Legislature(2015 - 2016)HOUSE FINANCE 519

01/27/2015 01:30 PM House FINANCE


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01:30:47 PM Start
01:31:23 PM Revenue Forecast: Department of Revenue
02:25:48 PM Oil and Gas Production Tax Credits: Department of Revenue
02:57:16 PM Fy 16 Budget Overview: Department of Revenue
03:26:56 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Revenue Forecast, and Oil & Gas Production Tax TELECONFERENCED
Credits by Commissioner Randall Hoffbeck &
Chief Economist John Tichotsky
+ Overview: TELECONFERENCED
FY16 Dept. of Revenue
                  HOUSE FINANCE COMMITTEE                                                                                       
                     January 27, 2015                                                                                           
                         1:30 p.m.                                                                                              
                                                                                                                                
1:30:47 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Neuman called the House Finance Committee meeting                                                                      
to order at 1:30 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mark Neuman, Co-Chair                                                                                            
Representative Steve Thompson, Co-Chair                                                                                         
Representative Dan Saddler, Vice-Chair                                                                                          
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lynn Gattis                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Lance Pruitt                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
RANDALL HOFFBECK, COMMISSIONER,  DEPARTMENT OF REVENUE; John                                                                    
Tichotsky,  Chief  Economist,  Tax Division,  Department  of                                                                    
Revenue;  Dan   Stickel,  Assistant  Chief   Economist,  Tax                                                                    
Division,  Department  of  Revenue.  Jerry  Burnett,  Deputy                                                                    
Commissioner, Treasury Division, Department of Revenue.                                                                         
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Lennie Dees, Audit Master, Tax Division, Department of                                                                          
Revenue.                                                                                                                        
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
REVENUE FORECAST and OIL and GAS TAX CREDITS                                                                                    
                                                                                                                                
FY 16 BUDGET OVERVIEW: DEPARTMENT OF REVENUE                                                                                    
                                                                                                                                
Co-Chair Neuman reviewed the agenda for the day.                                                                                
                                                                                                                                
1:31:23 PM                                                                                                                    
                                                                                                                                
^REVENUE FORECAST: DEPARTMENT OF REVENUE                                                                                      
                                                                                                                                
1:31:53 PM                                                                                                                    
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
introduced  the PowerPoint  presentation "Revenue  Forecast"                                                                    
(copy on  file). The focus  of the presentation would  be on                                                                    
the "How"  and the "Why"  of the revenue forecast.  He would                                                                    
be  addressing how  the revenue  forecast was  done and  why                                                                    
certain assumptions  were made.  There had  been significant                                                                    
concern  about  the  tumbling oil  prices  and  whether  the                                                                    
forecast remained reasonable. He  relayed that Dr. Tichotsky                                                                    
would be doing much of  the presentation since his group put                                                                    
together the forecast and was  responsible for producing the                                                                    
Revenue Sources Book.                                                                                                           
                                                                                                                                
Co-Chair Neuman  reminded committee members to  be conscious                                                                    
of time  and to keep  questions in  line with the  topic. He                                                                    
encouraged members to ask questions.                                                                                            
                                                                                                                                
Commissioner Hoffbeck began with  slide 3: "Methods: What Do                                                                    
We Forecast at  DOR?" The primary focus  of the department's                                                                    
forecast   was  petroleum   revenue  and   secondarily  non-                                                                    
petroleum  revenue.  Since  petroleum revenue  was  Alaska's                                                                    
largest  income  component, it  would  receive  the bulk  of                                                                    
attention.  Petroleum revenues  including production  taxes,                                                                    
severance tax,  royalties, corporate  income tax,  and other                                                                    
oil-related taxes such as  property taxes, and non-petroleum                                                                    
revenues made up  one bucket of money. The  second bucket of                                                                    
money was  composed of investment revenues,  the forecast of                                                                    
which  was  produced  by the  state's  investment  advisors,                                                                    
Callen.  The  forecast  largely reflected  long-term  trends                                                                    
with  some  adjustments  for market  conditions.  The  third                                                                    
bucket of  money was  comprised of  federal revenues  to the                                                                    
state.   The  department   forecasted   what  was   actually                                                                    
authorized  for  spending.  Typically, the  actual  revenues                                                                    
received were  20 to 30  percent less  due to the  state not                                                                    
meeting all of the match  requirements. The three buckets of                                                                    
money were what was compiled into the Revenue Sources Book.                                                                     
                                                                                                                                
Commissioner  Hoffbeck moved  on  to slide  4: "Oil  Revenue                                                                    
Forecasting."  The  slide reflected  the  way  in which  the                                                                    
forecast was put  together. He pointed to  the formula about                                                                    
one-third  of the  way down  the page  that read  "Net value                                                                    
equals, price  multiplied by  production, minus  costs". The                                                                    
three areas he would be looking  at that made up the state's                                                                    
net  value were  price,  production, and  cost. The  revenue                                                                    
forecast  would  then  be  built by  taking  the  net  value                                                                    
multiplied by the tax rate  and then deducting credits taken                                                                    
against liability.  The department would provide  a separate                                                                    
presentation on credits.                                                                                                        
                                                                                                                                
Commissioner  Hoffbeck  advanced  to  slide  5:  "Fall  2014                                                                    
Highlights." He indicated there  had been some concern about                                                                    
the  change  between  the  spring   forecast  and  the  fall                                                                    
forecast  and the  significant changes  in how  the forecast                                                                    
was put  together. The  assumptions, the  methodologies, and                                                                    
the people  that made the  forecast were the same.  The main                                                                    
difference  was   the  oil  price.   There  was   also  some                                                                    
adjustment  for oil  production. The  department had  seen a                                                                    
slight  uptick in  production, information  that had  become                                                                    
available in  between the spring  and fall  forecasts. There                                                                    
had been additional investment and production.                                                                                  
                                                                                                                                
1:36:46 PM                                                                                                                    
                                                                                                                                
JOHN  TICHOTSKY, CHIEF  ECONOMIST, TAX  DIVISION, DEPARTMENT                                                                    
OF  REVENUE, began  with slide  7:  "Production History  and                                                                    
Forecast." He indicated that he  would provide a larger view                                                                    
of   production  giving   a   history   of  production   and                                                                    
forecasting  and  how  an  increased  forecast  fit  into  a                                                                    
broader picture in order to  put things into perspective. He                                                                    
enjoyed the longer-term view.                                                                                                   
                                                                                                                                
Co-Chair  Neuman asked  about slide  7. He  wondered if  the                                                                    
forecast  included estimates  on  future  production due  to                                                                    
investments  in  current  production  tax  credits  for  new                                                                    
investments.                                                                                                                    
                                                                                                                                
Mr. Tichotsky  specified that  Co-Chair Neuman  was correct.                                                                    
He  explained  that  the methodology  was  such  that  every                                                                    
October  the  department  interviewed  almost  every  active                                                                    
company including the  exploration companies, companies that                                                                    
were  planning to  produce.  The  department summarized  the                                                                    
information  in  addition  to modeling  currently  producing                                                                    
fields  and wells.  Department of  Revenue came  up with  an                                                                    
overall production forecast. The  slight uptick on the slide                                                                    
reflected  what  people  were reading  in  the  press  about                                                                    
additional production. However, because  of the criteria the                                                                    
department used  to include the production  in its forecast,                                                                    
production was not booked until  there was confirmation that                                                                    
it was included in the business plans of the companies.                                                                         
                                                                                                                                
Co-Chair Neuman asked if Mr.  Tichotsky had an estimate if a                                                                    
gas pipeline was in operation by 2023.                                                                                          
                                                                                                                                
Mr.  Tichotsky  responded  that   the  chart  reflected  oil                                                                    
production.  He reported  that one  of the  issues that  the                                                                    
department encountered  was that most of  the information it                                                                    
received  was  good  for  3  to  5  years.  Beyond  5  years                                                                    
companies had a  difficulty seeing far out  into the future.                                                                    
The decline seen  on the slide was a function  of a physical                                                                    
decline  and of  the state's  certainty. The  state believed                                                                    
that  for  2023  the  estimate would  be  approximately  300                                                                    
thousand  barrels of  oil per  day. The  department believed                                                                    
that  the estimate  had  a  wide range  of  variance on  its                                                                    
estimate.  He  furthered that  if  he  was asked  about  the                                                                    
forecast in 2023  he would respond 300  thousand barrels per                                                                    
day  plus or  minus 300  thousand barrels.  Whereas, in  the                                                                    
following year  he could say with  relative certainty within                                                                    
tens of thousands of barrels  what would likely be produced.                                                                    
The department  had been extremely accurate  since adjusting                                                                    
its methodology. Certainly  1 to 2 years out  there would be                                                                    
great  certainty. In  the slides  provided a  point estimate                                                                    
was provided and showed some  of the ranges of possibilities                                                                    
in the future.                                                                                                                  
                                                                                                                                
1:40:31 PM                                                                                                                    
                                                                                                                                
Representative Gara asked about the  top color on the chart.                                                                    
He wondered if  the color in 2015  represented offshore oil.                                                                    
Mr.  Tichotsky responded  that  the top  skin  came in  from                                                                    
Prudhoe Bay  to the right  to Endicott then were  added from                                                                    
Kuparuk which  satellited to Point Thomson.  They layered in                                                                    
as reflected in the legend.                                                                                                     
                                                                                                                                
Representative Gara responded that  his chart showed a light                                                                    
green for  the top layer  that appeared to be  getting wider                                                                    
in  2015.  He  wondered  if  it  reflected  "Offshore".  Mr.                                                                    
Tichotsky responded in the affirmative.                                                                                         
                                                                                                                                
Representative  Gara asked  about  the  slight increase.  He                                                                    
wondered if  the state would  receive any production  tax if                                                                    
the  oil  production increased.  He  also  asked about  what                                                                    
offshore   fields  were   represented   in  the   "Offshore"                                                                    
category.   Mr.  Tichotsky   responded  that   the  offshore                                                                    
category  was not  what many  would considered  part of  the                                                                    
Outer  Continental   Shelf  (OCS).  The   offshore  category                                                                    
represented the  zero to  3 miles  offshore which  the state                                                                    
exerted  sovereignty. In  addition the  state had  a revenue                                                                    
sharing provision  from 3  mile to 6  mile range.  The state                                                                    
had no  sovereign jurisdiction beyond 6  miles. The offshore                                                                    
category  represented  only  the   oil  within  the  state's                                                                    
jurisdiction.                                                                                                                   
                                                                                                                                
Representative Gara  asked Mr. Tichotsky to  clarify what he                                                                    
considered to  be the oil  within the  state's jurisdiction.                                                                    
Mr.  Tichotsky answered  that it  reflected the  oil between                                                                    
zero to 3 and 3 to 6 mile ranges.                                                                                               
                                                                                                                                
Co-Chair  Neuman  commented  that  the  state  recently  had                                                                    
entered  into  an  agreement with  Callos  Energy  regarding                                                                    
Marathon's  Liberty   Field  investing  $1.2   billion.  Mr.                                                                    
Tichotsky  did  not hear  all  of  the details  of  Co-Chair                                                                    
Neuman's question.  He asked Co-Chair  Neuman to  repeat his                                                                    
question.                                                                                                                       
                                                                                                                                
Co-Chair Neuman stated that it  was okay to wait until later                                                                    
to  discuss his  question. Mr.  Tichotsky responded  that it                                                                    
would include North Star, Oooguruk, and Liberty fields.                                                                         
                                                                                                                                
1:43:07 PM                                                                                                                    
                                                                                                                                
Mr.  Tichotsky   advanced  to   slide  8:   "ANS  Production                                                                    
Comparison." He  relayed that the slide  showed the revision                                                                    
from  the  spring to  the  fall  forecast. It  included  the                                                                    
additional information  the department received  in October.                                                                    
The time between  the months of September and  October was a                                                                    
critical time  for the  oil companies  in terms  of planning                                                                    
and providing information  to the state. He  pointed out the                                                                    
production  increase   from  2015   through  2017   or  2018                                                                    
[Depicted in  blue], during  which time  production remained                                                                    
above 500 thousand  barrels per day. The decline  rate was a                                                                    
function of  the probability of  being able to  forecast the                                                                    
future.  It  was  not  necessarily  DOR's  belief  that  the                                                                    
production would decline at the rate shown.                                                                                     
                                                                                                                                
Representative  Wilson commented  that production  was close                                                                    
to what the state had thought  it would be. She asked if the                                                                    
state's budget would  have been close to  being accurate had                                                                    
the  price been  close to  what the  state had  predicted it                                                                    
would  be  at the  end  of  the  prior year.  Mr.  Tichotsky                                                                    
responded  that  price  was absolutely  a  major  driver  in                                                                    
determining revenue.                                                                                                            
                                                                                                                                
Representative Wilson  wanted to  clarify that it  was price                                                                    
rather   than  production   affecting  state   revenue.  Mr.                                                                    
Tichotsky responded, "That is  correct." The other issue was                                                                    
that  investment decisions  were  made on  a different  time                                                                    
scale. The price environment  collapsing was not necessarily                                                                    
connected  to  investment   decisions.  The  production  was                                                                    
driven  largely from  what  information  the state  received                                                                    
regarding investment decisions.                                                                                                 
                                                                                                                                
Mr. Tichotsky pointed out that  the Revenue Sources Book was                                                                    
a great  summary of the  information DOR was  presenting. In                                                                    
addition,  with the  help  of  his staff,  it  was also  the                                                                    
repository  of  data. He  noted  a  new feature,  the  Quick                                                                    
Response  (QR) codes,  easily read  by an  application in  a                                                                    
smart phone, which allowed a reader to see the data tables.                                                                     
                                                                                                                                
Mr.  Tichotsky  scrolled to  slide  9:  "ANS Oil  Production                                                                    
Forecast."  He asserted  that the  forecast was  sorted into                                                                    
three   major  bins;   developed   or  currently   producing                                                                    
reserves,  undeveloped  reserves, and  contingent  reserves.                                                                    
The three categories of reserves  added together equaled the                                                                    
state's unrisked investment case.                                                                                               
                                                                                                                                
Mr. Tichotsky discussed slide  10: "Production Forecast." He                                                                    
relayed that  in the graph  the point estimate for  2015 and                                                                    
2016 were provided. Going forward  into 2017 the state would                                                                    
begin  to risk  the unrisked  investment case.  He explained                                                                    
that  the  unrisked  investment   case  was  everything  the                                                                    
industry informed the  state that it was  likely to produce.                                                                    
The  low investment  case was  a circumstance  in which  all                                                                    
currently producing  wells were  to continue  producing with                                                                    
no further  investment or additional wells  brought on line.                                                                    
In reviewing the state's methodology  two elements needed to                                                                    
be risked;  the first was  when a project was  announced but                                                                    
delayed,  and the  second was  when  greater production  was                                                                    
anticipated  but targets  were not  reached. When  the state                                                                    
did  its  risking  it  was  not  well  specific  or  project                                                                    
specific. The state risked across  the board. He believed it                                                                    
was a  good strategy  because he had  found that  on average                                                                    
the  risks in  criteria  were useful.  They  got larger  the                                                                    
further out in time they  were due to uncertainty. They were                                                                    
also based  on industry  standards developed out  of looking                                                                    
at some of the classic oil industry expectations chapters.                                                                      
                                                                                                                                
1:49:18 PM                                                                                                                    
                                                                                                                                
Mr.  Tichotsky  pointed  to  slide  11:  "Dept.  of  Revenue                                                                    
Investment  Cases." He  suggested that  the slide  described                                                                    
how  the  state  looked  at   the  vocabulary  in  terms  of                                                                    
investments. There were three  investment cases; an unrisked                                                                    
investment case, and adjusted  expected investment case, and                                                                    
a low investment case.                                                                                                          
                                                                                                                                
Mr.  Tichotsky   continued  with  slide  12:   "North  Slope                                                                    
Production Forecast."  He drew the committee's  attention to                                                                    
the  green, red,  and  blue skins.  He  explained that  they                                                                    
represented  the   volumes  from   contingent,  undeveloped,                                                                    
forward-shifted  developed,  or   developed  reserves  which                                                                    
helped  to  define  the   state's  production  forecast.  He                                                                    
reported  that the  other  two skins  [the  purple and  teal                                                                    
colored  skins] represented  the  potential upside  volumes.                                                                    
The economic  research group favored seeing  that the likely                                                                    
probability  was  that  the  volumes  from  the  development                                                                    
reserves would fall  between the two goal  posts without any                                                                    
new unexpected discovery or a black swan event.                                                                                 
                                                                                                                                
Representative Gattis stated that  she thought she had heard                                                                    
Mr.  Tichotsky  say  that throughput  would  fall  somewhere                                                                    
between 500 thousand  and 600 thousand barrels  per day. She                                                                    
asked for clarification.                                                                                                        
                                                                                                                                
Mr.   Tichotsky  responded   that  the   state's  production                                                                    
forecast baseline  was represented by  the top of  the green                                                                    
skin. However,  production climbing to  the top of  the teal                                                                    
skin  was not  unrealistic  based on  information the  state                                                                    
received from  the industry concerning what  was possible to                                                                    
produce  and  what was  planned  for  production. Price  and                                                                    
investment  were  also  factors considered  in  forecasting.                                                                    
Reaching  the  top  of the  upside  potential  volumes  from                                                                    
contingent  resources was  within the  realm of  possibility                                                                    
based   on   current   technology    and   the   status   of                                                                    
infrastructure on the slope.                                                                                                    
                                                                                                                                
Vice-Chair  Saddler  asked  whether Mr.  Tichotsky  had  any                                                                    
formal  or informal  estimates of  production from  the 1002                                                                    
area of the Arctic National Wildlife Refuge.                                                                                    
                                                                                                                                
Mr. Tichotsky  responded in the negative.  He explained that                                                                    
it was not  within the 10-year horizon. He  added that there                                                                    
was an indication from United  States Geological Survey that                                                                    
there were undiscovered  reserves in the area  and there was                                                                    
an earlier  evaluation conducted  by DNR in  2009 indicating                                                                    
the same information. However,  the information was limited.                                                                    
He  emphasized   that  the  data  pointed   to  undiscovered                                                                    
resources rather than reserves.                                                                                                 
                                                                                                                                
Mr.  Tichotsky advanced  to slide  14:  "Alaska North  Slope                                                                    
Crude  West  Coast  Price."  He   explained  that  when  the                                                                    
department  looked  at  prices  its focus  was  to  look  at                                                                    
averages. The  average price of  the period was  about $104.                                                                    
It was  clear that  there was  an event  in which  the price                                                                    
dropped dramatically by more than  50 percent within a short                                                                    
period of time.                                                                                                                 
                                                                                                                                
Mr. Tichotsky explained slide 15:  "Alaska North Slope Crude                                                                    
West Coast and West  Texas Intermediate Prices." He reported                                                                    
that in  looking at a longer  term horizon back to  2007 the                                                                    
drop  was  not an  unexpected  event.  Economists were  very                                                                    
familiar  with   volatility  over   the  long   term.  Price                                                                    
stability  was something  that  Alaska  enjoyed for  several                                                                    
years but was an anomaly.                                                                                                       
                                                                                                                                
1:54:08 PM                                                                                                                    
                                                                                                                                
Mr.  Tichotsky  moved  on  to   slide  16:  "Key  Oil  Price                                                                    
Drivers."  There were  two key  oil price  drivers that  DOR                                                                    
monitored. The  first was the  global spare capacity  of Oil                                                                    
Producing  and  Exporting  Countries (OPEC)  which  included                                                                    
Saudi Arabia. The  second factor was the  cost of developing                                                                    
new oil supply. Currently, there  was adequate supply in the                                                                    
market driving the price down.  Also, at present, the global                                                                    
demand  was weak  and Saudi  Arabia was  willing to  sustain                                                                    
lower prices in order to maintain its market share.                                                                             
                                                                                                                                
Mr.   Tichotsky  looked   at  slide   17:  "Price   Forecast                                                                    
Methodology."  He  relayed  that  on the  first  Tuesday  of                                                                    
October DOR  held a day-long oil  price forecasting session.                                                                    
In the current  year it occurred on the 7th  of October. The                                                                    
State of  Alaska was very  fortunate to have  its investment                                                                    
funds,  particularly  the  Permanent  Fund.  The  state  had                                                                    
access  to top-notch  investment advisors.  The state  often                                                                    
invited  quality  presenters  to  speak  to  both  the  U.S.                                                                    
economy  and the  global economy.  He  remarked that  people                                                                    
were  very interested  in discussing  pricing  in the  price                                                                    
forecast   session.  In   the  past   year  there   were  37                                                                    
participants  from  state   government,  academia,  and  the                                                                    
private  sector.   Department  of  Revenue,   Department  of                                                                    
Natural  Resources,   Department  of  Law,  the   Office  of                                                                    
Management and Budget, and  the Legislative Finance Division                                                                    
participated. There was a wide  variety of people interested                                                                    
in markets  or had  expertise in the  oil and  gas industry.                                                                    
Rather  than  asking  for  a   high,  medium,  low  estimate                                                                    
approach   the  department   asked   for  more   statistical                                                                    
information. The  general process  that the  department used                                                                    
was  a modified  Delphi approach.  He explained  that people                                                                    
were  given information  in  which they  were  then able  to                                                                    
incorporate  throughout the  day in  order to  present their                                                                    
opinion of the  pricing at the end of the  day. The opinions                                                                    
were  then aggregated.  In  the current  year  at the  price                                                                    
forecast session people were asked  for a probability of 10,                                                                    
a probability  of 90, and  the median. The median  price was                                                                    
then  used  to generate  the  point  estimate used  for  the                                                                    
revenue. He advised  the committee to keep in  mind that DOR                                                                    
forecasted  real prices.  However,  when  DOR generated  the                                                                    
revenue  forecast  it  included inflation.  Therefore,  when                                                                    
looking at prices  10 years out the $120 to  $130 per barrel                                                                    
range would equate to about $90 to $100 in current dollars.                                                                     
                                                                                                                                
1:57:33 PM                                                                                                                    
                                                                                                                                
Representative  Edgmon recalled  in the  previous year  that                                                                    
the governor's  10-year budget had  prices soaring  into the                                                                    
$120 to  $130 range.  Mr. Tichotsky indicated  it was  a "no                                                                    
change"  price. When  prices sloped  up with  a 2.5  percent                                                                    
inflation  rate it  meant  the current  price  was the  same                                                                    
taking inflation into account.                                                                                                  
                                                                                                                                
Representative Edgmon  asked about the process  in which the                                                                    
department went  through every October.  He wondered  if the                                                                    
meeting  set  the  stage  for  looking  10  years  out.  Mr.                                                                    
Tichotsky responded  affirmatively. Participants  were asked                                                                    
to do the price forecast for a 10-year period.                                                                                  
                                                                                                                                
Representative  Gattis asked  about whether  the forecasting                                                                    
done in the prior October  accounted for the downturn in oil                                                                    
pricing. Mr.  Tichotsky explained that there  were different                                                                    
views concerning  supply and demand. He  furthered that when                                                                    
prices were very  high there would always be  someone in the                                                                    
room that would predict that  prices would drop. Often times                                                                    
psychologically it was  a difficult thing to  say because of                                                                    
current  prices.  The  opposite  was  true  in  a  low-price                                                                    
environment where  someone might  predict that  prices would                                                                    
go up. Not everyone shared the same opinion.                                                                                    
                                                                                                                                
Representative  Gattis followed  up with  a questions  about                                                                    
whether  the financial  crisis could  have been  forecasted.                                                                    
She  suggested  it  was  a   guessing  game  of  sorts.  Mr.                                                                    
Tichotsky  responded   that,  generally  speaking,   it  was                                                                    
extremely  difficult  to  forecast.  He added  that  it  was                                                                    
always a challenge to forecast  a great change in direction.                                                                    
In other  words, when  something changed  from one  state to                                                                    
the  next, psychologically  human beings  were resistant  to                                                                    
understanding  change. On  the  other  hand economists  were                                                                    
always ready  to anticipate a change.  Department of Revenue                                                                    
put the  forecast out  as one of  the tools  for legislators                                                                    
for  budgeting  purposes.  The   department  also  used  the                                                                    
revenue  forecast for  other items  such as  when the  state                                                                    
approached rating agencies.                                                                                                     
                                                                                                                                
2:00:45 PM                                                                                                                    
                                                                                                                                
Mr. Tichotsky  continued that when legislators  were looking                                                                    
at  the revenue  forecast or  the price  and budgeted  lower                                                                    
than  the predicted  revenue to  be on  the safe  side, they                                                                    
looked at  it from  the standpoint of  the glass  being half                                                                    
empty.  When  approaching  the credit  rating  agencies  the                                                                    
glass was  presented as being  half full focusing  on things                                                                    
such as capacity. The revenue forecast was strictly a tool.                                                                     
                                                                                                                                
Co-Chair  Neuman reminded  committee members  and presenters                                                                    
about time constraints.                                                                                                         
                                                                                                                                
Mr. Tichotsky  moved onto slide  18: "Fall 2014  ANS Revenue                                                                    
Forecast  Prices."  He  discussed the  methodology  used  in                                                                    
forecasting. He  reported that DOR adapted  when prices were                                                                    
low. The department  had looked at being able  to hybrid the                                                                    
information  from  the  price forecast  session.  The  price                                                                    
forecast   was  DOR's   price  forecast   endorsed  by   the                                                                    
commissioner  and  was   a  recommendation.  The  department                                                                    
wanted to make sure it reflected  reality in order to have a                                                                    
credible forecast in which to base decisions.                                                                                   
                                                                                                                                
Mr. Tichotsky  turned to  slide 19: "What  if the  oil price                                                                    
is…"  for the  last  half  of FY  2015."  He indicated  that                                                                    
because the price of oil in  the state was high in the early                                                                    
part of the current fiscal  year, even if oil prices dropped                                                                    
to $50 per barrel of oil,  the price would average about $70                                                                    
per barrel over the course of the year.                                                                                         
                                                                                                                                
Mr.  Tichotsky  discussed  slide 20:  "Historical  ANS  West                                                                    
Coast  FY  Oil  Price  Bands: Annual  Average  and  Official                                                                    
FY2014  Forecast." He  pointed to  the portion  on the  left                                                                    
that  depicted actual  oil prices.  The  dots indicated  the                                                                    
average price  and the  black scale  represented a  range of                                                                    
prices  including  the highest  and  lowest  prices for  the                                                                    
corresponding year.  The portion on  the right of  the slide                                                                    
represented  the  forecast  which  also showed  a  range  of                                                                    
pricing  possibilities  in  black  and  the  specific  price                                                                    
forecast in the  Revenue Sources Book in  dots. He explained                                                                    
that a  revision would be provided  prior to the end  of the                                                                    
legislative session  there was a revised  view. He suggested                                                                    
that if  the information  was changed so  might legislators'                                                                    
minds. One thing  he stressed that for two  years running in                                                                    
2013 and  2014 the state had  the exact same price  to three                                                                    
decimal  places. He  commented that  it reflected  stability                                                                    
but  it was  also as  if lightning  struck 16  times in  one                                                                    
place.                                                                                                                          
                                                                                                                                
2:04:37 PM                                                                                                                    
                                                                                                                                
Mr.   Tichotsky   looked   at  slide   22:   "General   Fund                                                                    
Unrestricted  Oil Revenues."  He indicated  that one  of the                                                                    
mainstays  of  petroleum revenue  during  times  of low  oil                                                                    
prices was  the state's net  royalty, the payment  the state                                                                    
received as owners  of the resource. The  production tax and                                                                    
corporate income tax were highly  dependent upon oil pricing                                                                    
whereas,  property   tax  was  not.   Non-petroleum  revenue                                                                    
equaled about $500 million depending  on the market. Revenue                                                                    
for  2015 was  forecasted to  be  about half  of the  actual                                                                    
revenue for 2014.                                                                                                               
                                                                                                                                
Mr.   Tichotsky  reported   on  slide   23:  "General   Fund                                                                    
Unrestricted  Revenues Non-Petroleum."  He relayed  that the                                                                    
slide  provided   an  overview  of  the   unrestricted  non-                                                                    
petroleum  revenues.  He  suggested that  the  $500  million                                                                    
revenue detail could be found in the Revenue Sources Book.                                                                      
                                                                                                                                
Mr. Tichotsky scrolled to slide  24: "Total Revenue Forecast                                                                    
-  FY  2015  and  2016."  He  mentioned  that  although  the                                                                    
investment revenue  was important  it did not  get deposited                                                                    
into the general fund (GF).  The state continued to generate                                                                    
revenue off  of its assets.  The total state revenue  for FY                                                                    
14  was  $17  billion,  the  second  largest  state  revenue                                                                    
figure. The  state forecasted  healthy total  state revenues                                                                    
for  FY 15  even in  the  face of  lower total  unrestricted                                                                    
revenue.                                                                                                                        
                                                                                                                                
Mr. Tichotsky  advanced to slide  25: "FY 2016  General Fund                                                                    
Unrestricted  Revenue with  Price Sensitivity."  He reported                                                                    
that the  department was frequently  asked about  what would                                                                    
happen if the  price was higher or lower.  He suggested that                                                                    
the graph on  the slide was in the Revenue  Sources Book and                                                                    
was a way  to get a feel  for what the revenue  might be. He                                                                    
pointed out  that if the  price of  oil was between  $80 and                                                                    
lower the  revenue slope became  flatter due to  the minimum                                                                    
tax.                                                                                                                            
                                                                                                                                
2:07:23 PM                                                                                                                    
                                                                                                                                
Mr.  Tichotsky reviewed  slide 27:  "Comparison -  Fall 2014                                                                    
vs. Spring 2014  Forecasts." He indicated that  the price of                                                                    
oil had changed, which was  the major driver for the changes                                                                    
from  the spring  to the  fall forecast.  There was  a small                                                                    
increase in  production from spring  to fall.  Overall there                                                                    
was a  significant change to  the general  fund unrestricted                                                                    
revenue mainly due to the change in the price of oil.                                                                           
                                                                                                                                
Mr.  Tichotsky continued  with  slide  28: "Contributors  of                                                                    
Change  in FY2015  Revenue Forecast."  He reported  that the                                                                    
slide  reflected more  of the  same and  suggested that  the                                                                    
slide provided detail which might be useful in the future.                                                                      
                                                                                                                                
Mr. Tichotsky  looked at slide  29: "Contributors  of Change                                                                    
in FY2016  Revenue Forecast." He  skipped through  the slide                                                                    
indicating that the same applied for FY 2016.                                                                                   
                                                                                                                                
Mr.  Tichotsky  moved  to slide  30:  "North  Slope  Capital                                                                    
Expenditure   Forecast  Change."   He  explained   that  DOR                                                                    
reviewed its  capital expenditure  forecast. The  driver for                                                                    
increased   production  was   that   the  state   forecasted                                                                    
additional capital expenditures especially in near years.                                                                       
                                                                                                                                
Mr.  Tichotsky  viewed  slide  31:  "North  Slope  Operating                                                                    
Expenditure  Forecast  change."  He relayed  that  operating                                                                    
expenditures  were  increased  based   on  the  increase  in                                                                    
production.                                                                                                                     
                                                                                                                                
Co-Chair  Neuman  asked  how   the  slide  showed  increased                                                                    
investment since 2013.                                                                                                          
                                                                                                                                
Mr. Tichotsky  referred back  to slide  30. In  the previous                                                                    
year there was  an increase in investment, and  based on the                                                                    
interviews  going forward  the department  saw a  relatively                                                                    
larger  amount in  the  fall  of 2014.  The  numbers on  the                                                                    
bottom of the slide  were significantly larger especially in                                                                    
FY 16, FY  17, and FY 18.  Looking out further to  FY 19, FY                                                                    
20,  and  FY  21  the   years  were  of  interest  but  less                                                                    
significant. The  oil industry was providing  the state with                                                                    
very forward looking statements about its plan.                                                                                 
                                                                                                                                
Representative  Edgmon   asked  whether  the   numbers  were                                                                    
adjusted  for inflation.  Mr. Tichotsky  responded that  the                                                                    
numbers were nominal dollars.                                                                                                   
                                                                                                                                
Representative Edgmon expressed that  it would be helpful to                                                                    
have non-adjusted numbers to do  a comparative analysis. Mr.                                                                    
Tichotsky  indicated  that  he  would be  happy  to  provide                                                                    
Representative Edgmon with  the information and additionally                                                                    
would provide an inflation series.                                                                                              
                                                                                                                                
Co-Chair Neuman  asked that the  information be  provided to                                                                    
his office  and he  would make  sure to  disperse it  to all                                                                    
committee members.                                                                                                              
                                                                                                                                
Representative  Edgmon suggested  including the  information                                                                    
on the same graph. Mr.  Tichotsky responded that he would be                                                                    
happy to reproduce the graphs  in real and nominal terms. He                                                                    
believed that a real view was very useful.                                                                                      
                                                                                                                                
Mr.  Tichotsky revealed  slide 32:  "Net Tax  Credits versus                                                                    
Production Tax."  He mentioned  that the information  on the                                                                    
slide would be discussed in the following presentation.                                                                         
                                                                                                                                
Mr. Tichotsky  discussed slide 33: "Fall  2014 Total Revenue                                                                    
Forecast." He  indicated that in  looking back at  the total                                                                    
revenue history  the state  had experienced  highly volatile                                                                    
revenues  either because  investment revenues  and petroleum                                                                    
dollars  were volatile.  The  state's non-petroleum  dollars                                                                    
remained  relatively  steady.  In  looking  forward  it  was                                                                    
difficult  to   anticipate  volatility   due  to   it  being                                                                    
typically unexpected. On average,  over a 10-year period DOR                                                                    
provided a fairly good picture.                                                                                                 
                                                                                                                                
2:13:23 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  noted the  increase in  federal spending                                                                    
in  the  out  years  compared to  the  historical  data.  He                                                                    
wondered why. Mr. Tichotsky  responded that federal spending                                                                    
remained steady  rather than increasing.  Vice-Chair Saddler                                                                    
clarified that he  was comparing it to  the historical data.                                                                    
Mr.  Tichotsky   responded  that   it  was  a   function  of                                                                    
forecasting.  He  referred  back  to the  first  slide  that                                                                    
Commissioner   Hoffbeck   spoke    about.   The   department                                                                    
forecasted  a  certain number  but  only  received about  20                                                                    
percent or  30 percent  of the  revenues that  actually came                                                                    
in. He continued that out of  the 3.1 that was allocated the                                                                    
state anticipated only receiving  2.5. He posed the question                                                                    
as to why the state did  not discount upfront. It had been a                                                                    
tradition for DOR to use the allocated number.                                                                                  
                                                                                                                                
Co-Chair Neuman asked  to return to slide 32.  He pointed to                                                                    
the red  bars that  fell below zero,  production tax  net of                                                                    
refundable credits,  and commented  that it was  somewhat of                                                                    
an  anomaly.  He added  that  the  refundable credits  would                                                                    
sunset in 2016.  He wondered if the state would  see the red                                                                    
bar  beyond 2016.  Mr. Tichotsky  responded that  there were                                                                    
refundable credits  that would  extend beyond 2016.  Some of                                                                    
the credits would sunset, but not all of them.                                                                                  
                                                                                                                                
Co-Chair Neuman  asked whether  the refundable  credits were                                                                    
for the  smaller producers. Mr.  Tichotsky replied  that the                                                                    
refundable   credits  were   primarily   those  claimed   by                                                                    
explorers   and   those   producers   currently   developing                                                                    
facilities that did not have any resulting revenues.                                                                            
                                                                                                                                
Co-Chair  Neuman asked  for clarity  that Mr.  Tichotsky was                                                                    
referring to  smaller companies making new  investments. Mr.                                                                    
Tichotsky  responded  in  the affirmative.  Co-Chair  Neuman                                                                    
commented,  "So  we  are cashing  in  using  our  production                                                                    
credits?" Mr. Tichotsky answered, "That is correct."                                                                            
                                                                                                                                
Co-Chair  Neuman   asked  about  the  large   producers.  He                                                                    
referred to the  darker green bars on slide  32. He wondered                                                                    
whether  the   bars  indicated  that  the   state  was  also                                                                    
competitive at low oil prices.                                                                                                  
                                                                                                                                
Commissioner Hoffbeck  responded that whether the  state was                                                                    
competitive at low oil prices  the state still collected tax                                                                    
at low oil prices. He  furthered that the difference between                                                                    
the light  green and the  dark green  bars on the  chart was                                                                    
the credits  taken against tax liabilities.  The state would                                                                    
collect about  $500 million in  taxes from the  producers in                                                                    
the current  year even  at low oil  prices with  the minimum                                                                    
tax in place.                                                                                                                   
                                                                                                                                
Co-Chair  Neuman asked  whether  the  commissioner was  only                                                                    
referring  to  the  production  taxes  used  by  the  larger                                                                    
companies.   Commissioner   Hoffbeck   replied,   "This   is                                                                    
generally the big three, yes."                                                                                                  
                                                                                                                                
Co-Chair Neuman  was attempting to point  out the difference                                                                    
the state saw  for investments in tax  credits between newer                                                                    
companies coming  in in  the red  and the  larger production                                                                    
tax credits that were investments  for purchases from others                                                                    
used against tax  liability by the big  three. Mr. Tichotsky                                                                    
offered that Co-Chair Neuman was correct.                                                                                       
                                                                                                                                
Representative  Gara  commented  that  the  state  had  less                                                                    
revenue  based on  the two  types of  credits but  suggested                                                                    
that  there  was  a  third place  the  state  received  less                                                                    
revenue.  He  continued that  until  the  minimum floor  was                                                                    
reached producers  received a 35  percent tax  deduction. He                                                                    
asked  if he  was correct.  Commissioner Hoffbeck  responded                                                                    
that  Representative  Gara  was correct  until  the  minimum                                                                    
floor was reached.                                                                                                              
                                                                                                                                
Representative Gara suggested that  only some fields had the                                                                    
minimum tax floor.  He wondered whether the  4 percent floor                                                                    
applied  to  the gross  value  reduction  (GVR) fields,  the                                                                    
post-2002  production  units,  and whether  the  35  percent                                                                    
deduction applied.  Mr. Tichotsky  relayed that he  would be                                                                    
addressing Representative  Gara's question in  the following                                                                    
presentation.                                                                                                                   
                                                                                                                                
Representative Wilson  asked a question regarding  slide 33.                                                                    
She wondered about holding on  to barrels until the price of                                                                    
oil   increased.  Mr.   Tichotsky   responded  that   energy                                                                    
companies  were  typically  used   to  volatility  and  made                                                                    
decisions accordingly.  He explained  that depending  on the                                                                    
direction of prices,  if the price increased  in a low-price                                                                    
environment,  then  there would  be  a  stimulus to  invest.                                                                    
There was  also a delayed  reaction at times. The  state had                                                                    
seen an  increase of investment  currently which  meant that                                                                    
there would be an increase  in production and tax revenue in                                                                    
subsequent  years.  There   was  sometimes  a  disconnection                                                                    
between a price signal and activity.                                                                                            
                                                                                                                                
Representative  Wilson commented  that she  would store  the                                                                    
oil until the price  increased. Mr. Tichotsky responded that                                                                    
what she  was proposing  was a hedging  activity in  which a                                                                    
commodity would  be held  back. The  types of  decisions she                                                                    
was mentioning depended  on timing and how  long a commodity                                                                    
would have to be stored.  Generally, when producing off of a                                                                    
large field, producing what was possible was preferred.                                                                         
                                                                                                                                
Representative Kawasaki  asked about  a nexus  between price                                                                    
and production. He wondered what  production level the state                                                                    
would have to  see to come up with the  same amount of money                                                                    
over  future years  if the  state continued  to see  low oil                                                                    
prices.                                                                                                                         
                                                                                                                                
2:21:11 PM                                                                                                                    
                                                                                                                                
Mr. Tichotsky  responded that the budgeting  process and the                                                                    
revenues and  expenditures were disconnected.  He recognized                                                                    
that in  recent years the  state had  spent or at  least had                                                                    
enough  revenue  to  cover   its  expenditures.  Within  the                                                                    
state's  forecast period,  depending  on price,  it was  not                                                                    
unreasonable to have yearly revenues  between $2 billion and                                                                    
$5  billion  based  on  current  levels  of  production  and                                                                    
expenditures.                                                                                                                   
                                                                                                                                
Mr. Tichotsky returned  to Representative Wilson's question.                                                                    
He relayed that  oil in the ground was not  oil in the bank.                                                                    
Even  if a  barrel of  oil is  produced, sold  for $20,  and                                                                    
deposited in the  bank for a period of ten  years, the state                                                                    
might  be able  to get  as much  oil as  the oil  price that                                                                    
appreciated. Once  a natural resource was  turned into money                                                                    
there were  many things that could  be done to get  the same                                                                    
or  equal value.  It depended  upon a  risk calculation.  In                                                                    
general, there  was a risk  of never producing oil  that was                                                                    
left  in  the  ground,  a significant  risk  that  petroleum                                                                    
producers as well as the state recognized.                                                                                      
                                                                                                                                
Representative  Wilson  was  concerned  about  revenues  and                                                                    
thought the  state and  producers might  be able  to rebound                                                                    
faster by  keeping some oil  in the ground. She  wondered if                                                                    
DOR  took into  consideration  whether  oil companies  would                                                                    
produce as quickly when the price  of oil was low as opposed                                                                    
to when the  price was higher. Mr.  Tichotsky responded that                                                                    
in general  when a  facility was producing  oil it  tried to                                                                    
maximize  production.  A  production manager's  job  was  to                                                                    
maximize  production   and  minimize  costs   without  price                                                                    
consideration.  He suggested  Representative Wilson  discuss                                                                    
her question with the oil companies.                                                                                            
                                                                                                                                
Commissioner Hoffbeck commented about  moving forward in the                                                                    
next portion of the presentation.                                                                                               
                                                                                                                                
^OIL and GAS PRODUCTION TAX CREDITS: DEPARTMENT OF REVENUE                                                                    
                                                                                                                                
2:25:48 PM                                                                                                                    
                                                                                                                                
Commissioner    Hoffbeck     introduced    the    PowerPoint                                                                    
presentation "Credits  (copy on  file)." He relayed  that he                                                                    
had the Assistant  Chief Economist, Dan Stickel  with him to                                                                    
answer  questions  if  needed during  the  presentation.  He                                                                    
explained that  the presentation  was a  historical overview                                                                    
of tax  credits and the point  at which the state  was at in                                                                    
the credit process.  He indicated he would  touch briefly on                                                                    
the  expiring credits  to better  understand what  the state                                                                    
would be dealing with in the future.                                                                                            
                                                                                                                                
Commissioner Hoffbeck detailed slide  3: "History of Oil and                                                                    
Gas  Tax Credits."  He explained  that the  credit situation                                                                    
that  the state  was  currently  in was  a  product of  four                                                                    
separate tax  regimes within  the last  10 years,  each with                                                                    
their  own   particular  focus   and  contributing   to  the                                                                    
available credits  to be used  by the  producers, explorers,                                                                    
and  the developers.  He mentioned  that  the first  "modern                                                                    
era"  credits came  during the  Economic Limit  Factor (ELF)                                                                    
regime  under SB  185 [Legislation  passed in  2003 -  Short                                                                    
Title:  Royalty  Reduction  on  Certain  Oil/Tax  Cred].  He                                                                    
explained that  the credit  was a 20  percent to  40 percent                                                                    
credit for  exploration depending on type  and location. The                                                                    
credit  could be  taken  against a  tax  liability, sold  to                                                                    
someone  else  with a  tax  liability,  or carried  forward.                                                                    
However, it  could not be cashed  in with the state.  It was                                                                    
not  a  reimbursable  credit,  rather, it  was  to  be  used                                                                    
against someone's tax liability.                                                                                                
                                                                                                                                
Commissioner  Hoffbeck turned  to slide  4: "History  of Oil                                                                    
and Gas  Tax Credits." Several  credits were added  with the                                                                  
passage  of the  Petroleum Profits  Tax (PPT)  [HB 3001  was                                                                    
legislation  that  passed in  2006  -  Short Title:  Oil/Gas                                                                    
Prod. Tax] moving  from a gross tax to a  net tax. There was                                                                    
a  20 percent  loss  carry forward  credit.  The 20  percent                                                                    
credit had  changed over time multiple  instances. There was                                                                    
also  a  20  percent   qualified  capital  expenditure  that                                                                    
expired with  SB 21 [Legislation  which passed in  2013 that                                                                    
had to  do with an  oil and  gas production tax].  There was                                                                    
also a small producer and  new area tax credit. He furthered                                                                    
that the  credit equaled $6  million for  frontier explorers                                                                    
and $12 million  for small producers. The  credit expired in                                                                    
2016  but had  a 9  year tail  which necessitated  the state                                                                    
paying the credit  for up to an additional  9 years. Another                                                                    
credit  that was  added  with  the passage  of  PPT was  the                                                                    
transitional  expenditure  credit  which  expired  in  2013.                                                                    
Also,  there was  a  mechanism  for the  state  to buy  back                                                                    
credits  from small  producers that  produced  less than  50                                                                    
thousand  barrels per  day with  a  cap of  $25 million  per                                                                    
year.                                                                                                                           
                                                                                                                                
Co-Chair  Neuman   asked  how  many  small   producers  took                                                                    
advantage of the credit. Commissioner  Hoffbeck did not know                                                                    
but could provide the committee the numbers.                                                                                    
                                                                                                                                
Representative  Munoz asked  about the  liability on  the 9-                                                                    
year tail. Commissioner Hoffbeck deferred to Mr. Stickel.                                                                       
                                                                                                                                
DAN  STICKEL,  ASSISTANT   CHIEF  ECONOMIST,  TAX  DIVISION,                                                                    
DEPARTMENT  OF REVENUE,  responded that  the small  producer                                                                    
credit  was a  credit  of up  to $12  million  per year  per                                                                    
producer for the  first 9 years of  production. The forecast                                                                    
for the credits was between  $55 million and $73 million per                                                                    
year for  all of  the companies  involved. His  numbers were                                                                    
based on the forecast for the following 4 years.                                                                                
                                                                                                                                
Vice-Chair  Saddler asked  for clarification  about the  $55                                                                    
million to  $73 million. Mr.  Stickel specified that  he was                                                                    
talking about the small producer  credits. He continued that                                                                    
for  FY 15  and  FY  16 the  department  was estimating  $55                                                                    
million for  North Slope small producer  credits and another                                                                    
$12  million  for  non-North   Slope  producer  credits.  He                                                                    
reported that it  would be a total of $67  million for FY 15                                                                    
and for FY  16 and $85 total  in FY 18. He  relayed that the                                                                    
department had  a document that provided  additional details                                                                    
on the  credits information included in  the Revenue Sources                                                                    
Book. For the  following 2 years the  department was looking                                                                    
at about  $67 million  in total  small producer  credits and                                                                    
increasing to $85 million.                                                                                                      
                                                                                                                                
2:31:53 PM                                                                                                                    
                                                                                                                                
Slide 5: "History of Oil  and Gas Tax Credits." Commissioner                                                                  
Hoffbeck discussed the credits  modified with Alaska's Clear                                                                    
and Equitable  Share (ACES)  [HB2001 was  legislation passed                                                                    
in  2007  -  Short  Title:  Oil  and  Gas  Tax  Amendments].                                                                    
Alaska's  Clear and  Equitable Share  (ACES) provided  minor                                                                    
changes to  the credits  themselves. The loss  carry forward                                                                    
was increased to 25 percent,  eliminated the $25 million cap                                                                    
on the  small producer  credit, and  created the  Tax Credit                                                                    
Fund, a sub fund of the GF.                                                                                                     
                                                                                                                                
Commissioner Hoffbeck  advanced to slide 6:  "History of Oil                                                                    
and Gas  Tax Credits."  He explained  that between  ACES and                                                                  
the SB 21 regime there  were several Cook Inlet changes that                                                                    
were  made to  the tax  credits  in an  effort to  stimulate                                                                    
exploration  and production  in  Southcentral Alaska.  There                                                                    
was  a  gas  storage  facility credit  that  allowed  for  a                                                                    
storage  facility  to deal  with  peak  demand times  during                                                                    
brown-out  conditions  in   Anchorage  and  the  surrounding                                                                    
areas. The  credit was granted  to the first  facility which                                                                    
was claimed  in FY 14  in the  amount of $15  million. There                                                                    
was  also a  $15 million  credit available  for a  Liquefied                                                                    
Natural  Gas (LNG)  project that  had not  been claimed.  He                                                                    
anticipated  the   credit  would   be  claimed   within  the                                                                    
following 2 years.                                                                                                              
                                                                                                                                
Co-Chair Neuman asked whether the  credits were for drilling                                                                    
dry wells.  Commissioner Hoffbeck asked for  Co-Chair Neuman                                                                    
to  clarify whether  he  was referring  to  the gas  storage                                                                    
facility credit.  Co-Chair Neuman commented that  he was not                                                                    
talking  about the  gas storage  credit but  the expenditure                                                                    
credit. Commissioner  Hoffbeck commented that he  hoped they                                                                    
were not for drilling dry wells.                                                                                                
                                                                                                                                
Commissioner Hoffbeck  continued to explain  additional Cook                                                                    
Inlet  credits.  He  mentioned   a  40  percent  well  lease                                                                    
expenditure  credit and  remarked  that it  was for  "Middle                                                                    
Earth" as  well as Cook  Inlet; anything South of  the North                                                                    
Slope. Another credit was a  jack-up rig credit put in place                                                                    
to encourage a  jack-up rig in the north.  Two rigs actually                                                                    
came north.  The credit was  100 percent for the  first well                                                                    
drilled up  to $25 million,  90 percent for the  second well                                                                    
up to  $22.5 million, and 80  percent for the third  well up                                                                    
to $20 million. At present no producer had made a claim.                                                                        
                                                                                                                                
Co-Chair   Neuman  asked   if  any   gas  had   been  found.                                                                    
Commissioner  Hoffbeck  reported  that the  wells  had  been                                                                    
drilled  but   that  there  were   information  requirements                                                                    
associated with the credit.  Therefore, some companies chose                                                                    
to use other credits with lesser returns.                                                                                       
                                                                                                                                
Co-Chair  Neuman  commented that  the  state  had offered  a                                                                    
significant  amount  of  credits without  getting  any  gas.                                                                    
Commissioner  Hoffbeck  acknowledged   that  the  state  had                                                                    
learned  of  some  information without  having  to  pay  any                                                                    
credits. The last  credit on the slide he  addressed was the                                                                    
frontier areas  credit was  set up in  a fashion  similar to                                                                    
the LNG storage and the  jack-up rig credits. He anticipated                                                                    
that the credits would be  claimed in the Nenana and Susitna                                                                    
basins.                                                                                                                         
                                                                                                                                
2:35:09 PM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  pointed to  slide 7: "History  of Oil                                                                    
and  Gas tax  Credits." He  conveyed that  additional credit                                                                    
modifications came  with the passing  of legislation,  SB 21                                                                    
[Legislation  passed in  2013  - Short  Title:  Oil and  Gas                                                                    
Production Tax]. He summarized that  SB 21 eliminated the 20                                                                    
percent qualified  capital credit only for  the North Slope.                                                                    
The   credit  remained   in  place   for  Cook   Inlet.  The                                                                    
legislation  also  created  a per-barrel  credit  which  was                                                                    
essentially  an  offset  against   the  20  percent  capital                                                                    
credit. They were not exactly  the same but were a trade-off                                                                    
between the  two credits. He  furthered that the  per barrel                                                                    
credit  was an  $8 credit  at $80  per barrel  of oil,  a $7                                                                    
credit at  $90 per barrel  of oil, and  a $6 credit  at $100                                                                    
per barrel  of oil. Once the  price of oil reached  $150 per                                                                    
barrel of  oil the credit  no longer existed. In  regards to                                                                    
new  oil there  was a  $5 flat  credit for  each barrel.  He                                                                    
stated that the final piece within  SB 21 was an increase of                                                                    
the loss  carry forward credit  to 35 percent.  He explained                                                                    
that it was  actually at 45 percent for the  first two years                                                                    
during  the  transition  period  then  dropped  down  to  35                                                                    
percent in 2016.  Cook Inlet remained at 25  percent for the                                                                    
net  operating loss  carry-forward  credit.  Cook Inlet  was                                                                    
basically still under ACES. The  change within SB 21 applied                                                                    
to the North Slope.                                                                                                             
                                                                                                                                
Co-Chair Neuman commented that it  was probably too early to                                                                    
determine  the original  effects.  He  wondered whether  the                                                                    
incentives were  resulting in more  production. Commissioner                                                                    
Hoffbeck responded  that the state was  seeing a substantial                                                                    
response in  Cook Inlet. He  indicated there  was sufficient                                                                    
gas  to ensure  Southcentral would  not run  out. There  was                                                                    
enough  gas for  other uses  as  well. The  totality of  the                                                                    
response in  Cook Inlet in  relationship to the cost  of the                                                                    
credits was still to be determined.                                                                                             
                                                                                                                                
Representative Gara asked whether  the per-barrel credit had                                                                    
anything to do  with how much oil was  produced. He wondered                                                                    
if at  different prices  a different tax  rate was  paid. He                                                                    
supposed that  it would  max out  at a  35 percent  tax rate                                                                    
around $160 per  barrel, 20 percent at $110  per barrel, and                                                                    
lower  at lower  oil prices.  He  asked if  he was  correct.                                                                    
Commissioner Hoffbeck affirmed  that Representative Gara was                                                                    
correct  except that  it was  at $150  rather than  $160 per                                                                    
barrel. It  was not  a production  driven credit.  The price                                                                    
credit was on every barrel produced.                                                                                            
                                                                                                                                
Commissioner  Hoffbeck continued  with slide  8: "So  to sum                                                                    
all that  up…" He reported that  over the last 10  years the                                                                    
size and  the applicability  of the oil  and gas  tax credit                                                                    
had  grown   dramatically.  The   slide  showed   a  graphic                                                                    
representation of  two types of  credits. The first  was the                                                                    
credits  used  against  tax liability  and  the  second  was                                                                    
refundable  credits  for  which the  state  actually  issued                                                                    
checks.  Both  types of  credits  had  grown over  time.  He                                                                    
relayed that  the credits purchased  by the state  peeked in                                                                    
2011. Otherwise  they had tracked parallel  with oil prices.                                                                    
He  pointed out  that the  credit liability  had grown  each                                                                    
year in relationship  to revenues generated by  the price of                                                                    
oil.                                                                                                                            
                                                                                                                                
2:39:41 PM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck revealed slide 9:  "So to sum all that                                                                    
up… (Continued)." He emphasized  that not all credits should                                                                    
be viewed  as a  cost. The 20  percent capital  credit under                                                                    
ACES and the  per barrel credit under SB21  were really part                                                                    
of the tax  rate itself. They worked together  to create the                                                                    
tax  rate.   He  stated   that  although   credits  function                                                                    
independently from  rate, a  person would  not have  a total                                                                    
picture of their function without  looking at them together.                                                                    
He added  that particularly with  the per barrel  credit the                                                                    
department saw  it as a  deduction prior to revenue.  It did                                                                    
not show up on the cost line but in reduced revenue.                                                                            
                                                                                                                                
Co-Chair Neuman  added that capital credits  were created to                                                                    
encourage a desired  behavior in the industry.  He asked the                                                                    
commissioner to further explain how the industry reacted.                                                                       
                                                                                                                                
Commissioner  Hoffbeck  pointed  out  that it  was  easy  to                                                                    
explain the  reaction in relationship  to explorers  and new                                                                    
development.  By  offering  credits  the  state  took  on  a                                                                    
substantial   portion   of   the   risk   that   accompanied                                                                    
exploration and new field development.  It was done in order                                                                    
to make marginal fields more  economic to develop. It was an                                                                    
investment in the future to  have additional production. The                                                                    
per-barrel  allowance was  an attempt  to make  Alaska's tax                                                                    
system competitive with  other tax regimes. It  was aimed at                                                                    
the  companies  that  were already  producing  to  encourage                                                                    
additional investment.                                                                                                          
                                                                                                                                
Co-Chair  Neuman  remarked  that  there  was  an  upside  to                                                                    
investments in  exploration which resulted in  creating more                                                                    
jobs to search for more oil.                                                                                                    
                                                                                                                                
Representative  Wilson  asked  who  determined  whether  the                                                                    
credits   were   working.    Commissioner   Hoffbeck   asked                                                                    
Representative Wilson to restate her question.                                                                                  
                                                                                                                                
Representative  Wilson asked  about  who determined  whether                                                                    
the  credits were  effective  in incentivizing  exploration.                                                                    
She  wondered what  department was  in charge  of evaluating                                                                    
the  effectiveness  of  the credits.  Commissioner  Hoffbeck                                                                    
responded  that  it  was  a   combination  of  many  of  the                                                                    
agencies. One of the things  that Governor Walker made clear                                                                    
was that  he was taking  a comprehensive look at  credits to                                                                    
make a  business decision moving forward.  He suggested that                                                                    
it was too early to know the impact of SB 21.                                                                                   
                                                                                                                                
2:44:11 PM                                                                                                                    
                                                                                                                                
Representative  Kawasaki   asked  about   qualified  capital                                                                    
credits. He wondered if the  credits were used primarily for                                                                    
the investment  in maintenance for  existing infrastructure.                                                                    
He  suggested that  the Legislative  Finance Division  had a                                                                    
different   opinion  about   what   the  qualified   capital                                                                    
expenditure credit ended up accomplishing.                                                                                      
                                                                                                                                
Commissioner  Hoffbeck replied  that the  statement was  not                                                                    
inaccurate. Much of the  credits went towards infrastructure                                                                    
and  maintenance which  had some  impact  on continuing  and                                                                    
increased  production.  The  totality of  the  analysis  was                                                                    
incomplete.                                                                                                                     
                                                                                                                                
Representative Kawasaki  asked when the ACES  audit would be                                                                    
made public and available  for review. Commissioner Hoffbeck                                                                    
asked whether  Representative Kawasaki  was referring  to an                                                                    
independent company audit or a total audit of ACES.                                                                             
                                                                                                                                
Representative Kawasaki  commented that  the state  had gone                                                                    
back and forth  changing the system. It was  changed with SB
21.  His problem  was that  the state  never fully  examined                                                                    
whether  ACES was  working.  He wanted  to  confirm that  an                                                                    
audit  was   being  done  or  was   completed.  Commissioner                                                                    
Hoffbeck reported that individual  audits were being done on                                                                    
companies and  that the  first of the  ACES audits  would be                                                                    
released shortly. There was a  6 year statute limitation. He                                                                    
furthered that  he had  been assured by  his staff  that the                                                                    
audit reports  would be out  before the  statute limitation.                                                                    
He confirmed  that PPT audits  were completed and  his staff                                                                    
was currently working on audits for ACES.                                                                                       
                                                                                                                                
Commissioner Hoffbeck  commented that  slide 9  also touched                                                                    
on the fact that there had been increased activity.                                                                             
                                                                                                                                
Representative  Munoz referred  back to  slide 8.  She asked                                                                    
what   portion  of   the  $1.2   billion   in  credits   was                                                                    
attributable to Cook  Inlet. Commissioner Hoffbeck responded                                                                    
that  of the  reimbursable credits  approximately half  were                                                                    
attributed to Cook Inlet and  the other half were attributed                                                                    
to  the North  Slope. He  detailed that  100 percent  of the                                                                    
credits  used against  tax liability  were  assigned to  the                                                                    
North  Slope. About  a  quarter of  the  total credits  were                                                                    
reimbursable to Cook Inlet.                                                                                                     
                                                                                                                                
Representative Gara  asked about the bottom  blue portion on                                                                    
the graph  on slide  8. He  commented that  under SB  21 the                                                                    
blue part  included a  portion that was  not credits,  but a                                                                    
price  per  barrel credit.  He  asked  if he  was  accurate.                                                                    
Commissioner Hoffbeck  affirmed that it was  essentially the                                                                    
per barrel allowance that was reflected in blue.                                                                                
                                                                                                                                
2:48:19 PM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  presented slide 10: "Net  Tax Credits                                                                    
versus  Production  Tax."  Commissioner  Hoffbeck  indicated                                                                    
that the  slide was  a history  look back  to 2007  when the                                                                    
refundable  credits were  implemented. The  light green  bar                                                                    
reflected  total production  tax revenue  prior to  applying                                                                    
the  credits.   He  continued  that   the  dark   green  bar                                                                    
represented the  production tax  after credits  were applied                                                                    
against  liability. The  red  bar  indicated the  refundable                                                                    
credits.  He pointed  out that  over  time the  red bar  had                                                                    
grown  dramatically.  He  added  that  the  credits  against                                                                    
liability  had also  grown particularly  as a  percentage of                                                                    
total revenue.                                                                                                                  
                                                                                                                                
Vice-Chair   Saddler  asked   the  commissioner   to  define                                                                    
"refundable  credits." Commissioner  Hoffbeck answered  that                                                                    
the refundable  credits could be  cashed in with  the state.                                                                    
He added  that companies that  did not have a  tax liability                                                                    
could essentially sell the credits back to the state.                                                                           
                                                                                                                                
Co-Chair  Neuman  asked  if  the   credits  could  be  other                                                                    
refundable credits  that companies  who had a  tax liability                                                                    
to  the   state  purchased  and  used   them  against  their                                                                    
liability. Commissioner Hoffbeck responded  that some of the                                                                    
credits could be sold to other companies.                                                                                       
                                                                                                                                
Commissioner  Hoffbeck  advanced  to   slide  11:  "Net  Tax                                                                    
Credits versus Production Tax."  He explained that the slide                                                                    
depicted current  day taxes. He  pointed out that  the light                                                                    
green  represented the  total tax  before  any credits.  The                                                                    
dark green  bar indicated production tax  after credits used                                                                    
against liability. The red bar  showed production tax net of                                                                    
refundable credits. He added that  those companies that were                                                                    
producing were  paying taxes even  in the current  low price                                                                    
environment. He acknowledged that the  low price of oil, the                                                                    
resulting cash flow issues, and  the overall decrease in tax                                                                    
revenue all contributed to the  state falling below zero for                                                                    
the  total take  when  the credits  were applied.  Companies                                                                    
that were  producing and had  a tax liability would  reach a                                                                    
floor. However,  no bottom limit existed  for companies that                                                                    
used the tax credits  for exploration and development. There                                                                    
was a robust  number of companies looking  to develop. There                                                                    
was  significant  exploration  occurring  due  to  high  oil                                                                    
prices that  drove the credits.  Also, the  expiring credits                                                                    
were generating  activity. Companies  wanted to do  the work                                                                    
prior to the expiration of credits.                                                                                             
                                                                                                                                
Co-Chair Neuman  commented that there were  multiple reasons                                                                    
for  the credits  being  used.  He had  a  problem with  the                                                                    
current graph.  He felt  that the chart  looked at  a single                                                                    
feature of  the entire tax  system. He  added that it  was a                                                                    
distortion  of the  public's perception  of how  the credits                                                                    
worked.                                                                                                                         
                                                                                                                                
Commissioner Hoffbeck  remarked that  it had  been discussed                                                                    
in several forms and he was  hoping that the slide would not                                                                    
have to be discussed much in the future.                                                                                        
                                                                                                                                
2:52:17 PM                                                                                                                    
                                                                                                                                
Representative Munoz  asked if the slide  reflected the Cook                                                                    
Inlet tax credits in the  total production tax. Commissioner                                                                    
Hoffbeck detailed  that the refundable  tax credits  were in                                                                    
Cook Inlet,  half of them were  in Cook Inlet and  half were                                                                    
on the North  Slope. She clarified that  the chart reflected                                                                    
the Cook  Inlet versus the total  tax. Commissioner Hoffbeck                                                                    
responded affirmatively.                                                                                                        
                                                                                                                                
Commissioner Hoffbeck  skipped to  slide 13:  "Alaska Credit                                                                    
Burden will  Naturally Decline."  He relayed that  the slide                                                                    
was  a summary  of the  expiring credits.  First, the  carry                                                                    
forward  annual  loss  credit  for  the  North  Slope  would                                                                    
decrease from  45 percent  to 35  percent in  January, 2016.                                                                    
The  credit  in Cook  Inlet  would  remain  the same  at  25                                                                    
percent.  Second,  the  small  producer  credit  would  stop                                                                    
accepting new producers  in May, 2016. However,  if they had                                                                    
production prior they could take  the credit for a period of                                                                    
up to  9 years.  The third  credits to  expire would  be the                                                                    
exploration  incentive  credits  for North  Slope  and  Cook                                                                    
Inlet which end in July, 2016.                                                                                                  
                                                                                                                                
Co-Chair  Neuman asked  if the  first two  types of  credits                                                                    
were primarily targeting producers  other than the big three                                                                    
oil  companies.  Commissioner  Hoffbeck responded  that  the                                                                    
first credits applied to both  types of producers. The first                                                                    
applied to  the North  Slope and the  second was  focused on                                                                    
both Cook Inlet and the North Slope.                                                                                            
                                                                                                                                
Representative  Gara  did  not  like  the  way  Commissioner                                                                    
Hoffbeck referred  to something  as a  tax credit  that just                                                                    
varied the  tax rate based on  price. He wanted to  know the                                                                    
effective tax rate  for FY 14 before deductions  and the non                                                                    
per barrel credit. He wondered  about the effective tax rate                                                                    
on  the producers  that paid  a  tax. Commissioner  Hoffbeck                                                                    
indicated   he  would   provide  the   committee  with   the                                                                    
information. Mr. Stickel responded that  he did not have the                                                                    
information with him but would be happy to provide it.                                                                          
                                                                                                                                
Co-Chair  Neuman reassured  the committee  that the  current                                                                    
discussion  would not  be  the last  on  the topic.  Further                                                                    
discussion   would  ensue.   He  recommended   that  members                                                                    
familiarize themselves with the credits.                                                                                        
                                                                                                                                
Commissioner  Hoffbeck  wondered whether  committee  members                                                                    
had  received the  supplemental  packet  the department  had                                                                    
sent over earlier the same  day. He elaborated that included                                                                    
was  a 9  page report  that  described each  credit in  more                                                                    
detail.                                                                                                                         
                                                                                                                                
Co-Chair  Neuman  asked  if  Dan   would  be  available  for                                                                    
questions  on the  credits. Commissioner  Hoffbeck responded                                                                    
that Dan would be available anytime.                                                                                            
                                                                                                                                
^FY 16 BUDGET OVERVIEW: DEPARTMENT OF REVENUE                                                                                 
                                                                                                                                
2:57:16 PM                                                                                                                    
                                                                                                                                
Co-Chair Neuman asked to visit  any of the major issues that                                                                    
had  been  previous  discussed  as  the  presentation  moved                                                                    
along.  Commissioner Hoffbeck  turned the  presentation over                                                                    
to Mr. Burnett.                                                                                                                 
                                                                                                                                
JERRY  BURNETT,  DEPUTY   COMMISSIONER,  TREASURY  DIVISION,                                                                    
DEPARTMENT   OF    REVENUE,   introduced    the   PowerPoint                                                                    
presentation "Department  of Revenue Budget  Overview" (copy                                                                    
on file). He mentioned he  would be going through the slides                                                                    
at  a rapid  pace and  suggested members  stop him  with any                                                                    
question.                                                                                                                       
                                                                                                                                
Mr.  Burnett's  reviewed  slide  2:  "Alaska  Department  of                                                                    
Revenue:  Major   Programs."  He   discussed  each   of  the                                                                    
divisions  briefly.   The  Tax  Division   collected  taxes,                                                                    
forecasted and  reported revenues, and  regulated charitable                                                                    
gaming.  The Treasury  Division managed  and invested  state                                                                    
funds  other than  the Permanent  Fund.  The Permanent  Fund                                                                    
Dividend  (PFD)  Division   administered  the  PFD  program,                                                                    
distributed   the  annual   dividend  payment   to  eligible                                                                    
Alaskans, and  administered the  Pick, Click,  Give donation                                                                    
system  which   was  doing  better  in   the  current  year.                                                                    
Donations  were up  by about  15 percent  from the  previous                                                                    
year.  He   relayed  that  the  last   division  within  the                                                                    
department  was the  Child  Support  Services Division.  The                                                                    
division   collected  and   distributed  child   support  to                                                                    
custodial parents and  to the state for children  who are in                                                                    
state custody.                                                                                                                  
                                                                                                                                
Mr. Burnett explained  the department's organizational chart                                                                    
on slide  3: "Alaska Department of  Revenue." He highlighted                                                                    
the commissioner's position as well  as his own position and                                                                    
that  of  the  deputy  commissioner's  in  Anchorage,  Donna                                                                    
Keppers. He elaborated that Ms.  Keppers was the lead on the                                                                    
Alaska  Liquefied Natural  Gas  project.  She also  provided                                                                    
administrative  oversight  for  the  Tax  Division  and  the                                                                    
criminal  investigation unit.  The remaining  divisions fell                                                                    
under Mr. Burnett's administrative watch.                                                                                       
                                                                                                                                
Mr.   Burnett   turned   to  slide   4:   "Authorities   and                                                                    
Corporations."  He detailed  that  the commissioner  oversaw                                                                    
four of  the state's corporations. First  was Alaska Housing                                                                    
Finance Corporation  which the  commissioner held a  seat on                                                                    
the  board.   The  corporation  provided  access   to  safe,                                                                    
quality,  and  affordable  housing.  The  commissioner  also                                                                    
oversaw  the Alaska  Permanent Fund  Corporation and  held a                                                                    
board  seat.  The  commissioner oversaw  the  Alaska  Mental                                                                    
Health Trust.  The commissioner did  not hold a seat  on the                                                                    
board.  However, it  was  within DOR  and  provided a  large                                                                    
number of  administrative services  for Mental  Health Trust                                                                    
Authority.  He  furthered  that the  Alaska  Municipal  Bank                                                                    
handled financing  options for capital projects.  There were                                                                    
two half-time  employees at the  Alaska Municipal  Bond Bank                                                                    
and a loan portfolio nearing $1 billion.                                                                                        
                                                                                                                                
Co-Chair  Neuman added  that all  of  the corporations  were                                                                    
overseen by  their own individual boards.  Respectively they                                                                    
did not fall under the budget  act. He suspected it made Mr.                                                                    
Burnett's job of managing them was pretty easy.                                                                                 
                                                                                                                                
Mr.  Burnett   responded  that  the  employees   within  the                                                                    
Municipal Bond  Bank were also half-time  treasury employees                                                                    
within his  direct purview. He  agreed with  Co-Chair Neuman                                                                    
that  the  administration was  done  by  the board  and  the                                                                    
executive director for the most  part but showed up in DOR's                                                                    
budget.                                                                                                                         
                                                                                                                                
Mr.  Burnett   advanced  to  slide  5:   "Results  in  2014:                                                                    
Department of Revenue as a  Whole and Treasury Division." He                                                                    
relayed that in 2014  the department consolidated leases and                                                                    
combined  public  facing  offices   to  reduce  the  state's                                                                    
billable footprint  for greater long-term cost  savings. The                                                                    
Department of Revenue  also reviewed and updated  all of its                                                                    
regulations, an  ongoing process.  In the  Treasury Division                                                                    
33 out of  36 funds managed by Treasury met  or exceeded the                                                                    
benchmark returns in  FY 14. He also reported  that PERS and                                                                    
TRS  funds  returned  18.55%   and  18.56%  respectively  as                                                                    
compared  to  12.50% and  12.59%  in  FY 13.  The  actuarial                                                                    
assumption was 8 percent which the division exceeded.                                                                           
                                                                                                                                
Vice-Chair Saddler  asked about  the public  facing offices.                                                                    
He assumed  that Mr. Burnett  was referring to  offices open                                                                    
to  the  public. Mr.  Burnett  answered  that public  facing                                                                    
offices  were offices  where people  came in  with questions                                                                    
about child support, PFD payments or taxes.                                                                                     
                                                                                                                                
Vice-Chair Saddler  asked about the locations  of the public                                                                    
facing offices.  Mr. Burnett answered  that the  main office                                                                    
in Anchorage  was in  the Atwood Building  and in  Juneau in                                                                    
the State  Office Building. The state  had satellite offices                                                                    
in  other   places,  but  the   department  was   trying  to                                                                    
consolidate them together.                                                                                                      
                                                                                                                                
Co-Chair Neuman noted that  the Department of Administration                                                                    
was consolidating with its office saving space plan.                                                                            
                                                                                                                                
Mr.  Burnett  discussed  slide  6:  "Results  in  2014:  Tax                                                                    
Division."  He informed  the committee  that the  department                                                                    
was  continuing  the  implementation   of  the  Tax  Revenue                                                                    
Management System (TRMS).  Phase 1 of the  system rolled out                                                                    
in April  of 2014  for all corporate  income and  excise tax                                                                    
filers. The  project included online filing  options for all                                                                    
taxpayers. The  first part of  the oil and gas  property tax                                                                    
came  online in  2014. Phase  2 of  the TRMS  rolled out  in                                                                    
January of 2014 for oil  and gas production tax. He reported                                                                    
that the prior year's tax  payments were uploaded to the new                                                                    
system which would greatly  assist with auditing information                                                                    
and  preparing  statistical  work.  It would  also  be  much                                                                    
easier  to file  online.  He believed  the  system would  be                                                                    
improved for  all users.  He suggested  that 98.5%  of known                                                                    
taxpayers filed tax returns and made their payments timely.                                                                     
                                                                                                                                
3:05:04 PM                                                                                                                    
                                                                                                                                
Mr. Burnett  addressed slide 7: "Results  in 2014: Permanent                                                                    
Fund Dividend Division (PFD)." He  relayed that the division                                                                    
contacted over  90 percent of the  state's eligibility cases                                                                    
by the time  the dividend amount was announced.  He felt the                                                                    
division  was doing  a better  job of  getting things  dealt                                                                    
with prior  to people contacting the  division. The division                                                                    
succeeded in  reaching the highest  case closure  rate since                                                                    
2008.  PFD technicians  were  increasing their  interactions                                                                    
with  the public  through phone,  email, and  in-person than                                                                    
the prior year. The division  had changed processes over the                                                                    
previous  several years  which  had made  it  a much  better                                                                    
experience  for   the  public.   The  division   focused  on                                                                    
improving  communications  with  other state  agencies  that                                                                    
directly affected the Permanent  Fund Dividend processes and                                                                    
customer  service experience.  He added  the necessity  of a                                                                    
collaborative effort between the  division and agencies like                                                                    
myAlaska (ETS),  DMV, and Vital  Statistics. In 2014  at the                                                                    
beginning  of  the filing  season  there  were a  number  of                                                                    
people whose  names did not  match between what was  on file                                                                    
with  DMV  and the  PFD  system  preventing applicants  from                                                                    
completing  an online  signature.  He believed  it was  much                                                                    
improved  although additional  improvements still  needed to                                                                    
be made.                                                                                                                        
                                                                                                                                
Representative Gara  relayed his own experience  when he had                                                                    
not received a  PFD a couple of years  earlier. He discussed                                                                    
a frustrating  experience dealing  with the division  in the                                                                    
application process.  Mr. Burnett replied that  the division                                                                    
was  working on  the  phone queue.  He  elaborated that  the                                                                    
system had  a feature where  a caller could leave  the queue                                                                    
and a person  from the division would call  back. There were                                                                    
other features incorporated to avoid such issues.                                                                               
                                                                                                                                
Co-Chair  Neuman noted  that committee  members had  all had                                                                    
constituents who experienced issues with the PFD system.                                                                        
                                                                                                                                
Representative Gara  just wanted to  know if the  system was                                                                    
working.  Mr. Burnett  relayed that  the PFD  Division could                                                                    
often  times  determine  whether   someone  tried  to  apply                                                                    
online.  The  system  would  be   able  to  track  a  person                                                                    
attempted  to  apply  online.  If  a  person  contacted  the                                                                    
division  and it  was  determined that  they  tried to  file                                                                    
their application  would be  accepted. However,  waiting two                                                                    
years  to  contact the  division  after  the fact  would  be                                                                    
considered too late.                                                                                                            
                                                                                                                                
3:09:04 PM                                                                                                                    
                                                                                                                                
Co-Chair  Neuman   thought  there  had  been   a  change  in                                                                    
regulation  that went  back  to a  one  time mulligan  where                                                                    
someone thought  they mailed their  application in,  but did                                                                    
not, and would get another opportunity.                                                                                         
                                                                                                                                
Representative  Gara interjected  that he  would get  to the                                                                    
point in the phone system where  he would be able to leave a                                                                    
message for  someone to call  him back and the  system would                                                                    
hang up. He  wondered if the problem he  had experienced had                                                                    
been resolved. Mr. Burnett believed so.                                                                                         
                                                                                                                                
Co-Chair Neuman recommended  Representative Gara contact Mr.                                                                    
Burnett.                                                                                                                        
                                                                                                                                
Co-Chair Thompson noted that he  had had a problem two years                                                                    
prior  with his  PFD. He  simply walked  across the  street,                                                                    
talked  with someone  at  the counter,  and  the matter  was                                                                    
resolved.                                                                                                                       
                                                                                                                                
Representative  Gara  was  not concerned  with  himself  but                                                                    
cared  about  the  phone hanging  up  on  constituents.  Mr.                                                                    
Burnett responded, "And so do we."                                                                                              
                                                                                                                                
Mr. Burnett  referred to  slide 8:  "Results in  2014: Child                                                                    
Support Services  Division." He  conveyed that  the division                                                                    
computed statistics for the federal  government each year on                                                                    
child support.  He pointed  out the  efficiency rate  of the                                                                    
division,  meeting  minimum  standards required  to  receive                                                                    
federal incentive payments.                                                                                                     
                                                                                                                                
Co-Chair Neuman commented that  it was important information                                                                    
to look at  because of the people it  affected. He mentioned                                                                    
a  previous   audit  that  determined  the   department  was                                                                    
efficient. He acknowledged a human factor.                                                                                      
                                                                                                                                
Mr. Burnett  advanced to slide  9: "Look Back  at Department                                                                    
Activities." He  reported that in  FY 15 the  department was                                                                    
collecting  more revenues  than in  FY 05.  A number  of new                                                                    
programs  had been  added since  then. There  had also  been                                                                    
many changes  to the oil  and gas production tax.  The funds                                                                    
that  were under  management of  the  Treasury Division  had                                                                    
grown  from $20  billion ten  years previously  to currently                                                                    
over  $50  billion.  In  the  prior  2  years  the  Treasury                                                                    
Division had had more money  than the Permanent Fund most of                                                                    
the time. It may end in  the current year with spending. The                                                                    
number  of dividends  paid had  increased, the  Pick, Click,                                                                    
and  Give Program  was implemented,  and the  department was                                                                    
dispersing more money in child support.                                                                                         
                                                                                                                                
Representative  Wilson  asked  where  audits  fit  into  the                                                                    
picture. Mr.  Burnett responded that  there was  a statutory                                                                    
framework in  which audit activity  within the  Tax Division                                                                    
had to be  completed. Some of the audit  activities had been                                                                    
down over the  last couple of years due  to installation and                                                                    
start-up  of the  TRMS.  In  many cases,  35  percent to  50                                                                    
percent of staff  time had been spent  changing systems. Now                                                                    
that  the  system  was  online   the  staff  time  could  be                                                                    
designated   to   regular   business.  He   understood   the                                                                    
seriousness of Representative Wilson's question.                                                                                
                                                                                                                                
Representative  Wilson asked  what year  the department  was                                                                    
auditing  currently.  Mr.  Burnett  responded  approximately                                                                    
2008.                                                                                                                           
                                                                                                                                
Representative Wilson  commented that  the state  really was                                                                    
not  caught up  at  all. Commissioner  Hoffbeck stated  that                                                                    
there were two contributing  components; the new system, and                                                                    
the fact that the PPT audits were completed.                                                                                    
                                                                                                                                
Representative Wilson relayed that  although the audits were                                                                    
not completed  it did  not mean that  the companies  had not                                                                    
paid their  taxes. An audit was  a check to see  whether the                                                                    
state  agreed with  the companies  on  their tax  liability.                                                                    
Commissioner Hoffbeck responded affirmatively.                                                                                  
                                                                                                                                
Co-Chair Neuman commented that pressure  had been applied to                                                                    
the  department to  stay  as current  as  possible with  the                                                                    
audits.                                                                                                                         
                                                                                                                                
Vice-Chair  Saddler asked  about the  complexity of  the tax                                                                    
audits  for ACES  versus  other structures.  He  also had  a                                                                    
question  about   PFD  payments  which  he   would  get  to.                                                                    
Commissioner  Hoffbeck  deferred  to Mr.  Dees.  He  relayed                                                                    
Vice-Chair Saddler's question.                                                                                                  
                                                                                                                                
LENNIE  DEES,  AUDIT  MASTER, TAX  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE (via  teleconference), responded  that ACES  and PPT                                                                    
were both net tax systems.  He commented that they were very                                                                    
similar.  Some changes  were made  in ACES  that added  some                                                                    
complexity to  the audits  such as  the reasonable  cost for                                                                    
transportation. The  department determined what was  to be a                                                                    
tariff  for   certain  pipelines   owned  by  some   of  the                                                                    
producers.  Another complexity  was  looking at  maintenance                                                                    
costs  completed  having  to   do  with  the  problems  that                                                                    
occurred in 2006 at Prudhoe  Bay. He continued that the most                                                                    
complex  portion  of  the  audit  was  the  audit  of  lease                                                                    
expenditures.  One  of  the challenges  was  the  amount  of                                                                    
activity  the  auditors  had  to  look at  as  well  as  the                                                                    
challenge of not  having the data presented  in a consistent                                                                    
manner. He suggested  that with the new  TMRS the department                                                                    
would be  able to  collect data on  a more  consistent basis                                                                    
having a data  warehouse of information for  the auditors to                                                                    
look at. Also,  he mentioned the learning  curve moving from                                                                    
a gross  to a net  tax system for  the auditors in  terms of                                                                    
understanding the operations of the industry.                                                                                   
                                                                                                                                
Co-Chair  Neuman  stopped  Mr.   Dees  from  continuing  and                                                                    
thanked him for his input. He mentioned other complexities.                                                                     
                                                                                                                                
Mr.  Burnett   continued  with  slide  10:   "Department  of                                                                    
Revenue's  Share  of  Total Agency  Operations  (GF  Only)($                                                                    
Thousands)."  He  provided DOR's  budget  as  it related  to                                                                    
total   agency   operations   and   gave   some   historical                                                                    
information since 2007. He drew  attention to the box to the                                                                    
left of  the graph. He  pointed out  there was an  error. He                                                                    
stated that where  it said, "decreased" it  should have said                                                                    
"increased." It was an error  on the slide. The department's                                                                    
operating budget was .61 percent of the state's GF budget.                                                                      
                                                                                                                                
Mr.  Burnett scrolled  to slide  11: "Appropriations  within                                                                    
the  Department  of Revenue  (GF  Only)  ($ Thousands)."  He                                                                    
explained  that the  slide showed  the  division detail.  He                                                                    
added that  the taxation and treasury  category included the                                                                    
Tax Division, the Treasury Division,  and the Permanent Fund                                                                    
Division  which was  why the  category appeared  much larger                                                                    
than any of the other division categories.                                                                                      
                                                                                                                                
Mr.  Burnett continued  to 12:  ""Appropriations within  the                                                                    
Department  of  Revenue  (All   Funds)  ($  Thousands)."  He                                                                    
pointed out that the slide depicted "All Funds."                                                                                
                                                                                                                                
Mr. Burnett  discussed slide 13:  "Department of  Revenue FY                                                                    
2016 Governor's  Budget by Fund  Source." He  commented that                                                                    
the largest  fund source was the  Permanent Fund's corporate                                                                    
receipts  which  was  in the  Permanent  Fund  Corporation's                                                                    
operating budget  primarily used to pay  management fees for                                                                    
its  investments. The  pension funds  were similar.  Federal                                                                    
funds were primarily  in the Child Support  Services and the                                                                    
Alaska  Housing components.  The GF  was only  8 percent  of                                                                    
DOR's total budget.                                                                                                             
                                                                                                                                
3:20:15 PM                                                                                                                    
                                                                                                                                
Mr.  Burnett   turned  to  the   pie  chart  in   slide  14:                                                                    
"Department  of   Revenue  FY  2016  Governor's   Budget  by                                                                    
Program." The  chart reflected that  the Permanent  Fund was                                                                    
the largest  portion, which funded  the external  manager of                                                                    
the  state's investments.  The pension  fund portion  of the                                                                    
department's budget  was significant for the  same reason; a                                                                    
large amount of money was being handled.                                                                                        
                                                                                                                                
Mr.  Burnett  discussed  slide   15:  "Key  FY  2016  Budget                                                                    
Changes." He reviewed  that non-personal services reductions                                                                    
totaled  about  $1.7   million  undesignated  general  funds                                                                    
(UGF),  personal  services  reductions  equaled  about  $1.5                                                                    
million  UGF,  and  health  insurance  and  working  reserve                                                                    
reductions  were taken  out of  the  budget as  part of  the                                                                    
payroll   administration   reductions.  He   reported   that                                                                    
positions   were  being   added   in   the  Permanent   Fund                                                                    
Corporation and  in the  Treasury Division.  These positions                                                                    
would  be  paid for  by  reducing  external management  fees                                                                    
resulting in a net savings.                                                                                                     
                                                                                                                                
Vice-Chair  Saddler  asked  if  DOR was  adding  a  thousand                                                                    
positions.  Mr. Burnett  responded  that it  was $1  million                                                                    
dollars-worth  of   positions.  Mr.  Burnett   continued  to                                                                    
elaborate  that  the  reductions  in  non-personal  services                                                                    
included  a  reduction  in  federal  funds  because  of  the                                                                    
matched funding  requirements. Some  of the  reductions were                                                                    
pension  fund and  Permanent Fund  Corporate management  fee                                                                    
reductions. He relayed that  more detailed information would                                                                    
be released the following week.                                                                                                 
                                                                                                                                
Mr.  Burnett  reviewed  slide  16:  "FY  2016  Capital."  He                                                                    
confirmed  that  100  percent of  the  department's  capital                                                                    
budget  fell under  the Alaska  Housing Finance  Corporation                                                                    
budget. The budget was small  relative to previous years. He                                                                    
read from a list of projects:                                                                                                   
                                                                                                                                
   · $8.1 million  Weatherization                                                                                               
   · $4.69 million  Teacher, Health, Public Safety and VPSO                                                                     
                    Housing Loans                                                                                               
   · $4.5 million  Housing & Urban Development Fed HOME                                                                         
                    Grant                                                                                                       
   · $3 million     Home Energy Rebate                                                                                          
   · $2.5 million  Housing & Urban Development Capital                                                                          
                    Fund Program                                                                                                
   · $1 million     Cold Climate Housing Research Center                                                                        
                    (CCHRC)                                                                                                     
                                                                                                                                
Mr. Burnett  noted that the  funding equated to  $17 million                                                                    
in UGF and $11.5 million in federal funds.                                                                                      
                                                                                                                                
3:23:02 PM                                                                                                                    
                                                                                                                                
Mr. Burnett talked about the  final slide 17: "Wrap-up." The                                                                    
Tax  Division   was  actively   engaged  in   improving  its                                                                    
information  system  and   improving  its  efficiencies.  He                                                                    
thought there  would be efficiencies  in future  budgets and                                                                    
more timely  audits. The department was  the state's largest                                                                    
investment  manager and  had made  prudent investments  over                                                                    
the previous  several years. Department of  Revenue also had                                                                    
achieved and  maintained the highest  credit rating  and the                                                                    
lowest cost  of borrowing.  He reported that  the department                                                                    
would  be  doing  some  GF refunding  bonds  and  some  bond                                                                    
anticipation notes in the future.                                                                                               
                                                                                                                                
Mr.  Burnett  continued  that   the  department  had  worked                                                                    
diligently to  improve the customer service  sections in the                                                                    
PFD  and  Child  Support Services  Divisions.  He  suggested                                                                    
doing a comparison of customer  support from the past to the                                                                    
present.  He thought  the  improvements  made an  incredible                                                                    
success story.  He also relayed that  DOR's corporations had                                                                    
received   national   recognition  for   exemplary   program                                                                    
management   and   fiscal   solvency.   He   concluded   his                                                                    
presentation.                                                                                                                   
                                                                                                                                
Representative Munoz asked  about the graph on  page 10. She                                                                    
believed it  showed a $13  million reduction.  She mentioned                                                                    
that the figure did not match  the amount shown on slide 15.                                                                    
She  asked  Mr.  Burnett  to explain  the  differences.  Mr.                                                                    
Burnett answered that there was  a one-time item included He                                                                    
would provide  additional information to the  committee at a                                                                    
later time.                                                                                                                     
                                                                                                                                
Representative  Munoz wondered  about  which divisions  were                                                                    
affected  by the  personal services  reductions in  UGF. Mr.                                                                    
Burnett responded  that the GF  personnel costs were  in the                                                                    
Tax  Division,  the  Treasury Division,  the  Child  Support                                                                    
Division,  administrative services,  and the  commissioner's                                                                    
office.                                                                                                                         
                                                                                                                                
Representative Gara  reported that  he would be  testing out                                                                    
the customer service of the PFD office.                                                                                         
                                                                                                                                
Co-Chair  Thompson asked  jokingly  for a  report back  from                                                                    
Representative Gara.                                                                                                            
                                                                                                                                
Co-Chair  Neuman thanked  the  presenters  and reviewed  the                                                                    
agenda for the following day.                                                                                                   
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
3:26:56 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:26 p.m.                                                                                          

Document Name Date/Time Subjects
DOR Budget Overview for HFC 1-27-15.pdf HFIN 1/27/2015 1:30:00 PM
DOR Rev Forecast HFIN v 1432 Jan 26 2015.pdf HFIN 1/27/2015 1:30:00 PM
DOR Pres to House Finance- Credits 1-27-15 Final.pdf HFIN 1/27/2015 1:30:00 PM
Summary of AS 43 55 Tax Credits 2015.pdf HFIN 1/27/2015 1:30:00 PM