Legislature(2011 - 2012)HOUSE FINANCE 519

04/25/2012 09:00 AM RESOURCES

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09:08:28 AM Start
09:09:13 AM HB3001
10:32:27 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
In Participation with House ENE
Heard & Held
-- Testimony <Invitation Only> --
Presentation: Impacts of Bill on State Revenue by
Office of Management and Budget
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         April 25, 2012                                                                                         
                           9:08 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Eric Feige, Co-Chair                                                                                             
Representative Paul Seaton, Co-Chair                                                                                            
Representative Peggy Wilson, Vice Chair                                                                                         
Representative Alan Dick                                                                                                        
Representative Neal Foster                                                                                                      
Representative Bob Herron                                                                                                       
Representative Cathy Engstrom Munoz                                                                                             
Representative Berta Gardner                                                                                                    
Representative Scott Kawasaki                                                                                                   
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER LEGISLATORS PRESENT                                                                                                     
Representative Chris Tuck                                                                                                       
Representative Mike Doogan                                                                                                      
Representative Alan Austerman                                                                                                   
Representative Lance Pruitt                                                                                                     
Representative Dan Saddler                                                                                                      
Representative Pete Petersen                                                                                                    
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 3001                                                                                                             
"An Act  relating to  adjustments to oil  and gas  production tax                                                               
values  based on  a percentage  of gross  value at  the point  of                                                               
production for  oil and  gas produced  from leases  or properties                                                               
north  of   68  degrees  North  latitude;   relating  to  monthly                                                               
installment payments of the oil  and gas production tax; relating                                                               
to  the determinations  of  oil and  gas  production tax  values;                                                               
relating  to  oil  and  gas   production  tax  credits  including                                                               
qualified  capital  credits   for  exploration,  development,  or                                                               
production; making  conforming amendments;  and providing  for an                                                               
effective date."                                                                                                                
     - HEARD & HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB3001                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
04/18/12       (H)       READ THE FIRST TIME - REFERRALS                                                                        
04/18/12       (H)       RES, FIN                                                                                               
04/20/12       (H)       RES AT 1:00 PM HOUSE FINANCE 519                                                                       
04/20/12       (H)       Heard & Held                                                                                           
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04/21/12       (H)       RES AT 10:00 AM HOUSE FINANCE 519                                                                      
04/21/12       (H)       Heard & Held                                                                                           
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04/21/12       (H)       RES AT 2:00 PM HOUSE FINANCE 519                                                                       
04/21/12       (H)       Heard & Held                                                                                           
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04/23/12       (H)       RES AT 9:00 AM HOUSE FINANCE 519                                                                       
04/23/12       (H)       Heard & Held                                                                                           
04/23/12       (H)       MINUTE(RES)                                                                                            
04/23/12       (H)       RES AT 1:00 PM HOUSE FINANCE 519                                                                       
04/23/12       (H)       Heard & Held                                                                                           
04/23/12       (H)       MINUTE(RES)                                                                                            
04/24/12       (H)       RES AT 9:00 AM HOUSE FINANCE 519                                                                       
04/24/12       (H)       Heard & Held                                                                                           
04/24/12       (H)       MINUTE(RES)                                                                                            
04/24/12       (H)       RES AT 1:00 PM HOUSE FINANCE 519                                                                       
04/24/12       (H)       Heard & Held                                                                                           
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04/25/12       (H)       RES AT 9:00 AM HOUSE FINANCE 519                                                                       
WITNESS REGISTER                                                                                                              
KAREN REHFELD, Director                                                                                                         
Office of Management & Budget (OMB)                                                                                             
Office of the Governor                                                                                                          
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  During the hearing on HB 3001, provided a                                                              
PowerPoint presentation entitled, "Alaska's Budget Outlook,"                                                                    
dated 4/25/12, and answered questions.                                                                                          
JOHN BOUCHER, Senior Economist                                                                                                  
Office of the Director                                                                                                          
Office of Management & Budget (OMB)                                                                                             
Office of the Governor                                                                                                          
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:   During the hearing on HB  3001, assisted in                                                           
a  PowerPoint presentation  entitled, "Alaska's  Budget Outlook,"                                                             
dated 4/25/12, and answered questions.                                                                                          
DAVID TEAL, Director                                                                                                            
Legislative Finance Division                                                                                                    
Legislative Agencies & Offices                                                                                                  
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   During the  hearing on  HB 3001,  provided                                                           
comments following  the presentation by the  Office of Management                                                             
& Budget, Office of the Governor.                                                                                               
ACTION NARRATIVE                                                                                                              
9:08:28 AM                                                                                                                    
CO-CHAIR  PAUL   SEATON  called  the  House   Resources  Standing                                                             
Committee meeting to order at  9:08 a.m.  Representatives Seaton,                                                               
Feige,  Herron, P.  Wilson, Kawasaki,  Gardner, Dick,  and Foster                                                               
were  present  at  the  call to  order.    Representatives  Munoz                                                               
arrived as the  meeting was in progress.  In  attendance from the                                                               
House Special  Committee on  Energy were  Representatives Pruitt,                                                               
Saddler,   Petersen,  and   Tuck.     Also  in   attendance  were                                                               
Representatives Doogan and Austerman.                                                                                           
               HB3001-OIL AND GAS PRODUCTION TAX                                                                            
9:09:13 AM                                                                                                                    
CO-CHAIR SEATON announced  that the only order  of business would                                                               
be HOUSE  BILL NO. 3001, "An  Act relating to adjustments  to oil                                                               
and  gas production  tax values  based on  a percentage  of gross                                                               
value at  the point of production  for oil and gas  produced from                                                               
leases  or  properties  north  of   68  degrees  North  latitude;                                                               
relating  to monthly  installment  payments of  the  oil and  gas                                                               
production tax;  relating to  the determinations  of oil  and gas                                                               
production tax  values; relating  to oil  and gas  production tax                                                               
credits  including  qualified  capital credits  for  exploration,                                                               
development,  or production;  making  conforming amendments;  and                                                               
providing for an effective date."                                                                                               
9:09:51 AM                                                                                                                    
KAREN  REHFELD, Director,  Office of  Management &  Budget (OMB),                                                               
Office  of  the  Governor,  said she  would  offer  a  PowerPoint                                                               
presentation   on   Alaska's   budget   outlook,   revenues   and                                                               
expenditures,  and the  potential impact  on future  budgets with                                                               
passage  of  HB  3001.    Her  presentation  would  also  include                                                               
background on  how OMB develops  its annual budget; a  brief look                                                               
at the current overall operating  and capital budgets; highlights                                                               
of  the 10-year  plan; and  discussion of  some of  the projected                                                               
revenue changes based  on the Department of  Revenue (DOR) fiscal                                                               
notes attached to HB 3001.                                                                                                      
MS.  REHFELD projected  slide 2  of the  PowerPoint presentation,                                                               
which displays the  governor's vision used by OMB  to develop the                                                               
annual budget:  economic growth  and strengthening families.  Ms.                                                               
Rehfeld  said   the  future  of   Alaska  rests   on  responsibly                                                               
developing its  natural resources and creating  jobs and economic                                                               
opportunities, especially  in light  of declining  oil production                                                               
and the price  of oil necessary to balance its  budget.  As shown                                                               
on slide 3,  she named the four budget principles  used by OMB to                                                               
develop  its proposals:   fiscal  restraint -  to spend  less and                                                               
save more  for the future;  strategic investments - made  to grow                                                               
the  economy;  cash reserves  -  the  2011 constitutional  budget                                                               
reserve  (CBR) and  the statutory  budget  reserve (SBR)  totaled                                                               
about $13 billion, with an  additional $2 billion appropriated to                                                               
the SBR in 2012; and focus  on results - agency missions and core                                                               
services that the  public expects to receive  from its investment                                                               
in state programs and services.                                                                                                 
MS. REHFELD  listed budget priorities -  shown on slide 4  - from                                                               
the  state constitution  and its  statutory framework:   resource                                                               
development - creating jobs for  Alaskans; education - to prepare                                                               
students  for success  in  vocational  training or  postsecondary                                                               
education; public  safety - for  safe homes and  strong families;                                                               
transportation/infrastructure - to  support economic development;                                                               
and military support - for missions and families.                                                                               
MS. REHFELD  presented slide 5  entitled, "FY2012/2013  Revenue &                                                               
Savings,"  which provides  a  chart of  the  spring forecast  and                                                               
budgets  passed by  the legislature  and awaiting  the governor's                                                               
signature.   Projected in fiscal year  2012 (FY 12) is:   revenue                                                               
of  about  $9.9  billion;  spending of  about  $7.4  billion;  an                                                               
available balance of  about $2.5 billion; deposits to  the SBR of                                                               
$1.75  billion; and  possible additional  savings  of about  $766                                                               
million.    Projected in  FY  13  is:    revenue of  about  $8.44                                                               
billion; spending of about $7.7  billion; an available balance of                                                               
$760  million; deposits  to the  SBR of  about $250  million; and                                                               
possible additional savings  of about $510 million.   She pointed                                                               
out that  the potential  savings for  FY 12 and  FY 13  under the                                                               
current spending proposal total $3.2 billion.                                                                                   
9:15:49 AM                                                                                                                    
MS.  REHFELD   acknowledged  the  spring  forecast   is  somewhat                                                               
conservative;  if oil  prices remain  at $120  per barrel  (/bbl)                                                               
there will be more revenue available.   However, it is known that                                                               
90 percent of the state's  unrestricted general fund (GF) revenue                                                               
comes from  oil production, and production  continues to decline,                                                               
thus high oil prices are masking  the effect of this decline, but                                                               
at  the same  time present  an opportunity  for savings.   As  an                                                               
aside, she noted that oil  prices of approximately $105/bbl would                                                               
be required to  balance the projected FY 13 budget.   Ms. Rehfeld                                                               
turned to  FY 13 proposed budget  sources of funds, slide  6, and                                                               
said the total proposed budget is  a little over $12 billion and,                                                               
of  that, roughly  53 percent  is  unrestricted GF.   About  one-                                                               
quarter of  the budget  is comprised  of federal  funds primarily                                                               
for  the Department  of Health  and Social  Services (DHSS),  the                                                               
Department of  Transportation &  Public Facilities  (DOT&PF), the                                                               
Department  of Education  and Early  Development (DEED),  and the                                                               
Department of Labor & Workforce  Development (DLWD), although all                                                               
departments receive  some federal  funds.  Further  federal funds                                                               
go directly  to the state  through the U.S. Department  of Health                                                               
and  Human   Services,  Indian   Health  Service,   and  military                                                               
spending.   As  an aside,  she  advised that  federal funding  is                                                               
expected  to decline  and its  impact  on the  state is  unknown.                                                               
Permanent  fund   dividends  (PFDs)  [earnings]   and  inflation-                                                               
proofing  contribute   about  12  percent  to   the  budget,  and                                                               
designated  GF  such as  University  of  Alaska receipts  and  GF                                                               
program  receipts contribute  7 percent.   Finally,  other funds,                                                               
such as international airport funds, contribute 4 percent.                                                                      
9:19:09 AM                                                                                                                    
MS.  REHFELD   presented  slide  7  entitled,   "FY2013  Proposed                                                               
Expenditures by  Category," which illustrates  that approximately                                                               
one-half  of   the  state's  expenses,  about   $6  billion,  are                                                               
nondiscretionary funds,  such as formula programs,  the Permanent                                                               
Fund, and items included in  statewide costs.  The other one-half                                                               
are discretionary funds and  include agency nonformula components                                                               
and capital  spending.  She  explained that under  the nonformula                                                               
component  of  35   percent  are  the  14   state  agencies,  the                                                               
University   of  Alaska,   the  Office   of  the   Governor,  the                                                               
legislature, and the Alaska Court System budgets.                                                                               
9:20:19 AM                                                                                                                    
CO-CHAIR  SEATON   asked  whether   discretionary  funds   are  a                                                               
combination of agency nonformula and capital budget funds.                                                                      
9:21:01 AM                                                                                                                    
MS. REHFELD answered  yes.  Returning to slide 7,  she said about                                                               
26 percent  of the budget is  for formula programs and  is mostly                                                               
taken up by the two largest  pieces of the formula program:  K-12                                                               
education and  pupil transportation cost $1.2  billion to support                                                               
54  school districts  and 129,000  students;  and Medicaid  costs                                                               
$1.64 billion,  with $676 million coming  from the GF.   The cost                                                               
of  Medicaid  is determined  by  the  number  of people  who  are                                                               
eligible and  enrolled, the utilization  of the program,  and the                                                               
cost of  providing the services.   Other elements of  the formula                                                               
program  include public  assistance,  foster  care programs,  and                                                               
power   cost  equalization   (PCE).     Statewide  appropriations                                                               
represent  12 percent  of  the total  budget  and include  annual                                                               
payments  of approximately  $613 million  to the  public employee                                                               
and teacher  retirement systems' unfunded liabilities.   She said                                                               
about  $400 million  from statewide  appropriations apply  to oil                                                               
exploration tax  credits, based on  which companies  are eligible                                                               
for credit  and outstanding credit  certificates that  are cashed                                                               
out in any  given year.  She said DOR  gives OMB those estimates,                                                               
which are  built into the  budget.   Ms. Rehfeld said  about $300                                                               
million apply  to debt service;  about $120 million apply  to the                                                               
school  debt reimbursement  program,  which reimburses  municipal                                                               
school  districts  for  a  portion of  the  cost  of  educational                                                               
facility  projects;  and about  $60  million  apply to  community                                                               
revenue  sharing  for  162 incorporated  and  150  unincorporated                                                               
communities,  including an  additional $25  million for  one-time                                                               
help with energy  costs.  The Permanent Fund is  about 12 percent                                                               
of  the  budget, including  funding  for  PFDs and  hold-harmless                                                               
provisions.   Ms.  Rehfeld said  the capital  budget is  about 15                                                               
percent  of the  total budget,  which was  increased by  about $1                                                               
billion  appropriated  by  the   legislature.    She  highlighted                                                               
important  elements:   resource  development; transportation  and                                                               
infrastructure   vital   for  economic   development,   including                                                               
highways  and  aviation; water  and  sewer  projects; the  harbor                                                               
grant   program;   energy    programs   for   renewable   energy,                                                               
weatherization, and  the home energy  rebate; rural  power system                                                               
upgrades;   deferred    maintenance;   public    safety;   school                                                               
construction   and  maintenance;   and   an  additional   general                                                               
obligation  bond package,  appropriated  by  the legislature,  of                                                               
$450 million for roads and port improvement projects.                                                                           
9:25:18 AM                                                                                                                    
CO-CHAIR  SEATON clarified  that  the  additional capital  budget                                                               
funding, and  funding for the  bond package, are not  included in                                                               
the pie chart on slide 7.                                                                                                       
9:25:28 AM                                                                                                                    
MS. REHFELD  confirmed that  is correct.   She projected  slide 8                                                               
entitled, "FY2013  Proposed Budget - Another  Perspective," which                                                               
is a  chart indicating another  way to look  at how the  money is                                                               
used:   approximately  60 percent  of  all funds  goes to  Alaska                                                               
communities,  individuals,  and organizations  through  Medicaid,                                                               
PFDs,  revenue  sharing,  school funding,  deposits  to  unfunded                                                               
liabilities,  capital  projects,   and  named  recipient  grants.                                                               
About  21  percent  goes  to   services  purchased  from  Alaskan                                                               
vendors, such as travel, lodging,  fuel, equipment, and supplies.                                                               
Finally, about  19 percent of  the total budget goes  to salaries                                                               
and benefits for the state's  workforce.  Ms. Rehfeld opined this                                                               
perspective is a way to display the overall budget in context.                                                                  
CO-CHAIR SEATON  asked if capital  projects are in  the purchased                                                               
services category.                                                                                                              
MS.  REHFELD answered  that capital  projects are  represented in                                                               
the 60  percent category.   Typically, many capital  projects are                                                               
for municipalities, and  large and small projects are  put out to                                                               
private industry for bid.                                                                                                       
MS. REHFELD turned attention to  the future and presented slide 9                                                               
entitled, "Ten-Year  Fiscal Plan,"  which displays  OMB's guiding                                                               
principles  for  improving  on   the  evaluation,  planning,  and                                                               
delivery of the budget:   to develop Alaska's natural resources -                                                               
economic  development  vital  to  the future  of  the  state  and                                                               
creation  of jobs  and opportunities  for  Alaskans; to  restrain                                                               
spending - budget discipline  to minimize unsustainable automatic                                                               
increases to formula programs; and to  save for the future - done                                                               
well  by  the legislature  and  governor  over the  last  several                                                               
years, given the environment the state has had.                                                                                 
MS. REHFELD  talked about focusing  on priorities  under Alaska's                                                               
constitutional and  statutory framework,  looking at  the mission                                                               
and core  services that the  department has been tasked  to carry                                                               
out,  maintaining  the  level  of   services  with  fixed  costs,                                                               
projecting costs  of increasing  capacity or  expanding services,                                                               
and considering and planning for new initiatives.                                                                               
9:30:20 AM                                                                                                                    
MS. REHFELD said the 10-year fiscal  plan is published on the OMB                                                               
website and  includes baseline scenarios for  individual agencies                                                               
and  new initiatives.   Also  on the  website are  four statewide                                                               
scenarios based on  variables in the price of  oil, including $90                                                               
oil,  flat-funding  of the  budget,  and  a 4  percent  increase.                                                               
Slides 10 and  11 illustrate the effects of OMB  Scenario 4:  the                                                               
potential fiscal impact of HB 3001  with a four percent growth in                                                               
agency operating components; the  projected increases in payments                                                               
to  unfunded  liabilities;  and  a  $1  billion  cap  on  capital                                                               
expenditures.   She advised that  a reduced capital budget  of $1                                                               
billion means the  state turns to a specific  focus on leveraging                                                               
dollars with  matching federal funds,  and the focus would  be on                                                               
funding deferred maintenance and schools.                                                                                       
MS.  REHFELD   continued  to  explain   that  the   revenues  and                                                               
expenditures adjusted for HB 3001  - illustrated by slides 10 and                                                               
11 -  reflect the timeframe of  the bill's fiscal note  [FY 13 to                                                               
FY 18].  On  slide 10:  the top line  represents the spring [2012                                                               
GF] revenue  forecast; the blue line  ["General Fund Expenditures                                                               
(Scenario  4 FY2013  10-year plan)"]  represents  OMB Scenario  4                                                               
projected expenditures,  incorporating the  budget that  was just                                                               
passed by the legislature, with  the "cap scenario" budget coming                                                               
into effect  in FY 14;  the green  line ["Spring 2012  GF Revenue                                                               
adjusted by HB  3001 FN dated 4/18/1012)"]  represents the change                                                               
in revenue,  based on  the fiscal note  worst case  scenario; the                                                               
yellow  shaded   area  ["Potential  Shortfall"]   represents  the                                                               
difference  between   the  revised  revenue  and   the  projected                                                               
expenditures;   and   the    black   line   ["projected   reserve                                                               
deposit/draw"]  represents the  amount that  would be  drawn from                                                               
reserves  to balance  the projected  expenditures to  FY 18.   In                                                               
response   to  Co-Chair   Seaton,  she   explained  the   revenue                                                               
projection was based on oil priced at $110/bbl.                                                                                 
9:35:26 AM                                                                                                                    
CO-CHAIR FEIGE asked for the forecasted level of production.                                                                    
MS. REHFELD said the forecast was  out of the Revenue Source Book                                                               
and is DOR's revised spring forecast.                                                                                           
REPRESENTATIVE PETERSEN returned attention  to slide 5, and asked                                                               
whether $110/bbl was the price used for those projections also.                                                                 
MS. REHFELD  answered yes.   She returned attention to  slide 10,                                                               
saying  that the  slide shows  the overall  impact of  the annual                                                               
draws on  reserves; however,  if the  price of  oil stays  at the                                                               
current  price of  $120/bbl, the  amount of  the potential  draws                                                               
will change.                                                                                                                    
CO-CHAIR SEATON  expressed the committee's  intent to ask  OMB to                                                               
generate scenarios  based on varying production  rates and prices                                                               
of  oil.   Also,  he offered  his understanding  that  the FY  13                                                               
budget reflects the actual budget,  but the projected budgets for                                                               
FY 14 and FY 15 reflect a cap at $1 billion.                                                                                    
MS. REHFELD responded that OMB updated  FY 13 based on the budget                                                               
that just passed;  FY 14 and beyond are projections  based on OMB                                                               
Scenario 4  with the capped  $1 billion  capital budget.   If the                                                               
committee wants  to look  at a  different level  of expenditures,                                                               
each adjustment would increase or decrease the draw on reserves.                                                                
CO-CHAIR SEATON  surmised that averaging  the capital  budget for                                                               
the past  two years  would add  an additional  $1 billion  to the                                                               
draw from reserves.                                                                                                             
MS. REHFELD said that is correct.                                                                                               
9:38:16 AM                                                                                                                    
REPRESENTATIVE MUNOZ asked for the  reserve balance projected for                                                               
FY 18, assuming the annual draws take place.                                                                                    
MS.  REHFELD,  in response,  drew  the  committee's attention  to                                                               
slide 11.    On slide  11: the orange bar  ["Spring 2012 Forecast                                                               
General Fund Unrestricted"] represents  the spring forecast of GF                                                               
revenues; the green  bar ["General Fund Revenues  Adjusted for HB                                                               
3001"] represents  adjusted revenue for  HB 3001; and  the yellow                                                               
bar  ["Budget Surplus/(Shortfall)"]  indicates the  required draw                                                               
from reserves.  New information is  shown in the gray bar ["Total                                                               
Reserves"], which indicates  that the balance in  reserves for FY                                                               
13,  after the  draw,  would  be $15.7  billion;  in  FY 18,  the                                                               
balance would be  $15.6 billion in reserves.   Ms. Rehfeld stated                                                               
the  importance of  understanding that  the combined  balances of                                                               
the CBR and  the SBR have grown  from $2.4 billion in FY  06 to a                                                               
projected  $16.1  billion  in  FY  13.    Ms.  Rehfeld  said  the                                                               
legislature has  excelled in growing significant  savings for the                                                               
state in  response to the high  price of oil.   She suggested the                                                               
heart  of the  issue is  in figuring  out how  much should  be in                                                               
savings  and  how  much  should   be  used  to  incent  increased                                                               
9:40:52 AM                                                                                                                    
REPRESENTATIVE HERRON observed HB 3001  seeks to change the taxes                                                               
and use the  dollars saved [by the industry]  for expenditures on                                                               
the North  Slope to flatten  the decline curve.   He acknowledged                                                               
that the  more the decline  curve is flattened, the  more revenue                                                               
the  state  will generate  over  time,  and  he  asked if  it  is                                                               
possible for  OMB to  determine how much  income is  generated by                                                               
each dollar lost in taxes.                                                                                                      
MS. REHFELD  advised that  a 3-D  model is  needed to  define the                                                               
aforementioned  investment because  data on  production would  be                                                               
required  from the  Division  of  Oil &  Gas  (DOG),  to then  be                                                               
interpreted  by DOR,  and the  expenditures would  be modeled  by                                                               
OMB.  She deferred to Mr. Boucher.                                                                                              
CO-CHAIR SEATON stated that the  committee had requested [DOG] to                                                               
provide speculation on the number  of barrels the state could see                                                               
from additional  fields, if those fields  became economic because                                                               
of the change in tax structure.                                                                                                 
9:43:02 AM                                                                                                                    
JOHN BOUCHER,  Senior Economist,  Office of the  Director, Office                                                               
of Management  & Budget (OMB),  Office of the  Governor, reminded                                                               
the committee that DOR can  illustrate what the state may receive                                                               
back  in revenue;  however, OMB  must  also try  to quantify  the                                                               
additional private  sector activity  that might  occur otherwise.                                                               
He agreed with Ms. Rehfeld on the core of the issue.                                                                            
REPRESENTATIVE  HERRON  opined  that   the  debate  going  on  is                                                               
regarding  what  amount invested  would  reduce  the decline  and                                                               
generate more  money for the state.   He said he  thinks it would                                                               
be  helpful  to those  on  both  sides of  the  debate  to see  a                                                               
presentation showing how many dollars  might be returned for each                                                               
dollar invested.                                                                                                                
MS. REHFELD responded that the  governor's goal is to create jobs                                                               
and grow  the economy,  and not necessarily  to offset  that with                                                               
more  money coming  to the  state.   She urged  for looking  at a                                                               
long-range  plan  that  will  create  a  vibrant  private  sector                                                               
employing many across the state.                                                                                                
REPRESENTATIVE  PETERSEN  returned  attention to  slide  11,  and                                                               
asked for the  assumed rates of return on investment  for the CBR                                                               
fund that will continue the projected growth.                                                                                   
MR.  BOUCHER answered  that OMB  used the  official returns  from                                                               
DOR, and he  recalled that the sub  account is in the  range of 6                                                               
percent, and  the long-term for  the main account, which  is more                                                               
conservatively invested, is approximately  3 percent.  He offered                                                               
to provide the exact figures.                                                                                                   
9:46:58 AM                                                                                                                    
REPRESENTATIVE PETERSEN  returned to slide 10,  and asked whether                                                               
reducing the capital  budget to $1 billion would  affect the rate                                                               
of unemployment.                                                                                                                
MS. REHFELD said there has  not been an analysis on unemployment;                                                               
however,  $1 billion  in the  GF would  be added  to federal  and                                                               
other funds of  about $1 billion.  In  total, without significant                                                               
changes in federal funding, the  capital budget would approach $2                                                               
billion,  which  would  -  over time  -  support  the  workforce.                                                               
Although not  refined over the  long-term, decisions are  made on                                                               
an annual basis, she said.                                                                                                      
REPRESENTATIVE PETERSEN  recounted having  heard from  the Alaska                                                               
Congressional  Delegation to  expect reductions  in funding  from                                                               
the federal government.   He requested a  long-term projection of                                                               
the effects  reduced funding  in the state  budget would  have on                                                               
unemployment in Alaska.                                                                                                         
MS. REHFELD  relayed that the  House Special Committee  on Fiscal                                                               
Policy (HFPY) is  actively looking at changes  to federal funding                                                               
and other  long-term issues,  and OMB will  focus on  whether the                                                               
state  would be  in a  position to  replace any  loss of  federal                                                               
funding.  In response to  Co-Chair Seaton, she clarified that the                                                               
revenue forecast  with a  cap of $1  billion on  capital spending                                                               
was only based on the GF.                                                                                                       
MR. BOUCHER  suggested that members  think of the amount  of cash                                                               
at  stake in  terms of  investment, and  that a  portion of  that                                                               
would  shift   from  state-purchased  construction   activity  to                                                               
private  sector  oil  and  gas  activity.    This  could  mean  a                                                               
different or similar  type of work, but it  would not necessarily                                                               
be that a $1 billion reduction  in the state capital budget would                                                               
mean an equal reduction in purchased construction.                                                                              
REPRESENTATIVE  PETERSEN  expressed  his understanding  that  the                                                               
spending would  shift to oil fields  from specific state-financed                                                               
projects around the state.                                                                                                      
MR. BOUCHER  responded, "In a  very large sense,  that's somewhat                                                               
what I think would occur."                                                                                                      
9:52:15 AM                                                                                                                    
CO-CHAIR  FEIGE  recalled  the  state  has  had  healthy  capital                                                               
budgets in the last three to  four years and HB 3001, if enacted,                                                               
may reduce  the capital budget  from approximately $3  billion to                                                               
$2 billion.  He  said the state is not expending  $3 billion in a                                                               
year; a  lot of  it is  getting rolled  over to  the future.   He                                                               
explained  the state  has a  kind of  rolling reserve  of capital                                                               
projects  that represent  a lot  of jobs;  it could  have a  zero                                                               
capital budget  next year and  still be keeping  people employed.                                                               
He asked if OMB could relate  "how much is actually from what has                                                               
already been  committed in previous years'  capital budgets [and]                                                               
how much is still left to be spent."                                                                                            
MS. REHFELD said  she was unsure; however, she  advised there are                                                               
a number of different components  to a capital budget.  Typically                                                               
a simple  GF project  can be  completed in a  five-year term.   A                                                               
number of  projects are federally  funded, such as those  that go                                                               
through DOT&PF.   Those projects,  she said, typically  take more                                                               
time, because  they require permitting  and other  steps required                                                               
under  the Federal  Highway  or Federal  Aviation  program.   She                                                               
ventured that in DOT&PF's budget,  there are a significant number                                                               
of federally authorized projects not  yet completed.  Ms. Rehfeld                                                               
said another group of projects  are grants to municipalities, the                                                               
timing  of which  varies depending  on  a municipal  government's                                                               
ability to  enter into grant  agreements.  She offered  to report                                                               
on  what  projects  have  been  authorized,  how  much  has  been                                                               
encumbered,  and  what  balances  are  remaining,  although  this                                                               
information  may not  answer  the  question at  a  high level  of                                                               
specificity, she said.                                                                                                          
9:55:34 AM                                                                                                                    
CO-CHAIR  SEATON asked  OMB to  prepare a  report on  the state's                                                               
history of  capital spending during  periods of  deficit spending                                                               
from  2001  to  2006.   He  explained  he  would  like to  see  a                                                               
comparison  of what  the capital  spending was  during the  years                                                               
when the legislature had to take  money out of savings and "since                                                               
2006, when we've been under a different regime."                                                                                
MS.  REHFELD suggested  that  the  Legislative Finance  Division,                                                               
Legislative   Agencies  &   Offices,   may   already  have   that                                                               
CO-CHAIR  SEATON  urged  that  the   committee  take  a  look  at                                                               
responses to deficits other than a $1 billion cap on spending.                                                                  
MR. BOUCHER said from an  historical perspective, a $1 billion GF                                                               
capital budget in deficit spending  is extremely high, but it was                                                               
chosen as  an example  because it would  be a  relatively healthy                                                               
capital  budget   assumption  and   would  allow  for   a  fairly                                                               
significant amount of non-matching, straight GF projects.                                                                       
CO-CHAIR SEATON said he understood  the reason for the $1 billion                                                               
cap scenario;  however, he said,  "I don't think that's  been the                                                               
response  of the  legislature  all  the time."    He opined  that                                                               
speculating that  a $1 billion  capital budget is "healthy"  - in                                                               
the context that  it is taken from savings -  should be looked at                                                               
by the committee and not assumed.   He re-stated the need to look                                                               
at all responses.                                                                                                               
9:59:08 AM                                                                                                                    
REPRESENTATIVE SADDLER,  referring to historical spending  by the                                                               
state on  operating expenses, asked if  agency spending increased                                                               
following the  change in the  tax system from  production profits                                                               
tax  (PPT) to  Alaska's Clear  & Equitable  Share (ACES)  and the                                                               
concurrent rise in oil prices.                                                                                                  
MS.  REHFELD  stated that  some  of  the  big increases  were  in                                                               
formula  and statewide  costs  related to  oil  tax credits,  the                                                               
three-year  education funding  plan, and  direct deposits  to the                                                               
unfunded liability of the retirement system.                                                                                    
CO-CHAIR SEATON  advised the  committee would  be looking  at the                                                               
effect of the state's commitments  to capital credits for the oil                                                               
industry  - which  are all  based  on "spend"  with disregard  to                                                               
revenue  -   and  which  are   an  ongoing  obligation   that  is                                                               
independent of the revenue stream.                                                                                              
REPRESENTATIVE SADDLER asked for  an estimate of additional state                                                               
revenue from  royalties, income taxes,  and severance  taxes that                                                               
would result from the changes made by HB 3001.                                                                                  
MS. REHFELD deferred to DOR.                                                                                                    
CO-CHAIR FEIGE  returned attention  to the production  numbers in                                                               
DOR's Revenue  Source Book  on which  OMB based  its budget.   He                                                               
stated that  with the effects of  HB 3001, one would  assume that                                                               
lowering the  taxes makes  more money  available to  industry for                                                               
investment, and  thereby would  result in  a rise  in production.                                                               
He asked  whether OMB accounted  for that rise in  production and                                                               
the subsequent additional revenue.                                                                                              
MS.  REHFELD  relayed that  estimates  of  the potential  revenue                                                               
generated  from investment  must  come  from DOR  and  DNR.   She                                                               
explained that  OMB relies on  the expertise  of DNR and  DOR for                                                               
the information on  which to base its budget  decisions, and does                                                               
not arrive  at numbers  independently.    In further  response to                                                               
Co-Chair Feige,  she confirmed  the committee  would need  to ask                                                               
DOR directly.                                                                                                                   
CO-CHAIR SEATON  acknowledged that  the committee is  asking some                                                               
speculative  questions;   however,  it   can  question   the  oil                                                               
companies on  their historic  application of  capital, especially                                                               
that of ConocoPhillips  Alaska, Inc.  In fact, in  2010 and 2011,                                                               
the committee  can see ConocoPhillips' allocation  of profits and                                                               
where  its profits  went on  a  percentage basis.   He  suggested                                                               
asking the  industry Representative  Herron's question,  and also                                                               
asking for  the historic perspective  of asset allocation  by the                                                               
oil companies.   He acknowledged that is a  difficult question to                                                               
ask  OMB,   and  ventured  that  DOG's   perspective  numbers  on                                                               
additional oil production would be helpful.                                                                                     
10:05:47 AM                                                                                                                   
REPRESENTATIVE SADDLER returned to slide  11 and pointed out that                                                               
the total estimated reserve funds in  FY 18 are about the same as                                                               
in FY  13, because funds  are taken from the  SBR.  He  asked for                                                               
the stated purpose  of the SBR, and whether it  is appropriate to                                                               
use SBR funds "to fill this hole in revenue."                                                                                   
MS. REHFELD  responded that the SBR  and the CBR are  the state's                                                               
savings  accounts.   She opined  there  is no  limitation on  the                                                               
state's  use of  the SBR;  language in  the annual  appropriation                                                               
bill  allows  the  state  to  use  the  SBR  if  the  balance  is                                                               
insufficient to  cover expenditures.   The reason that  funds are                                                               
taken from the  SBR in the forecast  is that in order  to use CBR                                                               
funds, there must  be a supporting vote by  three-quarters of the                                                               
legislature;  therefore,  SBR  funds   have  become  the  savings                                                               
account accessed first.                                                                                                         
REPRESENTATIVE SADDLER asked for  confirmation that SBR funds are                                                               
designed for this use.                                                                                                          
MS. REHFELD  responded that is correct.    She concluded  that at                                                               
the  end of  [FY 18]  -  the period  anticipated in  the HB  3001                                                               
fiscal note  - there  would still be  a healthy  reserve balance.                                                               
She said the governor's goal for  HB 3001 is to grow the economy,                                                               
create jobs, and turn around the production decline.                                                                            
CO-CHAIR  SEATON spoke  of the  need for  additional analysis  of                                                               
scenarios  assuming  the price  of  oil  at $20/bbl  higher,  and                                                               
$20/bbl lower,  than the price in  OMB's Scenario 4.   He said he                                                               
presumes this  analysis would more  accurately reveal  the impact                                                               
of volatile oil prices.                                                                                                         
CO-CHAIR  FEIGE  requested  OMB add  production  numbers  to  the                                                               
MS. REHFELD agreed.                                                                                                             
REPRESENTATIVE  MUNOZ  stated  that   the  HB  3001  fiscal  note                                                               
estimates forecasts with  5 percent, 10 percent,  15 percent, and                                                               
20 percent  increases in production.   She asked for  an analysis                                                               
on  the impact  of those  changes  on savings  and other  figures                                                               
provided in OMB's PowerPoint.                                                                                                   
MS. REHFELD agreed.                                                                                                             
10:12:14 AM                                                                                                                   
DAVID TEAL,  Director, Legislative Finance  Division, Legislative                                                               
Agencies  and Offices,  cautioned  that  the Legislative  Finance                                                               
Division does not  take a position on bills;  however, he offered                                                               
to comment on the presentation by  OMB.  He directed attention to                                                               
slide 3, noting  that one of OMB's budget  principles is building                                                               
cash reserves.  He affirmed  that the legislature should be aware                                                               
that building cash  reserves is important for  the future because                                                               
of the  projected deficits, which  will occur without  changes to                                                               
the production tax  structure, and which will  become even larger                                                               
with changes to the tax structure.                                                                                              
MR.  TEAL  agreed   with  members  of  the   committee  that  the                                                               
legislature needs  to see how  the deficit changes  if production                                                               
increases.   Referencing  slide 7,  he pointed  out that  the PFD                                                               
program  is  discretionary  spending,  and he  said  if  deficits                                                               
continue  to  eat into  reserves,  the  PFD  program may  not  be                                                               
affordable; in  fact, the $1 billion  cost of the PFD  program is                                                               
about the same amount that is lost  in revenue under HB 3001.  He                                                               
stressed  that the  state cannot  continue  to have  a cash  flow                                                               
deficit forever and, although reserves  will help the state for a                                                               
period, funding for  the PFD program can be used  instead to fund                                                               
government operations.                                                                                                          
MR. TEAL  turned to the  subject of  savings, noting on  slide 11                                                               
the total reserves  in FY 13 are $15.7 million  and are projected                                                               
to  be  basically the  same  in  FY 18.    In  fact, the  SBR  is                                                               
declining  because  it  is  being  used  to  fund  deficits;  the                                                               
reserves  don't decline  with the  SBR because  CBR earnings  are                                                               
offsetting the  expenditures.  He  said the point is  that Alaska                                                               
is like a  person nearing retirement; declining  earnings must be                                                               
replaced  by  earnings  from  savings,  thus  cash  reserves  are                                                               
critical as oil production declines.                                                                                            
MR.  TEAL,  in  response  to the  previous  questions  stated  by                                                               
Representatives  Herron  and  Petersen, regarding  whether  money                                                               
invested on increased production  is recovered, acknowledged that                                                               
OMB  makes a  good  point about  jobs, but  jobs  also come  from                                                               
keeping  tax  revenue  for  spending  as  capital  budget.    The                                                               
question remains whether  the state would benefit  more from that                                                               
than letting  the oil companies  keep the money and  invest "just                                                               
in  one way."    He  suggested turning  the  question around  and                                                               
asking how  much more  production would be  required in  order to                                                               
break even, because  the approximate costs of the  tax change are                                                               
known  and it  is possible  to see  the negative  cash flow.   He                                                               
offered an  example of  figuring out whether  a 2  percent annual                                                               
increase in  production would  generate enough  cash flow  over a                                                               
period of years  to produce a net present value  (NPV) back up to                                                               
zero,  or whether  it would  take a  great percent  increase, and                                                               
whether that level of production would be reasonable.                                                                           
10:19:23 AM                                                                                                                   
CO-CHAIR SEATON asked whether  [the Legislative Finance Division]                                                               
has those calculations or can provide them.                                                                                     
10:19:48 AM                                                                                                                   
MR.  TEAL answered  no.   He said  DOR and  DNR have  to generate                                                               
those numbers.                                                                                                                  
10:19:52 AM                                                                                                                   
CO-CHAIR   SEATON  clarified   that  his   question  related   to                                                               
Representative Herron's previous question:   How much production,                                                               
at estimated costs,  would it take to get back  $1 billion in tax                                                               
MR. TEAL  said he did  not know.  He  explained that the  oil tax                                                               
issue  has not  involved  his division,  because  of its  neutral                                                               
position, and although  he could do more modeling,  the source of                                                               
the numbers would be DNR and DOR.                                                                                               
CO-CHAIR  SEATON said  he would  inquire  as to  who can  provide                                                               
MR. TEAL offered  to provide the graph on  the state's historical                                                               
spending  patterns  which  was prepared  for  the  House  Special                                                               
Committee  on Fiscal  Policy.   He advised  the state  endured 20                                                               
years  in  deficit  spending  with no  increase  in  capital  and                                                               
operating  spending.   He  agreed  with  Mr.  Boucher that  a  $1                                                               
billion capital budget is high; on  the other hand, the state and                                                               
legislature can be fiscally conservative  if there is no money to                                                               
spend in the operating budget.                                                                                                  
CO-CHAIR SEATON requested the  information on historical spending                                                               
10:23:17 AM                                                                                                                   
REPRESENTATIVE  PRUITT referred  to  DOR's  Revenue Source  Book,                                                               
page  39, which  shows  "the total  North  Slope production  from                                                               
2011," and  he indicated that DOR  included opportunities related                                                               
to development,  valuation, and "what  we potentially  could have                                                               
total."   He said OMB  used numbers  "off of what's  projected in                                                               
here."   He recommended  asking DOR  what changes  it anticipates                                                               
from  the  effects  of  HB  3001, so  that  OMB  can  adjust  its                                                               
projections  and  come  back  before the  committee.    He  said,                                                               
"Because right now,  if you just look at from  2011 to 2018, it's                                                               
a  48,000 per  day barrel  drop.   How  is this  going to  change                                                               
that?"    He  said  he   thinks  that  will  help  the  committee                                                               
understand, because  the information would clarify  the situation                                                               
if a change is made with no new production.                                                                                     
CO-CHAIR  SEATON observed  that the  committee is  constrained by                                                               
DOR's  estimates  that  are  simply   various  percentages.    He                                                               
     That's why  we've asked  the Division of  Oil &  Gas to                                                                    
     come back and  say what, in addition to  these plans of                                                                    
     development that  are listed,  do they  speculate would                                                                    
     be out  there because [DOR]  said that they  don't have                                                                    
     ... that  information.  So,  hopefully, we can  ... get                                                                    
     that information  from [DOG] ... although,  the caveats                                                                    
     are  from  them  that  it's going  to  be  speculative.                                                                    
     Yeah, speculation by [DOG] is  much better than most of                                                                    
     us sitting  here trying to guess  off a ... 5,  10, 15,                                                                    
     20 percent range  with no ... knowledge  of what fields                                                                    
     are even potentially available.                                                                                            
REPRESENTATIVE  PRUITT opined  all the  information presented  is                                                               
speculative, and he  called for a better  estimate for comparison                                                               
of "what  we saw today with  ... those new numbers  thrown in the                                                               
same projections."                                                                                                              
CO-CHAIR SEATON explained  he used the term  speculative in order                                                               
to prevent a misunderstanding of guaranty.                                                                                      
10:27:34 AM                                                                                                                   
REPRESENTATIVE P. WILSON recalled having  to cut the state budget                                                               
year after year in the past,  and described doing so as "no fun."                                                               
She  encouraged  the  committee  to  seriously  consider  how  to                                                               
sustain the present budget before adding programs.                                                                              
CO-CHAIR   SEATON   expressed   appreciation   for   Mr.   Teal's                                                               
perspective that the  surplus is not just to "tide  us over," but                                                               
that the  CBR and  the SBR  are the  earnings that  will generate                                                               
some of  the state's flow of  capital in the long-term.   He said                                                               
it is a perspective that had previously not been discussed.                                                                     
REPRESENTATIVE PETERSEN returned attention  to the chart on slide                                                               
11  and  said  that  added  together, the  HB  3001  fiscal  note                                                               
adjustments from [FY 13 through  FY 18] equal $8.125 billion, and                                                               
if that is added to the  total reserves, it would put the state's                                                               
reserves at  $27.243 billion  in 2018, and  that is  not counting                                                               
any lost interest on investments over  those six years.  He said,                                                               
"It would be probably pushing  in the neighborhood of $30 billion                                                               
that we would  have in our reserve accounts."   He explained that                                                               
he  wants  the  committee  to   consider  that  as  one  of  many                                                               
[HB 3001 was held over.]                                                                                                        
10:32:27 AM                                                                                                                   
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 10:32 a.m.                                                                

Document Name Date/Time Subjects
House Resources for HB 3001 04.25.2012 Final.pdf HRES 4/25/2012 9:00:00 AM
BP Letter April 27th, 2012.pdf HRES 4/25/2012 9:00:00 AM