than anticipated (12 percent more)
generating extra costs. He wondered how the costs would be
offset by federal savings which he thought was already
reflected in the budget in the prior year. He did not want
to see the department absorb all the extra costs. He was
unclear about the real costs having to do with the
increased Medicaid recipients. He asked if there was extra
federal savings that the department generated that was not
reflected in the FY 17 budget.
Ms. Pitney relayed that 9 percent reflected the
additionally eligible, and 12 percent was the actual change
year over year. Some of the increase was anticipated,
However, 12 percent was not anticipated. She thought Vice-
Chair Gara's question was complex. She would be happy to
sit down with DHSS to discuss the numbers. She mentioned
that among the savings initiatives, some were working
faster than others generating a higher-than-expected
savings. She mentioned pharmacy and travel agreements. She
would be happy to have a stand-alone discussion.
2:50:46 PM
Vice-Chair Gara was concerned with having a large gap for
the budget in FY 17 for Medicaid. The budget in FY 18 for
Medicaid would reflect the extra people. He was concerned
with the FY 17 budget absorbing all the costs for the extra
people. He was unsure if the comparison of the budget years
would be true.
Co-Chair Seaton thought there was some confusion. He
clarified that Ms. Pitney was saying that in FY 17 the
state had 9 percent more eligible people and the state had
12 percent greater Medicaid utilization overall. The
increases were offset in FY 17 with savings that had
occurred. The costs from FY 16 that were being paid in FY
17 were independent of the number of new eligible people
and the utilization rate. He asked if he was correct. Ms.
Pitney responded, "That is correct."
Co-Chair Seaton further commented that the committee should
have had 2 conversations separately because the number of
people eligible and the utilization rate were not included
in any of the figures. The costs were being absorbed in the
cost savings generated in the current year. He thought
Vice-Chair Gara was asking if the state had anticipated the
questions and had reduced the budget by the amount of
savings, or was the savings greater than anticipated for FY
17.
Ms. Pitney responded the FY 17 budget was reduced from the
FY 16 budget for savings initiatives. Many of the cost
savings were going well and others were not. Independently,
the Medicaid group was managing the program and managing
their care utilization to limit costs where possible. The
administration was asking the department to manage as tight
as possible. The administration believed the FY 17 budget
would be adequate to meet FY 17 costs. There was a small
chance the state might have to check write into FY 18.
Early on, it became apparent that the administration would
have to come back to the committee.
2:54:58 PM
Vice-Chair Gara thought the math did not add up. He
reported that he had heard from the department that they
were trying to achieve the federal savings in the budget
the prior year. The department had not been able to achieve
all the savings. On one hand, the state had less federal
money coming in than was expected. Also, there was some
portion of the 12 percent of people seeking Medicaid that
the state anticipated in the previous year and put in the
budget. Additionally, there were more people that received
Medicaid services. It appeared that Alaska had less federal
dollars coming in for federal replacement money than the
state had hoped for and more Medicaid costs going out. He
did not understand how there could be less federal funds
and more state expenditures, without asking for a
supplemental.
Ms. Pitney responded that his logic was fair. The federal
savings did not line up program-by-program, but lined up
collectively. The state would receive a savings. The
administration was watching the department items including
expenditures and every check that was written monthly. The
administration believed that through the department's
efforts it could get through the current fiscal year with
the amount of money being requested. There was a slight
chance that a small amount would have to be written in FY
18.
Vice-Chair Gara was frustrated because the costs were FY 17
expenses. He anticipated that there would be real FY 17
costs. He argued that more people could not be treated with
Medicaid services for free with annual increases to medical
care costs. He opined that there would be an FY 18 amended
budget that would add costs to the budget when they were
really FY 17 costs that should be paid. He thought the
budget comparison between years would be skewed making it
appear that the budget was increasing.
Ms. Pitney acknowledged Vice-Chair Gara'S concerns. The
administration was confident enough that the FY 17 budget
would meet the FY 17 needs. There was a chance that all the
management efforts would fall a little short. If that was
the case, the administration would come back to the
legislature. The administration felt confident enough. It
wanted to keep the supplemental requests low while leaving
the pressure to manage the program high. The administration
thought it could get through the current year with the
amount requested.
Representative Guttenberg reported that the expansion of
Medicaid brought in a new group of people, more than
anticipated. Some of the projected savings was intangible.
He spoke of fewer emergency rooms and better handling of
chronic illnesses. He asked if there was an aspect of
measuring the changes. He wondered about the effect of the
new group on intangible items. He asked if the department
was trying to measure the changes with the expanded
Medicare [Medicaid] group. Ms. Pitney responded
affirmatively.
2:59:46 PM
Representative Ortiz returned to the $60 million. He
understood that the state spent $60 million less for
Medicaid than it did in 2015. He asked if he was accurate.
Ms. Pitney answered, "Yes." Representative Ortiz replied,
"I feel good about that. Thanks."
Ms. Pitney advanced to slide 11: "FY2017 Supplemental Bill
- Page 7 of 10." She explained that items 25 and 26 were
the Department of Fish and Game (DFG) supplemental
requests. The first was for a continuation of studies that
began in 2013. There were 2 groups, Pacific Seafood
Processors and Northern Southeast Regional Aquaculture
Association Incorporated, that were funding the
continuation of the studies. The second request fulfilled a
necessary match and the federal funds to receive the
Pittman Robertson funds that were available for Alaska. The
match source would come from DFG funding. She expounded
that the money was designated for several capital projects
that were part of a prioritized list.
Co-Chair Seaton asked whether the funding match would be
ongoing or if additional federal funding had become
available that had not been anticipated. Ms. Pitney
reported there had been periodic capital requests for
Pittman Robertson funding. The current item was a periodic
request. In the past, the request had been submitted on a
regular basis as part of the supplemental bill, which she
had not been aware of. However, she believed the request
should have been part of the FY 17 or FY 19 budget.
Ms. Pitney highlighted line 30 on page 7 [slide 11]. The
request was technical in nature. She explained that 2 years
prior, capital project funding had been inserted because of
several ongoing negotiations. The request would allow the
Department of Administration to continue to use the funds
in labor negotiations as necessary.
Ms. Pitney continued to line 31 on the same slide. She
detailed the request for an appropriation for the Alaska
Land Mobile Radio (ALMAR) system. The amount of the request
was $3 million. The amount would come from money originally
appropriated for a car driving range at the Sitka Police
Academy. The Department of Public Safety felt the money
would be better spent maintaining the ALMAR system. The
administration was $1.5 million short of the needed funds
outside of the $3 million and was currently looking for
another source for the additional monies.
3:04:51 PM
Representative Pruitt asked if the money would be used to
maintain or upgrade the system. Ms. Pitney responded that
the money would be used for both the equipment maintenance
and a refresh of the system.
Representative Pruitt asked about what the legislature
should expect in the future in terms of funding requests.
Ms. Pitney indicated that the amount would be consistent.
State records showed $5 million to $7 million being spent
on the system each year. It was an expensive system used
throughout the state by public safety employees. It was the
state's statewide emergency communications system.
Representative Pruitt asked if the state upgraded the
system each year. He asked for clarification. Ms. Pitney
used the example of software upgrades. They did not happen
every year. However, the equipment maintenance happened
every year. It depended on what maintenance was being done
each year. It was cyclical.
Ms. Pitney advanced to slide 12: "FY2017 Supplemental Bill
- Page 8 of 10." She spoke to line 32, which would allow
the state to receive a federal grant. Line 33 was a
significant item. The amount of the request was $8 million
for the Department of Corrections (DOC). One of the
Medicaid expansion savings came in the form of the
department being able to bill Medicaid for prisoners
hospitalized for more than 24 hours. She noted that
although the provision was working, the total healthcare
costs for inmates did not materially change by being able
to bill for extended hospital stays. The department was
seeing increased costs because of nursing staff turnover
resulting in overtime and temporary hiring costs. Higher
drug costs and higher than anticipated utilization also
contributed to increased costs. She reported that the
department had asked for $11 million to cover the costs.
The administration worked with the department to look at
management action that could be taken to contain costs. The
funding of $11 million included the $8 million request and
cost savings resulting from tighter management within the
healthcare area. Hiring nurses to provide adequate coverage
would be the most effective method of reducing costs within
the department. She asked the commissioner and his
management team to scrutinize every cost to find $3 million
in savings. She reiterated that only $8 million was being
requested from the general fund.
3:10:22 PM
Representative Wilson understood if an inmate was at a
halfway house or on electronic monitoring they would be
able to take advantage of Medicaid expansion. Yet, the
Department of Corrections had reduced the number of halfway
houses by about $8 million. The electronic monitoring
program (EMP) had also been cut in half from 400 to 200. In
terms of high medical costs, halfway houses and EMP were
two avenues the state was not utilizing. She had heard
stories of people walking away from halfway houses, which
she considered to be a contract issue. She believed it was
up to the contractor to make sure [people did not walk
away]. She thought it was unreasonable to hope to see the
savings by prisoners only being hospitalized for 24 hours.
She imagined hospitals would want to them [prisoners] out
as soon as possible to avoid paperwork. She thought the
high costs were due to prisoners not being able to utilize
options such as halfway houses and the EMP. She argued that
further savings could not only be found in Medicaid
expansion but within the prison system itself. Ms. Pitney
would investigate the issue.
Vice-Chair Gara was concerned with the corrections issue.
The commissioner of DOC had said that the department had
$11 million in unanticipated costs. The department
requested an $11 million increment to deal with the
shortfall. In turn, the administration directed the
department to find $3.7 million in savings that was never
identified in the budget in the previous year and limited
its supplemental request to $8 million. He asked if he was
right in his interpretation. Ms. Pitney replied, "Yes."
Co-Chair Seaton stated that DOC had identified one of the
problems having to do with medical facilities not
identifying the times people were out [hospitalized],
hence, the 24-hour period was not tracked. Therefore, there
was no mechanism to bill Medicaid for the 95 percent
federal reimbursement. He asked if the issue had been taken
care of. Ms. Pitney responded that the staff of the
commissioner's office looked at the bills to confirm the
timeframe. The office was actively managing the issue. In
the case where someone had stayed over 24-hours they sent
it back. The office was managing the issue on a case-by-
case basis.
Co-Chair Seaton asked if things were now being tracked
properly. Ms. Pitney responded that there was a
disincentive for the provider: It was easier to bill DOC
than to bill Medicaid. Also, providers received higher
reimbursements if they billed DOC rather than Medicaid. She
relayed that there were some built-in incentives and
disincentives that she hoped to manage. She thought the
issues were longer-term contract management issues.
3:15:09 PM
Representative Guttenberg suggested that if the provider
billed DOC they received a higher reimbursement rate than
if they billed Medicaid. He wondered what rate the state
received when it returned to Medicaid for billing for the
same service - the higher or lower rate. Ms. Pitney asked
Representative Guttenberg to repeat his question.
Representative Guttenberg heard Ms. Pitney state that the
provider would rather bill DOC because they received a
higher reimbursement rate than if they billed Medicaid
directly. He wondered if the state got reimbursed a
comparable amount. He wondered which number the state
received. Ms. Pitney answered that the provider received
the Medicaid rate if they were billed on Medicaid which was
lower than if they billed DOC directly. She added that the
rate could be adjusted after the transition.
Vice-Chair Gara asked if the $11 million shortfall for DOC
had anything to do with withheld felon PFD funds. Ms.
Pitney responded in the negative. The current year's felon
funds were based on the prior year's check amount. The
amount in the budget was lagging a year.
Ms. Pitney advanced to slide 13: "FY2017 Supplemental Bill
- Page 9 of 10." She spoke to line 37 which was a special
appropriation for a class V injection well consent decree.
The agreement between the Department of Transportation and
Public Facilities and the Environmental Protection Agency
had to do with the clean-up of how oil was collected in the
maintenance stations. She addressed line 38 having to do
with refinancing. There was a savings of $655 million by
refinancing the Goose Creek debt.
Representative Pruitt asked what terms changed in the
refinancing agreement. He wondered if the state obtained a
better financing rate or extended the financing for a
longer time. Ms. Pitney was happy to provide more details.
However, the change was made primarily because of an
interest rate reduction. Representative Pruitt confirmed he
wanted to see the refinancing details.
3:19:11 PM
Ms. Pitney advanced to slide 14: "FY2017 Supplemental Bill
- Page 10 of 10." Ms. Pitney spoke about line 39 regarding
a $3 million request for the disaster relief fund. The fund
balance was currently about $2 million. The amount would
replenish the fund to the normal level of about $5 million.
She thought that in the years before her tenor she thought
the amount might have been significantly higher.
Representative Wilson noted that wildfire relief was not a
part of the current supplemental request. Typically, relief
funding associated with wildfires in Fairbanks would appear
in the supplemental request each year. She asked if, in the
current year, relief funding for wildfires was paid for by
the federal government. Ms. Pitney would have to check into
the issue. She thought plenty of funds were available.
Representative Wilson wondered how much was in the fund.
She indicated there had been discussion about putting an
actual amount in the fund.
Co-Chair Seaton asked if it was different than the disaster
relief fund. Ms. Pitney would get back to the committee.
Representative Pruitt would love to see if the state
returned money to the general fund for wildfire relief. He
commented that the state issued its "make whole" payments
to welfare recipients in October because of the Permanent
Fund. He asked if the PF was reduced to a point where a
supplemental request was necessary. Ms. Pitney would follow
up with an answer.
Vice-Chair Gara was told by a few people that the
legislature would see a supplemental for fire suppression
expenses in the current year. He asked if the state was
using up more of the fund than normal. In other words, was
the state changing its policy about the amount of reserve
funds to have available for fire suppression. Ms. Pitney
reported that the administration was not changing the
policy. She had not received a supplemental request from
the Department of Natural Resources. She would find out.
HB 95 was HEARD and HELD in committee for further
consideration.
Co-Chair Seaton thanked Ms. Pitney and reviewed the agenda
for the following meeting.
ADJOURNMENT
3:24:22 PM
The meeting was adjourned at 3:24 p.m.