Legislature(2013 - 2014)HOUSE FINANCE 519
01/28/2014 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB265 || HB266 || HB267 | |
| Fy 15 Governor's Budget Overview: Department of Corrections | |
| 2013 Fall Revenue Forecast Overview and State Savings Account Update: Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 266 | TELECONFERENCED | |
| *+ | HB 267 | TELECONFERENCED | |
| *+ | HB 265 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
HOUSE BILL NO. 265
"An Act making appropriations, including capital
appropriations and other appropriations; making
appropriations to capitalize funds."
HOUSE BILL NO. 266
"An Act making appropriations for the operating and
loan program expenses of state government and for
certain programs, capitalizing funds, and making
reappropriations; making appropriations under art. IX,
sec. 17(c), Constitution of the State of Alaska, from
the constitutional budget reserve fund."
HOUSE BILL NO. 267
"An Act making appropriations for the operating and
capital expenses of the state's integrated
comprehensive mental health program."
1:32:52 PM
Co-Chair Austerman called the meeting to order.
^FY 15 GOVERNOR'S BUDGET OVERVIEW: DEPARTMENT OF
CORRECTIONS
1:33:15 PM
JOSEPH SCHMIDT, COMMISSIONER, DEPARTMENT OF CORRECTIONS,
provided a PowerPoint presentation "FY2015 Overview House
Finance Committee" (copy on file).
1:34:45 PM
Commissioner Schmidt began with slide 2: "Mission"
The Alaska Department of Corrections enhances the
safety of our communities. We provide secure
confinement, reformative programs, and a process of
supervised community reintegration.
He reported that the Department of Corrections (DOC) had a
three-part mission statement which included secure
confinement, reformative programs, and community
integration. The department conducted valuable assessments
to ensure proper confinement for inmates, provided
reformative programs to help keep inmates active during
incarceration, and assisted with community reintegration to
reduce recidivism.
1:35:43 PM
Commissioner Schmidt continued with slide 3: "DOC at a
Glance"
· Alaska is one of six states in the nation that
operates a unified correctional system
· In FY2013, DOC booked 39,203 offenders into its
facilities, including 3,726 Title 47 bookings
· As of June 30, 2013, 6,056 offenders are in prison, a
community residential center (CRC), or on electronic
monitoring (EM)
· As of June 30, 2013, 5,988 offenders are on probation
or parole
· Thirteen facilities statewide (Goose Creek and Pt.
MacKenzie combine in FY2015) with a total capacity of
5,352 beds
· Thirteen field probation offices statewide
· Eight contract CRCs with a capacity of 839 beds
· EM operates in six communities with a capacity of 385
· Fifteen regional and community jail contracts with a
total capacity of 157 beds
· Reformative Programming
Commissioner Schmidt relayed that the State of Alaska was
one of six states that had a unified system meaning that
the state housed all of the misdemeanants and felons
serving a sentence of any length. He also informed the
committee that DOC booked over 39,000 offenders,
approximately 4,000 of whom were non-criminals such as
inebriates. He emphasized that there was a number of repeat
offenders in the system. He cited that of the 6,056 current
offenders, 754 were in CRC's and 381 were on EM. The
approximately 5,000 remaining offenders occupied prison
beds. He reported that another 6,000 offenders where on
probation or parole. One of the things DOC was doing to
reduce the current year's budget was to roll the 128 beds
at the Point Mackenzie correctional farm facility into the
Goose Creek Correctional Center. Work crews would be
transported from Goose Creek to the farm. He elaborated
that 95 percent of EM participants were finishing without
incident or coming back to jail. He was looking into
expanding the EM program due to its proven success. He read
the remaining items on the slide.
1:39:38 PM
Commissioner Schmidt presented slide 4: "Secure
Confinement." He stated that the map depicted the various
institutions and community jails.
Commissioner Schmidt described slide 5: "Supervised
Release." He indicated that the map showed where the state
had its EM programs, field probation offices, and halfway
houses.
Commissioner Schmidt detailed slide 6: "Standing Population
and Crime Type." He noted the shift from violent to non-
violent offenders since 2002. He reported that the
percentage of non-violent offenders increased from 44
percent to 56 percent over the past eleven years which
resulted in the state incarcerating a larger number of non-
violent offenders than violent offenders. He affirmed the
importance of relaying incarceration trends to the public.
1:41:29 PM
Commissioner Schmidt revealed slide 7: "Percent of
Offenders by Length of Stay from Admission." He pointed out
that the percentage of offenders remaining imprisoned for
37 months or more had almost doubled in eleven years. He
surmised that non-violent offenders were serving longer
sentences costing the state more money. The slide also
showed that the number of people getting between a one and
two-year sentence was significantly smaller than in
previous years.
Commissioner Schmidt discussed slide 8: "Percent of
Incarcerated Offenders by Gender." He mentioned an increase
in incarcerated females from 9.46 percent in 2003 to 12.41
percent in 2013. He warned that the state would be faced
with providing additional jail facilities if the
incarcerated female population continued to grow at the
current rate of 6.01 percent. He signified that 15 percent
of the state halfway house population was female, female
probation cases accounted for 21 percent of the state's
caseload, and 27 percent of EM program participants were
female.
1:43:31 PM
Commissioner Schmidt introduced slide 9: "Institutional
Inmate Population 2004-2021." He pointed out that the red
line represented the state's total number of inmate beds
and the blue line signified the projection of inmate
population based on a 2.7 percent growth rate. He reported
that the dip in the red line was due to the caging of the
Point Mackenzie farm facility (120 beds). He stated that
the 120 beds at the farm facility would be moved back to
Goose Creek when needed. The graph did not account for any
increases for the EM program or the successes in probation
supervision. He stated that the trends would affect the
graph's data.
1:45:18 PM
Commissioner Schmidt discussed slide 10: "Goals"
· Protect the public
· Reduce recidivism
· Delay the need for construction of a new prison
· Ensure that incarcerated offenders spend their time in
custody productively
· Work collaboratively with outside stakeholders to
achieve these goals
He emphasized that protecting the public was the most
important responsibility of the department. He was pleased
with the success of prisoners who moved through the state's
system avoiding recidivism. He advocated working
collaboratively with communities and concluded that when
community members are engaged everyone wins.
1:47:22 PM
Co-Chair Austerman noted that Representative Gara entered
the room.
RON TAYLOR, DEPUTY COMMISSIONER, DEPARTMENT OF CORRECTIONS,
discussed slide 11: "Reentry Outcomes: Successfully
Increasing the Percent of Probationers and Parolees who
Satisfy Court Ordered Conditions of Release." He directed
the committee's attention to the graph which depicted an
increase in the last two years of probationers and parolees
satisfying court ordered conditions of release. He spoke of
the main drivers of prisoner re-entry and reported that
parole violations had declined.
1:49:27 PM
Mr. Taylor detailed slide 12: "Re-Entry Outcomes: Reducing
Criminal Recidivism." He noted that from 2006 to 2010
recidivism decreased. He believed it would continue to
decline based on the successes reported on the previous
slide.
1:50:46 PM
Mr. Taylor discussed slide 13: "Reformative Outcomes:
Offenders Completing an Institutional or Community-Based
Substance Abuse Treatment Program." He reported that the
department was ensuring that its programing was aligned
with its Risk-Needs Assessment. He stated the importance
of programming as it related to recidivism. He referenced
the Criminal Attitudes Program which saw a 7 percent
decline in recidivism. He suggested the need for
additional outpatient care for substance abuse.
1:51:49 PM
Mr. Taylor detailed slide 14: "Reformative Outcomes:
Polygraphed Sex Offender Probationers." He cited that over
the last three years polygraph testing has proved to be a
useful tool in reducing recidivism.
Mr. Taylor detailed slide 15: "Reformative Outcomes:
Offenders Who Receive General Education Development (GED)
While Incarcerated." He acknowledged that the department
needed to institute renewed efforts to provide the GED to
incarcerated individuals.
1:52:47 PM
Mr. Taylor discussed slides 16 and 17: "Challenges and
Issues"
· Meet 24/7 operational needs while striving to remain
within fiscal parameters
· Connect soon to be released offenders to community-
based resources
· Since 2001, medical care costs in Anchorage have
increased by 63.0%, compared to 52.1% nationwide
(Alaska Economic Trends, July 2013)
· Increases in chronic health issues and an aging inmate
population continue to increase the need for higher
acuity and specialized medical care
Mr. Taylor affirmed that meeting the needs of offenders
while staying within the state's budget was a challenge.
He expressed concerns about providing services to a growing
female inmate population and the rising costs of prisoner
medical care. He opined that the department was doing a
fine job of keeping costs contained and was staying within
its fiscal parameters.
1:55:01 PM
LESLIE HOUSTON, DEPUTY COMMISSIONER, DEPARTMENT OF
CORRECTIONS, skipped to slide 19: "Alaska Grown." She
reported that over the last four years the department had
emphasized educating food services staff and increased its
purchasing of Alaska grown produce.
Ms. Houston advanced to slide 20: "Inter-Department
Resource Sharing"
· DHSS/ Pharmacist Relief Services
· DHSS/Food Service for Bethel, Juneau, and Nome Youth
Facilities
· DOLWD/Provide minimum custody inmate labor for seafood
processing
· DOTPF/Currently providing laundry services to the
Alaska Marine Highway System; and, developing new
agreements to provide services to assist DOTPF with
brush clearing, snow removal, and potential for AMHS
garments.
Ms. Houston communicated that the department looked to
resource sharing as a means of reducing costs.
1:56:47 PM
Ms. Houston discussed slides 21 and 22: "Giving Back"
· Prisoners at Hiland Mountain Correctional Center
(Eagle River) contributed 90 homemade quilts, 30 hats,
and 30 scarves to Mat-Su Valley elders.
· A team of six inmates from Hiland Mountain
Correctional Center provided community work service in
assisting the Eagle River Parks and Recreation
Department with clean-up of the Beach Lake Chalet and
area trail maintenance over a period of six days.
· Throughout the summer and fall of 2013, prisoner
volunteers from Palmer Correctional Center (minimum)
cleaned approximately 93 miles of roadways in the Mat-
Su, picking up 12,200 pounds of trash.
· Prisoners at Palmer Correctional Center's (Sutton)
hobby wood shop constructed approximately 700 wooden
toy cars and trucks for donation to local charities.
· Wildwood Correctional Center (Kenai) began a "Cell
Dog" program where dogs from a local shelter are sent
to live with volunteer inmates who provide basic
obedience training and socialization to better prepare
the dogs for adoption.
· A group of prisoners at Wildwood Correctional Center
organized a fundraiser among the prison population to
benefit a local child with pediatric cancer. The
effort raised $1,375 which was forwarded to the
family.
· Prisoners at Wildwood Correctional Facility donated
hand-made knit hats to benefit the local Relay for
Life, which honors cancer victims. The pink hats were
either given as prizes or auctioned.
· An arts-and-crafts program at Yukon-Kuskokwim
Correctional Center (Bethel) resulted in crocheted
hats and headbands finished and donated to the Pre
Maternal Home, the Tundra Women's Coalition, and local
schools.
Ms. Houston asserted the department wanted to demonstrate
some of the good that inmates provided to communities.
1:57:43 PM
Ms. Houston forwarded to slide 24: "FY 15 Operating
Changes." She detailed that DOC was seeking an increase in
funds of $935.6 thousand for salary and health insurance
adjustments associated with all bargaining unit contracts.
She indicated a decrease in the current level of service
costs of $2.5 million from closing the housing at Pt.
Mackenzie Correctional Farm and from moving inmates to
Goose Creek. She also reported $1.6 million in reductions
from inmates not needing as many medical services as were
budgeted. She cited a net increase of $65 thousand in
federal funds for the Residential Substance Abuse Treatment
Program, previously a pass-through grant from the
Department of Public Safety to DOC. In the current year
the funding was given directly to DOC eliminating the need
for a pass-through relationship. She outlined an increase
of $120 thousand from the Mental Health Trust for a pilot
mental health program that DOC would be taking up that
focuses on fetal alcohol syndrome and culturally relevant
mental health programing.
Ms. Houston reviewed slide 25: "FY2015 Adjusted Base to FY
15 Governor's Request." She reported that the slide went
into greater detail on the adjustments to the base for FY
15.
2:01:44 PM
Ms. Houston discussed slide 26: FY2015 Operating
Reallocations." She reviewed the Goose Creek Correctional
Center authorization changes as well as the out-of-state
contractual authorization changes.
Ms. Houston presented slide 27: "Core Service Budget
Allocation Comparison." She stated that the slide showed
the budget allocation comparison of the FY 14 management
plan to the FY 15 governor's budget request, the net change
of which was a decrement of $2.9 million.
Ms. Houston turned to slide 28: "FY 15 Operating Budget
Distribution by Core Service." She commented that the
largest portion of the department's budget was allocated to
secure confinement.
2:03:31 PM
Ms. Houston directed the committee's attention to a
snapshot of the department's FY 15 capital budget in slide
29: "FY2015 Capital Budget." She relayed that 100 percent
of DOC's $5.0 million capital budget went to deferred
maintenance. She mentioned that slides 30 through 33 were
prepared by the Legislative Finance Division.
Ms. Houston directed attention to slide 30: "Department of
Corrections Share of Total Agency Operations (GF Only)."
Next she advanced to slide 31: "Department of Corrections
Percent of Total Department's Budget by Fund Group (All
Funds)." She reviewed the designation for each color
depicted on the chart.
Ms. Houston stated that slide 32: "Department of
Corrections Continued Growth Compared to 10-Year Plan (GF
Only)" was very similar to slide 33: "Department of
Corrections Continued Growth Compared to 10-Year Plan (All
Funds Only)." Both slides showed the budget growth compared
to the 10-year plan. She anticipated that the budget
growth would more likely be in line with the 10-year plan
due to the Goose Creek Correctional Center phasing in over
the next two fiscal years.
2:04:51 PM
Co-Chair Austerman asked if slide 6 reflected the growth in
prisoner population.
Commissioner Schmidt explained that slide 6 did not show
population growth but indicated the population percentages
of non-violent and violent prisoners.
Co-Chair Austerman wondered if it was the same comparison
numbers-to-numbers. Commissioner Schmidt answered in the
affirmative. He informed the committee that the slides the
department used previously were based on calendar year-end.
Currently, DOC compiled its data by fiscal year-end, June
30.
Co-Chair Austerman asked about slide 12. He wondered how
Alaska's recidivism rates compared to national rates. Mr.
Taylor replied that recidivism rates were declining
nationally. He stated that the decline was due to a greater
focus on reentry outcomes.
Co-Chair Austerman remarked that he would prefer the data
in slide 13 compiled in a percentage format. Commissioner
Schmidt acknowledged his preference.
2:07:34 PM
Co-Chair Stoltze asked the commissioner to characterize the
type of offense non-violent criminals committed and whether
or not the department used additional classification
measures to decipher between non-violent and violent
crimes.
Commissioner Schmidt replied that classification was based
only on the crime committed. Any crime against a person
including any sex offense was considered violent.
Co-Chair Stoltze asked what type of crime caused the
numbers to grow.
Commissioner Schmidt replied that sex-offender sentences
had doubled in the previous ten years. Sex offenders made
up approximately 14 percent of the state's prisoner
population. He agreed to provide the committee with further
information.
2:09:12 PM
Co-Chair Stoltze commented that slide 8 indicated a growth
in female offenders. He asked if the same growth rate for
females applied to Alaska Native females.
Commissioner Schmidt offered to provide the information at
a later date.
Co-Chair Stoltze acknowledged the efforts to support Alaska
grown products. He wanted to see a tracking system in place
to ensure the use of Alaska grown products.
2:10:42 PM
Vice-Chair Neuman referred to slide 13. He informed the
committee about a meeting he had attended that addressed
theft in the Matanuska-Susitna Valley. He found out that
most crimes in the valley were burglaries committed to
support drug habits. He asked the commissioner how many
inmates had enrolled in drug treatment programs and how
many were on a waiting list.
2:11:36 PM
Commissioner Schmidt stated that the department was lapsing
monies in its programs because, although DOC designed the
program plans, the service providers determined the time
tracks. He reported that the state had certain protections
built into its service contracts to avoid being charged for
services not provided. However, funding lapses and gaps in
service resulted because of limited service provider
availability. The state's contracts did not address the
gaps of time where services were not available but funding
was lapsing. The department did not want to spend money or
transfer money just to avoid a lapse. The department would
return unused funds, explain the circumstances, and request
full funding in the following budget cycle. He understood
that it did not make sense to expand a program when funds
went unused. Nevertheless, he indicated the department had
a plan. He requested that Mr. Taylor elaborate.
Mr. Taylor cited that capacity numbers were 900 for
outpatient programs and 180 for residential substance abuse
treatment programs. The problem with only looking at
capacity numbers was that a prisoner's ability to get into
a program was also determined by counselor availability and
whether or not there was a long waitlist for services.
Regarding need, the department had an outside consultant
evaluate the state's overall program design. It was
difficult for the department to determine the exact number
needing services because the program was voluntary.
However, it was clear that there was a need for substance
abuse services inside the state's system based on last
year's 6,000 risk assessments that were evaluated. Many
parolees sought treatment in their communities as a
condition of their probation or parole. In some instances
inmates were not required but recommended to participate in
a treatment program.
2:15:04 PM
Vice-Chair Neuman referred to the second bullet point on
slide 16. He suggested the Alaska Mental Health Trust and
the Department of Health and Social Services fund a
position to assist inmates transitioning out of
incarceration to prequalify for Medicaid. His idea would
connect inmates to services necessary to be successful once
released from jail. He asked if the commissioner thought
the idea would be effective in reducing recidivism.
Commissioner Schmidt affirmed the value of Representative
Neuman's suggestion to reduce recidivism. He revisited
program capacity. He confirmed that there was a need
beyond what the department was providing. However, he
indicated there was reconciling that needed to be completed
from the previous year before requesting additional program
funding.
Vice-Chair Neuman remarked that the state needed to be
taping into federal assistance funds for inmate programs
that would otherwise be funded by the state.
2:17:17 PM
Co-Chair Stoltze made a humorous remark.
Representative Gara referenced the importance of recidivism
because it saved the state money and it kept communities
safer. He was unclear about the state's success in reducing
recidivism because the state only looks at the first three
years following a prisoner's release. He wondered what the
results would show after four or five years.
Commissioner Schmidt specified that most reoffenders acted
within the first six months of release. The potential of
reoffending tapered off dramatically after one, two, and
three years. The judicial council led the charge in setting
a three-year monitoring period.
Representative Gara noted DOC's vocational training efforts
for its inmates. He asked if the department tracked
prisoner employment rates and other outcomes following
vocational training and incarceration. He wanted to make
sure vocational training expenditures were being wisely
spent.
2:19:55 PM
Commissioner Schmidt replied that DOC did not track the
information the representative was looking for, but would
request the information through the Department of Labor and
Workforce Development.
Representative Gara reiterated the importance of knowing
whether or not the training provided to inmates was
effective.
Representative Gara assumed the costs associated with
longer sentencing for non-violent criminals increased
proportionately. He asked for an analysis that confirmed
his conclusion. He also wanted to know which crimes
constituted longer sentences. The commissioner offered to
provide the requested information.
Representative Gara clarified that he wanted to know which
crimes had been assigned increased sentences. Commissioner
Schmidt reconfirmed that he would provide the information
to committee members.
2:23:08 PM
Co-Chair Austerman agreed with Representative Gara in
reference to tracking vocational training in the state's
correctional facilities. He believed a recommendation from
the department on how to track the information would be
helpful. He asserted that if the outcomes of training were
poor, then providing the training would not be justified.
The commissioner agreed that the department needed to know
how many offenders were working after being released before
it could uncover the contributing factors.
Co-Chair Austerman stated his concerns with future budget
cuts and indicated the importance of being able to evaluate
the soundness of expenditures. The more information
provided the better.
2:24:35 PM
Representative Wilson asked if judges were imposing
different sentences than established prison terms
associated with various crimes. Commissioner Schmidt stated
that he would compile data so that he and Representative
Wilson could start a conversation about sentencing terms.
^2013 FALL REVENUE FORECAST OVERVIEW and STATE SAVINGS
ACCOUNT UPDATE: DEPARTMENT OF REVENUE
2:26:48 PM
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled "Fall 2013
Revenue Forecast" (copy on file). She began her
presentation by reminding the committee that the forecast
was not a description of the potential revenues for Alaska
including heavy oil production or exploration activities by
Repsol and British Petroleum (BP). The Department of
Revenue (DOR) tried to create a reliable revenue forecast
from which the legislature could make decisions regarding
the following year's budget and Alaska's future.
She advanced to slide 3: "Unrestricted Revenue Forecast
2012-2022." She noted the revenue forecast reflected the
actual revenue for FY 12 and FY 13. There were four primary
factors that influenced the forecast including oil prices,
production, deductible lease expenses, and transportation
costs. In FY 12 the state saw an oil price of $112.65 that
declined to $107.57 in FY 13. The price was projected to
decline to $105.68 in FY 14 and $105.06 in FY 15.
Production in FY 12 was 579 thousand barrels per day and
declined in FY 13 by over 40 thousand barrels down to 531
thousand barrels per day. The department forecasted a
continued decline to 508 thousand barrels per day in FY 14
and leveling off at about 498 thousand barrels per day in
FY 15. Deductible lease expenses were approximately $4.4
billion in FY 12 with a slight increase to $4.9 billion in
FY 13. In 2014 there was a more substantial increase of
deductible lease expenditures to $6.6 billion and even
further to $7.2 billion in FY 15. The substantial increase
in lease expenditures reflected correlating increases in
activity on the North Slope and potential future
production. General fund (GF) unrestricted revenues for FY
2012 were $9.4 billion and declined to $6.9 billion in FY
13. The department forecasted FY 14 revenues at $4.9
billion decreasing to $4.5 billion in FY 15. She noted
that there was a substantial decline in the production tax
value per taxable barrel. In FY 12 the value calculation
was $79.33 per barrel value. It receded by more than $12
to $67.76 in FY 13. The value decreased even further in FY
14 to $54.67 and in FY 15 to $49.04 production tax value
per taxable barrel.
Commissioner Rodell continued with slide 4: "Contributors
of Change in FY 13 Revenue - Actual." She pointed out that
between FY 12 and FY 13 daily production dropped by 47.8
thousand barrels and $5.08 price per barrel. Deductible
lease expenditures increased by $519 million and
transportation costs rose by $0.95 per barrel. The
components contributed to the decline of the average
production tax value per barrel.
Commissioner Rodell moved to slide 5: "Fall 2013
Highlights"
· Oil price and production levels have been reduced
relative to the 2013 Spring Forecast.
· Correspondingly, unrestricted revenues have been
revised down from the Spring 2013 Forecast.
· Revenue impacts largely due to changes in oil price,
production, lease expenditures, and tariffs.
· Substantial (~$10 billion) increase in spending on the
North Slope over the next 10 years.
· Oil companies project increased North Slope production
following the increased activity.
· DOR continues to prudently assess future production
and the forecast is not intended as a comprehensive
assessment of all the potential activity or projects
under evaluation.
· State investment earnings are strong
2:32:23 PM
Commissioner Rodell presented slide 6: "General Fund
Unrestricted Oil Revenues." She reported that petroleum
revenue made up the largest portion of oil revenues;
production tax accounted for 58.5 percent and net royalty
accounted for 25.5 percent in FY 13. The corporate income
tax revenues remained steady at 6.3 percent. Property tax
revenue was the smallest component of petroleum revenue at
1.4 percent. The total petroleum revenue for FY 13 was
$6.3 billion. Total petroleum revenue forecasts were $4.3
million in FY 14 and $3.9 billion in FY 15.
Commissioner Rodell advanced to slide 7: "General Fund
Unrestricted Other Revenues." She reported non-petroleum
revenue; revenues from mining, tobacco, and other taxes.
Corporate income tax was the largest component of non-
petroleum revenues at 19.5 percent in FY 13 with an
expected decrease to 15.4 percent in FY 14 and an increase
to 21.3 percent in FY 15. Mining tax remained steady as
well as insurance premiums, tobacco tax, and motor fuel
taxes. The department administered over 20 different taxes.
The department rolled all of the lesser tax revenue types
into one category, "other taxes." She emphasized the
importance of investment income totaling $86 million in FY
14. This differed slightly from the state savings account
presentation because it included principle balances as of
December 31, 2013 versus DOR's numbers in the revenue
sources book which were captured two months prior. Total
non-oil revenue was approximately $577 million in FY 13.
Commissioner Rodell drew the committee's attention to slide
8: "Total Revenue Forecast - FY 13, 14, and 15." She
reported the designated GF revenue forecasted for FY 14 was
$329 million and $327.6 million in FY 15. Under "Other
Restricted Revenue" Permanent Fund earnings made up the
majority of the investment revenues in the amount of $3.5
billion in FY 14 and 15 projections. Federal revenues were
expected to increase slightly due to moving beyond
sequestration.
Commissioner Rodell pointed to slide 9: "General Fund
Unrestricted Revenue Price Sensitivity FY 14-16." The chart
showed the state's sensitivity of revenues to oil prices
based on the state's production forecast for FY 14, 15, and
16. She indicated the state has narrowed the volatility of
revenue and believed there was greater potential for
revenue. The forecast showed that if the price of oil per
barrel was $50 dollars the state's revenues would be $2.3
billion and at $150 per barrel revenues would be
approximately $9.4 billion.
2:36:33 PM
Commissioner Rodell referred to slide 10: "Fall 2013 Total
Revenue Forecast." She noted the department reviewed the
prior ten years of historical data in comparison to what it
had forecasted. It focused on examining the ability to
forecast accurately or within a specific margin of error.
Ultimately the department wanted to reduce its margin of
error when calculating projections.
Commissioner Rodell discussed slide 11: "Fall 2013
Production Forecast and Methodology." She reported that the
department was working diligently to reduce the margin of
error between the state's production forecast and actual
production.
Commissioner Rodell advanced to slide 12: "Production
History and Forecast." The slide depicted which fields
have produced the most barrels of oil. She stated that more
and more production was coming online from fields outside
of Prudhoe Bay and Kuparuk - fields such as Endicott and
Alpine. The development of such fields would be a very
important component in forecasting future oil production.
Commissioner Rodell summarized slide 13: "ANS Oil
Production Forecast." The state's intent was to improve its
forecast by studying previous forecasts. She pointed out
that the 2005 predictions for 2013 were much higher at more
than 800 thousand barrels of oil per day. FY 13 actual
numbers came in at 538 barrels of oil per day.
2:40:00 PM
Commissioner Rodell moved to slides 14 and 15: "ANS oil
Production Forecast." She explained that previously the
state used three categories for forecasting; oil from
currently producing wells, oil from projects that were
under development (UD), and oil from projects that were
under evaluation (UE). The department took all the
information provided by the oil companies, compiled the
data, and worked with the Department of Natural Resources
to produce a forecast. The old method did not account for
the highly speculative nature of the UD and UE numbers. In
order to to be more prudent in what it included in its
projections the state changed its method to include numbers
from two categories; new oil production (a combination of
UD and UE numbers adjusted for risk) and current production
numbers. The state created a trend line using the new
method currently in place.
Commissioner Rodell turned to slides 16 and 17: "ANS Oil
Production - Actuals and Forecast." She cited the trend
line for actual production calculated on historical
performance. The state took the data, did a risk
adjustment, calculated a floor as if there was no new oil
production, and derived a new forecast. She presented
slide 18: "North Slope Production Forecast." She stated
that the slide designated two categories; currently
producing oil and new oil. It also showed upside potential
had the state completed the forecast using its old
methodology.
Commissioner Rodell introduced slide 19: "Fall 2013 Price
Forecast," and slide 20: "Alaska North Slope Crude West
Coast Price." She commented that the department was
examining ways to reduce the volatility of the state's oil
price forecast. She reviewed factors that affected the
price of oil over the prior two years. She referenced the
Arab Spring, production in the lower 48, and the European
Union's summit to address its banking crisis. She stated
that the price remained in the band shown on the slide
between $100 and $120 dollars per barrel. Since April 2013
prices have lowered due to negotiations with Syria and Iran
as well as China moving into a recession.
2:43:39 PM
Commissioner Rodell referenced slide 21: "key Oil Price
Drivers"
· Supply & Demand
o There are two main factors to monitor.
ƒGlobal spare capacity, since it is both a
reflection of supply and demand. In other
words, the Organization of Petroleum
Exporting Countries (OPEC) spare capacity
(flipping a switch) is key.
ƒCost of developing new oil supply.
o Department is developing a probability and
statistical model incorporating spare capacity
and cost of developing new supply to help
forecast ANS prices in the future.
Commissioner Rodell relayed slide 22: "Price Forecast
Methodology"
· Price Forecasting Session
o Held a day long oil price forecasting session on
October 1, 2013.
o Speakers provided insight into oil markets,
probability and analysis, modeling, and financial
aspects of commodity markets.
o 39 participants from state government, academia
and the private sector.
ƒDOR, DNR, DOL, OMB, University, Legislative
Finance and outside participants.
o Participants were asked to forecast real ANS
prices for the West Coast.
ƒReal prices were converted to nominal using
a 2.5% inflation assumption.
o Median price path was chosen for each time
period.
Commissioner Rodell moved to slide 23: "Historical ANS West
Coast FY Oil Price Bands." She noted that the volatility in
oil price bands has narrowed in the previous two years. In
2007 the actual price per barrel was $61.60 with the band
ranging from $45.00 to $75.00. In 2009 the band was much
more variable due to the global recession at the time.
2:46:03 PM
Commissioner Rodell advanced to slide 25: "Comparison -
Fall vs. Spring 2013 Forecasts." She pointed out that the
higher forecast for FY 14 generated in spring 2013 was
driven by the negative activity occurring in the Middle
East. Prices started to recede as concerns about Syria and
Iran subsided resulting in a lower forecast generated in
fall 2013. Oil price and production projections declined by
3.6 and 3.5 percent respectively from spring to fall 2013.
The oil production projection changed in large part due to
an extended summer maintenance season. She noted the
unrestricted GF revenue forecast for FY 14 declined by 30
percent from spring to fall 2013 projections.
Commissioner Rodell reported that similar adjustments were
made to the spring and fall forecasts for FY 15.
2:47:28 PM
Commissioner Rodell referred to slide 26: "Contributors of
Changes in FY2014 Revenue Forecast," and slide 27:
"Contributors of Changes in FY 15 Revenue Forecast." She
pointed out the detailed changes in FY 14 including an
increase in lease expenditures of $454 million and a rise
in transportation costs due to there being fewer barrels of
oil to spread the costs against. Also, the state assumed a
12.5 percent royalty.
The commissioner explained that in the forecast for FY 15
the deductible lease expenditures nearly doubled from
spring to fall 2013 projections, a net change of $1
billion.
2:48:27 PM
Commissioner Rodell displayed slide 28: "Major Contributors
of Changes in Revenue Forecast (FY 14-15)." She specified
that the bulk of the changes in the FY 14 forecast was due
to reduced price expectations. The slide reflected a
forecast reduction of over $500 million. In addition, an
increase of $300 million in lease expenditures played a
major role in the variance of revenue projections from
spring to fall. Production decline and an increase in
transportation costs impacted the forecast as well. The
close out of capital credits under Alaska's Clear and
Equitable Share (ACES) affected the projections by $200
million. She explained that forecasted revenues decreased
because of the adoption of a new tax system. Other
contributing factors to the adjusted forecast included
property tax and corporate income tax changes and non-oil
changes.
Commissioner Rodell drew the committee's attention to slide
29: "North Slope Lease Expenditure Forecast Change (Total
North Slope CAPEX)." She pointed out the upward trend in
capital lease expenditures from the forecast in spring to
fall 2013.
Commissioner Rodell turned to slide 30: "North Slope Lease
Expenditure Forecast Change (Total North Slope OPEX)." She
reported a much greater increase in the operating
expenditures for FY 14. She opined that the increase in
expenditures had to do with the ramping up of activity on
the North Slope. Expenditure projections into the future
tapered off.
2:51:41 PM
Vice-Chair Neuman asked about the average cost per barrel
for standard allowable deductions for capital expenditures
(CAPEX) and operational expenditures (OPEX).
Commissioner Rodell replied that total lease expenditures
were approximately $45.99 per barrel. She affirmed that the
information is listed in the appendices of the revenue
sources book for the public.
Vice-Chair Neuman asked about increases in standard
allowable deductions in the prior 4 to 5 years by
percentage.
MICHAEL PAWLOWSKI, DEPUTY COMMISSIONER, STRATEGIC FINANCE,
DEPARTMENT OF REVENUE, replied that the production decline
over the previous two years was much more pronounced than
anticipated. At the same time there was an increase in
investment. The lease deduction system worked by dividing
the expenditures by the number of barrels of oil produced.
He explained that if expenditures exceeded barrels of oil,
the value of the lease deductions would increase. Until
the production curve materially turned around, the lease
expenditures per barrel would remain high.
2:54:16 PM
Vice-Chair Neuman clarified that standard allowable
deductions did not alter even with the changes in tax
structure. He asked about industry growth resulting from
the most recent oil taxation format.
Mr. Pawlowski referred to slide 10 as part of his response.
He stated that in 2008, the state saw 15 thousand more
barrels of oil produced per day. Since the lease
expenditures had not really changed, the fact that there
were fewer barrels resulted in the change in deductions per
barrel. He signified that there was a dramatic increase in
forecast investment. He opined that it was emature to add
in barrels of production until the forecast investment
proved itself.
2:56:17 PM
Representative Costello asked about the lease expenditures
under SB 21 [Note: Oil tax legislation that passed in 2013]
and the capital expenditure credits under ACES. She
continued by inquiring if lease expenditures provided
information about production versus the capital expenditure
credits.
Commissioner Rodell responded that the fundamental change
between ACES and SB 21 was that tax credits became directly
tied to oil production under the new tax structure. Tax
credits under SB 21 would only be applied after production
was realized. Since the passing of SB 21 the state had seen
a substantial increase in lease expenditures which
translated into companies making more capital investments,
thus, increasing production and realizing tax credits.
Companies also benefited by being able to better plan based
on a more reliable tax regime. She stated that under ACES,
company revenues depended more on oil prices than on
production. Now companies could focus more on production
due to the credits they could count on from the state under
SB 21.
Representative Costello discussed the idea of hedging the
state's oil.
Commissioner Rodell responded that the state periodically
reviewed the option of hedging but was traditionally
uncomfortable with it. However, she welcomed a further
discussion on the subject.
3:01:03 PM
Representative Gara clarified that the state changed the
way it forecasted oil production. The change was first seen
in the Spring 2013 Revenue Sources Book in which
speculative oil was calculated at a lower rate and known
oil was computed at a higher rate. Commissioner Rodell
responded in the affirmative.
Representative Gara asked about the variance in decline
rates for North Slope oil production under ACES and SB 21.
He restated that he wanted to know about the discrepancy in
the million barrels of oil a day and asked why the decline
rate was greater now than when the spring 2013 revenue
source book came out.
3:04:04 PM
Commissioner Rodell replied that in calculating the
forecast the state used currently producing oil numbers as
its starting point as well as conducting risk assessments.
Every six months, when the forecast was updated, the state
incorporated a new set of knowledge and applied the new
methodology for greater consistency between forecasts from
spring to fall and fall to spring. The state received
feedback about expected dates, current activities, future
activities, and run-out rate updates for the producing
fields.
Mr. Pawlowski added that what has changed substantially was
a consideration of actual data. The decline from FY 12 to
FY 13 and from FY 13 to FY 14 was significantly more than
the state anticipated. The forecast going forward from
present day started from a much lower base than from where
the state thought it would begin previously. Slide 26
showed that the state's spring FY 13 forecast had
overestimated FY 14 oil production by 18,000 barrels per
day. The state revised FY 15 predictions down by 14.4
thousand barrels of oil per day based on actual data. He
emphasized the importance of using a consistent methodology
from one year to the next and furthered that the forecast
was not a total assessment of potential production, it was
a component of a revenue forecast. The department had a
record of not being conservative or prudent in giving the
legislature a long-term production forecast as a base for
revenue projections. The department had tried to keep
forecasts consistent from year-to-year, but the state had
seen much larger declines than predicted. Adjusting the
base founded on current actual numbers changed future
projections.
3:08:04 PM
Representative Gara stated that the promise under SB 21 was
that there would be new oil production. However, between
FY 17 and FY 22 the decline rate was faster using the new
forecasting methodology than it was under ACES. He
summarized that the production decline under ACES was 130
thousand barrels versus 142 thousand barrels under SB 21.
He asked Mr. Pawlowski to explain.
Mr. Pawlowski indicated two areas of opportunity. First,
lease expenditures were on a dramatic incline. Second,
increased investment translated into increased production.
However, the department was cautious about using the
numbers to do forecasting at the time.
3:10:29 PM
Representative Gara discussed the revenue forecasts. He
noted that the spring forecast showed revenue of
approximately $3.6 billion dollars in FY 18 and in the most
recent forecast revenue was down to $2.2 billion. In FY 22
the spring forecast equaled $2.8 million in production tax
revenue, whereas, under the new forecasting method revenue
was down to $2.05 billion. He asked why new revenue was not
reflected in the newest numbers for FY 22.
Commissioner Rodell commented that the largest component of
petroleum revenue was the production tax. She reported that
when there was a decline in production tax, there was also
a decline in price. She furthered that the increase in
lease expenditures translated into a decline in petroleum
revenue, primarily in the production tax which then
adjusted the total unrestricted GF revenue available to the
state.
Co-Chair Austerman asked if Cook Inlet gas and oil revenues
were included in the state's new forecasts.
Commissioner Rodell responded that the state included gas
revenues. However, she informed the committee that the oil
tax rate for Cook Inlet was zero. The gas tax rate was
approximately 18 percent. She noted activity and increased
production in Cook Inlet.
Co-Chair Austerman asked if Cook Inlet's revenues were
separated out in DOR's forecast book.
Mr. Pawlowski relayed that the state did not separate out
revenues for Cook Inlet production. However, he indicated
that the department tried to break out Cook Inlet lease
expenditures in order to do some calculations.
Co-Chair Austerman asked if DOR kept track of Cook Inlet
production. Mr. Pawlowski responded affirmatively but added
that the department did not keep track of a distinct number
of the revenues from Cook Inlet's production.
3:14:19 PM
Co-Chair Austerman asked why the department did not keep
track of the revenues from Cook Inlet's production. Mr.
Pawlowski replied that it was because, until recently, Cook
Inlet's production was modest. The department was not
paying detailed attention to Cook Inlet's revenue component
but would be going forward.
Co-Chair Austerman asked if the state paid out credits on
Cook Inlet gas and oil. Mr. Pawlowski replied
affirmatively. Co-Chair Austerman believed that it would be
helpful for the committee to see actual numbers for Cook
Inlet production and for that information to be made
available to the public. Mr. Pawlowski agreed to provide
the information.
Co-Chair Stoltze welcomed Commissioner Rodell to her post.
3:16:09 PM
Representative Guttenberg asked about economic activity
that was not included in DOR's report and its relevancy.
Commissioner Rodell responded that economic activity became
more relevant to the production forecast when activities
moved from the evaluation to the development stage.
Evaluation activities included exploration efforts like
drilling test holes. Examples of development activities
included laying drill pads and drilling wells. She
referenced the Liberty field specifying that for an
extended time the state included in its projections a
tremendous amount of production that never materialized.
Representative Guttenberg referred to slide 5 and asked if
the $10 billion increase in spending on the North Slope
over the next ten years was included in the department's
forecast calculations.
Commissioner Rodell stated it was a forecasted plan of
expenditure given to DNR to incorporate into its plan.
Actual expectations were often larger and were adjusted
using other information.
3:19:48 PM
Representative Guttenberg opined that the facilities at
Prudhoe Bay were outdated. He was concerned about
inefficiencies and related maintenance costs. He inquired
as to whether or not the commissioner had seen additional
operating expenditures due to the use of antiquated
equipment.
Commissioner Rodell replied that she had seen capital
rather than operating expenditures allocated for repairs to
aged facilities. Producers spent money to extend the life
of a facility when the remaining yield of wells on a field
proved economically viable. She believed that larger
investments would be allocated for new infrastructure.
Representative Guttenberg asked if the commissioner felt
she had a clear understanding of the difference between
CAPEX and OPEX considering the state was far behind in its
audits. Commissioner Rodell reported that her department
had a very good sense of operating versus capital
expenditures. She confirmed that the department was doing
monthly desk audits and had a very good understanding of
what the oil companies were doing on a regular basis.
3:22:21 PM
Commissioner Rodell delivered a PowerPoint presentation:
"State of Alaska, An Update on the State's Savings
Accounts." She began her presentation with slide 3:
"General Fund and other non-segregated investments
(GeFONSI)." She reported that the markets had been kind to
the state in calendar year 2013. She identified GeFONSI as
the base GF from which the state managed its cash from day-
to-day. She indicated GeFONSi had a moderate risk profile
with a short-to-intermediate investment horizon. She
directed the committee's attention to the market value
actuals of $11.8 billion in December 2012 dropping to $5.7
billion by December 2013. She explained that previously the
state kept the Statutory Budget Reserve (SBR) in GeFONSI.
However, in 2013 the state moved the funds to a separate
asset allocation within the GF to extend the investment
term slightly. She reiterated that the reserve continued to
rest in the state's GF. She reported that by the end of
the calendar year 2013 GeFONSI's year-to-date return was
0.22 percent. The fiscal year-to-date return was 0.28
percent surpassing the state's benchmark.
Commissioner Rodell turned to slide 4: "Statutory Budget
Reserve Fund." She acknowledged that the fund had a
moderate risk and an intermediate investment horizon. In
2012 the market value balance in the GF was approximately
$5.5 billion. By the end of calendar year 2013 the balance
had dropped to $4.77 billion. She informed the committee
that the change was due to the draw used to close out FY
13. The fund's performance was 0.31 percent by the end of
FY 13. The year-to-date performance on the SBR was 1.08
percent confirming the value of extending the duration of
the fund. The state's fiscal year-to-date return was 1.15
percent, again surpassing the benchmark.
Commissioner Rodell advanced to slide 5: "Constitutional
Budget Reserve Fund (Main and Sub)." She cited that the
Constitutional Budget Reserve (CBR) had two funds; a main
fund and a subaccount fund. The main account had a moderate
risk and an intermediate investment horizon with a balance
of $5.8 billion on December 31, 2013 and a FY 13 return of
0.18 percent. The year-to-date return was (0.25) percent
primarily due to the fund's exposure to the bond market.
She reported that the department was examining what it
could do to mitigate against potential losses as interest
rates climbed. The subaccount had a high risk and a
moderately long investment horizon. The account performed
very well in 2013 with its exposure to the equity market.
The subaccount had a return of 11.75 percent for FY 13. The
year-to-date return was already at 15.85 percent. The fund
amount increased from $5.5 billion to $6.3 billion dollars
in a one-year period, creating a very healthy reserve.
3:27:15 PM
Commissioner Rodell discussed slide 6: "Power Cost
Equalization Fund." She relayed that the fund in statute
required the department to target a 7 percent return, which
translated into approximately 9 percent including
inflation. The Power Cost Equalization Fund (PCE) had a
very high equity concentration of 80 percent. The fund
benefited substantially from the equity market performance
in calendar year 2013. The fund balance went from $787
million to $937 million over the course of a year.
Commissioner Rodell moved on to slide 7: "Public School
Trust Fund." She announced that the Public school Trust
Fund had a more moderate risk profile. It had an equity
allocation of approximately 42 percent. It also benefited
from having an investment in equities but not nearly as
much of a return as the PCE. It increased its balance from
$487 million to $536 million in one year. It had a fiscal
return of 8.19 percent. Year-to-date it had a return of
10.6 percent. Earnings were moved into the income fund
which is invested in short-term instruments.
3:28:38 PM
Commissioner Rodell detailed slide 8: "PERS and TRS." The
targeted return for Public Employees' Retirement System
(PERS) was 8 percent. Given its long-term, 30-year
investment horizon the state was allowed to take a more
expansive asset allocation investing in assets not as
liquid as equities or bonds. The PERS account had increased
from $12 billion to $14 billion from 2012 to 2013
benefiting from the equity market performance in 2013. The
Teacher Retirement System funds went from $5 billion to
$5.8 billion with returns at 12.6 percent, considerably
better than the CBR fund with a shorter time horizon.
Commissioner Rodell advanced to slide 9: "APFC" [Alaska
Permanent Fund Corporation]. She asserted that the state
had a long-term goal of achieving a real rate of return of
5 percent per year. The fund was designed to be maintained
into perpetuity. On December 31, 2012 it had a balance of
$43.6 billion and by the end of 2013 it had a balance of
$49.2 billion. The performance rate of the fund was 10.93
in FY 13. Year-to-date the fund return reached 12.7
percent.
3:30:47 PM
Commissioner Rodell pointed to slide 11: "FY 14 Investment
Revenue Forecast." She indicated that the numbers on the
slide were actual performance numbers through December 31,
2013 and included a forecast for the balance of 6 months in
FY 14. The state increased the amount of investment income
for FY 14 from approximately $80 million to over $101.9
million for the unrestricted GF revenue. The CBR subaccount
would increase almost $778 million for FY 14. She reported
a total investment revenue of $4.9 billion, which included
PFD revenues, for the state by the end of FY 14.
3:32:03 PM
Representative Gara addressed slide 4. He understood that
$1 billion was used to balance the budget. He asked about
whether some of the money was put into state savings or if
it was used as a draw due to state spending.
Commissioner Rodell replied that the $700 million was used
to reconcile state accounts rather than applied to state
savings accounts.
Representative Gara directed his attention to slide 8. He
noted that in reference to PERS from 2011 to 2013 the
balance increased by $4 million to about $14 million. He
asked whether the balance was keeping pace with or
exceeding the liabilities.
Commissioner Rodell replied that the liabilities were
increasing faster than the earnings, which explained the
governor's proposal to move $3 billion into the PERS fund.
The state's current liability was $12 billion dollars. She
noted that a loss such as the 20 percent loss experienced
in 2009 created even more of a burden. The state had to
make up both the 20 percent loss and the 8 percent earnings
it had anticipated for the same year. She noted that the
three-year and the five-year actuals no longer reflected
2009 figures.
3:34:46 PM
Representative Costello inquired about the use of the
Public School Trust Fund.
Commissioner Rodell deferred the question.
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, stated that the trust fund provided a component to
the formula foundation. One half of one percent of the
state's oil revenues were deposited into the principal
portion of the trust fund. She explained that as earnings
from the fund grew the interest and dividend monies went
into the income fund for the education budget.
Representative Costello asked whether the state was forward
funding education through the Public School Trust Fund.
Commissioner Rodell replied in the negative and deferred
Representative Costello to the Office of Management and
Budget for information regarding forward funding of
education.
Representative Costello asked for clarification about the
use of the fund. Commissioner Rodell replied that the fund
was set up as a specific entitlement from oil and tax
revenue for education appropriations.
Representative Costello asked if the commissioner had read
any film scripts since taking on her position at DOR.
Commissioner Rodell stated that the department received and
reviewed film scripts on a monthly basis.
3:37:39 PM
Co-Chair Stoltze discussed HB 265.
Vice-Chair Neuman MOVED HB 265 before the committee.
Co-Chair Stoltze informed the committee that he hoped to
arrange joint meetings with the Senate Finance Committee
early in the session to review the governor's submissions
and to bring up questions about the capital budget.
Vice-Chair Neuman MOVED HB 266 and HB 267 before the
committee.
HB 265 was HEARD and HELD in committee for further
consideration.
HB 266 was HEARD and HELD in committee for further
consideration.
HB 267 was HEARD and HELD in committee for further
consideration.
Co-Chair Austerman discussed the schedule for the following
day.
| Document Name | Date/Time | Subjects |
|---|---|---|
| FY2015 Full House DOC Department Overview - 01282014.pdf |
HFIN 1/28/2014 1:30:00 PM |
DOC Overview HFIN |
| State Savings Accounts Update House Finance 1.28.14.pdf |
HFIN 1/28/2014 1:30:00 PM |
DOR Revenue Forecast HFIN |
| Fall 2013 Forecast Presentation House Finance 1.28.14.pdf |
HFIN 1/28/2014 1:30:00 PM |
DOR HFIN Savings |
| DOC 2014HFCBudgetResponse.pdf |
HFIN 1/28/2014 1:30:00 PM |
DOC Response HFIN |