Legislature(2021 - 2022)DAVIS 106

08/23/2021 11:00 AM House WAYS & MEANS

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12:10:56 PM Start
12:11:39 PM HB3004
01:32:18 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 12:00 pm --
-- Testimony <Invitation Only> --
Heard & Held
+ Presentation: Comprehensive Fiscal Plan Working TELECONFERENCED
Group Report
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
           HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS                                                                          
                        August 23, 2021                                                                                         
                           12:10 p.m.                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Ivy Spohnholz, Chair                                                                                             
Representative Adam Wool                                                                                                        
Representative Andy Josephson                                                                                                   
Representative Calvin Schrage                                                                                                   
Representative Andi Story                                                                                                       
Representative Mike Prax                                                                                                        
Representative David Eastman                                                                                                    
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 3004                                                                                                             
"An Act making appropriations for  the operating and loan program                                                               
expenses   of  state   government  and   for  certain   programs;                                                               
capitalizing   funds;    making   capital    appropriations   and                                                               
supplemental  appropriations;  making appropriations  under  art.                                                               
IX, sec.  17(c), Constitution  of the State  of Alaska,  from the                                                               
constitutional  budget   reserve  fund;  and  providing   for  an                                                               
effective date."                                                                                                                
     - HEARD & HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB3004                                                                                                                  
SHORT TITLE: APPROP: REVERSE OPERATING APPROP. VETOES                                                                           
SPONSOR(s): WAYS & MEANS                                                                                                        
08/20/21       (H)       READ THE FIRST TIME - REFERRALS                                                                        
08/20/21       (H)       W&M, FIN                                                                                               
08/23/21       (H)       W&M AT 11:00 AM DAVIS 106                                                                              
WITNESS REGISTER                                                                                                              
ALEXEI PAINTER, Director                                                                                                        
Legislative Finance Division                                                                                                    
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   Presented a  PowerPoint titled  "Update on                                                             
Fiscal Summary, Governor's Vetoes,  and Reverse Sweep; Comparison                                                               
of HB 3003 and 3004," dated 8/23/21.                                                                                            
MEGAN WALLACE, Director                                                                                                         
Legislative Legal Services                                                                                                      
Legislative Affairs Agency                                                                                                      
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Answered  questions and provided information                                                             
during the hearing on HB 3004.                                                                                                  
ACTION NARRATIVE                                                                                                              
12:10:56 PM                                                                                                                   
CHAIR IVY  SPOHNHOLZ called the  House Special Committee  on Ways                                                             
and  Means  meeting  to  order at  12:10  p.m.    Representatives                                                               
Eastman, Prax, Story, Schrage, and  Spohnholz were present at the                                                               
call to  order.   Representatives Josephson  and Wool  arrived as                                                               
the meeting was  in progress.  Also  present were Representatives                                                               
Drummond and Ortiz.                                                                                                             
        HB3004-APPROP: REVERSE OPERATING APPROP. VETOES                                                                     
[Contains discussion of HB 3003.]                                                                                               
12:11:39 PM                                                                                                                   
CHAIR SPOHNHOLZ announced  that the only order  of business would                                                               
be HOUSE  BILL NO.  3004, "An Act  making appropriations  for the                                                               
operating and loan  program expenses of state  government and for                                                               
certain    programs;   capitalizing    funds;   making    capital                                                               
appropriations    and    supplemental   appropriations;    making                                                               
appropriations  under art.  IX, sec.  17(c), Constitution  of the                                                               
State  of Alaska,  from the  constitutional budget  reserve fund;                                                               
and providing for an effective date."                                                                                           
12:12:28 PM                                                                                                                   
ALEXEI   PAINTER,   Director,   Legislative   Finance   Division,                                                               
presented  a   PowerPoint  titled  "Update  on   Fiscal  Summary,                                                               
Governor's Vetoes, and  Reverse Sweep; Comparison of  HB 3003 and                                                               
3004."   He began  his presentation with  slide 4,  "Short Fiscal                                                               
Summary -  FY21/FY22 Budget,"  which displayed  a summary  of the                                                               
enacted  budget after  vetoes.    He drew  attention  to line  7,                                                               
Agency Operations, which  he said considers the effect  of SB 55,                                                               
which shifted  retirement funding  from the Statewide  Items line                                                               
to Agency Operations.   He noted that the  $100 million reduction                                                               
exists even  after adding  $73 million  to the  Agency Operations                                                               
undesignated general  fund (UGF) under  SB 55, and  the Statewide                                                               
Items reduction is largely due to SB 55.                                                                                        
MR. PAINTER  pointed out  the Capital Budget  on line  10, noting                                                               
that  the full  capital  budget  was not  passed  the prior  year                                                               
because of the abbreviated legislative  session due to the COVID-                                                               
19 pandemic;  this year's  capital budget  is larger  than recent                                                               
years due,  in part, to the  last abbreviated session as  well as                                                               
additional projects.   He then  noted the governor's veto  of all                                                               
but $8.5 million  from the Permanent Fund  dividend, which covers                                                               
administrative costs but not payment of the actual dividends.                                                                   
MR.  PAINTER concluded  slide 4  with the  note that  there is  a                                                               
surplus  of $220.6  million before  fund  transfers, which  total                                                               
$250 million  from the American Rescue  Plan Act of 2021  as well                                                               
as  "some use"  of  the  statutory budget  reserve.   After  fund                                                               
transfers, he said, the surplus totals $536.6 million.                                                                          
12:15:16 PM                                                                                                                   
REPRESENTATIVE  STORY  asked  for   information  on  the  reduced                                                               
percent of  market value (POMV) draw,  as noted on line  3 of the                                                               
MR. PAINTER explained SB 26  established the first POMV draw, and                                                               
the  first three  years used  a  higher draw  percentage of  5.25                                                               
percent, which decreased to 5 percent starting in FY 2022.                                                                      
12:16:07 PM                                                                                                                   
MR. PAINTER  presented slide 5,  "Projected FY22 Fund  Balances                                                                 
With  Reverse  Sweep," which  displayed  a  version of  the  fund                                                               
balance  if  a reserve  sweep  exists;  he  noted that  there  is                                                               
currently no  reserve sweep.   The constitutional  budget reserve                                                               
(CBR) fund of  -$536.6 million represents a deposit,  he said, as                                                               
surpluses go into CBR; the CBR balance  at the end of the year is                                                               
expected to  be approximately  $1 billion,  with $330  million in                                                               
the  statutory budget  reserve fund,  which represents  vetoes by                                                               
the governor.   The designated  funds tracked in this  report, he                                                               
said, are  projected to  total $1.675  billion at  the end  of FY                                                               
2022, assuming a reverse sweep.                                                                                                 
12:17:13 PM                                                                                                                   
MR. PAINTER  presented slide 6,  "Projected FY22 Fund  Balances -                                                               
Without Reverse  Sweep," which  displayed a  version of  the fund                                                               
balance  if there  is  no  reverse sweep,  which  is the  current                                                               
situation.  He said this version  assumes that the only fund that                                                               
changes, resulting from  how the sweep was conducted  in FY 2020,                                                               
is  the power  cost  equalization (PCE)  endowment  fund.   There                                                               
would exist  a larger balance  in the  CBR, a smaller  balance in                                                               
the designated funds, and no  starting balance in the other funds                                                               
undesignated reserves, because those  amounts would be swept into                                                               
the CBR.                                                                                                                        
CHAIR SPOHNHOLZ  asked whether  the three-quarter  vote threshold                                                               
would apply whether or not the reverse sweep exists.                                                                            
MR. PAINTER replied in the affirmative.                                                                                         
12:18:33 PM                                                                                                                   
MR. PAINTER  presented slide 8,  "Summary of  Governor's Vetoes."                                                               
There were  $64.5 million in  vetoes of legislative  addition, of                                                               
which  approximately $57  million  is  undesignated general  fund                                                               
(UGF).   He noted that some  of the vetoes were  for items funded                                                               
by  the  legislature at  the  statutory  level, which  were  then                                                               
vetoed,  such   as  community  assistance.     Partial   veto  of                                                               
legislative addition totals approximately  $11.6 million, and was                                                               
largely comprised of vetoes to  the Alaska Marine Highway System.                                                               
The  category of  veto to  match  governor's proposed  reduction,                                                               
totaling  approximately $38  million, is  comprised of  items cut                                                               
from the budget  passed by the legislature  and includes Medicaid                                                               
and  the  Alaska  Legal  Services Corporation.    The  vetoes  of                                                               
funding from a  difference source than proposed  by the governor,                                                               
totaling  approximately  $1  million; this  category  is  largely                                                               
comprised  of the  veto  of  funds to  the  Alaska Mental  Health                                                               
Trust.  The vetoes in the  category of other operating items were                                                               
largely in  the area  of the permanent  fund dividend  (PFD); the                                                               
legislature had  proposed a smaller  amount than proposed  by the                                                               
governor, who  then vetoed  all but $8.5  million.   The governor                                                               
also vetoed approximately $2 million  in legislative per diem, he                                                               
said.   The public  school trust  fund, he  said, had  been over-                                                               
appropriated by the  legislature, so the governor  vetoed some of                                                               
the funds in order to be consistent with the statutory formula.                                                                 
12:22:14 PM                                                                                                                   
REPRESENTATIVE JOSEPHSON  sought to  clarify whether  Mr. Painter                                                               
had stated  that the  legislature "inadvertently  overfunded" the                                                               
education appropriation.                                                                                                        
MR. PAINTER explained  that the governor vetoed  funding from the                                                               
public  school trust  fund,  which  is a  dedicated  fund in  the                                                               
statehood  compact.   The trust  fund is  currently an  endowment                                                               
with a draw  limited to a percentage of market  value (POMV), and                                                               
the legislature  inadvertently appropriated more than  the limit.                                                               
The  statute specifies  that  the POMV  draw is  to  pay for  the                                                               
education  formula  as  well  as management  fees,  he  said,  so                                                               
management fees were vetoed by  the governor with the expectation                                                               
that the UGF would make up the difference in funding.                                                                           
12:24:07 PM                                                                                                                   
REPRESENTATIVE STORY commented that  many items and services that                                                               
were  cut  were in  areas  in  which  the legislature  worked  to                                                               
improve Alaskans' quality of life.                                                                                              
12:25:01 PM                                                                                                                   
MR. PAINTER resumed  his explanation of slide 8  with the capital                                                               
projects  category of  vetoes, which  totaled approximately  $331                                                               
million.   He  noted the  vetoed federal  funds, which  were from                                                               
DOT&PF's budget  designated to project acceleration,  which would                                                               
provide  flexibility.    He  clarified   that  the  veto  doesn't                                                               
necessarily mean Alaska loses $220  million in federal funds, but                                                               
that  DOT&PF  may have  less  flexibility  than they  would  have                                                               
without the veto.                                                                                                               
CHAIR SPOHNHOLZ pointed out that  details on all vetoed items was                                                               
available   on   slides  27-31.      Services   such  as   public                                                               
broadcasting,  emergency  response system,  children's  services,                                                               
community assistance,  Medicaid, and behavioral  health treatment                                                               
were  legislative additions,  she said,  but were  vetoed by  the                                                               
12:28:33 PM                                                                                                                   
REPRESENTATIVE PRAX asked where to find the presentation.                                                                       
12:28:58 PM                                                                                                                   
REPRESENTATIVE  STORY  inquired  about   the  increased  cost  of                                                               
materials and flexibility in the face of the vetoes.                                                                            
MR.  PAINTER  replied  that  he  can't  offer  insight  into  the                                                               
governor's reasoning for any particular veto.                                                                                   
12:29:43 PM                                                                                                                   
MR.  PAINTER presented  slide 10,  "CBR  Sweep Mechanism,"  which                                                               
read as follows [original punctuation provided]:                                                                                
     The CBR sweep provision  was established in Article IX,                                                                    
     Section 17 of the Alaska Constitution:                                                                                     
     (d)  Repayment requirement    "If  an appropriation  is                                                                    
     made  from the  budget reserve  fund, until  the amount                                                                    
     appropriated  is repaid,  the  amount of  money in  the                                                                    
     general fund available for appropriation  at the end of                                                                    
     each succeeding  fiscal year shall be  deposited in the                                                                    
     budget  reserve fund.  The legislature  shall implement                                                                    
     this subsection by law."                                                                                                   
MR. PAINTER  noted that  the legislature  currently owes  the CBR                                                               
fund approximately $11 billion from  appropriations from the fund                                                               
that have  not been repaid.   He then presented slide  11, titled                                                               
"Reverse  Sweep," which  read  as  follows [original  punctuation                                                               
     ? The "reverse sweep" is  an appropriation from the CBR                                                                    
     that returns  swept funds back to  the original subfund                                                                    
     or  account. The  "reverse sweep"  is an  appropriation                                                                    
     under art. IX,  sec. 17(c), and requires a  3/4 vote to                                                                    
     ? The  sweep is effective at  the end of a  fiscal year                                                                    
     (June 30)  and the  reverse sweep  is effective  on the                                                                    
     first day of the following fiscal year (July 1).                                                                           
MR. PAINTER noted that the  language doesn't actually reverse the                                                               
sweep from the  CBR fund, only from the funds  and accounts under                                                               
12:32:08 PM                                                                                                                   
REPRESENTATIVE JOSEPHSON  asked whether or  not the funds  in the                                                               
general CBR fund are swept.                                                                                                     
MR. PAINTER replied  that the general funds that are  not part of                                                               
sub-funds are swept, and that sweep is typically not reversed.                                                                  
REPRESENTATIVE JOSEPHSON  hypothesized about  an amendment  to HB
3003 to  spend general fund dollars,  and he asked why  the money                                                               
specified  in  the  amendment  shouldn't  be  deemed  "swept  and                                                               
MR.  PAINTER explained  that if  general fund  dollars are  to be                                                               
spent  in FY  2022, it's  FY 2022  revenue into  the fund  that's                                                               
being spent.   If there is  a post-transfer surplus in  the fund,                                                               
he said,  it can  be spent;  however, FY  2021 dollars  cannot be                                                               
spent without a three-quarters vote.                                                                                            
12:33:34 PM                                                                                                                   
MR. PAINTER advanced  to slide 12, "State  Implementing Sweep was                                                               
Found   Unconstitutional,"  which   read  as   follows  [original                                                               
punctuation provided]:                                                                                                          
     ? AS 37.10.420 was intended to implement the sweep.                                                                        
     ?  The Supreme  Court in  Hickel v.  Cowper found  this                                                                    
     statute unconstitutional in 1994.                                                                                          
     ?  Since   then,  the  executive  branch   has  had  to                                                                    
     implement  the sweep  without  statutory guidance.  The                                                                    
     list  of  sweepable  funds has  been  driven  by  legal                                                                    
     interpretations of Hickel v. Cowper.                                                                                       
     ?  The  legislature  could  pass  a  new  statute  that                                                                    
     attempts  to  define  which funds  are  sweepable,  but                                                                    
     absent  this  or  a  court  case  the  administration's                                                                    
     interpretation is operative.                                                                                               
CHAIR  SPOHNHOLZ  called  on  Ms.   Wallace  to  provide  further                                                               
explanation of  the 1994  legal decision  that found  the statute                                                               
12:34:53 PM                                                                                                                   
MEGAN WALLACE, Director,  Legislative Legal Services, Legislative                                                               
Affairs Agency,  explained that discussion  in the  case centered                                                               
on article IX,  section 17(b), which is the  provision within the                                                               
CBR constitutional  amendment that dictates when  the legislature                                                               
can access  the funds  with a  simple majority  vote, as  well as                                                               
defining  what  it   means  have  an  amount   available  for  an                                                               
appropriation.    The  statutes  passed by  the  legislature  had                                                               
attempted  to  define the  amounts;  the  court struck  down  the                                                               
legislature's  definition.   In  another statute,  she said,  the                                                               
same definition was used; because the definitions were the same,                                                                
she said, subsection(b) was struck down by the Alaska Supreme                                                                   
12:36:54 PM                                                                                                                   
MR. PAINTER presented slide 13, "How the Sweep Works," which                                                                    
read as follows [original punctuation provided]:                                                                                
     ?  The  Department   of  Administration's  Division  of                                                                    
     Finance  (DOF) accountants  calculate  the sweep  while                                                                    
     preparing  the  Annual Comprehensive  Financial  Report                                                                    
     (ACFR). The  sweep represents  unreserved, undesignated                                                                    
     fund balances of the general fund subfunds.                                                                                
     ? DOF  accountants calculate the sweep  in September as                                                                    
     the ACFR  is prepared  yet the amount  of the  sweep is                                                                    
     posted in  the financial records  as of the end  of the                                                                    
     fiscal year (June 30th).                                                                                                   
       After the  ACFR is prepared (historically  by the end                                                                    
     of  October), the  ACFR is  audited by  the legislative                                                                    
     auditor. The sweep amount is adjusted as necessary.                                                                        
12:38:26 PM                                                                                                                   
MR. PAINTER progressed to slide 14, titled "Changes in                                                                          
Interpretation for FY19 Sweep," which read as follows [original                                                                 
punctuation provided]:                                                                                                          
     ?  Starting with  the  FY19  sweep, the  administration                                                                    
     expanded the  scope of the sweep  to include additional                                                                    
     ?  Most  significantly,  the   sweep  was  expanded  to                                                                    
     include the Power Cost Equalization  (PCE) Fund and the                                                                    
     Higher Education Investment Fund.                                                                                          
     ? While  this added  only a few  new funds,  it greatly                                                                    
     increased  the affected  balances: in  FY20, those  two                                                                    
     funds  accounted  for  $1.4 billion  out  of  the  $1.5                                                                    
     billion swept to the CBR.                                                                                                  
MR. PAINTER presented slide 15, "Impact of Litigation on Sweep                                                                  
Interpretation," which read [original punctuation provided]:                                                                    
     ? The  Alaska Federation  of Natives brought  a lawsuit                                                                    
     against    the     administration    challenging    the                                                                    
     sweepability of the PCE Fund.                                                                                              
     ? On August 11, a Superior  Court ruled in favor of the                                                                    
     plaintiffs, finding  that PCE should not  be subject to                                                                    
     the  sweep  because,  although  it  was  available  for                                                                    
     appropriation, it was not part of the general fund.                                                                        
     ?  The  Superior  Court decision  also  indicates  that                                                                    
     other  funds that  are statutorily  established outside                                                                    
     the general fund should not  be swept, although this is                                                                    
     not directly ordered.                                                                                                      
     ?  LFD  is  reviewing   the  sweepable  funds  list  to                                                                    
     determine whether  other funds should  be reclassified,                                                                    
     although it  is up to the  administration to reclassify                                                                    
     them in the absence of further litigation.                                                                                 
             Most  notably,  the  Statutory  Budget  Reserve                                                                    
          likely should  not be subject  to the  sweep under                                                                    
          this  ruling  based  on  statutory  language  that                                                                    
          places the fund  as a "separate fund  in the state                                                                    
          treasury"  rather than  in the  general fund  (see                                                                    
          footnote 77  of the decision). This  fund has long                                                                    
          been considered sweepable.                                                                                            
             The Higher  Education Fund  was established  in                                                                    
          the  general fund  and would  not  be affected  by                                                                    
          this ruling.                                                                                                          
12:40:06 PM                                                                                                                   
CHAIR SPOHNHOLZ asked  Ms. Wallace to discuss the  sweep how much                                                               
discretion the  administration has  regarding what  is sweepable,                                                               
as well as how the sweep has historically been defined.                                                                         
12:40:49 PM                                                                                                                   
MS.  WALLACE explained  that  the  PCE fund  had  not been  swept                                                               
during    previous    administrations;   under    the    Dunleavy                                                               
Administration, however,  former Attorney General  Kevin Clarkson                                                               
determined the fund  was sweepable.  She pointed  out that Hickel                                                               
v. Cowper, 874 P.2d 922 (1994),  is the only Alaska Supreme Court                                                               
decision on  the topic, so  there is  not much legal  guidance to                                                               
make  determinations  about  appropriations.    The  more  recent                                                               
Anchorage Superior  Court decision  found that  the PCE  fund was                                                               
not  part  of the  general  fund,  and  the legislature  has  the                                                               
constitutional authority  to create funds outside  of the general                                                               
fund.   The language specifically  says that the  legislature has                                                               
expressly created  many funds  and accounts  in the  general fund                                                               
for various  purposes, she  said, and  noted several  examples of                                                               
separate funds;  the Anchorage  Superior Court  decision provided                                                               
further explanation regarding which funds are sweepable.                                                                        
12:45:50 PM                                                                                                                   
CHAIR SPOHNHOLZ  emphasized the importance of  considering policy                                                               
and  fiduciary responsibilities,  and she  noted that  the Higher                                                               
Education Investment Fund  (HEIF) is now sweepable.   The failure                                                               
of the  reverse sweep, she  said, now  means that funds  in HEIF,                                                               
which have outperformed the CBR, are  now swept into the CBR.  In                                                               
2017,  she said,  the HEIF  earned over  12 percent  in interest,                                                               
while CBR  earned approximately 1.83  percent; the sweep  of HEIF                                                               
into CBR  means the  investment from the  general fund  in higher                                                               
education will be increased.                                                                                                    
12:47:16 PM                                                                                                                   
REPRESENTATIVE EASTMAN asked whether management  of CBR is at the                                                               
legislature's discretion, and whether  there are any proposals to                                                               
improvement the management.                                                                                                     
CHAIR   SPOHNHOLZ   replied   that   "everything"   is   at   the                                                               
legislature's discretion.                                                                                                       
12:47:44 PM                                                                                                                   
MR. PAINTER pointed out that there  is a statute that governs the                                                               
management of  CBR which states that  when the balance of  CBR is                                                               
needed  within five  years for  deficit management,  the goal  is                                                               
preserving  cash through  conservative  management.   When  there                                                               
exists  a balanced  budget  or a  surplus, he  said,  CBR can  be                                                               
invested more aggressively.                                                                                                     
CHAIR SPOHNHOLZ  added that there  had been details  described by                                                               
Alaska Permanent Fund Corporation  (APFC) Chief Executive Officer                                                               
(CEO) Angela  Rodell explaining why the  rules-based framework is                                                               
so important; it's known how much  money is needed for both state                                                               
operations and  dividend payments, so  APFC is able to  invest as                                                               
aggressively as possible while still meeting its obligations.                                                                   
12:49:27 PM                                                                                                                   
REPRESENTATIVE JOSEPHSON  asked how  managers handle  the "chaos"                                                               
of a reverse sweep with respect to investment funds.                                                                            
MR.  PAINTER  reported  that the  administration  was  trying  to                                                               
gradually  transition the  portfolio  to match  CBR, rather  than                                                               
engaging  in a  mass sell-off  which would  result in  a loss  of                                                               
value, then transition back in the case of a reverse sweep.                                                                     
REPRESENTATIVE JOSEPHSON  expressed that such maneuvers  can't be                                                               
CHAIR SPOHNHOLZ  expressed that Mr.  Painter just  described some                                                               
of the potential consequences of such transitions.                                                                              
12:50:59 PM                                                                                                                   
REPRESENTATIVE  PRAX asked  whether  funds taken  from CBR  would                                                               
still be available for appropriation for other purposes.                                                                        
CHAIR SPOHNHOLZ  asked Representative Prax whether  he was asking                                                               
whether the funds  would be swept back into  the higher education                                                               
fund from CBR in the case of a reverse sweep.                                                                                   
REPRESENTATIVE PRAX responded, "Correct."                                                                                       
CHAIR   SPOHNHOLZ   asked,   "Would   they   be   available   for                                                               
REPRESENTATIVE PRAX answered yes.                                                                                               
12:51:53 PM                                                                                                                   
MR. PAINTER deferred to Ms. Wallace                                                                                             
12:52:06 PM                                                                                                                   
MS. WALLACE explained that funds  are available for appropriation                                                               
by  the legislature  once  they've been  reversed  back into  the                                                               
original  account;  any  funds affected  by  the  reverse  sweep,                                                               
returning to  the higher  education fund  from CBR,  would remain                                                               
available  for  legislative  appropriation   out  of  the  higher                                                               
education fund and  would potentially be subject to a  sweep in a                                                               
subsequent fiscal year.                                                                                                         
12:53:24 PM                                                                                                                   
REPRESENTATIVE PRAX wondered whether the  fact that the funds are                                                               
still  be subject  to appropriation  could affect  the investment                                                               
strategy of those funds.                                                                                                        
CHAIR  SPOHNHOLZ   pointed  out  that,  hypothetically,   such  a                                                               
situation  could happen  at  any time.   She  said  the point  of                                                               
setting  up the  funds was  to  designate funding  to a  specific                                                               
purpose, and  that having a  longer time  horizon for the  use of                                                               
funds would  allow for more aggressive  investment.  Conservative                                                               
investment  would allow  for more  cash on  hand, she  said, thus                                                               
less wealth would be generated from the funds.                                                                                  
REPRESENTATIVE PRAX  said in times  of fiscal  stress, designated                                                               
funds  are  exposed to  a  greater  risk  of appropriation  to  a                                                               
different use.                                                                                                                  
12:55:00 PM                                                                                                                   
REPRESENTATIVE STORY  asked how  to protect the  Higher Education                                                               
Investment Fund.                                                                                                                
MR. PAINTER replied  that the fund was established  by statute in                                                               
the general fund; if it were not,  it would not be subject to the                                                               
12:56:10 PM                                                                                                                   
MR. PAINTER  resumed his presentation  of slide 15,  pointing out                                                               
that the  Statutory Budget Reserve  (SBR) is  listed specifically                                                               
as  separate  from the  general  fund,  which indicates  that  it                                                               
should not be swept, thought  it has historically been considered                                                               
12:57:01 PM                                                                                                                   
REPRESENTATIVE  JOSEPHSON asked  whether the  governor's response                                                               
could  only be  veto or  litigation if  the legislature  chose to                                                               
spend the SBR, treating it as "unswept."                                                                                        
MR. PAINTER  replied that  litigation would  be expected  on that                                                               
point.    He   pointed  out  that  there  were   $80  million  in                                                               
appropriations  from  the SBR  that  were  used to  fund  capital                                                               
projects, so if the governor  decided not to reclassify the fund,                                                               
litigation could follow.                                                                                                        
REPRESENTATIVE JOSEPHSON  sought to verify that  the governor had                                                               
decided to authorize the expenditure of $80 million.                                                                            
MR. PAINTER responded that he  believes those appropriations were                                                               
made  as  part of  the  budget  under HB  69  but  have not  been                                                               
REPRESENTATIVE  JOSEPHSON  concluded  that   it  can't  be  known                                                               
whether  the  administration  intends  to  spend  that  money  or                                                               
declare that the funds are swept.                                                                                               
MR. PAINTER confirmed Representative Josephson's comment.                                                                       
12:59:32 PM                                                                                                                   
MR. PAINTER turned to slide 16,  "Impact of Sweep on the budget,"                                                               
which read as follows [original punctuation provided]:                                                                          
     ?  Based on  the list  of funds  swept in  FY20 by  the                                                                    
     Division  of  Finance,  the  FY22  budget  uses  $367.4                                                                    
     million from sweepable funds.  Subtracting the PCE fund                                                                    
     would reduce that to $321.2 million.                                                                                       
     ?  Not all  funds  are impacted  equally, however.  LFD                                                                    
     breaks them into three categories:                                                                                         
          1. Immediate Impact: No  ongoing source of revenue                                                                    
          to support appropriations.                                                                                            
          2. Partial Impact: Ongoing  source of revenue that                                                                    
          is insufficient to support appropriations.                                                                            
          3.  Minimal/No Impact:  Ongoing source  of revenue                                                                    
          fully covers appropriations.                                                                                          
1:00:53 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON discussed  the  prevention account  for                                                               
the  Division of  Spill  Prevention and  Response  (SPAR) in  the                                                               
Department of Environmental Conservation (DEC).   He asked how to                                                               
handle the  circumstance of  a sweep of  $12 million,  leaving $9                                                               
million to operate.                                                                                                             
MR. PAINTER deferred to the  Office of Management & Budget (OMB),                                                               
and  he  expressed  that  in  some  cases,  OMB  would  structure                                                               
appropriations to ensure ongoing revenue.                                                                                       
1:02:46 PM                                                                                                                    
MR. PAINTER  resumed the presentation  and reviewed a  summary of                                                               
impacts by category:  Immediate  impact, immediate impact pending                                                               
interpretation, partial impact, and minimal  to no impact.  There                                                               
are  more appropriations  from the  low  impact categories,  with                                                               
balances coming from the immediate impact categories.                                                                           
CHAIR SPOHNHOLZ clarified that the  permanent fund dividend (PFD)                                                               
this year was  largely funded through SBR because  of the failure                                                               
of the reverse sweep.                                                                                                           
1:04:32 PM                                                                                                                    
MR.  PAINTER detailed  immediate impact  on slide  18, "Immediate                                                               
Impact."   He said  the Higher Education  Investment Fund  is the                                                               
only  one  in the  "Immediate  Impact"  category; since  it's  an                                                               
investment  fund,   the  only   ongoing  revenue   is  investment                                                               
earnings, resulting  in a $21  million shortfall.   Similarly, he                                                               
said,  if the  SBR  is swept,  there would  be  an $80.7  million                                                               
shortfall in capital projects and school debt.                                                                                  
1:05:30 PM                                                                                                                    
REPRESENTATIVE STORY  noted that more  money was lost due  to the                                                               
low CBR interest versus high interest in the fund.                                                                              
MR.  PAINTER stressed  that  most  years would  see  a return  of                                                               
approximately  6   percent,  which  is  the   amount  in  ongoing                                                               
appropriations, instead of the 38 percent return seen this year.                                                                
1:06:13 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON   expressed  concern  about   the  term                                                               
"immediate" in  terms of impact.   He said the  Alaska Children's                                                               
Trust relies  on the  marijuana education  and treatment  fund to                                                               
operate in approximately  40 communities, and the  fund is swept.                                                               
He  said, "Am  I wrong  when I  say they  also have  an immediate                                                               
MR. PAINTER  responded that the  MET fund has an  ongoing revenue                                                               
source  to  fulfill  a  portion of  the  appropriations,  so  the                                                               
administration could  keep making  payments in anticipation  of a                                                               
reverse sweep.   He stressed  that the decision is  between funds                                                               
where  there exists  no money,  versus "some"  money, to  pay the                                                               
1:07:43 PM                                                                                                                    
MR.  PAINTER turned  to slide  19, "Items  Funded with  Statutory                                                               
Budget Reserve in FY 22  Budget," which read as follows [original                                                               
punctuation provided]:                                                                                                          
     ?  Governor  vetoed  $320.0 million  appropriation  for                                                                    
     Permanent  Fund  Dividends  from the  SBR,  along  with                                                                    
     $362.5 million from the general fund.                                                                                      
            If  the SBR is  swept, this would  have resulted                                                                    
          in a PFD  estimated to be $525. If the  SBR is not                                                                    
          swept, the  vetoed PFD  would have  been estimated                                                                    
          to be $1,025.                                                                                                         
        SBR  also  funds   $4.15  million  for  School  Debt                                                                    
     Reimbursement in FY22.                                                                                                     
     ?  SBR  was  used  to fund  $76.5  million  of  capital                                                                    
     projects, including:                                                                                                       
            $10 million for Mat-Su Borough Pavement Rehab                                                                       
            $9 million for Houston Middle School                                                                                
            $8.5 million for West Susitna Access                                                                                
            $36.5  million of projects in  the Department of                                                                    
          Natural  Resources,  including   $10  million  for                                                                    
          firebreak construction                                                                                                
            $6.3 million of projects in other agencies                                                                          
1:08:52 PM                                                                                                                    
REPRESENTATIVE  EASTMAN expressed  that  he  didn't remember  SBR                                                               
having much  money last year,  and he  asked how the  account was                                                               
MR. PAINTER  replied that two appropriations  filled the account.                                                               
One populated the  account with lapsing balances  of general fund                                                               
appropriations from  FY 2021,  rather than  lapsing them  to CBR.                                                               
The other was  an appropriation directly to SBR in  the amount of                                                               
$325  million from  the  general fund.    The two  appropriations                                                               
totaled $410.7  million in SBR,  which was  spent in the  FY 2022                                                               
1:09:47 PM                                                                                                                    
MR.  PAINTER  presented  slide   20,  Partial  Impacts,"  and  he                                                               
stressed that  these are  areas of  appropriation where  there is                                                               
some  ongoing  revenue,  but  in   which  there  still  exists  a                                                               
shortfall.   He  said the  largest impact  is the  Alaska Capital                                                               
Income Fund, which  is used for deferred  maintenance; because of                                                               
the high investment returns in  FY 2021, there exists extra money                                                               
in the  fund that would  have been spent  in the FY  2022 budget,                                                               
but will  be swept,  leaving a  shortfall of  $18.5 million.   He                                                               
noted several funds with shortfalls due  to the CBR sweep, and he                                                               
called special attention to the  recidivism reduction fund, which                                                               
has  almost  a  $5  million  shortfall  due  to  previous'  years                                                               
exceeded projections,  and the marijuana education  and treatment                                                               
fund, which had been under discussion earlier in the meeting.                                                                   
CHAIR  SPOHNHOLZ pointed  out  the impacts  of  a failed  reverse                                                               
sweep,  noting that  the recidivism  reduction fund  is used  for                                                               
halfway  houses  and  addiction   treatment,  and  the  marijuana                                                               
education and treatment fund is used for prevention programs.                                                                   
1:12:28 PM                                                                                                                    
REPRESENTATIVE STORY asked whether the  rate of return for any of                                                               
the  funds on  slide  20 would  allow for  separate  funds to  be                                                               
established in statute, as is  the case with the Higher Education                                                               
Investment Fund.                                                                                                                
MR. PAINTER responded that many of  the funds are in the "general                                                               
fund  and  other  non-segregated  funds"  (GeFONSI),  which  have                                                               
relatively  low  earnings  amounts  due  to  their  ongoing  use,                                                               
whereas funds  for long-term  use, such  as the  Higher Education                                                               
Investment Fund or  the Power Cost Equalization  (PCE) fund, have                                                               
a higher return.                                                                                                                
1:13:34 PM                                                                                                                    
REPRESENTATIVE  PRAX  asked  for  the source  of  inflow  to  the                                                               
recidivism reduction fund.                                                                                                      
MR.  PAINTER  responded that  it's  a  portion of  marijuana  tax                                                               
1:13:59 PM                                                                                                                    
REPRESENTATIVE  SCHRAGE discussed  the betrayal  of public  trust                                                               
stemming  from  the expectation  that  certain  taxes would  have                                                               
specific purposes, not to be swept to  CBR.  He said a portion of                                                               
the  marijuana tax  was expected  to  be used  for education  and                                                               
treatment,  and he  characterized  the use  of  funds as  "almost                                                               
1:15:37 PM                                                                                                                    
MR.  PAINTER  presented  slide  21,  "Minimal/No  Impact,"  which                                                               
listed several programs with accounts  that had nothing to sweep,                                                               
or the  amount of available  projected revenue is higher  than or                                                               
equal to  the amount used in  the FY 2022 budget,  so there would                                                               
be no impact from a sweep.                                                                                                      
1:16:37 PM                                                                                                                    
MR.  PAINTER  presented  slide  22, "4.  Comparison  of  HB  3003                                                               
(Governor's  appropriation  bill)  to  HB 3004  (Ways  and  Means                                                               
appropriation  bill)   and  continued  to  slide   23,  "HB  3003                                                               
(Governor's   Appropriation   Bill),"    which   read   [original                                                               
punctuation provided]:                                                                                                          
     ? $1.53 billion  from the ERA to the  Dividend Fund for                                                                    
     a 2021 PFD based on 50% of the POMV draw                                                                                   
            While this is based on  50% of the POMV draw, it                                                                    
          is an additional draw beyond the POMV for FY22                                                                        
     ? $1.47 billion transfer from the ERA to the CBR                                                                           
             When added  to  the  above appropriation,  this                                                                    
          represents  the  Governor's   $3  billion  "bridge                                                                    
     ? $21.4  million of fund changes  from Higher Education                                                                    
     Investment Fund  to UGF, supporting  Alaska Performance                                                                    
     Scholarship Awards, Alaska  Education Grants, and WWAMI                                                                    
     Medical Education                                                                                                          
CHAIR SPOHNHOLZ  asked whether the  governor's bill  would double                                                               
the amount of  money taken from the Permanent Fund  if it were to                                                               
pass in its current form.                                                                                                       
MR. PAINTER answered yes.                                                                                                       
1:18:35 PM                                                                                                                    
REPRESENTATIVE  SCHRAGE asked  why  the specific  funds would  be                                                               
supported by the $21.4 million,  as described in the third bullet                                                               
point, instead of any of the other funds.                                                                                       
MR. PAINTER replied that the  Higher Education Investment Fund is                                                               
the only fund in the "immediate  impact" category due to the lack                                                               
of  partial  funding.     The  other  items   have  some  funding                                                               
available, and may prorate or delay grants.                                                                                     
REPRESENTATIVE  SCHRAGE expressed  that if  the reverse  sweep is                                                               
not addressed, and funding for  the other programs isn't restored                                                               
within  a few  months, the  impact would  be the  same by  end of                                                               
fiscal year.                                                                                                                    
MR.  PAINTER  responded  that  there  would  only  be  a  partial                                                               
reduction in the funds, so while  there would be an impact at the                                                               
end of the  fiscal year, it would  be less of an  impact on those                                                               
1:20:21 PM                                                                                                                    
MR.  PAINTER continued  to slide  24, titled  "HB 3004  (Ways and                                                               
Means  Appropriation  Bill),"  which read  as  follows  [original                                                               
punctuation provided]:                                                                                                          
        ? Restores funding for all Governor's vetoes of                                                                         
     operating and capital items except for the PFD                                                                             
         ? Appropriates $500.7 million to the PFD Fund                                                                          
       (representing a roughly $742 PFD) from the General                                                                       
     Fund and Statutory Budget Reserve                                                                                          
      Funds direct CBR funded items that were removed from                                                                      
     HB 205 with the failure of the CBR vote                                                                                    
          $114.0 million for oil and gas tax credits,                                                                           
          $48.6 million for School Debt Reimbursement                                                                           
        ? Provides reverse sweep and CBR deficit-filling                                                                        
     language (requiring a ? vote)                                                                                              
CHAIR SPOHNHOLZ noted the importance  of understanding that a PFD                                                               
of $742  is what  the Permanent Fund  could support  unless other                                                               
revenue sources can be found.                                                                                                   
1:22:20 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON asked whether  the difference between an                                                               
$1,100 and $742 PFD is due to  oil and gas tax credits and school                                                               
bond debt reimbursement being funded not using CBR.                                                                             
CHAIR SPOHNHOLZ replied yes.                                                                                                    
REPRESENTATIVE JOSEPHSON  surmised that  adding the  $114 million                                                               
for oil  and gas  tax credits  and the  $48.6 million  for school                                                               
bond debt reimbursement would translate to an $1,100 PFD.                                                                       
MR. PAINTER added that $48  million from CBR was directly funding                                                               
the $1,100 PFD.                                                                                                                 
1:23:19 PM                                                                                                                    
REPRESENTATIVE PRAX  asked whether legal issues  would arise from                                                               
funding the PFD from another source.                                                                                            
1:24:10 PM                                                                                                                    
MS.   WALLACE  explained   that  the   dividend  is   subject  to                                                               
legislative appropriation  and is calculated based  on the amount                                                               
of  money in  the Alaska  Permanent Fund,  so there  would be  no                                                               
legal  issue with  transferring money  into the  Alaska Permanent                                                               
Fund for payment of a PFD.                                                                                                      
REPRESENTATIVE PRAX expressed that the statutes seem confusing.                                                                 
CHAIR SPOHNHOLZ clarified that the  statute is about defining the                                                               
amount  of the  dividend, but  the legislature  has the  ultimate                                                               
appropriating authority.                                                                                                        
REPRESENTATIVE  PRAX  expressed  that   "taking  funds  from  the                                                               
constitutional budget  reserve to pay the  dividend" would create                                                               
a future obligation to fund CBR.                                                                                                
MR.  PAINTER  answered  that  anything  spent  from  CBR  becomes                                                               
subject to repayment.                                                                                                           
1:26:39 PM                                                                                                                    
REPRESENTATIVE EASTMAN  said the  money from  the dividend  is to                                                               
come from  the earnings  reserve account  (ERA), and  he wondered                                                               
why money wouldn't be taken from ERA.                                                                                           
CHAIR SPOHNHOLZ  said the point  of the draft  of HB 3004  was to                                                               
show what  dividend could be  afforded if a balanced  budget were                                                               
1:27:44 PM                                                                                                                    
REPRESENTATIVE STORY asked whether an  amendment could be made to                                                               
HB  3003 to  direct money  into the  Higher Education  Investment                                                               
MR.  PAINTER explained  that  HB 3004  would  reverse the  sweep,                                                               
thereby restoring  the money to  the Higher  Education Investment                                                               
REPRESENTATIVE  STORY clarified  that  she was  talking about  HB
MR. PAINTER answered  that such an amendment could  be adopted to                                                               
HB  3003, and  that it  would  require a  three-quarters vote  to                                                               
remove money from CBR.                                                                                                          
1:29:15 PM                                                                                                                    
REPRESENTATIVE EASTMAN asked why a  balanced budget would allow a                                                               
dividend  of $742,  when  the Alaska  Permanent  Fund has  gained                                                               
approximately $20 billion.                                                                                                      
CHAIR SPOHNHOLZ  reiterated that HB  3004 was drafted based  on a                                                               
presumption  that the  statutory  formula for  spending from  the                                                               
Alaska Permanent Fund that was passed in SB 26 in 2018.                                                                         
1:30:54 PM                                                                                                                    
REPRESENTATIVE  EASTMAN  commented  that HB  3004  would  require                                                               
support from the  House minority to pass, and he  asked why there                                                               
was "no  effort to consult  with or gain consensus  from" members                                                               
of the minority in drafting the proposed legislation.                                                                           
CHAIR  SPOHNHOLZ acknowledged  his comments,  and she  reiterated                                                               
that the  goal was  to define the  existing problem,  clarify the                                                               
impact  of the  reverse sweep,  and show  what a  balanced budget                                                               
would look  like when operating within  the rules-based framework                                                               
with regards to drawing from the Alaska Permanent Fund.                                                                         
[HB 3004 was held over.]                                                                                                        
1:32:18 PM                                                                                                                    
There being no  further business before the  committee, the House                                                               
Special  Committee on  Ways and  Means meeting  was adjourned  at                                                               
1:32 p.m.                                                                                                                       

Document Name Date/Time Subjects
Leg Finance Presentation 8.23.21.pdf HW&M 8/23/2021 11:00:00 AM