Legislature(2009 - 2010)HOUSE FINANCE 519
01/21/2010 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Overview: Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 21, 2010
1:33 p.m.
1:33:43 PM
CALL TO ORDER
Co-Chair Hawker called the House Finance Committee meeting
to order at 1:33 p.m.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Vice-Chair
Representative Allan Austerman
Representative Mike Doogan
Representative Anna Fairclough
Representative Neal Foster
Representative Les Gara
Representative Reggie Joule
Representative Mike Kelly
Representative Woodie Salmon
MEMBERS ABSENT
None.
ALSO PRESENT
Representative Bob Buch; Representative David Guttenberg;
Pat Galvin, Commissioner, Department of Revenue; Daniel
Stickle, Petroleum Economist, Department of Revenue; Dona
Keppers, Audit Master, Tax Division, Department of Revenue;
Jerry Burnett, Deputy Commissioner, Department of Revenue;
PRESENT VIA TELECONFERENCE
Jennifer Duval, Petroleum Economist, Department of Revenue;
Frank Molli, Production Forecasting Consultant;
SUMMARY
1:33:55 PM
Co-Chair Hawker discussed housekeeping. He reminded the
committee that budget overview meetings were meant to foster
a productive conversation between the department and the
legislature.
1:37:06 PM
Co-Chair Hawker queried the fiscal standing of the state at
the end of FY 2009.
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, began the
presentation titled, "Overview of Fall 2009 Revenue
Forecast" (copy on file). He informed the committee that FY
2009 had ended with a surplus. He introduced his support
staff and described their expertise.
1:41:44 PM
Co-Chair Hawker asked how long the position of lead
economist for the state had been vacant. Commissioner Galvin
replied that it has been vacant for a year and a half. He
relayed that the department has been searching nationwide to
fill the position but that, at the salary being offered for
the classification of chief economist, no candidates have
applied. Co-Chair Hawker wondered if the position remained
unfilled; it could be taken out of the budget. Commissioner
Galvin replied that the position was necessary. He added
that currently, members of the department were sharing the
responsibilities of the position, to the detriment of the
state.
Representative Doogan wondered about the positions salary.
Commissioner Galvin replied that the position paid $86,000-
$100,000 per year, depending on the qualifications of the
new hire. Thus far, a qualified applicant has yet to apply.
The department has pursued a bill to make the position
exempt, to allow for a higher salary. He felt that filing
the position would require offering a higher wage.
Representative Doogan asked how much the wage would need to
be increased. Commissioner Galvin answered that it would
depend on the level of experience wanted. He thought a
salary raise of 50 percent would attract a suitably
qualified applicant.
Representative Joule asked if the department had included
the salary raise in the budget request.
1:45:55 PM
Commissioner Galvin replied that legislation would be needed
in order to convert the current position into an exempt
position, and a fiscal note would accompany the legislation,
noting the additional salary.
Co-Chair Stoltze asked about Slide 6, "FY 2010 and FY 2011
Non-Oil Revenue Detail". He asked if mining, insurance,
tobacco and motor fuel taxes contributed more to the economy
than fisheries taxes.
1:48:01 PM
DANIEL STICKLE, PETROLEUM ECONOMIST, DEPARTMENT OF REVENUE,
cited pages 50 and 51 of the Revenue Sources Book, which
shows that a majority of the fisheries revenue was
considered restricted. He stated that the slide illustrates
the portion of the revenue that the department considers
unrestricted.
Co-Chair Stoltze felt that fishing was a primary industry in
the state and that the projected revenues should be higher.
He felt that the numbers were surprisingly low and thought
they could come into play in the further evolution of the
Carlson litigation [For most recent case, see State v.
Carlson, 191 P. 3v 137 (Alaska 2008)].
1:49:50 PM
Representative Austerman reminded the committee that the
legislature was responsible for determining which taxes
would be distributed to municipalities and not placed in the
general fund.
Representative Fairclough wondered if centralizing the
hiring process would be advantageous to the department in
order to fill vacancies. Commissioner Galvin replied
centralizing the classification system and salary systems
have had both positive and negative effects. One of the
negative aspects that the department has experienced with
specialized personnel, was a disconnect between what the
department could offer, and what the market was seeking.
1:51:42 PM
Representative Fairclough asked if there had been any
candidates that have responded that may have been lost in
the system. Commissioner Galvin replied that he was not
aware of any. He added that one applicant had met the
minimum requirements, but withdrew before an interview.
Representative Fairclough asked how much time passed between
receiving the application and offering the interview.
Commissioner Galvin replied that time had not been the
issue.
1:52:09 PM
Representative Gara asked if fisheries related companies
paid a corporate income tax, in addition to the individual
fisheries taxes listed. Commissioner Galvin replied yes. He
furthered that the department's method of calculating
petroleum related income tax could be found on Page 50 of
the Revenue Sources Book.
1:53:11 PM
Representative Gara speculated that positions were not being
filled statewide because competitive salaries were not being
offered. Commissioner Galvin relayed that the Commissioner
of Administration was attempting to address the problem. He
stated that a comprehensive statewide salary survey had been
conducted and the numbers would be available.
Representative Gara wondered why the department had not
approached the union to fill the position. Commissioner
Galvin thought the question could be better answered by
Commissioner of Administration.
1:54:39 PM
Representative Doogan understood that $2 out of every $3 of
fisheries tax revenue were restricted. He requested
clarification concerning how much of the fisheries related
revenue was unrestricted verses restricted. Commissioner
Galvin said that the department would provide a report to
the committee that would break down the distribution of the
corporate income tax and identify other areas of fisheries
revenue.
1:57:00 PM
Commissioner Galvin reintroduced the presentation titled,
"Overview of Fall 2009 Revenue Forecast"(copy on file). He
referred to Slide 2, "Outline for Presentation". Co-Chair
Hawker interjected that the high-level presentation was
intended as a point of reference from which the rest of the
session would progress.
Commissioner Galvin continued with the presentation. Slide 4
details "FY 2010 and FY 2011 Total Revenue". Commissioner
Galvin said that the department was projecting $4777.9
million of total unrestricted revenue. Recognized restricted
revenue totaled $7,870.2 million, which results in a total
revenue for FY 10 of $12,648.1 million.
Co-Chair Stoltze asked if permanent fund earnings were
restricted. Commissioner Galvin replied that it would depend
on whether the funds were realized or unrealized. Realized
funds would be placed into the unrestricted earnings
reserve. Unrealized gains to the fund would be considered
part of the principal and would remain unavailable.
2:00:52 PM
Representative Austerman asked when the unrealized gains
portion would be discussed. He asked what percentage of the
projections were unrealized gains. Commissioner Galvin
offered to provide the numbers at a later date.
Representative Austerman clarified that the numbers in the
presentation were an estimate. Commissioner Galvin explained
that the numbers in the presentation were a projection based
upon what the investment advisors provided as the expected
earnings in the current asset allocation.
Co-Chair Hawker reminded the committee that the presentation
was a revenue forecast and, therefore, entirely an
estimation.
2:02:16 PM
Commissioner Galvin informed the committee that the
department had 6 months experience in FY 2010, but that the
numbers after that were total projections. Fiscal Year 2011
is a complete projection.
Representative Gara asked what the oil revenue total was for
FY 2008. Commissioner Galvin replied that according the
Revenue Sources Book, Page 88, the unrestricted total for
oil revenue was $10 billion in FY 2008, and 5.2 billion in
FY 2009.
Representative Gara asked if the lower number of $4,167,
projected for FY 2010, was a result of a previous decline in
oil prices, or a decline in production. Commissioner Galvin
replied that it was a combination of both, and an added
increase in company expenditures.
Co-Chair Hawker reminded the committee about the challenges
associated with the spring revenue forecast. The spring
forecast assumed an average price of $58.29 per barrel of
oil. The fall forecast numbers were equated assuming a price
of $67 per barrel. He summarized that the budget, which was
on a break even basis in the spring, was expecting a surplus
in FY 2010.
2:06:25 PM
Commissioner Galvin shared that in 2008 the department went
from a surplus budget, to a deficit budget, in the course of
going from the budget to the supplemental. This year the
opposite is expected. Co-Chair Hawker asked if the
department has the sense that the oil market has stabilized.
Commissioner Galvin replied that the departments economists
project, but do not assure, a period of stability. The
economic recovery was happening faster than expected, in the
oil market in particular, whether the recovery can be
sustained remains to be seen.
2:07:43 PM
Representative Doogan wondered if the hope for economic
stability was based on the projected oil price of $67 per
barrel. Commissioner Galvin replied there was a section on
price forecasting in the presentation which would enlighten
the committee on the issue. He continued to Slide 5, which
estimates an increase of unrestricted revenue to $5.2
billion in FY 2011. The overall revenue, because of expected
reduction in restricted revenue, should be balanced between
the total revenues.
Co-Chair Hawker requested to revisit Slide 4. He pointed out
that the slide presents the unrestricted federal revenue for
FY 2010 and FY 2011 as the same number. He presumed that the
totals included the federal stimulus dollars that had been
appropriated, and asked for details as to where those funds
were being spent.
2:10:26 PM
JENNIFER DUVAL, PETROLEUM ECONOMIST, DEPARTMENT OF REVENUE,
(via teleconference) commented on the methodology used by
the department for projecting the federal revenue in the
Revenue Sources Book. She said the forecast was under the
direction of the Office of Management and Budget (OMB). She
explained that the federal revenue number was kept flat in
the fall projection due to the inability to give assurances
on projections two years into the future. In the spring, as
the department gains confidence on the projections, the FY
2011 numbers will be updated.
2:12:37 PM
Commissioner Galvin continued to slide 6, "FY 2010 and FY
2011 Non-Oil Revenue Detail".
Representative Gara wondered if the mining number on page 6
represented taxes and royalties. Commissioner Galvin replied
that the number indicated taxes. Representative Gara asked
if there was a substantial royalty number available.
Mr. Stickle explained that the department did receive a
small amount of royalties from mining on state land. The
number was listed in the "other" field under the "revenue
type" section of the slide. He added that the number was
relatively small compared to the tax component.
Representative Gara asked for the specific numbers.
Commissioner Galvin replied that the numbers were detailed
in the Revenue Sources Book.
2:14:17 PM
Commissioner Galvin continued to Slide 8, "10-Year Revenue
and Spending". Slide 8 details the assumed fall 2009 revenue
and 3 percent budget escalation from FY 2011. He explained
that revenue expectations were enough to sustain a flat-line
budget that increases with the rate of inflation, and
provides a surplus. Little capital spending is built into
the projection, which results in a growth of reserves. At
the end of the ten-year projection, the balance of the
Constitutional Budget Reserve (CBR) is expected to be $24
billion. He said that the numbers were a reflection of
revenue expectations and current spending levels.
Co-Chair Hawker stated that the numbers were attractive to
him. He clarified that the numbers were source book
calculated projected revenues, which were a relationship
between the calculated result of both future estimated price
fluctuations, and future estimated production volumes.
Commissioner Galvin agreed. Co-Chair Hawker added that the
slide did not consider any proposals that have currently
been offered by the legislature or the governor. He stressed
that the slide represents appropriation projections and is
subject to change.
2:18:28 PM
Representative Doogan asked if the components contributing
to the growth of the CBR, from year to year, were an
assumption that surpluses would be deposited in to the CBR
in addition to the level of investment income. Commissioner
Galvin replied in the affirmative. He believed that there
was also an assumption of deposits. He added that he CBR is
also a depository for any settlements on tax disputes.
Historically, the department's projected CBR balance did not
include any expectation of settlement deposits.
Representative Doogan clarified that whatever was not spent
by the state was deposited into the CBR and earned money on
a year-to-year basis through investment. Commissioner Galvin
said that was correct.
2:20:38 PM
Co-Chair Hawker pointed out to the committee that the source
book projections for FY 2010 used the current price of
$66.93 per barrel of oil. Commissioner Galvin added that the
FY 2011 projection was based on an estimated $76 per barrel.
Co-Chair Hawker stated that the year-to-date average is $73
per barrel which, if the number maintains, or rises,
indicated a successful FY 2010.
DONA KEPPERS, AUDIT MASTER, TAX DIVISION, DEPARTMENT OF
REVENUE, introduced her support staff in presenting the high
level oil production forecast.
FRANK MOLLI, PRODUCTION FORECASTING CONSULTANT (via
teleconference), discussed Slide 10, which details the
"Alaskan North Slope (ANS) Production, History and Forecast
from 1978-2030". He shared the methodology used to produce
the forecast. Production data from each well was gathered
from the Alaska Oil and Gas Conservation Commission, which
was then applied to a trend analysis for each well. This,
along with discussions with the operators, and their plans
of development for future wells, and consideration for
public and private information, was summed on a per fill
basis to produce the forecast found on the slide. He felt
that the forecast was prudent compared to past years. The
areas that did not meet the "under development" criteria
such as; the Alaska National Wildlife Refuge (ANWAR), the
National Petroleum Reserve Alaska (APRA), and the Ugnu Heavy
Oil Deposit, are not included on the slide. Not included,
but worthy of consideration in the future, is the Umiat
field, with an estimated 1 billion barrels in place and the
probable recovery of 200 million barrels. He continued to
Slide 11, which depicts the detailed representation of the
forecast portion only.
Ms. Duval addressed Slide 11 titled, "Forecasted ANS
production FY 2010 through 2030". She explained that the
gray area on the chart represented the oil forecast for
projects currently producing oil. Typically the forecast has
been divided into three categories; currently producing,
under development, and under evaluation. The myriad of
colors on the chart represent what was expected to be
produced from new projects. She pointed out to the committee
that the off-shores listed in the legend were Ooguruk and
Nikitchuck. The bulk of the forecast comes from new projects
under development and under evaluation, which would mitigate
decline, were they to come online.
2:29:56 PM
Co-Chair Hawker asked if the new project components
correlated to Figure 4-11, on Page 40, of the Revenue
Sources Book. Ms. Duval replied that that was correct. Co-
Chair Hawker summarized that the production expected in 2013
was under development or under evaluation. Ms. Duval
answered in the affirmative. He asked if the layers of the
chart included both categories of under evaluation and under
development. Ms. Duval said yes. Co-Chair Hawker asked how
the projected production was divided between under
development and under evaluation. Ms. Duval replied that for
the next 10 years 80 percent of new oil is considered in the
under development category.
2:31:58 PM
Representative Gara asked if the projections assumed a
gasline. Mr. Molli replied that it did. He added that where
the pink section on Slide 11 expands was Point Thompson, and
assumed a gas pipeline.
Commissioner Galvin clarified that the gasline was not
included as part of the economic projection until FY 2020.
Representative Gara asked about the Point Thompson Oil
Development. He wondered if oil could be expected to come
from Point Thompson without a gas pipeline. Mr. Molli
answered that by 2014 approximately 10,000 barrels per day
were anticipated without a gas pipeline.
Co-Chair Hawker asked if the numbers reflected the current
anticipated results from the gas cycling development. Mr.
Molli reiterated that even without the gas pipeline, 10,000
barrels per day were expected to come from Point Thompson.
Co-Chair Hawker understood the conservative approach that
was taken in the projections, specifically the exclusion of
ANWR and Ugnu Heavy Oil Development. He wondered what was
transpiring in regard to heavy and viscous oil development.
Mr. Molli shared that the operators had given no clear plans
for the development of the oil. Commissioner Galvin added
that the development plans may not have changed for those
producers, but that the department had been more critical
with specific development expectations in order to include
them in the forecast.
2:36:16 PM
Co-Chair Hawker wondered if the current tax regime has made
economically inconvenient for the producers. Commissioner
Galvin replied that the question would need to be directed
to the specific producers. He added that the companies had
given the department no indication that the current tax
system had been a problem.
2:37:13 PM
Representative Austerman asked about the production of oil
over the next 20 years, as charted on Slide 11. Ms. Duval
replied that by 2030, projections indicated 20,000 barrels
produced per day. Representative Austerman asked if there
had been discussion with producers of the volume number that
would signal the closure of the pipeline.
2:38:44 PM
Commissioner Galvin stated that the department had focused
on the issue of operational capacity of the Trans Alaska
Pipeline System (TAPS), primarily because of the impact of
property tax evaluation of the asset itself. The asset life
is a direct component in assessing the value of the TAPS
line. Historically, 300,000 barrels per day has been the
operational viability figure. That was based on the
construction design and operational ability to flow 200
million barrels per day at its peak. With the strategic
realignment of the systems within the TAPS structure,
operational viability has been significantly reduced. It was
the view of the department that there would be 100,000 to
200,000 barrels produced daily. Additional costs would be
expected for operating the pipeline at that level, but it
would not affect the operational viability of the pipeline.
Representative Austerman felt that knowing the volume number
kept the lifetime of the pipeline in perspective.
2:41:20 PM
Co-Chair Hawker referred to a document "Alaska North Slope
(ANS) Production Forecasts for 2015 from Fall Revenue Source
Books-2004 to 2009" (copy on file). He expressed concern for
the increase of production decline through 2018. Mr. Molli
replied that the Point Thompson forecast out to 2022-23, is
an under evaluation forecast. Because the department
extended the ramp up of Point Thompson out 2 years, from
where it was in 2007, combined with projects moving from
under evaluation to under development, could be why the 2018
projections show a drop in production. Co-Chair Hawker
expressed anxiety that policy decisions were being made that
were accelerating production decline. Commissioner Galvin
responded that the department had worked to create
projections that were reasonable and dependable. He
reiterated that 80 percent of the numbers projected fall
under the category of under development and are less
speculative. He said that while the number was going down;
the confidence level was going up.
Co-Chair Hawker asked if the department believed that the
2004-2009 numbers were inconsequential in the projections.
Commissioner Galvin said no. He added that broad factors
were used when projecting the production expectations.
Changes in regard to land access, permitting, technological
advances and oil price expectations were drivers of spending
and production expectations. He felt that policy decisions
should be scrutinized in the broad sense.
2:49:09 PM
Co-Chair Hawker felt that the current price of oil argued
the opposite. He said that the factors would be examined
closely and the results would be quantified.
Vice-Chair Thomas asked why there were no projected
increases for tax credits in the Fall Revenue Source Book.
Commissioner Galvin relayed that the information could be
found on page 34 of the source book. He recommended Figure
4-7, as a useful layout of the way the production tax
operates. He added that any legislation would include a
fiscal note that would reflect the projected impact to the
numbers.
Co-Chair Hawker furthered that the tax credits were one
element of the tax structure. In making investment decisions
it was best to examine the total taken by the government.
Commissioner Galvin added that profitability was also a
factor.
Vice-Chair Thomas asked if the tax credit applicants were
kept confidential. Commissioner Galvin replied that
individual company tax records were confidential.
Representative Thomas wondered what formula was used in
determining the tax credits. Commissioner Galvin responded
that the formula taxed 20 percent of the company's capital
expenditures.
2:53:15 PM
Representative Gara recalled that prior to the Petroleum
Production Tax (PPT), new oil on the North Slope outside of;
Alpine, Prudhoe Bay, Northstar and Kuparuk, paid zero
percent production tax. Commissioner Galvin replied that he
was not prepared to respond to the generalization.
Representative Gara directed attention to page 38 of the
Revenue Sources Book. He stated that a lower oil tax had not
attracted more production in the past. He highlighted that
in 2000, over 1 million barrels were produced per day.
Between 2000 and 2006, production dropped by 300,000 barrels
per day. He asserted that reducing the oil tax would not
guarantee more oil production.
Representative Austerman referred to the chart on Page 11 of
the revenue forecast. He asked if oil exploration and
production worldwide had been considered when creating the
chart. Commissioner Galvin responded that the potential
production in the rest of the world would drive the price
forecasting. Price expectation would then play a role at the
individual company level in terms of what could be spent
going forward. Representative Austerman thought that the
less oil available in the world would drive companies to
drill for more oil within the state. Mr. Molli added that
the price of oil would steer the amount of investment that
companies would make. Predicting the price numbers was the
challenge.
2:58:05 PM
Commissioner Galvin remarked that oil production in Alaska
was not driven by the need to fill a supply obligation. It
is driven by economics and the profitability of producing
additional oil. If the price supports the investment, that
investment will result in the production level.
Co-Chair Hawker reminded the committee that, although the
conversation could continue perpetually, time was of the
essence.
Commissioner Galvin continued to Slide 12 of the revenue
forecast titled, "Production Decline":
· FY 1988: production peak-2.01 million barrels per
day (bpd).
· FY 2009: production-693,000 bpd, a 66 percent
decline since peak.
· FY 1988 to date: production decline rate-4.9
percent per year, on average.
· Forecast production decline rate-3.6 percent per
year, on average, through FY 2030.
Ms. Keppers explained the process used to determine price.
The oil price forecast is compiled from several sources,
including a one-day forecasting session with attendees from
various state agencies, as well as industry experts. In the
session, factors that influence price, such as; supply and
demand, the economy, geopolitics, the market, and other
factors are considered. Attendees are asked their West Texas
Intermediate (WTI) projections and assumptions. The
assumptions are logged and compiled. Commissioner Galvin
clarified that, historically, Alaska has used WTI as the
benchmark for evaluating the price of oil.
Co-Chair Hawker added that the WTI is used because there is
not an open, broad market in ANS sales.
Commissioner Galvin explained that the WTI was used as a
middle ground, and the ANS prices fluctuate around that,
depending on different factors on the West Coast. Generally,
$2.50 was deducted from WTI to come up with the price for
ANS oil. Recently, ANS has sold closer to WTI, occasionally
at a premium over WTI. Revenue to the state would be derived
from the ANS price.
3:02:46 PM
Ms. Keppers continued to Slide 15, which is a graph of the
available WTI price forecasts. She explained that the first
variable in price forecasting process was the addition of
the numbers from the averaged results of the compiled
assumptions of the attendees. The numbers were then compared
to available industry expert forecasts, such as; the Energy
Information Administration (EIA), The Wall Street Journal,
Bloomberg, The New York Mercantile Exchange (NYMEX), and
other industry analysts.
Commissioner Galvin interjected that the EIA, the federal
government's official forecast, was optimistically charted.
The red NYMEX line indicated what the marketplace was
projecting into the future.
Co-Chair Hawker added that the NYMEX line was what companies
were willing to pay for a futures contract, and anticipated
money made on the contract.
Commissioner Galvin explained that the blue line shows the
average view of the experts.
Ms. Keppers directed attention to Slide 16, which is a table
depicting WTI and ANS for the fiscal years from 2009 through
2015. The numbers for FY 2009 are actual, and the FY 2010
numbers include five months of actual data. The FY 2010
forecast is eight dollars higher than was predicted in the
spring of 2009, while FY 2015 is five dollars higher,
attributable to a recovery in the economy and oil prices.
3:05:57 PM
Co-Chair Hawker believed that 2011 was most relevant. He
noted that the stability of the price of oil would continue
to be a topic of discussion.
Commissioner Galvin relayed that the department no longer
attempts derive its own long-term price. The main focus was
to establish solid, short term projections, drawing from the
expertise with-in the department, and with an escalation
rate based on inflation.
Mr. Stickle discussed the lease expenditures detailed on
page 18. He stated that lease expenditures became important
to the department with the passage of PPT and Alaska's Clear
and Equitable Share (ACES), because of the move from a gross
value tax to a net value tax, which allows companies to
deduct capital and operating expenditures when determining
their tax liability.
Co-Chair Hawker asked if the Economic Limit Factor (ELF) was
a proxy for net profitability. Commissioner Galvin said yes.
He furthered that like all proxies, it was not consistently
accurate. Co-Chair Hawker interjected that the state was on
an aggregate system that was a proxy for net. Commissioner
Galvin expounded that the state was at a disadvantage moving
out of the ELF system due to a lack of data to evaluate the
accuracy of the system as a proxy. From PPT moving forward,
there was a significant amount of missing information,
resulting in incomplete equations. With the advent of the
net based tax, the spending levels and spending experience
of companies has become clearer, which gives the department
a better indication of the fluctuations that may exist. He
communicated that the vision into the past is imprecise. He
spoke of a component of PPT called the Tie Credit Program,
where a producer looking at forward spending could gain
additional credits based upon past expenditures for the
previous five years. That had motivated producers to provide
documentation of spending patterns over the past five years.
This has provided a window to a period of time with regard
to capital expenditures. The department does not have the
same information with regard to operating expenditures.
Mr. Stickle continued. He shared that companies report
operating and capital expenditures to the department each
month. An annual information form is received by the
department monthly from the companies, and is the source of
the historical data for FY 2007 through FY 2009. He
continued onto Slide 18, which is a chart detailing the
lease expenditure costs. He said the forecast was based on
projected earning information from the companies, based on
current conditions. The department receives unit budgets
from the companies going out five to six years, which is the
same information the companies use internally and provide to
partners.
Representative Fairclough asked if all the regulations had
been finalized regarding the accounting of lease
expenditures, and, had a standardized format been resolved
within the industry. Commissioner Galvin replied that the
regulations for lease expenditures were finalized and would
be applied retroactively. The statutory changes in ACES
resulted in a series of regulation packages, two of which
remain outstanding; how the unexpected interruption of
service is defined and transportation expenditures. The
transportation expenditures will be released in conjunction
with Alaska Gasline Inducement Act (AGIA) related open
season regulations.
Representative Fairclough asked if the department was
confident that the companies would comply with the
regulations. Commissioner Galvin said that the industry had
given the indication that compliance was a reasonable
expectation.
Representative Fairclough asked for a percentage number of
money exchanging hands in regards to acceptable
expenditures. Commissioner Galvin replied that the
department would get back to the committee with the numbers.
3:15:52 PM
Representative Fairclough reiterated the desire for specific
percentage numbers. She wondered if there were outstanding
issues with producers whether to deduct or to not deduct,
and if the issue would impact the forecast presented by the
department. Commissioner Galvin reiterated that he would
provide the numbers as soon as possible.
Representative Austerman asked if the department audited the
reports submitted by the companies. Ms. Keppers replied yes.
Commissioner Galvin added that the timeframe for auditing is
four years between initial submission and when the auditing
occurs.
3:16:48 PM
Co-Chair Hawker wondered why an audit master was acting as
the state's chief economist when there was a backlog of
audits awaiting completion.
3:17:14 PM
Commissioner Galvin said that at this time, audits had begun
for the first year of PPT, which when completed would
provide a clearer picture.
Representative Fairclough asked what level of confidence the
producers had for expenditures allowed for deductible when
projecting their return on investments. Commissioner Galvin
thought the question would be best directed to the
producers.
3:18:27 PM
Mr. Stickle continued to Slide 19, which is a graph
detailing historical lease expenditures, for the North
Slope, for FY 2007 through 2009, and the forecast for FY
2010 and 2011. The numbers are based on communications with
the companies. Operating expenditures were expected to
remain steady at 2 billion per year; Capital spending has
increased yearly since 2007, and was expected to increase
from 2.2 billion in FY 2009 to 2.5 billion FY 2010, and 2.9
billion in FY 2011. Companies have forecasted both decline
and increase in capital spending. Decline in capital
spending could be offset by new companies coming into the
state. The reason for increased spending was the development
of new fields including; Ooguruk, Nikitchuk, Point Thompson,
and Alpine.
Co-Chair Hawker asked how companies distinguished between a
capital expenditure and an operational expenditure. Mr.
Stickle replied that the expenditures were defined in the
ACES statutes. Co-Chair Hawker asked how the department
would direct a company accountant to classify costs. Mr.
Stickle replied that he would refer the company to the
statute. Commissioner Galvin added that another department
member could provide a more elaborate answer upon request.
Representative Doogan asked if it was possible to obtain
operating expenditure and capital expenditure numbers for
the past ten years. Commissioner Galvin said that a capital
expenditure history was possible, because of the Tie Credit
reports. Definitive operational expenditure histories were
unavailable.
Representative Doogan wondered when, and how, a quantifiable
benefit to the state would be expected as a result to the
capital tax credits for the oil companies, Commissioner
Galvin replied that the oil tax discussion raises the
question of investment decision making. The department has
struggled with a lack of transparency regarding oil company
economic decision making. The department can examine whether
or not the practices that companies engage in are
satisfactory to DOR. Increased availability of cost,
production, and price data could allow the department to
replicate the economic drivers of the company decision
making to a greater extent.
3:26:30 PM
Co-Chair Hawker stated that the master auditor had the
ability to compel the oil companies to open their financial
books. He said that access was available to all the
necessary information to pursue audits. He thought that what
the department needed was to learn the business decision
making process that drives the companies.
3:28:01 PM
Commissioner Galvin agreed. He said that the department
needed more insight into the drivers of investment decisions
and how they relate to the economics. The extent to which
companies should make their business decisions making known,
is debatable. Co-Chair Hawker clarified that the department
wanted to know what makes an investment alternative to one
company competitive with other investments across the world.
Commissioner Galvin disagreed. He stressed that what the
governor had asked for, in response to a call for the drop
in the overall tax rate, was an indication from the
companies on how the change in the cash flow, associated
with a particular investment, was going to alter the
investment decisions. He argued that he could not respond
to what the result of a particular change in the tax law
would be, without the decision making insight.
3:31:18 PM
Representative Doogan said that the insight was important
because the administration would be proposing greater tax
credits. He thought that it would be useful to know how well
the credits were working before expanding them. He felt that
it was would be difficult to determine how the legislature
should proceed with the absence of information. He hoped
that the department would be better prepared when coming
before the committee in the future.
3:33:03 PM
Commissioner Galvin responded that when a bill is presented
to the committee pertaining to the administrations
recommendations, the information needed to justify the
requests would be presented. He recognized that, in order to
rationalize a tax credit, the department would need to
provide more information.
Representative Gara wondered how the 30 percent tax credit
proposal was prepared without the financial documentation
and information. Commissioner Galvin stated that the
information was obtainable but not immediately available. He
believed that the overview presentation should not require
the specific information.
Representative Gara thought that the tax credit rate should
be established when the numbers are definite. Commissioner
Galvin explained the rationale used in the governor's
recommendations were forthcoming. He furthered that fairness
was an issue; the current system treats some companies
different than others. He recognized that a full discussion
would be necessary in the future about the tax credits.
3:37:08 PM
Commissioner Galvin discussed Slide 20, which details lease
expenditures per barrel.
JERRY BURNETT, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
discussed Slide 22, which charts fund balances and
allocations. The first chart is the general fund and other
non-segregated investments. The investment objective is of
moderate risk and has a short to intermediate investment
horizon. The most current audited cash balance available was
from November 30, 2009. Co-Chair Hawker interjected that
once the department has an opportunity to update the
balance, the committee will receive the information. Mr.
Burnett explained that daily balances were available to the
department, but were unaudited. The General Fund, which
includes the Statutory Budget Reserve Fund, the Forward
Funding for Education, and the tax credit account has a
dynamic balance of $6.3 billion, and does not reflect
obligations or receivables to the account. Co-Chair Hawker
added that it was a floating bank account. The second chart
shows the main account of the CBR, and reflects a balance of
$4 billion dollars as of November 30, 2009. The unrestricted
General Fund surplus from FY 2009 was deposited into the
CBR. The third chart details the CBR sub fund, which is
larger than the main account, and has a balance of $4.38
billion. The account will have unrealized losses until it
rises to $4.67 billion. Co-Chair Hawker asked how the
accounts were affected by the volatile oil prices of the
past. Mr. Burnett replied that as of February 2009, there
was a loss of $1.5 billion. That number is down by $200
million and is expected to improve over the next five years.
He pointed out an error in the third chart. International
Equity should be at 20 percent and not 44 percent. Also,
within the Fixed Income there is a one percent allocation to
emerging market data. Mr. Burnett stated that the CBR sub
fund was the state's most liquid account. The international
and domestic equity are comprised of index funds, which are
exchange traded, and could be brought out at their market
value at any time.
3:41:10 PM
Mr. Burnett continued to explain that over the past two
years the fixed income accounts have not always been liquid.
3:45:06 PM
Mr. Burnett moved onto Slide 23, "Fund Balances and
Allocations". The slide contains two pie charts detailing
the Public Employees Retirement System (PERS) and the
Teachers Retirement System (TRS). The funds are dynamic.
Money is put in by employers and taken out for benefits on a
regular basis. Recovery from lows seen in 2008 were visible,
but were not yet back up to where they were in 2007. He
reminded the committee that the numbers on the chart were a
representation of the money under management and the cash
account balances. The final slide contains a pie chart
detailing the Alaska Permanent Fund Corporation balance. The
funds are not broken down into the Earnings Reserve Account
and the Principal Account. The numbers are expected to
increase as the market moves forward.
3:46:58 PM
Co-Chair Hawker mentioned articles recently published
concerning the Permanent Fund. He expressed concern that
Earnings Reserve Account balance would be too low to pay out
the fully calculated dividend in October 2010. Commissioner
Galvin replied that it was determinate on the market
activity and investment returns within the next six months.
Co-Chair Hawker asked if an endowment style of management
had been adopted, would the issue exist. Commissioner Galvin
replied that if another methodology had been employed, the
problem would not exist.
Representative Austerman clarified that new audited numbers
of the account balances were available. Mr. Burnett replied
that new number were available for most of the accounts.
Representative Austerman queried when the next set of
audited numbers would be released. Mr. Burnett answered they
would be available in February.
3:50:25 PM
He added that the General Fund and CBR numbers could be
given easily, but that the other numbers would take some
time.
ADJOURNMENT
3:51:23 PM
The meeting was adjourned at 3:51 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Revenue Presenatation Materials 012010.pdf |
HFIN 1/21/2010 1:30:00 PM |
DOR Presenatation Materials |
| Revenue Source Book Comparison.pdf |
HFIN 1/21/2010 1:30:00 PM |
DOR Overview |
| Revenue Sources Book Link.doc |
HFIN 1/21/2010 1:30:00 PM |
DOR Overview Material |