Legislature(2009 - 2010)
01/12/2009 09:05 AM House BUD
| Audio | Topic |
|---|---|
| Start | |
| Approval of Minutes | |
| Gas Fiscal Design Additional Information | |
| Department of Education and Early Development - Public School Performance Incentive Program | |
| Executive Session | |
| Final Audit – Department of Commerce, Community, & Economic Development, Board of Public Accountancy – Sunset | |
| Other Committee Business | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
LEGISLATIVE BUDGET AND AUDIT COMMITTEE
Anchorage, Alaska
January 12, 2009
9:05 a.m.
MEMBERS PRESENT
Representative Ralph Samuels, Chair
Representative Mike Doogan
Representative Mike Hawker
Representative Mike Kelly (via teleconference)
Representative Kevin Meyer (alternate)
Senator Bert Stedman
Senator Gene Therriault
Senator Charlie Huggins (alternate)
MEMBERS ABSENT
Senator Lyman Hoffman, Vice Chair
Representative Mike Chenault
Representative Reggie Joule (alternate)
Senator Johnny Ellis
Senator Lyda Green
COMMITTEE CALENDAR
APPROVAL OF MINUTES
GAS FISCAL DESIGN ADDITIONAL INFORMATION: DAN DICKINSON AND
DAVID WOOD
DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT - PUBLIC SCHOOL
PERFORMANCE INCENTIVE PROGRAM: EDDY JEANS
EXECUTIVE SESSION
FINAL AUDIT - DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC
DEVELOPMENT, BOARD OF PUBLIC ACCOUNTANCY - SUNSET
OTHER COMMITTEE BUSINESS
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DAN E. DICKINSON, CPA, Consultant
to the Legislative Budget and Audit (JBUD) Committee
Alaska State Legislature
Anchorage, Alaska
POSITION STATEMENT: Presented answers to questions asked by
committee members at the last meeting regarding oil and gas
taxation.
DAVID WOOD, PhD, Consultant
to the Legislative Budget and Audit (JBUD) Committee
Alaska State Legislature
Lincoln, United Kingdom
POSITION STATEMENT: Explained a series of slides and presented
answers to questions asked by committee members at the last
meeting regarding oil and gas taxation.
EDDY JEANS, Director
School Finance and Facilities Section
Department of Education and Early Development (EED)
Juneau, Alaska
POSITION STATEMENT: Presented a report regarding the Public
School Performance Incentive Program.
CAROL COMEAU, Superintendent
Anchorage School District (ASD)
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on the Public
School Performance Incentive Program.
PAT DAVIDSON, Legislative Auditor
Legislative Audit Division
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided information on the final audit for
the Department of Commerce, Community, & Economic Development,
Board of Public Accountancy - Sunset.
CHERYL SUTTON, Staff
to Representative Ralph Samuels
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided information on regarding a
Reimbursable Service Agreement to the Department of Natural
Resources
ACTION NARRATIVE
9:05:21 AM
CHAIR RALPH SAMUELS called the Legislative Budget and Audit
Committee meeting to order at 9:05 a.m. Present at the call to
order were Representatives Doogan, Hawker, and Meyer and
Senators Stedman and Huggins. Representative Kelly and Senator
Therriault arrived as the meeting was in progress.
^APPROVAL OF MINUTES
9:06:36 AM
SENATOR STEDMAN made a motion to approve the minutes of
[December 9, 2008, and December 10, 2008,] as presented. There
being no objection, the minutes of December 9, 2008, and
December 10, 2008, were approved.
^GAS FISCAL DESIGN ADDITIONAL INFORMATION
9:06:47 AM
CHAIR SAMUELS announced that Mr. Dan Dickinson and Dr. David
Wood will present answers to questions asked by members at the
last committee meeting regarding oil and gas taxation. He said
Mr. Dickinson will also present some price forecasting
scenarios.
9:07:23 AM
DAN E. DICKINSON, CPA, Consultant to the Legislative Budget and
Audit (JBUD) Committee, Alaska State Legislature, discussed the
interactive model he prepared for the committee using the
computer program Excel. The variables in the model can be
changed to see what happens to the tax flow, he explained. The
model shows that when there is a gasline some years from now the
state's production taxes will go down, not up, because of
peculiarities in the way the tax is defined.
9:09:30 AM
MR. DICKINSON walked the committee through the modeling
methodology [slides 1-3 entitled, "Combined Progressivity
Example"]. The variables that can be changed are the daily
volume of oil and gas production, the Alaska North Slope West
Coast (ANS WC) and Henry Hub prices, the transportation to
market costs, and the upstream costs, he pointed out.
Calculation of the production tax value (PTV) includes the
upstream costs, he continued, and when oil production is lower
the upstream costs will likely be lower.
CHAIR SAMUELS inquired whether lower oil production always means
lower upstream costs given that there are fixed costs.
MR. DICKINSON acknowledged that this is a good point. A big
field will have much more cost and a small field will only have
so much cost, he said. However, there are times when a company
is making huge investments, such as when it is turning a small
field into a large one.
MR. DICKINSON continued explaining the modeling methodology. He
said the model is set up such that the gas values have a limit,
i.e. the model looks at the number of dollars per million cubic
feet (MCF), while the oil is set at a total figure that can be
taken out of the DOR Revenue Sources Book.
9:11:25 AM
MR. DICKINSON ran through an example with a PTV per barrel of
oil equivalent (BOE) of $55. At a trigger point of $30, this
scenario leaves $25 subject to progressivity, generating an
additional 10 percent tax rate, he said. The 25 percent base
tax rate combined with the 10 percent progressivity rate results
in a total tax rate of 35 percent, generating a tax revenue of
$4.3 billion.
9:12:16 AM
MR. DICKINSON next presented a modeling scenario with gas
production of 4.4 billion cubic feet (BCF) per day, a Henry Hub
price of $6 per MCF, a $.75 adjustment that was used in the
TransCanada proposal, and a transportation to market cost of
$2.75. This comes out to about $2.50 per MCF, he said, and this
is multiplied times the volume, resulting in a PTV of about $3.5
billion. In this scenario, he continued, the oil and gas
streams are not calculated separately; they are combined into
BOE. So, the BOE for the gas is 500 million which equals a BOE
of $35 per barrel. At a trigger point of $30, this leaves $5
subject to progressivity, generating an additional 2 percent tax
rate. The 25 percent base tax combined with the 2 percent
progressivity tax results in a tax rate of 27 percent. The tax
revenue in this combined oil and gas scenario is about $4.2
billion, a decrease of about $100 million from the oil-only
scenario, he said.
9:14:17 AM
MR. DICKINSON demonstrated how changing the oil price variable
from $55 per barrel to $135 would generate a tax revenue to the
state of $12 billion in an oil-only scenario. He then added gas
to the model at a price of $6 and explained that, in this
combined oil and gas scenario, the total production tax revenue
would drop to $10.7 billion.
9:15:52 AM
MR. DICKINSON referenced discussion from a month ago in which he
had said the state's total revenue would drop [as a result of
combined oil and gas taxation] and Chair Samuels had said that
that would not be the case because there would be higher
royalties and higher income taxes. Using the model, Mr.
Dickinson demonstrated that the increase in gas royalty would
still not cover up the deficit. The increased income and
property taxes from gas production might possibly make up that
difference, he said, but it could be that the state's total
revenue does go down.
9:16:23 AM
SENATOR STEDMAN surmised that since oil taxes are monthly,
looking at a certain price for one month will give a good
guesstimate on the effects of that incremental month versus
using that price for an entire year.
MR. DICKINSON responded, "Absolutely." The model will calculate
monthly figures when the variable for days per year is changed
from 365 to 30, he said. He acknowledged that Senator Stedman
is correct in a sense because the model has taken what is a
monthly calculation and turned it into a constant for the entire
year.
9:17:13 AM
SENATOR STEDMAN presumed that the point is to determine the
magnitude and direction of what is going to happen and not so
much the actual numerics.
MR. DICKINSON replied that a lot of the elements have been
removed from the calculation, but what he is trying to
illustrate is that the revenues could go down significantly by
the act of adding gas.
9:17:35 AM
SENATOR STEDMAN requested Mr. Dickinson to touch again on the
barrel of oil equivalent and the upstream costs being zeroed out
in the gas column in the model.
MR. DICKINSON explained that 6000 cubic feet of gas has the same
number of BTUs as a barrel of oil. The law establishes that
relationship, he said; but, in the market, that same economic
relationship does not always hold. He said he thinks the
legislature was confident in adopting it because it had held
roughly constant for a number of years; however, this has not
been the case in the last couple of years. As the economics of
moving oil and gas around change, the premium people are willing
to pay for liquidity change, he continued. Thus, under the [6:1
ratio] established in law, selling 6000 cubic feet of gas at $6
per MCF is equivalent to selling a $36 barrel of oil. This
means that if oil is selling at $135 a barrel, it is more like a
15:1 than a 6:1 ratio.
9:19:24 AM
MR. DICKINSON, regarding Senator Stedman's second point, said he
used Prudhoe Bay in his model which already has a central gas
facility. Thus, this gas is essentially ready to go into a gas
line, he continued, although right now it goes back down into
the ground to keep up enough pressure to produce oil. So, when
folks are ready to sell gas from Prudhoe Bay the incremental
costs up to that central gas facility will be very small.
However, this may not be true in a new gas field, he allowed.
He said that in this Prudhoe Bay scenario, the gas costs are an
allocation issue. For example, if it costs $4 billion to run
Prudhoe Bay, the cost assigned to oil can be lowered by
assigning some of that cost to gas. He explained that this
spreadsheet is set up so that as gas cost increases it comes out
of the oil cost. But, he continued, one could independently
choose to increase the oil cost and leave the gas alone.
Fundamentally, it does not change the equation that much, but
what it does change is the royalty calculation.
9:21:08 AM
CHAIR SAMUELS interjected that it does not matter how the costs
are allocated because the progressivity and BOE are together in
one pool. The point of Mr. Dickinson's example is that only if
the costs are separated and then evaluated with different
schemes you get a different answer than if they are treated
together as under the current law.
MR. DICKINSON answered, "Correct." If the same parameters are
left in place, but the oil and gas streams are cataloged
separately so there is no cross subsidization, then that number
would be affected by how costs are divided between oil and gas.
9:21:46 AM
SENATOR STEDMAN asked Mr. Dickinson to address the issue of
capital credit because that is a significant deduction.
MR. DICKINSON reiterated that to simplify and keep to one
screen, he left some things out of the document, including
capital credits. The model calculates the taxes before credits,
he said.
9:22:21 AM
MR. DICKINSON noted that the incentive to producers to produce
gas as a way to bring down their taxes has been an issue.
However, he said, if the gas price rises to $13 and the oil
price stays the same, the 6:1 ratio is violated in the other
direction. A tax should last 30-40 years, the life of the
gasline, he said. He then inserted this scenario into the model
and calculated that oil alone would generate $5 billion in
revenue and $4 billion would be added to that by the gas. So,
in this case, adding gas nearly doubles the tax, he said.
Sometimes adding gas will raise the tax and sometimes it will
lower the tax.
9:24:53 AM
CHAIR SAMUELS questioned the number of barrels per day used in
the aforementioned scenario.
MR. DICKINSON said he used 700,000 barrels a day. He clarified
that this is a little bit lower because he has moved a lot of
cost over to gas. He re-manipulated the model by putting the
cost back up to the $4 billion level and calculated there would
be about $4 billion in tax revenue.
9:25:34 AM
MR. DICKINSON expressed his concern that there might be a great
hue and cry if people are expecting the dollars to go up as a
result of the gasline but instead they go down. Or, other folks
may be expecting it to be a subsidy and then the producers come
back saying that under current price conditions they will be
paying a huge addition. He warned that folks need to understand
which of those things they are trying to do.
9:26:05 AM
REPRESENTATIVE DOOGAN asked whether the assumptions built into
the oil pricing on the left hand side of the example include the
standard deduction for oil field costs.
MR. DICKINSON said that would affect the $4 billion. If the
state thought that that was decreasing what companies were
deducting, it would have to move that down a little bit, he
advised. And, if the state thought it was increasing what
companies were deducting because of falling volumes then it
would have to move that up a little bit. There is no direct way
of plugging that in because this is an amalgamation of a lot of
numbers together. But, yes, the state could recognize that, he
said.
9:27:13 AM
CHAIR SAMUELS informed members there will soon be an Excel
spreadsheet on the committee's website that can be manipulated.
Members will be able to manipulate the volume of gas, volume of
oil, the price, [upstream] costs, and the transportation costs
to see what happens.
MR. DICKINSON noted that the version currently posted on the
website is a PDF version so it cannot be manipulated.
CHAIR SAMUELS stated that a way will be figured out for members
and the public to be able to manipulate the various mechanisms.
9:28:09 AM
MR. DICKINSON moved to his illustrations demonstrating what
happens when gas PTV per BOE and oil PTV per BOE are put
together. He said the line on the graph defines the point at
which there would be no effect from adding gas. Above the line
represents higher production tax revenues with added gas, and
below the line represents lower production tax revenues with
added gas. For the data points on the graph, he said he used
actual sales minus actual transportation costs for the oil for
the years 2004-2008. For the upstream gas cost he used the
tariff suggested by TransCanada which was in the range of $2.40,
although the tariff suggested by Black & Veatch was about double
that in the $4.80 range. This gives a historical sense of where
points have fallen out, he said. In general, it can be seen
that there will be higher revenues as a consequence of adding a
gasline - if the past is a good predictor of the future.
However, it will be a situation of subsidy if the tariff is what
Black & Veatch predicted.
9:30:17 AM
MR. DICKINSON said his point is that if folks think it should be
one way or the other, right now it could be either way. He
noted that on the graph he took oil PTV's all the way out to
$400 a barrel, since this is about a 30 year stability on a
gasline. What is important is that the breakeven point keeps
changing, he said. Sometimes making an investment will move the
state from a situation of higher taxes to lower taxes and
sometimes that investment will move the state from lower taxes
to higher taxes. There are some very odd things that have to do
with the flex points built into the law, he advised. At each of
the cusp points on the graph, what happens to the tax as the
price or PTV are raised or lowered - and that can happen as a
consequence of investment - changes.
9:33:07 AM
DAVID WOOD, PhD, Consultant to the Legislative Budget and Audit
(JBUD) Committee, Alaska State Legislature, directed attention
to a slide presentation entitled, "Reponses to Questions from
LB&A asked on December 9th and 10th, 2008." He referred to
slide 2, which shows the impact of natural gas on combined oil
and gas production tax. Dr. Wood said he thinks his approach
complements Mr. Dickinson's approach. He explained that he has
studied a wide range of oil and gas production tax values to
ascertain their affect in either increasing or decreasing the
ultimate production taxes paid. He said he found that the
magnitude of difference between the value of the oil production
tax stream and the gas production tax stream is important
relative to flex or cusp points in tax law. Dr. Wood said two
other factors are of importance: the relative volumes of gas
and oil are going to have an impact; and the amount of PTV
reinvested can have a significant impact on the combined tax
paid.
9:34:29 AM
DR. WOOD moved on to a graph on slide 3, which depicts ["Natural
Gas Dilution Effects on Combined Oil & Gas Production Tax."] He
pointed out that the horizontal axis shows the production tax
value for oil, while the vertical axis shows the increase or
decrease of the overall amount of tax paid as a result of adding
gas to an oil production tax stream. Anything above the zero
point depicts an increase, while anything below it shows a
decrease of that tax. The various lines on the graph represent
different gas production tax values. The lowest line is a $5
BOE gas production tax value. Most of the curve lies below the
zero line and becomes more negative as tax production values
increase. He explained, "As you get a greater disparity between
the low gas price and a high oil price, you're increasing that
dilution effect of the gas." He said a $75 BOE production gas
value line "only just catches a negative" at approximately $342.
9:36:46 AM
DR. WOOD said it is interesting that between the $20 and $40 gas
production tax value lines there are areas that fluctuate
between positive and negative "as we get that disparity between
a gas production tax value and an oil production tax value." At
that point, he said, it becomes clear that it is becoming quite
difficult to predict variations in the impact of gas on oil.
Most of the numbers on the right-hand side of the graph don't
reflect the kind of oil and gas values that have been seen
historically; however, at some point in the future, "we may well
move into some of those territories." Dr. Wood said it is
important to understand that the impact of gas on oil stream is
quite complicated and is related to that structure of
progressivity.
9:38:15 AM
CHAIR SAMUELS said, "The best case scenario is 10 years for gas
- probably closer to 15." He said there was a 4 percent decline
in Prudhoe Bay this year, which he characterized as a good year.
He predicted that within 10 years the state will be at 400,000
barrels a day, the tariff per unit will be higher because the
fixed cost of Alyeska Pipeline Service Company will not drop
proportionally, the volume of oil will be low, and the cost per
unit will probably go up. He asked Mr. Dickinson to use that
prediction and calculate the following into it: $40, $80, and
$100 a barrel. He added that he would like Mr. Dickinson to
start off using a presumption of zero gas.
9:40:01 AM
MR. DICKINSON outlined the following: 450,000 barrels a day,
$80 a barrel, and $8.00 transportation to market. In response
to Chair Samuels, he said transportation is currently about
$6.00. He said he thinks there is a general presumption that
the state would prevail "on a low-cost mechanism." He said the
carriers are not necessarily going to agree with that.
CHAIR SAMUELS asked if Mr. Dickinson thinks the cost will drop
when everything is "depreciated out."
MR. DICKINSON said that is certainly a possibly, although he
said he does not know if that is a likely scenario. Returning
to Chair Samuel's previous request, he said there would be about
a $2 billion tax on $80 a barrel, whereas for $40 a barrel,
[tax] would be about $240 million.
9:41:56 AM
MR. DICKINSON, referring to [slide 3], previously shown by Dr.
Wood, said it is possible to predict "what each of those lines
that changes the cusp is"; however, what is unpredictable are
the small changes, which can have bizarre results. It is a
complex set of interactions, he explained, and "the things that
are changing the tax may not be the determinants that you want
tax changed by."
9:43:38 AM
SENATOR STEDMAN concluded that the combination of a high value
of oil - because there is less of it - and a lower value of gas
- because there is more of it - will result in virtually no net
revenue off a gasline.
MR. DICKINSON concurred.
SENATOR STEDMAN posited that waiting for "first gas" may not be
the best option.
MR. DICKINSON responded that there are ways to fix the problem
that would make the amount of tax generated by the gas more
predictable and may not tie it directly to the price of oil at
the time.
9:44:36 AM
DR. WOOD noted that a number of the slides he is presenting
"also draw attention to the fact that the amount of production
tax value that is reinvested will also have an impact on this
dilution effect on oil stream."
9:45:23 AM
DR. WOOD returned to discussion of the slides. He drew
attention to slide 7, entitled, "Marginal Production Tax Rates
Seen by a Producer for Reinvestment Dollars." The graph on
slide 7 has a horizontal axis that shows the production tax
value of the revenue stream. Regarding the reinvestment of the
producer, he said, "We can see that there would be quite
different impacts on our marginal production tax rate, depending
on that production tax value." He noted that around the $90
production tax value there is a high point that actually goes
above 100 percent at $342. That, he said, is less important
than the fact that the graph shows lines crossing over peaks at
different points, and those lines represent different
percentages of reinvestment. The point, he said, is that it is
very difficult to determine what exactly will be "the impact of
investment on the taxation position," whether looked at from the
perspective of the State of Alaska or the producer.
9:47:38 AM
DR. WOOD moved on to slide 8, entitled, "Implications of
Analysis." He spoke of the relationships being non-linear. He
said the magnitude of the variation would be influenced by a
number of factors. Without detailed analysis, it is difficult
to say whether a particular combination of volumes and budgeted
values will lead to a positive or negative tax outcome.
9:49:15 AM
DR. WOOD presented slide 9. He concluded that under the current
production tax rules known as the combined progressivity tax
rules (CPT), the impact of a gas revenue stream makes tax
planning quite difficult. One of the issues is whether it is a
stable tax structure over the long term. In a situation where
gas does significantly dilute the revenue stream, the
consequences are that there will be a strong incentive to change
the tax mechanism and that may need to be done several times
which may lead to fiscal instability. In addition, by
separating out that combined production tax approach, splitting
the revenue streams into a gas and an oil revenue stream and
calculating the production taxes independently will be a way to
simplify the process and make it more predictable and stable.
This approach is also flexible in the sense that incentives
could be placed on the gas stream, focused on specific
situations, and separated from the oil stream. He opined that
as a result, the cost analysis would be slightly more difficult,
but it is a small price to pay for a simplified taxation
structure.
9:51:36 AM
DR. WOOD moved to slide 10. He explained that the final slide
points out that the work on the two models has identified some
of the issues with the existing structure. The work presented
in December was focused on how a fiscal design could be
structured for the yet-to-find (YTF) future gas reserves. He
expressed his belief that there was value in doing analysis on
the existing proven reserves of Prudhoe Bay and Point Thomson on
a multi-year basis. This would establish, not only how it looks
in the current fiscal structure, but how might it look with
alternative structures separating out gas and oil, and with
different development scenarios and gasoline alternatives such
as liquefied natural gas (LNG). He stressed that the work
presented in December was based on hypothetical fields over
multiple years and is useful to look at exploration and future
production potential; however, tax planning analysis must
include the proved reserves as well.
9:53:37 AM
DR. WOOD continued to explain that another aspect is to look at
the fiscal design of Alaska and compare it with the fiscal
design of a number of the main gas producing states in the Lower
48. Although those gas resources are quite different, there is
lots of investment going into non-conventional gas such as shale
gas, and different states are establishing different incentives
to encourage investment. Dr. Wood predicted that in the next
decade Alaska's gas will be competing with those gas projects
and the fiscal design of other projects in the U.S.
9:54:34 AM
DR. WOOD ended his presentation.
9:54:43 AM
CHAIR SAMUELS said he would like to set up another scenario.
MR. DICKINSON recommended that Chair Samuels, while describing
another scenario, remember that as people look for gas, they
will find oil; therefore, 450 [barrels per day] may not be an
"out-of-the-range, high point."
9:55:57 AM
CHAIR SAMUELS, using the figure of 450 barrels per day,
described another scenario in which every broad-based tax was
instituted, the entire permanent fund dividend was taken away,
there was a zero tariff and one-third the current cost at
Prudhoe Bay, and "we still didn't make it." He asked if that is
an unfair assessment of what it will be like in ten years.
MR. DICKINSON responded by noting that the Revenue Sources Book
says that in fiscal year 2010, at $40 a barrel for oil, all
general fund revenues combined will be approximately $2 billion.
CHAIR SAMUELS observed, "That's at 700,000 barrels a day."
MR. DICKINSON responded, "That was [650,000 barrels a day]."
9:58:16 AM
CHAIR SAMUELS emphasized that each time he runs the numbers he
concludes: "You can't make it, unless you get gas."
SENATOR STEDMAN stated that there is no incentive to get gas if
there is no net revenue. Another issue, he remarked, is that
there are other tax mechanisms available to fall back on "if
that scenario does produce itself in our future."
9:59:19 AM
SENATOR HUGGINS said Commissioner Galvin maintains that the
administration is not convinced that there needs to be an
adjustment to Alaska's Clear and Equitable Share (ACES). He
asked Mr. Dickinson if he has talked to "them" about the
differential between analyses.
MR. DICKINSON said he held some preliminary conversations
last month, and the general notion was that total taxes
would be falling to be close to the oil-only tax, thus
there would be a large incentive built in. He said the
producers had not indicated that there should be a
different kind of incentive. He surmised that Dr. Wood's
point is that if you separate oil and gas, and you build
certain things that have gas-only progressivity that is
more predictable and oil-only progressivity that is more
predictable it may end up having higher revenues or a
higher bite. But, if it's more predictable and it's more
tied to what a producer does so the producer understands
what will happen with investment, that may in some senses
be a better situation for a producer than one saying
there's a fairly large random element in the tax that will
result.
10:00:58 AM
SENATOR HUGGINS opined that the average Alaskan, the state, and
the producers want a system that is predictable.
MR. DICKINSON agreed and expressed his belief that in some
ranges the predictability is more important than the "overall
amount of the take".
10:01:18 AM
REPRESENTATIVE DOOGAN questioned how to construct a predictable
tax on a commodity which had decreased in value by two-thirds in
the prior six months.
MR. DICKINSON agreed with the difficulty, but suggested that
revenue prediction for an investor differs from budget
prediction.
REPRESENTATIVE DOOGAN disagreed and stated that predictable
revenue is based on price assumption.
MR. DICKINSON clarified that an investor might be comfortable
knowing that "X amount" of their profit is allocated to taxes.
He pointed out that the budget prediction dilemma is in not
knowing the amount of profit.
10:02:21 AM
CHAIR SAMUELS surmised that if the government perceived budget
prediction as a problem to be fixed, there would be a need to
review the cost allocations and the tax rate.
MR. DICKINSON said flex points would be a third consideration.
He offered his belief that the same flex points would not apply
to gas as apply to oil. He opined that it is difficult to
understand a barrels of oil equivalent number that includes
millions of cubic feet and a mathematical formula. He offered
his belief that it is difficult for many people to understand
whether a BOE number is high or low, hence it is difficult to
discuss progressivity on gas.
10:03:47 AM
MR. DICKINSON suggested that if there is concern that 90 percent
of the budget is determined by a highly volatile mechanism, the
solution is to create a buffer mechanism such as a fund into
which all oil and gas revenues go and from which there is a
method of stable payouts for revenue.
CHAIR SAMUELS laughingly noted that this was attempted during
the past year.
MR. DICKINSON said that only pursuing a tax method solution may
not be a broad enough quest.
CHAIR SAMUELS quipped that the state would not be 90 percent
dependent on oil next year, but would be 40 percent dependent on
cash from a savings account, which reflected diversification.
10:05:17 AM
CHAIR SAMUELS announced that Mr. Dickinson will discuss price
forecasts from a variety of entities.
MR. DICKINSON directed attention to the chart on a projected
slide. He explained that the chart plotted oil price
predictions during the last calendar quarter, 2008, by ten
analysts which included Citigroup, Merrill Lynch, Deutsche Bank,
the federal Energy Information Agency (EIA), and Goldman Sachs.
He stated that these price predictions were based on the West
Coast and West Texas Intermediate (WTI) daily crude oil prices.
He noted that as the actual prices changed, the average annual
predictions reflected this same price.
10:08:32 AM
MR. DICKINSON said that the Department of Revenue (DOR) oil
price forecast of $75 per barrel, which was released in early
December, was significantly higher than most other forecasts at
that time of $40 per barrel. He allowed that there was a
negative reaction to this forecast. He disclosed that DOR had
made the analysis and forecast on October 7, and that a
bureaucratic delay resulted in the forecast not being released
until December.
MR. DICKINSON pointed out that the EIA does put out a monthly
Short-Term Energy Outlook (STEO) which projects prices for the
upcoming year. He commented that the current advanced forecast
price of oil is $51.75 per barrel. He noted that the Short-Term
Energy Outlook (STEO) projections are also lagging behind the
actual rise and fall of oil prices. He commented that the
federal government is also making big decisions based on the
energy prices.
10:11:54 AM
REPRESENTATIVE KELLY asked how far each of the predictors points
into the future.
MR. DICKINSON responded that each predictor is looking at
calendar year 2009. He explained that since the DOR forecast is
for the fiscal year, he used an average of the calendar year
predictions.
CHAIR SAMUELS thanked Mr. Dickinson.
^DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT - PUBLIC SCHOOL
PERFORMANCE INCENTIVE PROGRAM
10:13:19 AM
CHAIR SAMUELS announced the next order of business would be a
report regarding the Public School Performance Incentive
Program.
10:14:59 AM
EDDY JEANS, Director, School Finance and Facilities Section,
Department of Education and Early Development (EED), explained
that the Public School Performance Incentive Program was adopted
by the legislature three years ago as a pilot program. He said
the department has not included the program in its fiscal year
2009 (FY 09) budget and recommends that the program not be
continued. Mr. Jeans explained that the program was intended to
encourage collaboration at the school level to improve student
achievement. He said there has not been a lot of support for
the program. For example, during its first year, there were
articles in the newspaper claiming the program was pitting
teachers against teachers and schools against schools. Mr.
Jeans thanked the legislature for the opportunity to conduct the
program and said the department does not anticipate the
legislature's continued support of it.
10:17:12 AM
SENATOR HUGGINS observed that many programs initiated by
individuals disappear when those individuals are no longer
involved.
MR. JEANS, in response to Senator Huggins, confirmed that the
program was brought about by former Commissioner Sampson, and he
surmised that Commissioner Sampson would support the
department's decision to discontinue the program. He added,
"There's been a lot of push-back from the district."
10:17:48 AM
SENATOR HUGGINS said he read about a number of cases in which
people said they would not accept the money. He asked how often
that actually happened.
MR. JEANS responded that one check was returned to the
department in the last two years.
10:18:18 AM
CAROL COMEAU, Superintendent, Anchorage School District (ASD),
in response to Chair Samuels, noted that the Department of
Education receives about one quarter of a $5 billion budget.
CHAIR SAMUELS remarked, "Within 10 years, we're going to have
problems ... as production declines." He expressed appreciation
that something new got tried. He asked if there are any other
ideas being formulated.
MR. JEANS spoke of a three-year funding bill for education
passed by the legislature, and noted that the geographic cost
differentials will be faced in over a five-year period. He
reported that there were increases in the base student
allocation of $100 a year for the next two years after 2009, as
well as increases in the intensive needs students category.
10:20:04 AM
CHAIR SAMUELS warned that "putting money into the same system"
currently in place will eventually result in a downward pressure
on the department; it will no longer be possible to spend the
same amount of money. He clarified that he would like to know
if there are any programs currently being considered to stave
off the upcoming problems.
MR. JEANS said he does not have any suggestions to increase the
state's revenue to support its budget.
10:21:50 AM
REPRESENTATIVE MEYER offered his understanding that there were
three programs implemented under Commissioner Sampson. In
addition to the incentive program, there is a mentoring program,
which Representative Meyer called "a huge success."
MR. JEANS, in response to Representative Meyer, noted that there
is a "coaches' program" where coaching is provided to districts
that are not performing well. Both the mentoring and coaches'
programs are working well, he said. He noted that Commissioner
LeDoux has made internal changes to the Department of Education
and Early Development, while the Deputy Commissioner Les Morris
will be focusing on the improvement of schools and districts.
The department still collects and evaluates student data based
on the state assessment, and it provides technical assistance to
districts regarding how to use that information to improve
student achievement. He opined that the department is heading
in the right direction and there will be improvement in public
schools.
10:23:38 AM
MR. JEANS reiterated that the department has not been looking at
ways to reduce costs to education. He said consolidation is a
concept that even the legislature has discussed numerous times
over the years. He noted that Legislative Audit Division
conducted a study to see if there would be administrative cost
savings by consolidating school districts, and the results of
that study showed that the savings would be minimal. He stated,
"Unfortunately, Alaska's a very large state with very dispersed
population, but we still have an obligation to educate the
children wherever they live, and it's extremely expensive."
10:24:15 AM
SENATOR HUGGINS mentioned the federal stimulus package, and he
offered his understanding that "education was one of the
categories that was going to be eligible." He asked if the
department has made any requests regarding the federal stimulus
package that would impact the education community.
MR. JEANS replied that the department is just now getting
information about what will be included in the federal stimulus
package. He said, "The big item that has come our direction is
funding for ... construction of schools, and we're not sure
exactly what our share would be under that, or how that would
impact the state."
MR. JEANS, in further response to Senator Huggins, said he does
not think deferred maintenance is specified under the federal
stimulus package.
10:25:25 AM
SENATOR HUGGINS, regarding drop-outs, offered his understanding
that as soon as a student begins eleventh grade, the clock
starts ticking and if the student does not subsequently graduate
with his/her class, he/she becomes a drop-out. The governor's
association is considering a program in which that clock would
start ticking as soon as a student enters ninth grade. He asked
what the state's definition of drop-out is.
MR. JEANS said he believes the clock starts ticking when a
student enters ninth grade. In response to follow-up questions,
he offered his understanding that there are "some adjustments to
that calculation," but he said he could not describe them. He
said he does not know whether or not special education students
are treated differently in that regard. He said he does know
that drop-outs are a big issue for the department and
Commissioner LeDoux would address the matter forthcoming.
10:27:19 AM
SENATOR STEDMAN asked Mr. Jeans how a student would be treated
if he/she took five years - instead of the four years the rest
of his/her classmates took - to graduate.
MR. JEANS responded that that student would be considered a
drop-out, but "there is some adjustment that occurs if a student
gets their diploma in their fifth year." He said he does not
know the exact calculation but could get that information. In
response to a follow-up question, he confirmed that graduation
rates and drop-out rates are two completely different
calculations.
10:28:47 AM
SENATOR STEDMAN, regarding the stimulus package and the interest
the federal government appears to have in the construction of
new schools, said in Southeast Alaska, construction of new
schools is not a priority, whereas getting children into school
is. He asked where new school construction is warranted around
the state versus maintenance.
MR. EDDY reviewed that the department produces two lists: the
major maintenance list and the school construction list. The
majority of the schools on the construction list exist in "the
unorganized areas of the state," and they include old BIA and
Molly Hootch schools, which are now getting to the point where
they need to be replaced. The only mechanism available to the
schools to be replaced is through the state grant program.
Conversely, on the major maintenance list there will be a blend
of both regional education attendance areas and municipal school
districts.
10:30:52 AM
REPRESENTATIVE KELLY asked Mr. Jeans whether he was surprised at
the failure of a program that was [initially] strongly supported
by the unions, the National Education Association (NEA),
teachers, principals, and superintendents.
MR. JEANS responded that he was not surprised and expressed his
belief that the program itself did not fail, but that there was
some misunderstanding about what the intent of the program was
and how it functioned; therefore, the department elected not to
extend the program.
10:31:48 AM
REPRESENTATIVE KELLY pointed out that movement in a direction to
try to measure performance with some elements of competition,
and educating and graduating kids, is more important than
worrying about hurt feelings. He expressed his disappointment
at the failure and urged the department to quit throwing money
at problems and to find ways to make needed improvements in the
future with the available revenue. He stressed that some
initiatives do not have as much to do with money than with
complete change, and suggested the funds from this program could
be used for additional support for the vouchers program and the
[Charter Schools] program. Representative Kelly stated his
frustration that programs that will have a major and positive
effect do not have the support of the "old traditional crowd."
10:34:15 AM
CHAIR SAMUELS warned Mr. Jeans about the upcoming revenue
problems for the department.
MR. JEANS assured the committee that the department is looking
forward to working with the standing committees on education to
address some of the issues raised by Representative Kelly.
CHAIR SAMUELS directed Mr. Jeans to work with his staff on the
required report to the legislature. He expressed his doubt that
the legislature would [fund] the program without the
recommendation of the department.
10:35:25 AM
SUPERINTENDENT COMEAU informed the committee that the Public
School Performance and Incentive Program was originally
supported by superintendents because they liked the idea of
collaboration among all of the staff in a school environment.
However, in Anchorage each of the schools that received
performance incentives were "parent choice" schools of very high
socio-economic status. She explained that there was huge growth
in the Elementary and Secondary Education Act of 1965 (Title 1)
schools, and in other schools, but not quite to the same level.
As a result, the situation became very demoralizing to all of
the staff. It was recognized that when parents have enough
resources to be actively involved in their children's education
there is increased student achievement and less parental support
was a detriment to schools where parents were unable to provide
transportation. Additionally, in rural areas with two or three
schools, incentives received by one school because of varying
circumstances and not because of the effort on the part of the
school, divided the community. She clarified that she was not
against incentivizing schools, but there are other ways to do
that and expressed her desire to "be part of the discussion."
SUPERINTENDENT COMEAU related that the staff of a charter school
that received an incentive had acknowledged that active parental
involvement made a huge difference in the ability of its
students to attend school regularly and not "move around a lot."
In fact, none of the Anchorage schools receiving an incentive
had a high mobility rate, not because parents are dissatisfied
with the school, but because of where affordable housing is
available. She noted that she was glad to hear the discussion
on this subject as she was about to present the ASD budget.
Contrary to some school districts, the ASD is continuing to gain
students and is struggling with its budget that was based on the
October count date.
10:38:44 AM
REPRESENTATIVE DOOGAN asked whether there is historical data
that indicates whether the April student head count is
significantly different than the October count date.
SUPERINTENDENT COMEAU answered that this is the first time
Anchorage's school population in January is higher by far than
in October. Historically, due to early graduation and drop
outs, the school population declines at the end of the first
semester. In response to a further question, she confirmed that
at this point in time, her district has 500 more students than
in October.
REPRESENTATIVE STEDMAN mentioned that during the legislative
session the department will be invited to present information
about school enrollment across the state. He opined that there
seems like there has been an acceleration in numbers this year.
10:40:36 AM
SENATOR HUGGINS asked Superintendent Comeau to suggest other
ways to incentivize performance.
SUPERINTENDENT COMEAU expressed her belief that money is not the
way to incentivize people. She opined that teachers,
principals, and superintendents are working very hard to
increase student achievement and the graduation rate. The
biggest challenge for teachers is finding time to collaborate
within their work day. She said that adding time into the work
year - perhaps by additional compensated days into the school
year, or additional hours to the day for planning,
collaboration, training, and professional development - would go
far to incentivize and encourage the good work the staff is
doing in the school.
10:42:08 AM
SENATOR HUGGINS asked whether Superintendent Comeau was
suggesting increasing staff.
SUPERINTENDENT COMEAU replied no. She reiterated that
compensated time could be added to each [current] teacher's day
for collaboration, planning, and professional development. Or,
additional paid days could be added to the school year to
provide for the additional time needed to improve lessons.
SENATOR HUGGINS noted that this model is being practiced in some
middle schools in the state. He asked for Superintendent
Comeau's thoughts about two head counts during the school year
as recommended by the Mat-Su Borough School District.
SUPERINTENDENT COMEAU agreed that if a school's student
enrollment goes up there needs to be an opportunity to apply for
supplementary funding in February or March. In addition, when
intensive-needs students enroll after the count date there needs
to be an opportunity to look for additional funding.
10:44:05 AM
SENATOR HUGGINS asked how the money [for additional or
intensive-needs students] can follow the student from school to
school as they move.
SUPERINTENDENT COMEAU confirmed that teachers are hired in the
fall with a contract for the school year. That is the biggest
challenge.
10:44:38 AM
SENATOR HUGGINS asked whether the migration of rural students
into Anchorage schools has noticeably increased.
SUPERINTENDENT COMEAU explained that students come and then go.
In January a group [moved to Anchorage] from rural Alaska and
many families have come in from California looking for jobs. In
addition, there has been an increased military buildup in the
Matanuska-Susitna Valley, Fairbanks, and Anchorage.
10:45:19 AM
SENATOR HUGGINS asked for a description of the ASD mobility rate
this year.
SUPERINTENDENT COMEAU said she would provide that information.
However, some schools have a very stable student population rate
and others, in mostly Title 1 schools and in areas of affordable
housing, have a 200-300 percent turnover.
10:45:59 AM
SENATOR HUGGINS spoke of "performance oriented" students moving
from one school to another with a coach. "[Do] we have the
right structure to fix that or not?" he asked.
SUPERINTENDENT COMEAU responded that the Alaska School
Activities Association (ASAA) governs that when a child's family
moves its residence, the child can participate in activities at
the new school; however, there is a one-time summer transfer
rule and if the student moves again he or she can not
participate in activities for eighteen weeks.
10:47:12 AM
CHAIR SAMUELS referred to a study by the University of Alaska,
Anchorage (UAA), Institute of Social and Economic Research
(ISER), that indicated 57 percent of the municipal budget was
tied to oil [production].
SUPERINTENDENT COMEAU recommended that committee members read
the ISER study.
CHAIR SAMUELS stated that [he and] Senator Meyer will write the
report to the legislature on this program.
^EXECUTIVE SESSION
10:48:22 AM
REPRESENTATIVE STEDMAN made a motion to move to executive
session under Uniform Rule 22 for the purpose of discussing
confidential audit reports under AS 24.20.301. There being no
objection, the committee went into executive session at 10:48
a.m.
CHAIR SAMUELS invited Josh Applebee to stay for the executive
session.
CHAIR SAMUELS called the committee back to order at 10:56 a.m.
^FINAL AUDIT - DEPARTMENT OF COMMERCE, COMMUNITY, & ECONOMIC
DEVELOPMENT, BOARD OF PUBLIC ACCOUNTANCY - SUNSET
CHAIR SAMUELS announced that the next order of business would be
consideration of the final audit for the Department of Commerce,
Community, & Economic Development, Board of Public Accountancy -
Sunset.
REPRESENTATIVE KELLY inquired as to clarification of the process
taken for the closure of an investigative complaint.
10:56:15 AM
PAT DAVIDSON, Legislative Auditor, Legislative Audit Division,
Alaska State Legislature, responded that complaints made to the
investigations unit of the Division of Corporations, Business,
and Professional Licensing (DCBPL) are prioritized using a
three-tiered system, determined by the importance of the
complaint. Thus, she noted, complaints that affect life or
safety, such as those that would affect the Alaska Board of
Pharmacy or the Alaska State Medical Board, would have a higher
priority for investigation than complaints that affect
consumers, which would have a secondary emphasis. Additionally,
the licensing board will often initiate complaints that fall
under their regulations, and those complaints are generally
considered a lesser priority than life or safety and consumer
complaints. She added that the DCBPL investigators currently
attempt to prioritize their efforts. She opined that the Board
of Public Accountancy (BPA) has generally been satisfied with
the efforts of the investigative unit. She further opined that
the investigator's priority process also works well. However,
she noted that in instances of staff turnover that absent a good
case management system, new staff does not know where to begin.
She suggested that this is the area within investigations that
needs improvement.
10:57:58 AM
REPRESENTATIVE KELLY inquired as to whether a procedure exists
that requires the BPA to respond to a complainant within a
specific time period, regardless of whether it is for a high
priority complaint or one of a lesser priority. He further
inquired if the BPA would then revisit the matter and grant an
extension of time for the investigation.
MS. DAVIDSON responded that she is not aware of the protocol for
interaction between the BPA and the Division of Corporations,
Business, and Professional Licensing investigators when an
initial complaint is made. She added that the purpose of the
investigation is to determine whether a licensing action should
be taken, and if so, the recommendation is taken to the board.
She recalled that the BPA meets about four times a year. She
reiterated that she did not have an answer with respect to the
turnaround time for the BPA to respond to the complainant since
she is not aware of the dialogue between the investigator and
the board. She advised that the process used by the Legislative
Audit Division auditor is to review timeframes for how quickly
resolution of investigative cases occurs, the length of time it
takes to bring the matter to the board, and whether the BPA
takes its action in a speedy manner.
10:59:43 AM
REPRESENTATIVE KELLY noted that he did not wish to slow this
audit down since it is his understanding that there has been
improvement in the delivery of investigation service. He
inquired as to whether the investigations unit of the Division
of Corporations, Business, and Professional Licensing Division
could be required to ensure that all complaints are handled
timely, regardless of the level of complaint.
CHAIR SAMUELS inquired as to whether Representative Kelly is
offering this suggestion with respect to complaints for all
licensing boards or specifically to complaints under the BPA.
REPRESENTATIVE KELLY reiterated that while he did not want to
delay action on this sunset review, he suggested that complaints
should be handled within a certain timeframe. He said that
perhaps a matrix could be developed to provide the BPA an
overview of the progress taken on investigative complaints.
11:01:02 AM
CHAIR SAMUELS offered that one option to ensure this happens
would be for the Legislative Budget and Audit Committee staff to
work to establish a general policy for all sunset audits rather
than to amend the statutes. He further noted that the
Legislative Budget and Audit Committee could work with
legislators who oversee the Department of Commerce, Community, &
Economic Development (DCCED) budget in order to help establish
parameters on the budget and to ensure the goal that the
licensing boards are more responsive.
11:01:31 AM
MS. DAVIDSON said that about seven or eight boards will be
coming up for sunset audit reviews during the upcoming
legislative session, of which at least five are regulatory
boards. She suggested that the Legislative Audit Division could
review not only that the investigators are prioritizing the
cases, but could also review the aging of complaints to
determine how fast the complaint is resolved. She further
offered that in her experience it is not uncommon for a board,
such as the Board of Barbers and Hairdressers (BBH), to be less
satisfied with the Investigative Unit of the DCBPL than the
State Medical Board (SMB) because complaints against the BBH
would tend to fall into the lowest category of effort by the
investigators and the complaints for the SMB would have a higher
priority. She reiterated that with at least five regulatory
boards due for sunset audits this year the auditors could review
not only the priority of complaints, but could also review aging
of ongoing investigations.
11:02:48 AM
REPRESENTATIVE KELLY acknowledged that the additional layer of
review would help and could also help legislators better assess
the complaint processes for each of the boards.
CHAIR SAMUELS suggested that the Legislative Budget and Audit
Committee could work with the House and Senate Labor & Commerce
committees (L&C) since all of the sunset bills are ultimately
referred to the L&C committees for review. He offered that Ms.
Davidson could work with Legislative Budget and Audit Committee
staff to draft letters to the respective L&C committee chairs
with suggested intent language for them to consider attaching to
any sunset bills.
REPRESENTATIVE KELLY responded with his preference for that to
happen.
11:03:53 AM
REPRESENTATIVE DOOGAN recalled a recommendation about not
filling vacant positions very quickly and he further recalled
that several recommendations like that were included in other
preliminary sunset audits.
MS. DAVIDSON acknowledged Representative Doogan is correct. She
recalled the issue arose when the Legislative Budget and Audit
Committee considered an audit for the Suicide Prevention Council
(SPC). She further recalled that the Legislative Audit Division
had previously recommended more timely appointments to the SPC.
She said auditors have recommended statutory changes to reduce
some of the requirements for the SPC members. She noted that
requirements for the members of other professional boards are
not that stringent. She added that the licensing boards
generally meet quarterly and preparing for a meeting requires
time, effort, and energy on the part of all board members.
11:05:13 AM
REPRESENTATIVE DOOGAN inquired as to whether this [vacancy]
issue is a new problem or if this is an historical problem that
has worsened.
MS. DAVIDSON responded that the issue [of vacancies] ebbs and
flows. She noted it is not always an issue, but it is not
uncommon for the issue to arise. She said the problem is
exacerbated in instances of boards and commissions that have
more narrowly defined requirements. She further stated that
with the BPA it is just a matter of [the appointments] just not
being done.
11:06:02 AM
SENATOR STEDMAN made a motion that the following final audit
report be released to the public for response:
Department of Commerce, Community, & Economic Development,
Board of Public Accountancy - Sunset
There being no objection, the motion passed.
^OTHER COMMITTEE BUSINESS
11:06:22 AM
CHAIR SAMUELS asked to add one additional item to the agenda.
He explained that a motion was needed to approve a Reimbursable
Services Agreement (RSA) to the Department of Natural Resources
(DNR) since at the last Legislative Budget and Audit Committee
meeting the motion included an RSA to the Alaska Department of
Fish & Game (ADF&G), but the committee inadvertently omitted the
motion for DNR for the RSA to cover the R.S. 2477 and Navigable
Waters.
CHERYL SUTTON, Staff to Representative Ralph Samuels, Alaska
State Legislature, clarified that the Legislative Budget and
Audit Committee had approved a motion at its last meeting for
DNR. However, she noted that the motion did not cover the full
amount and this motion would correct the amount of the RSA to
the portion allocated to DNR for the RSA.
11:07:10 AM
SENATOR STEDMAN made a motion that the Chair be authorized to
amend the existing contract with the Department of Natural
Resources for research and preparation work on R.S. 2477 and
navigable waters to an amount not to exceed $70,000.
There being no objection, the motion passed.
11:07:32 AM
CHAIR SAMUELS thanked Ms. Sutton for her work over the past
legislative session.
SENATOR HUGGINS assumed this was Chair Samuel's last official
act as the Legislative Budget and Audit Committee Chair. He
thanked Chair Samuels on behalf of the Senate and said Chair
Samuels has earned the respect of the legislature and the
public. He also offered his personal thanks to Chair Samuels.
CHAIR SAMUELS noted his appreciation for the comments.
11:08:42 AM
ADJOURNMENT
There being no further business before the committee, the
Legislative Budget and Audit Committee meeting was adjourned at
11:08 a.m.
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