Legislature(2013 - 2014)HOUSE FINANCE 519

01/24/2013 01:30 PM FINANCE


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01:31:58 PM Start
01:32:57 PM Fy 14 Governor's Budget Overview: Department of Education and Early Development
02:28:37 PM Alaska Revenue Forecast: Department of Revenue and Department of Natural Resources
03:54:38 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 65 APPROP: OPERATING BUDGET/LOANS/FUNDS TELECONFERENCED
Heard & Held
+= HB 66 APPROP: MENTAL HEALTH BUDGET TELECONFERENCED
Heard & Held
+ Governor's FY14 Budget Overview: TELECONFERENCED
- Dept. of Education & Early Development
+ Presentations: "Alaska's Revenue Forecast, TELECONFERENCED
Including Change in Methodology" by:
- Bryan Butcher, Commissioner, Dept. of Revenue;
Bruce Tangeman, Deputy Commissioner, Dept. of
Revenue; William Barron, Director, Division of
Oil & Gas, Dept. of Natural Resources
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                     January 24, 2013                                                                                           
                         1:31 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:31:58 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Austerman  called   the  House  Finance  Committee                                                                    
meeting to order at 1:31 p.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Lindsey Holmes                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Mark Neuman, Vice-Chair                                                                                          
Representative Mia Costello                                                                                                     
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Michael  Hanley, Commissioner,  Department of  Education and                                                                    
Early  Development;  Mark  Lewis,  Director,  Administrative                                                                    
Services,  Department of  Education  and Early  Development;                                                                    
Bryan  Butcher,  Commissioner,  Department Of  Revenue;  Dan                                                                    
Stickel,   Assistant   Chief    Economist,   Tax   Division,                                                                    
Department of Revenue;  Bruce Tangeman, Deputy Commissioner,                                                                    
Tax  Division,   Department  of  Revenue;   William  Barron,                                                                    
Director,  Division of  Oil and  Gas, Department  of Natural                                                                    
Resources;  Angela  Rodell,  Deputy  Commissioner,  Treasury                                                                    
Division, Department of Revenue.                                                                                                
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
FY 14 GOVERNOR'S BUDGET OVERVIEW:                                                                                               
                                                                                                                                
     Department of Education and Early Development                                                                              
     Alaska  Revenue  and   Price  Forecast:  Department  of                                                                    
     Revenue and Department of Natural Resources                                                                                
                                                                                                                                
HB 65     APPROP: OPERATING BUDGET/LOANS/FUNDS                                                                                  
                                                                                                                                
          HB 65 was HEARD and HELD in committee for further                                                                     
          consideration.                                                                                                        
                                                                                                                                
HB 66     APPROP: MENTAL HEALTH BUDGET                                                                                          
                                                                                                                                
          HB 66 was HEARD and HELD in committee for further                                                                     
          consideration.                                                                                                        
                                                                                                                                
HOUSE BILL NO. 65                                                                                                             
                                                                                                                                
     "An  Act making  appropriations for  the operating  and                                                                    
     loan  program  expenses  of state  government  and  for                                                                    
     certain   programs,    capitalizing   funds,   amending                                                                    
     appropriations,   and   making  reappropriations;   and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
HOUSE BILL NO. 66                                                                                                             
                                                                                                                                
     "An  Act making  appropriations for  the operating  and                                                                    
     capital    expenses   of    the   state's    integrated                                                                    
     comprehensive mental health  program; and providing for                                                                    
     an effective date."                                                                                                        
                                                                                                                                
^FY 14  GOVERNOR'S BUDGET OVERVIEW: DEPARTMENT  OF EDUCATION                                                                  
AND EARLY DEVELOPMENT                                                                                                         
                                                                                                                                
1:32:57 PM                                                                                                                    
                                                                                                                                
MICHAEL  HANLEY, COMMISSIONER,  DEPARTMENT OF  EDUCATION AND                                                                    
EARLY  DEVELOPMENT (DEED),  introduced department  staff. He                                                                    
provided a Power Point presentation  titled "State of Alaska                                                                    
FY   2014  Governor's   Operating   Budget:  Department   of                                                                    
Education  and Early  Development."  He  explained that  the                                                                    
parameters of  education services in Alaska  were defined by                                                                    
its  constitution,  which  designates that  the  legislature                                                                    
shall  by general  law establish  and maintain  a system  of                                                                    
public schools for all children  in the state (slide 2). The                                                                    
core  system  had defined  key  functions  that enabled  the                                                                    
establishment  and maintenance  of public  schools including                                                                    
providing adequate  funding, oversight and  support, setting                                                                    
student standards, and assessing  students on their progress                                                                    
towards proficiency in meeting the standards.                                                                                   
                                                                                                                                
Commissioner Hanley  communicated that the  education policy                                                                    
is  defined in  statute, which  stated that  the purpose  of                                                                    
education is to  help ensure that all  students will succeed                                                                    
in  their education  and work  (AS 14.03.015).  He read  the                                                                    
department's four core services on slide 3:                                                                                     
                                                                                                                                
   1. Public  School    Funding   -   Ensure    funding   is                                                                    
     appropriately distributed to recipients based on                                                                           
     legislative appropriations and by Statute.                                                                                 
                                                                                                                                
   2. Fiscal Accountability, Compliance, and Oversight -                                                                        
     Ensure the department effectively and efficiently                                                                          
     manages state, federal and other funds.                                                                                    
                                                                                                                                
   3. School Effectiveness Programs - Assist districts by                                                                       
     providing programs, technical on-site and distance                                                                         
    delivery support, and early intervention services.                                                                          
                                                                                                                                
   4. Active Partnerships - Provide opportunities for, and                                                                      
     collaborate with government entities, and other public                                                                     
     and private organizations.                                                                                                 
                                                                                                                                
Commissioner  Hanley   elaborated  that  funding   could  be                                                                    
provided by grants and formula  programs. He added that DEED                                                                    
worked   directly  with   districts   to  [effectively   and                                                                    
efficiently]  manage funding.  He added  that the  state and                                                                    
department did not  have authority to make  decisions at the                                                                    
local  level related  to curriculum,  personnel, and  other;                                                                    
the items were  set at the local level by  school boards and                                                                    
personnel.  He  moved  to  a  pie  chart  on  slide  4  that                                                                    
illustrated  the DEED  budget by  core services:  80 percent                                                                    
went  to   public  school  funding;   14  percent   went  to                                                                    
accountability,  compliance, and  oversight, which  included                                                                    
assessments;   2  percent   went  to   school  effectiveness                                                                    
programs  including   State  System  of   Support  programs,                                                                    
mentors,  and  WorkKeys;  and  4   percent  went  to  active                                                                    
partnerships.                                                                                                                   
                                                                                                                                
Commissioner Hanley addressed a graph  on slide 5 related to                                                                    
school  effectiveness  and  the  statewide  graduation  rate                                                                    
goal.  He relayed  that graduation  had always  been one  of                                                                    
DEED's  core  functions.  He stressed  that  the  department                                                                    
viewed  graduation  as  a  destination  it  needed  to  help                                                                    
students reach in  order to adequately prepare  them for the                                                                    
next step  in their lives.  He shared that the  governor had                                                                    
recently  set  a  90  percent graduation  rate  goal  to  be                                                                    
achieved by  2020; the  actual rate had  been 68  percent in                                                                    
2011 and 69.6 percent in 2012.                                                                                                  
                                                                                                                                
1:37:35 PM                                                                                                                    
                                                                                                                                
Representative Wilson wondered how  the state and department                                                                    
could help  increase graduation rates  to 90 percent  if all                                                                    
of the  action was  taken at  the local  level. Commissioner                                                                    
Hanley replied that local decisions  were not the only piece                                                                    
of  the  equation.  He  shared his  intent  to  address  the                                                                    
question further on the following slide.                                                                                        
                                                                                                                                
Commissioner  Hanley pointed  out that  the graduation  rate                                                                    
was a cohort  and not an annual rate;  the measurement began                                                                    
when students  entered ninth grade  and tracked how  many of                                                                    
the students graduated in four years.                                                                                           
                                                                                                                                
Co-Chair  Austerman asked  committee members  to hold  their                                                                    
questions until the end of the presentation.                                                                                    
                                                                                                                                
Commissioner  Hanley  continued  to discuss  how  graduation                                                                    
rates  were determined  (slide 5);  all states  utilized the                                                                    
same  method.  Slide  6 addressed  the  governor's  proposed                                                                    
increment  for  the  Jobs  for  Alaska's  Graduates  program                                                                    
(JAG). The  proposal was based  on a national model  used by                                                                    
33 other  states; it  had a 93  percent graduation  rate for                                                                    
at-risk students. The program  would identify and engage at-                                                                    
risk students, set  time for them on a daily  basis, work to                                                                    
help them obtain  the credits needed to  graduate, work with                                                                    
them on  employability skills, connect them  employers, help                                                                    
them  to  overcome barriers,  stick  with  them through  the                                                                    
summers, guide  them into jobs,  and stick with them  for 12                                                                    
months  after graduation.  The proposal  would put  eight or                                                                    
nine specialists in different  locations who would work with                                                                    
35 to 45 students a piece.                                                                                                      
                                                                                                                                
Commissioner Hanley turned to a  chart on slide 7 related to                                                                    
DEED's  active partnerships  with the  Alaska Commission  on                                                                    
Postsecondary  Education (ACPE).  The  blue bar  represented                                                                    
the  total graduation  rate; the  2012  graduate cohort  was                                                                    
smaller  than  the  one  in   2011  due  to  a  decrease  in                                                                    
enrollment. The  red bar represented the  number of students                                                                    
who  qualified for  the Alaska  Performance Scholarship;  29                                                                    
percent qualified in 2011 and  28 percent qualified in 2012.                                                                    
The green  bar represented the  number of students  who took                                                                    
advantage  of the  scholarship; 12.8  percent of  qualifying                                                                    
students  used  the scholarship  in  2011  compared to  10.7                                                                    
percent in 2012.  The comparison did not  provide a complete                                                                    
look  at the  overall picture  given that  students had  two                                                                    
years  to  access  the   scholarship  after  qualifying.  He                                                                    
elaborated that  some students in  the 2011 cohort  had left                                                                    
the state  for a year  and had  then returned to  access the                                                                    
program;  therefore,  DEED  anticipated that  numbers  would                                                                    
rise for 2011 and 2012.                                                                                                         
                                                                                                                                
1:42:30 PM                                                                                                                    
                                                                                                                                
Commissioner  Hanley  spoke  about the  governor's  proposed                                                                    
increment for digitizing education in  Alaska on slide 8. He                                                                    
pointed to  several components of  the proposal  including a                                                                    
"1:1 initiative."  He detailed  that the initiative  was not                                                                    
about matching  technology to  students, but  about changing                                                                    
and providing  better access  for opportunities  to students                                                                    
and  meeting students'  needs.  The  initiative would  allow                                                                    
teachers  to become  more efficient  by using  the tools  to                                                                    
measure  student growth.  The initiative  was about  putting                                                                    
devices into  the hands of  each student in order  to ensure                                                                    
that they had the latest technology skills.                                                                                     
                                                                                                                                
Commissioner  Hanley discussed  the Alaska  Learning Network                                                                    
as  another  piece  of  the   governor's  goal  to  digitize                                                                    
education in Alaska. A portion  of the network was currently                                                                    
in  place; it  connected  high quality  teachers and  online                                                                    
courses  to  students  around  the  state.  He  provided  an                                                                    
example  of  an  Introduction  to  Mining  course  that  had                                                                    
started  during the  current  week;  120 students  statewide                                                                    
were anticipated  to participate  in the current  course. He                                                                    
detailed  that  the  course  was   a  partnership  with  the                                                                    
University  of Alaska  that provided  dual credits  with the                                                                    
mining companies throughout the  state. Greens Creek Mine in                                                                    
Southeast was  a primary  supporter of  the program  and was                                                                    
helping to pay student  fees; students were only responsible                                                                    
for $44. The  mines were looking for local  hires, given the                                                                    
lower  turnover rate;  the goal  was to  aim students  for a                                                                    
local  workforce.   Greens  Creek  had  also   committed  to                                                                    
offering a  summer internship  to students  in the  top one-                                                                    
third of  the class that  would pay $12,000;  students would                                                                    
then  have the  opportunity to  have some  of their  college                                                                    
tuition paid.  He emphasized that  every student  would have                                                                    
the opportunity to tour a  mine in their region. The program                                                                    
applied  to the  entire  spectrum of  occupations that  fell                                                                    
within the  mining sector including  environmental engineers                                                                    
and other.                                                                                                                      
                                                                                                                                
Commissioner  Hanley pointed  to  broadband  support as  the                                                                    
third  component of  the governor's  emphasis on  digitizing                                                                    
education  in Alaska  (slide 8).  The  effort was  conducted                                                                    
through  the  state's   libraries  and  museums  partnership                                                                    
called   Online   with   Libraries   (OWL).   Infrastructure                                                                    
capabilities  were  available  in  67  community  libraries;                                                                    
continued support  would be  provided to  maintain broadband                                                                    
access.  He  furthered that  30  of  the 67  libraries  were                                                                    
school  libraries.   The  capability   allowed  college-aged                                                                    
students  to   access  courses,   adults  to   access  state                                                                    
services,  and communities  to connect  with each  other for                                                                    
joint meetings.                                                                                                                 
                                                                                                                                
1:46:10 PM                                                                                                                    
                                                                                                                                
Commissioner Hanley relayed that  the final component of the                                                                    
governor's  plan to  digitize education  in Alaska  was live                                                                    
homework help  (slide 8). The program  offered tutoring help                                                                    
from 1:00 p.m. to 12:00 a.m.  7 days per week. The number of                                                                    
students  using the  service had  grown from  5,703 to  over                                                                    
8,000.  He shared  that the  student  representative on  the                                                                    
state school board came from  a small school in Port Heiden;                                                                    
the program  allowed her  to access  help with  algebra that                                                                    
her local teacher was not able to provide.                                                                                      
                                                                                                                                
                                                                                                                                
Commissioner Hanley  addressed efficiency measures  on slide                                                                    
9. He explained  that the agency portion of  the $5,680 Base                                                                    
Student Allocation (BSA) was $129.15  per student; the funds                                                                    
paid for support services including  mentoring and other. He                                                                    
turned  to a  DEED  organizational chart  on  slide 10.  The                                                                    
Alaska State  Board of Education  and Early  Development was                                                                    
the head of  DEED; membership was composed of  7 members who                                                                    
represented  the state's  4 judicial  districts, 3  at-large                                                                    
members,  and 1  member  who represented  an REAA  [Regional                                                                    
Educational Attendance  Area]. He elaborated that  the three                                                                    
components  at  the  bottom of  the  chart  represented  the                                                                    
department's active partnerships  including the Professional                                                                    
Teaching Practices  Commission, Alaska State Council  on the                                                                    
Arts, and  the Alaska Commission on  Postsecondary Education                                                                    
(each  entity  had  its  own  organizational  structure  and                                                                    
boards and commissions).                                                                                                        
                                                                                                                                
Commissioner Hanley  stated that the DEED  budget was broken                                                                    
into two  components (slide 11):  (1) K-12  formula programs                                                                    
in the  amount of $1.386  billion and (2)  agency operations                                                                    
in the  amount of $311  million; the total budget  was $1.69                                                                    
billion. A  pie chart  showed the  operating budget  by fund                                                                    
source: 85 percent general funds,  14 percent federal funds,                                                                    
and 2  percent other  funds (e.g. interagency  receipts). He                                                                    
turned  to  a  chart  showing the  department's  total  fund                                                                    
operating  overview (slide  12):  94 percent  of funds  were                                                                    
spent on  grants to schools (e.g.  foundation formula, pupil                                                                    
transportation,  school  debt  reimbursement,  and  Title  1                                                                    
programs);  4  percent  of   funds  were  contractual  (e.g.                                                                    
assessment,  commodities,  and  travel); and  2  percent  of                                                                    
funds went to personal services.                                                                                                
                                                                                                                                
1:50:25 PM                                                                                                                    
                                                                                                                                
Commissioner  Hanley relayed  that  the  department had  335                                                                    
full-time positions,  which included staffing for  the state                                                                    
run  boarding  school   Mount  Edgecumbe,  the  Professional                                                                    
Teaching  Practices  Commission  (PTPC), the  Talking  Books                                                                    
Library, ACPE,  and other  (slide 12).  Slide 15  included a                                                                    
pie  chart   depicting  an  overview  of   the  department's                                                                    
operating budget:  82 percent went to  K-12 formula programs                                                                    
and 18  percent went to  agency operations. Slide  14 showed                                                                    
agency  operations by  fund source:  24  percent in  general                                                                    
funds; and 68  percent in federal funds.  He emphasized that                                                                    
agency operations were largely funded with federal dollars.                                                                     
                                                                                                                                
Commissioner Hanley directed  attention to budget highlights                                                                    
on slide  15. He  stated that  the governor  recognized that                                                                    
state  revenues  were  decreasing  and  had  put  forward  a                                                                    
fiscally  conservative budget;  however, several  additional                                                                    
increments  had  been  added   to  the  department's  budget                                                                    
including  funding for  school district  support outside  of                                                                    
the formula, forward funding for  the Foundation Program and                                                                    
pupil transportation,  and funding  for the  Autism Resource                                                                    
Center    and   Rural    Transition   Services    (per   the                                                                    
recommendation   of   the   Alaska   Mental   Health   Trust                                                                    
Authority).                                                                                                                     
                                                                                                                                
1:53:59 PM                                                                                                                    
                                                                                                                                
Commissioner Hanley  discussed additional  funding proposals                                                                    
on slide  16. The  administration recognized  the importance                                                                    
of  children being  able to  read  by the  third grade.  The                                                                    
statewide  K-3   Literacy  Program  would  focus   on  early                                                                    
identification and would provide  a universal screening tool                                                                    
for  kindergarten  through  third grade  that  would  enable                                                                    
teachers to recognize and address  any deficits in students'                                                                    
reading. The program did not  address deficits, but provided                                                                    
teachers  with   the  information  to  make   the  necessary                                                                    
teaching  decisions  to  help students.  He  explained  that                                                                    
previously $800,000  for Pre-K grant funding  had been moved                                                                    
to one-time funding; the proposal  was to move $480,000 back                                                                    
into the base. Two other  funding increments would go to the                                                                    
JAG  program  and  the   digitizing  of  Alaska's  education                                                                    
system.                                                                                                                         
                                                                                                                                
Commissioner Hanley communicated  that DEED had incorporated                                                                    
its budget  changes into the  10-year plan. Using  data from                                                                    
the past  several years DEED  projected flat funding  of the                                                                    
foundation formula,  which included $25 million  outside the                                                                    
formula  as   targeted  funding.   He  noted   that  10-year                                                                    
projections were "crystal ball  exercises" given that it was                                                                    
hard  to determine  the  future.  Projected operating  costs                                                                    
included inflation adjustments for contractual obligations.                                                                     
                                                                                                                                
Commissioner Hanley addressed capital  projects on slide 18.                                                                    
He detailed  that construction  and major  maintenance items                                                                    
remained  at current  levels. The  proposed budget  included                                                                    
funding for one school  construction (based on the Kasayulie                                                                    
settlement)   and  continued   funding   for  a   previously                                                                    
supported  project.   The  department  had  moved   down  14                                                                    
projects  on its  major maintenance  list.  The budget  also                                                                    
included  maintenance for  Mount Edgecumbe  based on  its 6-                                                                    
year plan  to keep the  school in operation and  funding for                                                                    
the  Stratton  library  the state  had  acquired  in  Sitka.                                                                    
Slides  19  and 20  illustrated  the  10-year projection  in                                                                    
graph  form.  The  dotted   black  line  represented  DEED's                                                                    
projection  and   was  relatively   flat.  The   green  line                                                                    
represented  what would  occur  if  the department's  budget                                                                    
continued to grow  at a 10.5 percent annual  growth rate. He                                                                    
believed  a  realistic  growth  rate  would  fall  somewhere                                                                    
between the two lines.   He emphasized that the department's                                                                    
budget was  a part  of a  fiscally conservative  total state                                                                    
budget that  did not grow  at 10.6 percent. He  believed the                                                                    
governor recognized  that a 10.6 percent  annual growth rate                                                                    
would be  unsustainable. The graph  on slide  20 represented                                                                    
the 10-year projection for all funds.                                                                                           
                                                                                                                                
1:58:10 PM                                                                                                                    
                                                                                                                                
Commissioner  Hanley continued  to discuss  slide 20,  which                                                                    
showed a  target of  4.8 percent  annual growth;  the target                                                                    
was slightly higher than actual  growth that had occurred in                                                                    
the  past five  to six  years.  The graph  showed a  flatter                                                                    
projection than  4.8 percent, but he  anticipated the actual                                                                    
budget  would fall  somewhere between  the two  projections.                                                                    
Slide  21  showed the  DEED  budget  compared to  all  other                                                                    
agency  budgets (non-formula  and  general  fund only).  The                                                                    
DEED share  had been  consistent at approximately  2 percent                                                                    
beginning in  FY 07; it  had been at  1.6 percent in  FY 05.                                                                    
Slide 22  provided the DEED formula  and non-formula funding                                                                    
compared to  other state agencies.  He pointed to  the trend                                                                    
line (shown  in blue) that  had decreased from  29.7 percent                                                                    
in  FY  05 to  25.5  percent  in  FY  14. He  stressed  that                                                                    
department's portion  of the total budget  had been steadily                                                                    
declining over the last several years.                                                                                          
                                                                                                                                
Co-Chair  Austerman  pointed  to  slide  19  and  asked  for                                                                    
verification that  DEED expected  "somewhat" of  an increase                                                                    
over  the  next  several  years in  general  fund  spending.                                                                    
Commissioner Hanley responded in the affirmative.                                                                               
                                                                                                                                
Co-Chair Austerman  asked if  the growth  was due  to salary                                                                    
increases or other.                                                                                                             
                                                                                                                                
MARK  LEWIS, DIRECTOR,  ADMINISTRATIVE SERVICES,  DEPARTMENT                                                                    
OF EDUCATION  AND EARLY  DEVELOPMENT, responded  that salary                                                                    
increases  were not  included  in  the department's  10-year                                                                    
plan;  the  Office  of  Management   and  Budget  (OMB)  was                                                                    
responsible  for trending  salaries. The  graph only  showed                                                                    
increments contained in the DEED 10-year plan.                                                                                  
                                                                                                                                
Co-Chair Austerman asked for detail  on increments that were                                                                    
responsible  for  the  department's projected  general  fund                                                                    
spending growth. Mr. Lewis replied  that the "modest" growth                                                                    
was  due to  items  such as  contractual  increases for  the                                                                    
state assessment  system, mentors  (growth of  2.7 percent),                                                                    
and other.                                                                                                                      
                                                                                                                                
2:01:20 PM                                                                                                                    
                                                                                                                                
Representative  Munoz queried  how graduation  rates tracked                                                                    
students who moved from one  district to another during high                                                                    
school or who  began high school in Alaska and  moved out of                                                                    
state prior to finishing.                                                                                                       
                                                                                                                                
Commissioner  Hanley answered  that  there  was a  statewide                                                                    
identification system  for K-12  that allowed DEED  to track                                                                    
when a  student left one  district and enrolled  in another.                                                                    
He explained that it became  challenging when students moved                                                                    
out of  state, but  the system  did recognize  when students                                                                    
enrolled  elsewhere   and  worked  to  create   a  realistic                                                                    
picture.                                                                                                                        
                                                                                                                                
Representative  Thompson  asked  for verification  that  the                                                                    
69.6 percent  graduation rate included students  who entered                                                                    
9th grade  and graduated in four  years. Commissioner Hanley                                                                    
replied in the affirmative.                                                                                                     
                                                                                                                                
Representative Thompson asked how  students who graduated in                                                                    
over  four years  were accounted  for. He  wondered how  the                                                                    
data skewed the  graduation percentages. Commissioner Hanley                                                                    
opined that  every graduate represented a  success story. He                                                                    
responded  that those  graduating  in more  than four  years                                                                    
would  add   approximately  1  percent  to   2  percent.  He                                                                    
furthered that  the state used the  specific formula because                                                                    
it  allowed  DEED to  compare  Alaska's  graduation rate  to                                                                    
those in other states.                                                                                                          
                                                                                                                                
2:03:51 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg asked  whether the  growth charts                                                                    
accounted  for  fluctuating  student enrollments,  costs  of                                                                    
heating,  transportation, or  other.  He  wondered what  was                                                                    
built into the figures.                                                                                                         
Mr. Lewis replied that the  growth had been trended out. The                                                                    
department   based  future   projections  on   current  year                                                                    
forecasts  because it  was the  only basis  it could  use to                                                                    
make  a  decision  on;  it  did not  try  to  calculate  any                                                                    
increase or decline in student population.                                                                                      
                                                                                                                                
Representative Holmes  referred to the  department's 10-year                                                                    
plan. She urged  the department to work on a  way to develop                                                                    
a more realistic  future projection that could be  used as a                                                                    
planning  tool.  She  observed  that  the  10-year  forecast                                                                    
looked remarkably flat. She pointed  out that there would be                                                                    
increases in inflation and other.                                                                                               
                                                                                                                                
Representative  Gara referenced  slide 17  and asked  if the                                                                    
$25  million in  funding  outside  of the  BSA  would be  an                                                                    
annual  increment or  if it  would  build on  itself by  $25                                                                    
million annually.                                                                                                               
                                                                                                                                
Commissioner Hanley  replied that  the figure was  an annual                                                                    
increment of  $25 million;  the 10-year  projection included                                                                    
the amount  as a reflection of  recent years but it  was not                                                                    
reflective of a "wish list" or suggestion.                                                                                      
                                                                                                                                
2:07:33 PM                                                                                                                    
                                                                                                                                
Representative Gara looked at slide  19 and wondered if DEED                                                                    
could  provide  a  better  estimate  on  its  future  budget                                                                    
growth.                                                                                                                         
                                                                                                                                
Commissioner Hanley  replied that it was  difficult for DEED                                                                    
to  provide  future  projections because  working  with  the                                                                    
legislature  determined   what  the  number  would   be.  He                                                                    
furthered  that  the  projection   would  continue  to  look                                                                    
similar if  the BSA of  $5,680 and the  annual appropriation                                                                    
of $25 million remained static going forward.                                                                                   
                                                                                                                                
Representative Gara  wondered how  DEED planned  to increase                                                                    
student  achievement  given  cuts  that had  been  made.  He                                                                    
pointed to  two years  of flat  education; no  BSA increase;                                                                    
and, the  Anchorage school district  was laying  off teacher                                                                    
aides, tutors, and student counselors  in Anchorage who were                                                                    
helping students transition to  college and jobs; and summer                                                                    
school in Anchorage had been closed the prior year.                                                                             
                                                                                                                                
Commissioner Hanley  answered that  flat funding  meant that                                                                    
no money  had been  added to  the BSA, but  it did  not mean                                                                    
that education had received no  funding increase in the past                                                                    
years. He expounded that the  $25 million increment had been                                                                    
provided for the  first time the prior year,  money had been                                                                    
added  to  Career and  Technical  Education  (CTE), and  the                                                                    
state  had  allocated  money  to  the  Teachers'  Retirement                                                                    
System  (TRS). He  reiterated that  the governor's  proposed                                                                    
budget included  funding for energy  and other;  however, he                                                                    
recognized  that  whether  the  budget  kept  up  with  what                                                                    
districts needed was a different issue.                                                                                         
                                                                                                                                
Representative  Gara  appreciated  the  effort  to  increase                                                                    
reading proficiency  in the  K-3 Literacy  Program; however,                                                                    
he thought Commissioner Hanley had  testified in the past to                                                                    
the importance of  working with children on  literacy by the                                                                    
ages of  3 and 4. He  wondered why the Literacy  Program was                                                                    
not starting at the Pre-K level.                                                                                                
                                                                                                                                
2:10:57 PM                                                                                                                    
                                                                                                                                
Commissioner Hanley did not recall  the testimony. He stated                                                                    
that  the  Literacy  Program would  strengthen  the  current                                                                    
school  system. He  elaborated that  there  was funding  for                                                                    
some Pre-K  programs, Parents as Teachers,  Head Start, Best                                                                    
Beginnings, and  other. There  was not  a system  wide Pre-K                                                                    
program  in  place, but  DEED  believed  that when  children                                                                    
entered the school  system it was important  for teachers to                                                                    
understand each  child's specific needs to  ensure readiness                                                                    
for reading by the third grade.                                                                                                 
                                                                                                                                
Representative Wilson queried whether  the state was seeking                                                                    
a waiver related  to No Child Left Behind.  She wondered how                                                                    
the waiver would impact the state's federal funding.                                                                            
                                                                                                                                
Commissioner Hanley  replied that  the waiver from  No Child                                                                    
Left Behind  should not have  an impact on  federal funding;                                                                    
however, it would change  the measurement and accountability                                                                    
tools.  The   department  believed  the  shift   would  more                                                                    
accurately measure what took place with students in Alaska.                                                                     
                                                                                                                                
Representative  Wilson discussed  that district's  had local                                                                    
control  over  how  they  spent   BSA  money.  She  believed                                                                    
programs  continued to  be added  and surmised  that it  was                                                                    
because the department was not  seeing the necessary growth.                                                                    
She  wondered why  districts were  not charged  for elective                                                                    
programs and why the funds were not coming out of the BSA.                                                                      
                                                                                                                                
Commissioner Hanley asked for verification on the question.                                                                     
                                                                                                                                
Representative  Wilson clarified  her question.  She pointed                                                                    
to digital learning  as an example; not  all districts would                                                                    
access the  same programs based  on their  individual needs.                                                                    
She  wondered why  the various  elective  programs were  not                                                                    
charged to  the BSA. She  thought that districts  should pay                                                                    
for  their  participation in  the  programs  instead of  the                                                                    
state providing a free service.                                                                                                 
                                                                                                                                
Commissioner Hanley  responded that  DEED had  some explicit                                                                    
proposals  to   move  forward  with.  He   stated  that  the                                                                    
department  was looking  at "specific  targets for  specific                                                                    
outcomes." He  stressed the importance of  local control for                                                                    
districts to  address their  needs. He  addressed graduation                                                                    
rates  and believed  that  implementing  a targeted  program                                                                    
would provide  a targeted outcome.  He communicated  that it                                                                    
was "a categorical specified funding  for something that the                                                                    
governor wants to see."                                                                                                         
                                                                                                                                
Representative Wilson asked if  the department could specify                                                                    
targets for  districts that would  allow DEED  the authority                                                                    
to redirect or change programs  in specific districts if the                                                                    
targets were not  met. She stressed that the  budget did not                                                                    
included enough money for all of the districts.                                                                                 
                                                                                                                                
2:15:24 PM                                                                                                                    
                                                                                                                                
Commissioner  Hanley replied  that the  JAG program  was the                                                                    
only  program that  would begin  in select  districts; other                                                                    
programs  were all  statewide. He  guessed  the state  could                                                                    
implement   regulations   that   put   responsibilities   on                                                                    
districts  without funding  them;  however,  he pointed  out                                                                    
that a  new set  of content  standards had  been implemented                                                                    
and that  the rigor had been  tremendously increased related                                                                    
to expectations for students. The  department had not funded                                                                    
districts  to replace  their curriculum  or do  professional                                                                    
development; it  was a burden  for districts to move  in the                                                                    
new  direction, but  it was  an  expectation the  department                                                                    
had.  He expounded  that teacher  evaluations were  now tied                                                                    
with student learning; funding had  not been tied to the new                                                                    
requirement, but  DEED wanted to  see high  quality teachers                                                                    
in the classroom.  He noted that the  department was working                                                                    
to support teachers and that only  so much could be asked of                                                                    
them without providing additional funding.                                                                                      
                                                                                                                                
Representative Wilson  was concerned  about the  fairness of                                                                    
some  "excellent" districts  operating  on a  set amount  of                                                                    
funding  while  challenged  districts were  receiving  added                                                                    
programs.  She opined  that  the  challenged districts  were                                                                    
getting the BSA  and programs on top of  that, whereas other                                                                    
excellent districts  were "trying  to survive on  a string."                                                                    
She wanted  to ensure that districts  with excellent schools                                                                    
were  taken care  of as  well. She  would discuss  the issue                                                                    
further during the DEED Finance Subcommittee meetings.                                                                          
                                                                                                                                
Representative  Guttenberg pointed  to digitizing  education                                                                    
(slide 8). He asked about  current capability to provide all                                                                    
schools  with bandwidth.  He pointed  to constant  growth in                                                                    
the  demand  for  increased  capacity  to  account  for  the                                                                    
growing number  of computers, iPads, and  other. He observed                                                                    
that  currently bandwidth  capacity was  fairly limited.  He                                                                    
mentioned  the  state's  broadband task-force.  He  wondered                                                                    
whether the  department would  be able to  keep up  with the                                                                    
ever increasing demand for bandwidth.                                                                                           
                                                                                                                                
2:19:23 PM                                                                                                                    
                                                                                                                                
Commissioner Hanley believed that  broadband would always be                                                                    
maxed  out.  The  digitization initiative  did  not  require                                                                    
broadband in  every capacity. He  relayed that  every school                                                                    
district had broadband, but every  district did not have the                                                                    
ability for  all of its  students to  be online at  the same                                                                    
time or  the ability  for live-streaming. Under  the digital                                                                    
initiative  districts  would  build   a  plan  around  their                                                                    
existing  capacity. He  pointed  to recent  funding for  the                                                                    
Association of  Alaska School Boards (AASB)  for student use                                                                    
of  iPads;  he  stated  that "tremendous  growth"  had  been                                                                    
witnessed  for  K-3  graders who  had  participated  in  the                                                                    
program. He  elaborated that most  of the iPads  used "apps"                                                                    
(applications)  and did  not have  access  to broadband.  He                                                                    
relayed that DEED did not  have significant capacity to push                                                                    
forward broadband. He referenced  that DEED was watching and                                                                    
supporting  GCI's  TERRA  project   [a  project  working  to                                                                    
provide   broadband   connection    to   rural   communities                                                                    
throughout Alaska];  broadband access  was now  available in                                                                    
Hooper Bay.  He shared  that DEED  was looking  at obtaining                                                                    
the best e-rate  in order to keep costs  down. He recognized                                                                    
the  challenge  and  believed   the  department  could  move                                                                    
forward  with  the  current  capacity;  the  capacity  could                                                                    
continue to be increased when available.                                                                                        
                                                                                                                                
Representative  Guttenberg  was   concerned  that  broadband                                                                    
learning opportunities  were equalizers for rural  and urban                                                                    
communities and  students with  different ways  of learning.                                                                    
He  wanted  to  ensure  that  students  had  equal  learning                                                                    
opportunities  that would  help them  succeed in  school and                                                                    
life.                                                                                                                           
                                                                                                                                
2:22:25 PM                                                                                                                    
                                                                                                                                
Representative  Munoz believed  the mining  training program                                                                    
was  a  great  partnership between  multiple  entities.  She                                                                    
wondered whether the program could  act as a model for other                                                                    
sectors including healthcare, marine technology, and other.                                                                     
                                                                                                                                
Commissioner  Hanley replied  that he  hoped so.  The mining                                                                    
program  connected industry  with  the  education system  to                                                                    
help provide training  and high paying jobs  to Alaskans; it                                                                    
was  the  first   of  its  kind  that   the  department  had                                                                    
participated in.                                                                                                                
                                                                                                                                
Representative  Gara had  been told  by school  officials in                                                                    
Anchorage  that the  rate for  school districts'  ability to                                                                    
make local  contribution had  been capped  too low  when the                                                                    
legislature  had worked  to  make  local contributions  more                                                                    
equitable the  prior year. He  had heard from  officials who                                                                    
wanted  to  contribute more.  He  wondered  if there  was  a                                                                    
solution to the problem.                                                                                                        
                                                                                                                                
Commissioner  Hanley responded  that  he did  not believe  a                                                                    
mistake had been  made, but the local  contribution rate had                                                                    
been  changed. He  explained  that Anchorage's  contribution                                                                    
needed to be $8 million less  and the state had picked up $8                                                                    
million more. He added that  criteria existed related to how                                                                    
much could be contributed. He  had been involved in meetings                                                                    
the prior summer with the  Anchorage Chamber of Commerce and                                                                    
the school  district related  to the  issue. He  opined that                                                                    
there were ways for communities to adequately contribute.                                                                       
                                                                                                                                
Representative Gara  asked if  the department  supported the                                                                    
concept  of Pre-K  programs. Commissioner  Hanley recognized                                                                    
that early intervention programs  could benefit students and                                                                    
prepare them for kindergarten.                                                                                                  
                                                                                                                                
Co-Chair  Austerman  referenced   the  department's  10-year                                                                    
budget projection on slide 19.  He stressed that legislators                                                                    
and department  administrators had to think  beyond the next                                                                    
several years or the state could  end up in a bad situation.                                                                    
He  expressed  concern  about  the  10.5  percent  projected                                                                    
annual growth figure  on slide 19 and stated that  if it was                                                                    
accurate there were  some "real problems" that  needed to be                                                                    
planned for.  He elaborated  that there was  no way  to plan                                                                    
for  the future  if  departments continued  to come  forward                                                                    
with one  or two years  of anticipated growth. He  hoped the                                                                    
administration would  recognize the importance  of providing                                                                    
a realistic 10-year plan.                                                                                                       
                                                                                                                                
2:26:56 PM                                                                                                                    
                                                                                                                                
Commissioner Hanley  replied that the department  could work                                                                    
with  key  legislators  to  help  it come  up  with  a  more                                                                    
realistic plan.                                                                                                                 
                                                                                                                                
Co-Chair  Austerman remarked  that  population growth  alone                                                                    
would  account  for  higher   budget  increases  than  those                                                                    
included  in  the  department's annual  management  plan  on                                                                    
slides 19 and 20.                                                                                                               
                                                                                                                                
^ALASKA   REVENUE  FORECAST:   DEPARTMENT  OF   REVENUE  and                                                                  
DEPARTMENT OF NATURAL RESOURCES                                                                                               
                                                                                                                                
2:28:37 PM                                                                                                                    
                                                                                                                                
BRYAN  BUTCHER, COMMISSIONER,  DEPARTMENT OF  REVENUE (DOR),                                                                    
provided  a Power  Point  presentation  titled "Overview  of                                                                    
Fall  2012 Revenue  and  Price Forecast."  He  looked at  an                                                                    
outline  on slide  2  and  shared his  plan  to discuss  the                                                                    
department's 10-year overview,  total revenue (including oil                                                                    
and non-oil  revenue). Slide  4 showed  a snapshot  of DOR's                                                                    
10-year   revenue  forecast.   He  pointed   out  that   the                                                                    
department's forecast included  an expectation of relatively                                                                    
high  oil prices  into  the future.  The  yellow row  titled                                                                    
"Total ANS  Production" showed production levels  that would                                                                    
continue  to  decline  (production  had  been  declining  in                                                                    
recent decades);  as a result the  general fund unrestricted                                                                    
revenues were projected to decrease as well.                                                                                    
                                                                                                                                
Commissioner  Butcher directed  attention  to  slide 5  that                                                                    
provided  a detailed  look at  the  differences between  the                                                                    
department's  spring  2012  and   fall  2012  forecasts.  He                                                                    
relayed  that the  price of  oil was  down by  approximately                                                                    
$1.77  from the  spring 2012  forecast; production  was also                                                                    
down  by approximately  10,000 barrels  per  day. He  stated                                                                    
that in conjunction with  increased North Slope expenditures                                                                    
revenue  was down  by approximately  $928  million from  the                                                                    
spring forecast (higher spending was  taken out prior to the                                                                    
calculation of  production tax  value; corporate  income tax                                                                    
was also  off slightly).  There was a  slight uptick  in the                                                                    
oil price  forecast and a  more "severe"  production decline                                                                    
(by  approximately 29,000  barrels). The  production decline                                                                    
was  largely due  to delayed  production in  some wells  and                                                                    
reduced performance in some other wells.                                                                                        
                                                                                                                                
2:32:50 PM                                                                                                                    
                                                                                                                                
Commissioner  Butcher  added  that  the  fall  forecast  was                                                                    
approximately $1.6 billion less  than the spring projection.                                                                    
He  reiterated   that  the  reduction   was  due   to  lower                                                                    
production and oil prices and  higher spending. He addressed                                                                    
slide  6  titled  "Total  Revenue  Forecast"  that  included                                                                    
unrestricted and designated  general funds, other restricted                                                                    
revenue,  and federal  revenue.  He pointed  out  the FY  12                                                                    
actual investment  revenue at $109  million compared  to the                                                                    
forecasts for  FY 13  and FY  14 that  were over  $3 billion                                                                    
each.  He  explained  that  the   Permanent  Fund  had  high                                                                    
earnings in  FY 11,  but that FY  12 investment  revenue was                                                                    
virtually flat.  The projections  for FY 13  and FY  14 were                                                                    
based on what the Permanent  Fund expected to make; the fund                                                                    
was up approximately 7 percent for  the first 6 months of FY                                                                    
13.  He stated  that  the  fund was  "well  on  its way"  to                                                                    
achieving the FY 13 forecast.                                                                                                   
                                                                                                                                
2:34:24 PM                                                                                                                    
                                                                                                                                
Commissioner  Butcher pointed  to  a table  that broke  down                                                                    
unrestricted  general fund  revenue particularly  related to                                                                    
petroleum revenue;  it detailed  what the state  receives in                                                                    
royalties minus royalties designated  for the Permanent Fund                                                                    
and Public  School Fund. The production  tax represented the                                                                    
largest portion  of incoming  revenue; corporate  income tax                                                                    
accounted for  $568 million; and property  tax was generally                                                                    
around $100 million. Slide 8  provided a snapshot of non-oil                                                                    
revenue.  He relayed  that over  90 percent  of the  state's                                                                    
budget was paid for with  oil revenue; therefore the non-oil                                                                    
revenue represented a relatively  small portion of the total                                                                    
picture  at  approximately  $627  million.  The  slide  also                                                                    
included a  detail on the various  taxes including corporate                                                                    
income, mining  license, insurance premiums,  tobacco, motor                                                                    
fuel,  and  other  smaller taxes.  The  department  did  not                                                                    
foresee a  tremendous change between the  last, current, and                                                                    
upcoming fiscal years.                                                                                                          
                                                                                                                                
Commissioner  Butcher   addressed  a  chart   depicting  the                                                                    
production history  and forecast  on the North  Slope (slide                                                                    
9); production had  peaked in the late 1980s  at 2.1 million                                                                    
barrels  per day.  Slide 10  included a  closer look  at oil                                                                    
producing fields  from 2002 to  2022 including  Prudhoe Bay,                                                                    
Prudhoe  Bay Satellites,  Kuparuk, Endicott,  and other.  He                                                                    
noted  that legacy  oil fields  of Prudhoe  Bay and  Kuparuk                                                                    
were still  expected to produce  the most oil over  the next                                                                    
ten years.  He looked at  oil price forecast  methodology on                                                                    
slide 12. He  shared that the past fall marked  the fifth or                                                                    
sixth  year  that  DOR  had   held  an  all-day  forecasting                                                                    
session. The  most recent  session was  on October  2, 2012;                                                                    
there  had  been 31  participants  from  DOR, Department  of                                                                    
Natural  Resources,   Department  of  Labor   and  Workforce                                                                    
Development, OMB, University of  Alaska, Institute of Social                                                                    
and  Economic Research,  Legislative  Finance Division,  and                                                                    
other  outside entities.  He  elaborated  that experts  were                                                                    
brought  in  and  the entities  considered  supply,  demand,                                                                    
geopolitics, financial  markets, and other  expert forecasts                                                                    
(e.g.  federal Energy  Information  Agency  (EIA), New  York                                                                    
Mercantile Exchange (NYMEX), futures  market, and other). He                                                                    
furthered that  experts were  brought in  to present  at the                                                                    
meeting in  order to encourage  a more  interactive dialogue                                                                    
on  what was  occurring worldwide.  He shared  that DOR  had                                                                    
heard  from Barry  Pulliam of  Econ One,  the late  Dr. Tony                                                                    
Finizza  (former  chief  economist   of  ARCO),  Samuel  Van                                                                    
Vector, President of Economic  Insights, and the Wells Fargo                                                                    
senior   economist   Mark   Vitner.   The   forecasts   from                                                                    
participants  were  blended with  EIA  and  NYMEX and  other                                                                    
analysts to determine the DOR fall forecast.                                                                                    
                                                                                                                                
2:39:33 PM                                                                                                                    
                                                                                                                                
Commissioner  Butcher  moved to  slide  13  that showed  the                                                                    
price of  oil for  the past five  years and  price forecasts                                                                    
through  FY  17. The  slide  included  price forecasts  from                                                                    
multiple  entities; EIA  had a  "rosier" or  bullish outlook                                                                    
than others  and NYMEX was  forecasting at the lower  end of                                                                    
the spectrum;  however, most analysts  tended to  see prices                                                                    
in the  middle range. He  pointed out that  DOR's projection                                                                    
fell "comfortably"  in between  the high and  low forecasts.                                                                    
He communicated that rating agencies  look at all aspects of                                                                    
the  revenue projections  to  determine  how realistic  they                                                                    
are. For example, a state could  use a state income tax that                                                                    
was higher than rating  agencies believed would occur, which                                                                    
would give  a rosier view  of forecasted state  revenues. He                                                                    
furthered  that ratings  agencies  worked  to determine  how                                                                    
conservative or optimistic projections  were; he stated that                                                                    
conservative  projections   were  better.  He   shared  that                                                                    
ratings  agencies  had  acknowledged that  the  department's                                                                    
price forecast  had been lower  than the actual  forecast in                                                                    
five  of  the  past   six  years;  however,  its  production                                                                    
forecast had been overly optimistic  every year for the past                                                                    
couple of decades.                                                                                                              
                                                                                                                                
Commissioner Butcher  shared that  slide 14  titled "General                                                                    
Fund  Unrestricted Revenue  Price Sensitivity  FY 2013-2015"                                                                    
had  been  included  for future  reference;  it  showed  the                                                                    
forecasted  revenue,  production,  and  price  (price  could                                                                    
fluctuate tremendously).  The slide depicted what  the state                                                                    
would  generate in  revenue at  different  per barrel  costs                                                                    
beginning at  $50 dollars and increasing  by $10 increments;                                                                    
it  showed  how  a  price  swing up  or  down  would  impact                                                                    
revenue.  He  observed  that  there  was  a  fairly  extreme                                                                    
difference between  the scenarios  due to  the progressivity                                                                    
of the current production tax system.                                                                                           
                                                                                                                                
2:42:47 PM                                                                                                                    
                                                                                                                                
Co-Chair Austerman  pointed to  a breakdown  of unrestricted                                                                    
non-oil taxes on  slide 8 and asked for  a brief description                                                                    
of other taxes.                                                                                                                 
                                                                                                                                
DAN  STICKEL,  ASSISTANT   CHIEF  ECONOMIST,  TAX  DIVISION,                                                                    
DEPARTMENT OF  REVENUE, answered  that the other  taxes were                                                                    
all  unrestricted  taxes. He  explained  that  the table  on                                                                    
slide  8 included  line items  for  the top  five taxes.  He                                                                    
pointed to  the department's fall 2012  Revenue Sources Book                                                                    
(page  54) that  listed other  unrestricted taxes  for items                                                                    
including  alcohol,  fisheries, charitable  gaming,  vehicle                                                                    
rental, and other.                                                                                                              
                                                                                                                                
Representative  Gara   referred  to   a  January   21,  2013                                                                    
presentation  specifying that  one  of  Moody's factors  for                                                                    
rating  the state  highly was  that it  used a  conservative                                                                    
approach to  forecasting oil revenues  with respect  to both                                                                    
price and production. He observed  that DOR's projection was                                                                    
below the  middle mark on  slide 13 and wondered  whether it                                                                    
was what  Moody's was referring  to and what  the department                                                                    
was aiming for.                                                                                                                 
                                                                                                                                
Commissioner Butcher replied that  slide 13 was related only                                                                    
to price forecasts;  DOR's forecast was a  result of equally                                                                    
blending  projections from  multiple entities.  He furthered                                                                    
that  Moody's  based  its  view   on  the  fact  that  DOR's                                                                    
forecasts were consistently lower  than actual prices turned                                                                    
out to  be. He explained that  if DOR based its  forecast on                                                                    
EIA  it  would  be  much  more  likely  to  have  an  overly                                                                    
optimistic price projection compared to actual.                                                                                 
                                                                                                                                
Representative Gara  asked for  verification that  the price                                                                    
forecast  had been  slightly under  what actual  numbers had                                                                    
been in  five of  the past  six years.  Commissioner Butcher                                                                    
replied in the affirmative.                                                                                                     
                                                                                                                                
Representative Gara  understood that the state  did not want                                                                    
to  overestimate how  much  money it  would  have to  spend;                                                                    
however, he wondered if the  price estimates were being used                                                                    
in the  fiscal notes  for the  current oil  tax legislation.                                                                    
Commissioner Butcher replied in  the affirmative. He relayed                                                                    
that the  fiscal notes were  based on the  department's fall                                                                    
2012 forecast.                                                                                                                  
                                                                                                                                
Representative   Guttenberg  had   read  that   the  federal                                                                    
government was  looking at making changes  to mining royalty                                                                    
rates.  He wondered  if  the state  may be  able  to take  a                                                                    
percentage if royalty rates were increased.                                                                                     
                                                                                                                                
2:46:32 PM                                                                                                                    
                                                                                                                                
Commissioner   Butcher  asked   for  clarification   on  the                                                                    
question.                                                                                                                       
                                                                                                                                
Representative   Guttenberg   restated  that   the   federal                                                                    
government  was  reexamining  royalty rates  and  that  some                                                                    
states got a larger cut  for offshore oil or gas production.                                                                    
He did  not want  to increase rates  above what  the federal                                                                    
government  would implement,  but  surmised  that the  state                                                                    
could take  a portion  of the revenue.  Commissioner Butcher                                                                    
answered  that  the  issue  was under  the  purview  of  the                                                                    
Department of Natural Resources (DNR).                                                                                          
                                                                                                                                
Representative Guttenberg  wondered how a  pipeline shutdown                                                                    
in 2012 had impacted production  compared to other years. He                                                                    
asked  why  the  shutdown  had been  longer  than  expected.                                                                    
Commissioner Butcher confirmed that  the main reason for the                                                                    
10,000 barrel per  day decrease was due to  the shutdown. He                                                                    
did  not know  if  issues had  prolonged  the shutdown.  The                                                                    
department would follow up on the question.                                                                                     
                                                                                                                                
Representative  Guttenberg   asked  for  a  status   on  the                                                                    
auditing of  past tax reports. Commissioner  Butcher replied                                                                    
that audits  had been  completed for the  first year  of the                                                                    
Petroleum  Production Tax  (PPT);  it was  currently in  the                                                                    
PPT/Alaska's Clear  and Equitable  Share (ACES)  year, which                                                                    
had come  in in 2008.  The department expected the  audit to                                                                    
move  increasingly faster  given  that it  had finished  the                                                                    
transition from gross  to net. He pointed  to vacant auditor                                                                    
positions  as  a  primary  problem   and  relayed  that  the                                                                    
positions had been filled; the  proposed FY 14 also included                                                                    
a  request for  two  auditor positions.  The department  was                                                                    
statutorily in  a fine position  related to the  audits, but                                                                    
it would like to get further along.                                                                                             
                                                                                                                                
2:49:18 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg asked  whether  a  report on  the                                                                    
audits  would be  available. Commissioner  Butcher responded                                                                    
that  there had  not been  a substantial  difference in  the                                                                    
audits.  The   department  would  be  happy   to  brief  the                                                                    
committee  or provide  a confidential  briefing  at a  later                                                                    
time.                                                                                                                           
                                                                                                                                
Co-Chair Stoltze remarked that it  may be helpful for DOR to                                                                    
be  present at  department budget  presentations to  instill                                                                    
recognition of the current situation  related to revenue and                                                                    
oil production.  He pointed to  the challenges of  running a                                                                    
pipeline  under  lower oil  flow  conditions.  He asked  the                                                                    
department to  be mindful of  what oil meant to  the state's                                                                    
budget;  he observed  that mining  revenue  would not  "even                                                                    
cover" the operational costs of  the Department of Education                                                                    
and  Early  Development and  fish  taxes  would not  fund  a                                                                    
three-year Chinook study in the amount of $30 million.                                                                          
                                                                                                                                
Commissioner Butcher  discussed why  DOR had decided  to dig                                                                    
into  the  way  its  production forecast  was  produced.  He                                                                    
recalled that  in the past  committee members  had expressed                                                                    
dissatisfaction  over DOR's  long-term production  forecast.                                                                    
As  a result  the  department  had looked  at  the issue  to                                                                    
determine how  to increase accuracy  in its  forecasting; it                                                                    
discovered that the forecast had  been high by 40 percent to                                                                    
65  percent in  its 10-year  production forecast.  He shared                                                                    
that historically the  decline rate had been  6 percent, but                                                                    
DOR had projected  an annual decline rate of  no higher than                                                                    
2.5 percent (many  years the projection had  been lower than                                                                    
2.5 percent).  He stated  that clearly  the process  had not                                                                    
been accurate  and needed to  be improved.  Subsequently DOR                                                                    
had  met   with  DNR  to   figure  out  a  way   to  provide                                                                    
policymakers  with a  better  production  snapshot into  the                                                                    
future; DNR had only played a  small role in the forecast in                                                                    
the past. He stressed that DOR  had done a good job with the                                                                    
forecast  for  the  couple of  years,  but  the  longer-term                                                                    
forecast needed improvement.                                                                                                    
                                                                                                                                
2:54:20 PM                                                                                                                    
                                                                                                                                
BRUCE   TANGEMAN,   DEPUTY   COMMISSIONER,   TAX   DIVISION,                                                                    
DEPARTMENT OF  REVENUE, provided a Power  Point presentation                                                                    
titled "Oil Production Forecast."  He planned to explain the                                                                    
production methodology that DOR had  been working on for the                                                                    
past 18  months; the  goal was a  more prudent  and reliable                                                                    
long-term  forecast.  He  stated  that oil  funded  over  90                                                                    
percent of state government.  He referenced committee member                                                                    
comments about  the importance of  planning for  the future;                                                                    
the  thoughts had  been taken  into  consideration when  DOR                                                                    
looked   at  its   historically  overoptimistic   production                                                                    
forecast going back  two decades. He emphasized  that it was                                                                    
critical for  legislators and the  executive branch  to have                                                                    
the  best  available  information for  short  and  long-term                                                                    
budgeting. He read from AS  37.07.020, which designated that                                                                    
OMB:                                                                                                                            
                                                                                                                                
     ...must  set out  significant assumptions  used in  the                                                                    
     projection  with   sufficient  detail  to   enable  the                                                                    
     legislature   to   rely   on   the   fiscal   plan   in                                                                    
     understanding,  evaluating,  and  resolving  issues  of                                                                    
     state budgeting.                                                                                                           
                                                                                                                                
Mr.  Tangeman moved  to a  chart  on slide  2 that  compared                                                                    
overly  optimistic production  forecasts  from 2002  through                                                                    
2012.  He pointed  out  that in  year-one  the forecast  was                                                                    
fairly  close to  actual  production, but  none  of the  out                                                                    
years   "were  even   close  to   reality".  He   reiterated                                                                    
Commissioner  Butcher's earlier  statement that  projections                                                                    
were  40 to  60 percent  off in  the future.  He pointed  to                                                                    
bumps in  the forecast that represented  potential resources                                                                    
coming online,  which had not necessarily  come to fruition.                                                                    
He  shared  that  DOR  had  a  contract  petroleum  engineer                                                                    
consultant who  had historically  met with  his counterparts                                                                    
at oil  companies to  discuss the  next 10-year  outlook. He                                                                    
furthered  that  a private  sector  budget  person had  been                                                                    
missing  from  the  conversation. He  relayed  that  William                                                                    
Barron the director  of the Division of Oil and  Gas for DNR                                                                    
had  volunteered to  help DOR  work on  the project.  He was                                                                    
pleased at the current progress of the ongoing project.                                                                         
                                                                                                                                
2:59:19 PM                                                                                                                    
                                                                                                                                
Mr. Tangeman  moved to  slide 4  and addressed  concern that                                                                    
had been expressed  by members of both the  House and Senate                                                                    
Finance Committees. He read  quotes from Representatives Mia                                                                    
Costello and  Mike Doogan respectively: "Is  it possible for                                                                    
the department  to come  forward with  a plan  for providing                                                                    
more  accountability  to  the  productions  forecasts?"  and                                                                    
"What I  am asking is  that I  be given something  that will                                                                    
give me  more confidence  that the  projections that  we see                                                                    
are,  not necessarily  100 percent  accurate, but  that they                                                                    
have taken into account everything  that they can, and we've                                                                    
got the best shot we can get."                                                                                                  
                                                                                                                                
Co-Chair    Austerman   acknowledged    the   presence    of                                                                    
Representative Lora Reinbold.                                                                                                   
                                                                                                                                
WILLIAM  BARRON,   DIRECTOR,  DIVISION   OF  OIL   AND  GAS,                                                                    
DEPARTMENT OF NATURAL RESOURCES,  relayed that DOR had asked                                                                    
DNR to help establish a  method to produce a reasonable out-                                                                    
year production forecast for the  greater North Slope region                                                                    
(factoring   in  several   categories  of   production).  He                                                                    
addressed  efforts  to  understand   the  magnitude  of  the                                                                    
problem  on slide  5  titled "Forecast  Errors  by Years  in                                                                    
Advance Being  Forecast." Numbers along the  outside edge of                                                                    
a  spider  diagram represented  years  and  data showed  the                                                                    
percent error from forecast to  actual. He noted that spider                                                                    
diagrams  provided an  insight  into any  patterns that  may                                                                    
exist.   He  elaborated   that  the   blue  and   red  lines                                                                    
illustrated the  errors from the  2001 and 2002  forecast to                                                                    
actual; the green line represented  the average from 2001 to                                                                    
2010. He pointed  out that the pattern stayed  the same; the                                                                    
error increased consistently as time went on.                                                                                   
                                                                                                                                
Mr.  Barron believed  it was  important for  DOR and  DNR to                                                                    
look  at the  issue independently  from each  other; if  the                                                                    
departments  both  identified  similar procedures  it  would                                                                    
help  determine  a better  approach.  He  had asked  DOR  to                                                                    
establish  confidence intervals  based on  all Alaska  North                                                                    
Slope (ANS)  production; DOR had  used a  standard deviation                                                                    
variance  of  all  production  from 1992  to  2011  and  had                                                                    
projected it  forward (slide  7). The  bold green  and light                                                                    
green dashes represented  the upper and lower  bounds of the                                                                    
production  standard  deviation  forecast  respectively.  He                                                                    
added  that it  was necessary  to factor  in a  multitude of                                                                    
items  that  could  impact  production.   He  pointed  to  a                                                                    
flattening of the curve beginning  in 2006 through 2008; the                                                                    
leveling  was predominantly  due to  the impact  of gas  cap                                                                    
water injection at Prudhoe Bay. He  had asked DOR to look at                                                                    
the years prior to the  enhanced oil recovery project and to                                                                    
identify the  lower bound.  Prior to 2006  the slope  of the                                                                    
line was steeper than the  slope across the entire "regime."                                                                    
The purple lines represented  confidence intervals from 1992                                                                    
to 2006. He elaborated that  the lines established the high-                                                                    
high  and low-low  given the  two different  time parameters                                                                    
[1992 to 2011 and 1992 to 2006].                                                                                                
                                                                                                                                
3:05:11 PM                                                                                                                    
                                                                                                                                
Mr. Barron shared that the  departments had considered three                                                                    
out of four  tranches of the production  forecast (slide 8):                                                                    
currently   producing,   under    development,   and   under                                                                    
evaluation. He  explained that  currently producing  or "old                                                                    
oil"  applied to  existing  wells,  facilities, and  fields.                                                                    
"Under  development" represented  the first  tranche of  new                                                                    
oil; projects included in the  category would be incremental                                                                    
to  existing  fields  or  new  fields  (projects  that  were                                                                    
currently   being   funded).   He   furthered   that   under                                                                    
development  projects had  some risk;  the confidence  level                                                                    
fell  in  between  currently   producing  fields  and  under                                                                    
evaluation  fields.   "Under  evaluation"   represented  the                                                                    
second tranche  of new oil.  The category  included projects                                                                    
that were  likely to  occur in  the future;  assessments had                                                                    
been  made,   but  money  had   not  been   invested.  Under                                                                    
evaluation  fields had  a greater  risk than  the first  two                                                                    
tranches.                                                                                                                       
                                                                                                                                
Mr.  Barron  relayed  that   "exploration"  was  the  fourth                                                                    
tranche, which  had not  been included  in the  forecast. He                                                                    
elaborated that  exploratory projects  could be on  the cusp                                                                    
of a company's  lease sale or based  on seismic information;                                                                    
the projects  represented areas of  new potential,  but were                                                                    
not  substantial   enough  to  be  included   in  the  under                                                                    
evaluation  category. He  elaborated that  shale oil  was an                                                                    
example  of   exploration.  He   explained  that   shale  by                                                                    
definition was  a reasonable  project; the  current operator                                                                    
had drilled two wells on the  North Slope, but no flow tests                                                                    
had been done. Core samples  were currently being tested for                                                                    
"fracability" and  product yield. He added  that exploration                                                                    
could lead to  projects, but there was no  data available to                                                                    
project how  it would impact  the production profile  from a                                                                    
budgetary perspective.                                                                                                          
                                                                                                                                
3:09:14 PM                                                                                                                    
                                                                                                                                
Mr.  Barron addressed  the concept  of risk  on slide  9. He                                                                    
explained  that risk  was  a natural  component  of the  oil                                                                    
industry business. He read the last quote on slide 9:                                                                           
                                                                                                                                
     The ability to convey the relative riskiness of                                                                            
     various oil and gas projects in a consistent manner is                                                                     
     an elusive and desirable goal.                                                                                             
                                                                                                                                
     [Source:   Development   and   Implementation   of   an                                                                    
     Integrated Risk Assessment Methodology. Cutten, Evoy,                                                                      
     Grecu. SPE conference pater 1993]                                                                                          
                                                                                                                                
Mr. Barron  looked at  risk assumptions  on slide  10 titled                                                                    
"Accounting   for   the  Risks   Appropriately."   Currently                                                                    
producing  oil was  not  risked in  the  DOR forecast;  some                                                                    
people  had voiced  that  it should  have  been factored  in                                                                    
given the  lack of restart  on some existing  facilities the                                                                    
prior   summer.    He   acknowledged   the    existence   of                                                                    
uncertainties and  unknowns even in the  currently producing                                                                    
category.   The  DOR   consultant  had   done  a   ground-up                                                                    
assessment; every  well was factored into  the participating                                                                    
area  and  field-level review.  He  furthered  that DNR  had                                                                    
reviewed every  field decline  curve for  reasonableness and                                                                    
credibility; staff had not agreed  on everything, but it had                                                                    
agreed on the reasonableness and consistency.                                                                                   
                                                                                                                                
Mr. Barron  continued to discuss  risk assumptions  on slide                                                                    
10. Risk related  to new oil was factored  into the forecast                                                                    
beginning with  FY 15. He  stated that the  under evaluation                                                                    
portion of  the forecast had  a greater risk  component than                                                                    
the under  development category.  He relayed  that technical                                                                    
and non-technical risks had been  included in the review. He                                                                    
communicated that  many items impacted  production forecasts                                                                    
(e.g.  reserve assessment  and other).  The departments  had                                                                    
looked  at two  categories:  (1) budgetary  control and  (2)                                                                    
technical  or production  control; there  were many  subsets                                                                    
within the two  categories. The main question  was whether a                                                                    
project had come  on in time and if it  happened at the same                                                                    
rate  as  originally  forecast; multiple  items  could  have                                                                    
subtle impacts that were compounding.                                                                                           
                                                                                                                                
Mr.  Tangeman  emphasized  that currently  producing  fields                                                                    
were  not included  in the  forecast  risk assumptions;  the                                                                    
category  represented  a  very significant  portion  of  the                                                                    
projected oil for the current  and upcoming fiscal years. He                                                                    
clarified that the specific risk factor began in FY 15.                                                                         
                                                                                                                                
Mr. Barron moved to "Risk Factor  1: Delays" on slide 11. He                                                                    
relayed  that delays  (due to  equipment not  showing up  on                                                                    
time  or  facilities  were  delayed) were  likely  to  be  a                                                                    
budgetary  constraint.  He  pointed  out  that  publications                                                                    
(e.g. Petroleum  News and Oil  and Gas Journal)  were always                                                                    
accurate when they  predicted a project would  go online the                                                                    
following  year; however,  predictions became  less accurate                                                                    
when a  project was  scheduled to  come online  further into                                                                    
the future.  The only outlier  was related to year  7 (shown                                                                    
in a chart on slide 11)  when 7 years earlier when a company                                                                    
had accurately  specified when it would  bring the Northstar                                                                    
field  on. He  informed the  committee that  the numbers  on                                                                    
slide 11 were relative, but  it was important to account for                                                                    
delays or  projections would be  skewed. He  reiterated that                                                                    
the closer a prediction was to  the date it was scheduled to                                                                    
occur the more accurate it would be.                                                                                            
                                                                                                                                
3:14:17 PM                                                                                                                    
                                                                                                                                
Mr. Barron  addressed "Risk  Factor 2:  Performance Deviates                                                                    
from Expectations" on slide 12.  The slide showed production                                                                    
performances  for  oil   fields  including  Badami,  Aurora,                                                                    
Polaris,  and Prudhoe  Bay Satellites.  He  shared that  the                                                                    
Badami field had been late  coming online and production had                                                                    
peaked at 18,000 barrels per  day (compared to the predicted                                                                    
production of 30,000 to 35,000  barrels per day). The Aurora                                                                    
field  had  been predicted  to  produce  between 15,000  and                                                                    
20,000 barrels  per day,  but it had  peaked at  10,500. The                                                                    
Polaris  field  had  peaked  30 to  40  percent  lower  than                                                                    
expected.  However, Prudhoe  Bay satellite  fields had  been                                                                    
predicted  to   bring  in  40,000   barrels  per   day,  but                                                                    
production  had peaked  at 50,000.  He communicated  that it                                                                    
was possible  to have  upside [deviation  from expectations]                                                                    
as well  as downside.  He stressed that  uncertainty existed                                                                    
as  companies  progressed  a  project  from  exploration  to                                                                    
inception;  a company's  understanding  of recovery  factors                                                                    
and production  increased once a  project was  producing and                                                                    
more information was obtained.                                                                                                  
                                                                                                                                
Mr. Barron  directed attention to historical  ANS production                                                                    
on slide  13 [identical to  slide 7]. He explained  that the                                                                    
high-high  represented   on  the  chart  included   all  ANS                                                                    
production from 1992  to 2011; the lower  edge represented a                                                                    
confidence interval based on 1992 to 2006.                                                                                      
                                                                                                                                
3:16:11 PM                                                                                                                    
                                                                                                                                
Mr. Barron  pointed to slide  14 where DNR's  refined method                                                                    
was applied.  The red  line represented  industry production                                                                    
forecasting for  currently producing, under  evaluation, and                                                                    
under development fields without  the risk factors; the line                                                                    
was  not  dissimilar  from  other  forecasts  and  was  flat                                                                    
followed by  a slight  positive increase  and a  decline. He                                                                    
believed  it  was  important   for  the  administration  and                                                                    
departments to  provide committee members with  the high and                                                                    
low  sides and  a  prediction proposal.  The  low side  fell                                                                    
along  the lower  benchmark tranche  and excluded  the under                                                                    
evaluation  and under  development  categories. The  refined                                                                    
method  including  risk  for  under  development  and  under                                                                    
evaluation and  no risk for currently  producing yielded the                                                                    
green  curve  on  slide  14.  He  emphasized  that  the  two                                                                    
programs had  been done independently and  were combined for                                                                    
review   and  assessment.   The  refined   methodology  fell                                                                    
slightly on  the higher  side of  the spectrum's  middle. He                                                                    
opined  that the  projection was  reasonable;  the goal  had                                                                    
been  to  provide  policy  makers   with  a  benchmark  that                                                                    
provided risk profile boundaries.  Slide 15 showed a longer-                                                                    
term view  of the refined  model applied over time  [1978 to                                                                    
2022].                                                                                                                          
                                                                                                                                
3:19:01 PM                                                                                                                    
                                                                                                                                
Mr. Barron  addressed that the real  difference [between the                                                                    
original  and  refined  methods]  was  how  the  departments                                                                    
looked at  new oil. He  pointed to a graph  that illustrated                                                                    
the  new oil  share of  total production  on slide  16 [2012                                                                    
through 2021];  the blue bar represented  the 2011 forecast.                                                                    
The blue  bars increased  and then began  to flatten  out at                                                                    
approximately  40  percent  to   45  percent  of  the  total                                                                    
production. The  red bars represented the  2012 forecast and                                                                    
were  derived  by  using  a risk  model  relative  to  under                                                                    
evaluation  and under  development  tranches; out-year  risk                                                                    
was factored in with projects that were not yet online.                                                                         
                                                                                                                                
Mr. Barron  stressed that any  good modeler would  look back                                                                    
in history  to determine how  accurate the model  would have                                                                    
been.  He pointed  to a  spider diagram  on slide  17 titled                                                                    
"Testing  the  Refined  Method."  The red  line  showed  the                                                                    
original forecast  error from  2001 to  2010. The  blue line                                                                    
used the  refined method and showed  a significant reduction                                                                    
in overall error. He emphasized  that the refined model took                                                                    
away approximately 50 percent  of the error. He communicated                                                                    
that DNR  had been asked to  come up with a  method that was                                                                    
more reasonable,  more prudent, and more  practical in terms                                                                    
of the  out-year forecasting for  the under  development and                                                                    
under evaluation process.                                                                                                       
                                                                                                                                
Mr.  Tangeman  stated  that the  presentation  and  the  DOR                                                                    
Revenue Sources Book  were not meant to be  "doom and gloom"                                                                    
scenarios.  The  goal  had  been to  set  a  more  realistic                                                                    
baseline   for  decision   makers   while  recognizing   the                                                                    
tremendous up-side of the state's  resources. He stated that                                                                    
the forecast  had historically dealt  with what  is possible                                                                    
compared  to what  is probable  and had  always been  overly                                                                    
optimistic. He  pointed out  that chapter  4 of  the Revenue                                                                    
Sources Book provided additional detail on the issue.                                                                           
                                                                                                                                
3:22:19 PM                                                                                                                    
                                                                                                                                
Mr. Tangeman addressed potential  concern about what ratings                                                                    
agencies would think of the  state's process. He shared that                                                                    
Commissioner Butcher and Deputy  Commissioner Rodell had met                                                                    
with  the ratings  agencies in  late 2012  and had  received                                                                    
positive  feedback on  the department's  process. He  read a                                                                    
brief quote from the Standard and Poor's rating agency:                                                                         
                                                                                                                                
     The  state's Department  of Revenue  has  a good  track                                                                    
     record  forecasting year  ahead  prices and  production                                                                    
     levels. A bigger  issue for the state  is measuring the                                                                    
     long-term  rate   of  oil  production   decline.  Since                                                                    
     peaking in 1988  the average annual rate  of decline in                                                                    
     production has  been around  5.5 percent;  however, the                                                                    
     state's long-term  forecast has  consistently projected                                                                    
     a long-term  rate of annual  decline in  oil production                                                                    
     of just 2.5  percent or lower. As a  result the state's                                                                    
     long-term  forecast has  tended to  overestimate actual                                                                    
     production  levels. With  its  fall  2012 forecast  the                                                                    
     Department of Revenue has  revised the methodology used                                                                    
     to  develop its  longer-term production  forecasts. The                                                                    
     new  approach  applies  risk factors  to  discount  the                                                                    
     projected  oil  production  from oil  fields  that  are                                                                    
     still  under development  or in  the evaluation  stage.                                                                    
     Previously  production estimates  in the  forecast from                                                                    
     such fields  were not adjusted downward  to account for                                                                    
     their higher level of uncertainty.                                                                                         
                                                                                                                                
Mr. Tangeman elaborated that there  were many items a rating                                                                    
agency  took into  account. Price  and production  were both                                                                    
very critical  and DOR had  received great feedback  that it                                                                    
was  headed  in  the  right direction  with  its  production                                                                    
forecasting.                                                                                                                    
                                                                                                                                
Representative  Guttenberg wondered  whether an  independent                                                                    
entity had been called upon  to weigh in on the departments'                                                                    
approach to the forecasting  method. He observed that during                                                                    
his time working for the  legislature, price forecasters had                                                                    
admitted  that  they  were  always   wrong.  He  recalled  a                                                                    
legislative class  that had been  given in the past  on mega                                                                    
projects; it had  shown the ranges of  projects that failed,                                                                    
succeeded,  were over  budget,  and other.  He believed  the                                                                    
departments'  work  to  increase  forecasting  accuracy  was                                                                    
positive.                                                                                                                       
                                                                                                                                
Mr. Barron  replied that outside  source had not  been used;                                                                    
therefore,  the confidence  intervals  had been  established                                                                    
independently  of  the  scenario   plan.  The  Oil  and  Gas                                                                    
Division had  reached out to  some of its colleagues  in the                                                                    
industry  to  ask  if the  approaches  were  reasonable;  he                                                                    
relayed that  the answer  had been yes.  He stated  that the                                                                    
way  assessment   numbers  had   been  generated   could  be                                                                    
construed   as  arbitrary;   therefore,  DOR   numbers  were                                                                    
provided to  identify where tranches lay.  He furthered that                                                                    
the technique was not uncommon  in the oil and gas industry;                                                                    
he  had used  a  similar technique  for long-term  budgeting                                                                    
when he  had worked for  the industry. He  acknowledged that                                                                    
forecasting was "a degree of  wrongness" and the "best wrong                                                                    
answer we have today."                                                                                                          
                                                                                                                                
3:28:01 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg sited  a  disclaimer  on slide  8                                                                    
that stated  "These definitions are not  equivalent to those                                                                    
used  by  the  Society   of  Petroleum  Engineers  (SPE)  or                                                                    
Securities and  Exchange Commission (SEC) and  should not be                                                                    
used as  such." He questioned how  different the definitions                                                                    
were. He asked  if another analysis had been  done using the                                                                    
SPE and SEC definitions.                                                                                                        
                                                                                                                                
Mr. Barron responded that the  terms "under development" and                                                                    
"under  evaluation" were  common  industry  terms, but  they                                                                    
were not necessarily  the same terms used by SPE  or SEC. He                                                                    
stated that  prevalent phrases used were  "proven, probable,                                                                    
and potential."  The definitions  used in the  analysis were                                                                    
not far  off from those  of the  SEC and SPE.  He elaborated                                                                    
that under  the currently producing category  there could be                                                                    
several sub-layers  of SPE definitions;  for the  purpose of                                                                    
the  analysis the  basic definition  was adequate.  He added                                                                    
that  the other  two  tranches fell  within  a probable  and                                                                    
possible  category,  which  would   be  similar  to  an  SPE                                                                    
definition.                                                                                                                     
                                                                                                                                
Representative Guttenberg remarked  that the forecasting was                                                                    
now 30 percent wrong instead of 60 percent wrong.                                                                               
                                                                                                                                
Co-Chair  Stoltze understood  it  was not  possible to  find                                                                    
someone to conduct a  completely accurate price forecasting.                                                                    
He  discussed risk  and reward.  He provided  an approximate                                                                    
quote that the "U.S. tax  code is the greatest influencer of                                                                    
behavior." He wondered  about the influence of  tax codes on                                                                    
production. He expressed the  hope for further conversations                                                                    
with the departments throughout the legislative session.                                                                        
                                                                                                                                
3:30:23 PM                                                                                                                    
                                                                                                                                
Mr.  Tangeman  replied that  the  exercise  had been  purely                                                                    
technical  and had  not taken  tax, revenue,  or other  into                                                                    
account. He deferred the question  to Mr. Barron for further                                                                    
detail.                                                                                                                         
                                                                                                                                
Mr. Barron agreed. He expounded  that the model did not look                                                                    
at  product   price  or  fiscal  regimes;   the  model  used                                                                    
information  and historical  data related  to fields  on the                                                                    
North Slope and  industry fields in general.  He followed up                                                                    
on  Representative Guttenberg's  remark about  mega projects                                                                    
and stated that 30 percent  of projects were over budget and                                                                    
behind schedule 10  percent of the time;  the reality needed                                                                    
to   be  included   to  produce   a  realistic   model.  The                                                                    
departments  had not  attempted  to look  at  anything on  a                                                                    
micro  level. He  discussed other  parameters that  had been                                                                    
factored in including  the closer in time a  project was due                                                                    
to come online there was less risk and higher certainty.                                                                        
                                                                                                                                
Representative Gara  asked for  verification that  shale oil                                                                    
did  not fall  into  any of  the  three tranches  [currently                                                                    
producing, under development, and  under evaluation]. He had                                                                    
heard  from  an  industry  person  that  ConocoPhillips  had                                                                    
purchased leases around the Great Bear shale oil play.                                                                          
                                                                                                                                
Mr. Barron  affirmed that shale  oil did not fall  under the                                                                    
three  tranches (slide  8); it  fell  under the  exploration                                                                    
category.                                                                                                                       
                                                                                                                                
Representative  Gara asked  whether consideration  should be                                                                    
given to  shale oil.  He acknowledged  that shale  oil could                                                                    
turn out to  be nothing, but that it could  also turn out to                                                                    
be  a significant  source  of oil  production  on the  North                                                                    
Slope.                                                                                                                          
                                                                                                                                
Mr. Barron  answered that  the problem  with shale  was that                                                                    
there were  no benchmarks  showing its capacity  or duration                                                                    
to  date;  there was  "nothing  to  hang  your hat  on."  He                                                                    
stressed  that it  would  be  "unbelievably speculative"  to                                                                    
include anything like  shale in a state  forecast that would                                                                    
be used  to make  business decisions. He  added that  by the                                                                    
time shale was brought online  it would fall under the high-                                                                    
high and low-low profile.                                                                                                       
                                                                                                                                
3:34:30 PM                                                                                                                    
                                                                                                                                
Representative  Gara asked  if the  revised forecast  method                                                                    
was  trying  to  be  conservative or  hit  the  middle  line                                                                    
perfectly. Mr. Barron answered that  the departments did not                                                                    
want to skew the forecast  in either direction. The goal had                                                                    
been to  establish a method  that would assess  the relative                                                                    
risk related  to time  by the  [under development  and under                                                                    
evaluation] categories.  The forecast  could have  been much                                                                    
more conservative or more optimistic,  but the goal had been                                                                    
to use a technical and neutral methodology.                                                                                     
                                                                                                                                
Representative  Gara  wondered  whether  ConocoPhillips  had                                                                    
purchased leases  near the  shale area.  He referred  to Mr.                                                                    
Barron's statement  that he had  talked to industry  as part                                                                    
of the analysis; he surmised  there were members of industry                                                                    
who   may   overestimate    production,   others   who   may                                                                    
underestimate  their production  until oil  reform occurred,                                                                    
and others  who may be  accurate; he wondered how  the items                                                                    
were factored into the equation.                                                                                                
                                                                                                                                
Mr. Barron replied that industry  project engineers acted as                                                                    
salespeople   when   they   pitched   projects   to   senior                                                                    
management.  He communicated  that when  the DOR  consultant                                                                    
had met with industry engineers,  a budget component had not                                                                    
been included  in the discussion.  The consultant  had asked                                                                    
engineers  what  the  production   would  be  for  different                                                                    
projects;  the  refined method  had  absorbed  the data.  He                                                                    
looked at the  red line that showed a  gross un-risked basis                                                                    
(slide 14); the line  represented what had historically been                                                                    
presented in forecasts. He added  that the red line was also                                                                    
overly  optimistic. The  refined methodology  had looked  at                                                                    
accuracy  relative   to  time.   He  addressed   what  under                                                                    
development meant and  used the Badami field  as an example.                                                                    
The field had  been a "huge" capital cost to  BP when it had                                                                    
begun; it  had under  produced and  hundreds of  millions of                                                                    
dollars had  been spent on  the project. The  occurrence was                                                                    
unfortunate, but the risk was inherent to the business.                                                                         
                                                                                                                                
3:39:30 PM                                                                                                                    
                                                                                                                                
Mr. Barron addressed  Representative Gara's question related                                                                    
to leases  around shale  oil plays. He  stated that  most of                                                                    
the  leases  around  the  south Great  Bear  play  had  been                                                                    
purchased by Royale Energy. He  did not recall any major oil                                                                    
industry  companies  purchasing   leases  around  shale  oil                                                                    
plays. He would follow up with more detail.                                                                                     
                                                                                                                                
ANGELA  RODELL,  DEPUTY   COMMISSIONER,  TREASURY  DIVISION,                                                                    
DEPARTMENT OF  REVENUE, provided a power  point presentation                                                                    
titled  "An Update  on the  State's  Savings Accounts."  She                                                                    
began  on slide  3 related  to general  fund and  other non-                                                                    
segregated investments; the fund  was responsible for paying                                                                    
state bills.  The general fund  had a moderate  risk profile                                                                    
and  tended to  be  invested in  short to  intermediate-term                                                                    
investments due to  the high demand for  liquidity. The fund                                                                    
had a  balance of $11.67  billion on December 31,  2012. The                                                                    
Statutory Budget  Reserve (SBR) made up  the largest portion                                                                    
of  the general  fund with  a balance  of $5.487  billion on                                                                    
December  31,  2012;  the  amount  was  comprised  of  $1.75                                                                    
billion appropriated in FY 12,  $250 million appropriated in                                                                    
FY 13, and $805 million in  FY 12 surpluses. The other large                                                                    
piece   of  the   fund  was   the  Alaska   Housing  Finance                                                                    
Corporation  (AHFC) and  Alaska Housing  Capital Corporation                                                                    
deposits of  approximately $1 billion.  She relayed  that to                                                                    
date the  markets were  much improved  over the  prior year.                                                                    
The improvement  had been seen  in the returns; the  Year to                                                                    
Date (YTD) return was 1  percent compared to the Fiscal Year                                                                    
to Date (FYTD) return of 0.37 percent.                                                                                          
                                                                                                                                
Ms.  Rodell  addressed  the  Constitutional  Budget  Reserve                                                                    
(CBR) main  and sub funds on  slide 4. The main  fund had an                                                                    
intermediate, broad  market, short-term asset  allocation (a                                                                    
very conservative,  moderate risk mix).  The sub fund  had a                                                                    
higher risk asset allocation  and contained approximately 60                                                                    
percent equities. On December 31,  2012 the balance was $5.7                                                                    
billion in the  main fund and $5.5 billion in  the sub fund.                                                                    
She shared  that the totals  included the amounts paid  by a                                                                    
BP settlement in  December 2012; the CBR  received a deposit                                                                    
of approximately $160 million and  the remainder went to the                                                                    
Permanent Fund and Public School  Trust Fund. The YTD return                                                                    
was 1.9 percent  for the main fund and 11.2  percent for the                                                                    
sub fund due to the robust equities market return in 2013.                                                                      
                                                                                                                                
Ms.   Rodell   directed   attention  to   the   Power   Cost                                                                    
Equalization (PCE) Fund  on slide 5. She  explained that due                                                                    
to the  fund's 7 percent  target rate  it had a  higher risk                                                                    
tolerance and  asset allocation. She  was happy to  report a                                                                    
YTD return of  7.38 percent. The balance  was $787.5 million                                                                    
on December 31, 2012.                                                                                                           
                                                                                                                                
Ms. Rodell  spoke to the  Public School Trust Fund  on slide                                                                    
6.  She  detailed  that  the  fund's  income  was  used  for                                                                    
education formula  funding. The principal fund  was invested                                                                    
in  a  moderate risk  profile  made  up primarily  of  broad                                                                    
market and  equities (not  to the same  extent as  the CBR).                                                                    
The principal fund had a balance  of $487 million and a 10.7                                                                    
percent  YTD return.  The investment  income was  moved into                                                                    
the income fund for  eventual appropriation to Department of                                                                    
Education and Early  Development; it had a  balance of $10.4                                                                    
million on December 31, 2012.                                                                                                   
                                                                                                                                
3:45:31 PM                                                                                                                    
                                                                                                                                
Ms.  Rodell  addressed   the  Public  Employees'  Retirement                                                                    
System (PERS)  and Teachers'  Retirement System  (TRS) trust                                                                    
funds  on slide  7.  As  of December  31,  2012  PERS had  a                                                                    
balance of  $12.016 billion and  the TRS balance  was $5.018                                                                    
billion. She relayed that FY  12 had been challenging on the                                                                    
returns; the 0.52  percent return for PERS  and 0.59 percent                                                                    
return  for  TRS was  well  below  the 8  percent  actuarial                                                                    
target rate.  The FYTD  returns were  5.63 percent  and 5.68                                                                    
percent for PERS and TRS respectively.                                                                                          
                                                                                                                                
Ms.  Rodell  communicated  that the  Alaska  Permanent  Fund                                                                    
Corporation  (APFC)  had  a December  31,  2012  balance  of                                                                    
$43.654 billion (slide 8). She  noted that the number was up                                                                    
significantly  from  the prior  year.  The  fund saw  a  low                                                                    
return of 0.02  percent for FY 12, but with  the recovery of                                                                    
the  equity  markets  the  return  had  increased  to  12.58                                                                    
percent YTD and to 7.34 percent FYTD.                                                                                           
                                                                                                                                
Ms.  Rodell  concluded  with an  FY  13  investment  revenue                                                                    
forecast  (slide  10);  it  was also  included  in  the  DOR                                                                    
Revenue Sources Book as part  of the total revenue forecast.                                                                    
She  noted  that given  current  market  conditions and  low                                                                    
short-term rates a  0.6 percent return had been  used in the                                                                    
forecast rather  than a 2.87 percent  (the expected interest                                                                    
earning  over  a 10-year  period);  the  0.6 percent  return                                                                    
explained  some   of  the  declines  in   investment  income                                                                    
expectation.                                                                                                                    
                                                                                                                                
3:47:54 PM                                                                                                                    
                                                                                                                                
Commissioner   Butcher  spoke   to  a   question  posed   by                                                                    
Representative Gara  at a prior  meeting. He  explained that                                                                    
the two  CBR funds and  the SBR fund totaled  slightly under                                                                    
$17 billion.                                                                                                                    
                                                                                                                                
Co-Chair Austerman looked  at slide 4 and  surmised that the                                                                    
CBR main  and sub funds  could be subtracted from  the total                                                                    
reserve fund  to reach the SBR  amount. Commissioner Butcher                                                                    
replied  in  the affirmative.  He  added  that although  the                                                                    
PERS, TRS,  and APFC  funds were  flat for  FY 12,  they had                                                                    
been up approximately  20 percent for FY 11.  He stated that                                                                    
the returns had been "pretty  healthy" in the past two years                                                                    
and were approximately 7 percent  FYTD. The markets had been                                                                    
up and  down, but  targets had been  exceeded over  the past                                                                    
2.5-plus  years.   He  stated  that  although   markets  had                                                                    
recovered from the  drop in 2008 and 2009,  the numbers were                                                                    
still relatively low.                                                                                                           
                                                                                                                                
Co-Chair Austerman  asked about  the value  of the  SBR. Ms.                                                                    
Rodell  replied  that  the SBR  totaled  $5.487  billion  on                                                                    
December 31, 2012.                                                                                                              
                                                                                                                                
Representative  Munoz asked  if  the switch  from a  Defined                                                                    
Benefit  to a  Defined Contribution  system had  changed the                                                                    
department's  projected rate  of return  for the  retirement                                                                    
funds.                                                                                                                          
                                                                                                                                
Ms. Rodell  replied that  Defined Contribution  numbers were                                                                    
not   included  because   individuals   managed  the   asset                                                                    
allocation of  their accounts.  There were  approximately 25                                                                    
different investment options to select from.                                                                                    
                                                                                                                                
3:50:44 PM                                                                                                                    
                                                                                                                                
Representative Munoz understood, but  wondered how the shift                                                                    
had  impacted  the  projected rate  of  return.  Ms.  Rodell                                                                    
replied that  the change did  not have fiscal impact  on the                                                                    
retirement fund accounts shown in the presentation.                                                                             
                                                                                                                                
Representative  Gara asked  for  the current  amount in  the                                                                    
AHFC Capital  Investment fund. Ms.  Rodell replied  that the                                                                    
account  had contained  approximately  $600  million at  one                                                                    
point. She could provide an exact number at a later time.                                                                       
                                                                                                                                
Commissioner  Butcher agreed.  He  added that  the fund  was                                                                    
available for  appropriation for items like  forward funding                                                                    
for education.                                                                                                                  
                                                                                                                                
Representative  Edgmon asked  for a  definition of  the term                                                                    
Year to  Date. Ms. Rodell  replied that the current  YTD was                                                                    
January 1, 2013 to the current day (calendar year to date).                                                                     
                                                                                                                                
Representative Edgmon  surmised the state's fiscal  year had                                                                    
to be factored into a fund's earning performance.                                                                               
                                                                                                                                
3:52:30 PM                                                                                                                    
                                                                                                                                
Ms.  Rodell replied  in the  affirmative and  explained that                                                                    
Fiscal Year to Date was July 1, 2012 to the current day.                                                                        
                                                                                                                                
Representative Edgmon  asked what 7 percent  earnings on the                                                                    
$17 billion in reserves would equal.                                                                                            
                                                                                                                                
Commissioner  Butcher replied  that  the  7 percent  applied                                                                    
specifically  to the  PCE fund;  returns were  significantly                                                                    
lower  on other  state funds  because approximately  half of                                                                    
the   general  fund   was  invested   very  short-term   and                                                                    
intermediate term  due to liquidity  issues for  payments to                                                                    
the  operating and  capital budgets.  The projected  general                                                                    
fund return  was approximately 3  percent. The PERS  and TRS                                                                    
funds had  an 8 percent  target and APFC  had a target  of 5                                                                    
percent  plus inflation.  The  PCE fund  was  invested at  a                                                                    
higher risk given its statutory target return of 7 percent.                                                                     
                                                                                                                                
Co-Chair  Austerman   thanked  the  departments   for  their                                                                    
presentations and  discussed the schedule for  the following                                                                    
day.                                                                                                                            
                                                                                                                                
HB  65  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
HB  66  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
3:54:38 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:54 p.m.                                                                                          
                                                                                                                                

Document Name Date/Time Subjects
FY14 EED HFIN Overview 1_24_2013_MEL_1_23 No Notes.pdf HFIN 1/24/2013 1:30:00 PM
DEED Overview HFIN
HFIN DOR Oil Production Forecasting - FINAL (2).pdf HFIN 1/24/2013 1:30:00 PM
DOR Oil Forecast HFIN
HFIN Revenue Forecast OVERVIEW vFINAL2 01242013 (2).pdf HFIN 1/24/2013 1:30:00 PM
HFIN DOR Revenue Forecast
State Savings Accounts Update 1 22 13.pdf HFIN 1/24/2013 1:30:00 PM
DOR HFIN State Savings Update