Legislature(2005 - 2006)

01/14/2005 08:32 AM House W&M


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08:32:56 AM Start
08:32:56 AM Overview: Department of Revenue
10:08:15 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
              SPECIAL COMMITTEE HOUSE WAYS & MEANS                                                                            
                        January 14, 2005                                                                                        
                           8:32 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Bruce Weyhrauch Chair                                                                                            
Representative Norman Rokeberg (via teleconference)                                                                             
Representative Ralph Samuels                                                                                                    
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Representative Max Gruenberg                                                                                                    
                                                                                                                              
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Carl Moses                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
OVERVIEW:  DEPARTMENT OF REVENUE                                                                                                
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
WILLIAM CORBUS, Commissioner                                                                                                    
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Offered an overview regarding the Department                                                                
of Revenue's fall forecast.                                                                                                     
                                                                                                                                
TOMAS H. BOUTIN, Deputy Commissioner                                                                                            
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Presented an overview regarding the                                                                         
Department of Revenue's fall forecast.                                                                                          
                                                                                                                                
DAN DICKINSON, Director of the Tax Division                                                                                     
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   Answered questions  and further  explained                                                               
the  fall  forecast during  the  overview  of the  Department  of                                                               
Revenue.                                                                                                                        
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  WEYHRAUCH  called the  meeting  to  order at  8:32:56  AM.                                                             
Representatives Samuels,  Seaton, and Wilson were  present at the                                                               
call  to  order.   Representatives  Gruenberg  and Rokeberg  (via                                                               
teleconference) arrived as the meeting was in progress.                                                                         
                                                                                                                                
^OVERVIEW:  DEPARTMENT OF REVENUE                                                                                               
                                                                                                                                
8:32:56 AM                                                                                                                    
                                                                                                                                
CHAIR  WEYHRAUCH commented  that it  was a  pleasure to  have the                                                               
same  group  of  Representatives  working on  the  House  Special                                                               
Committee on Ways and Means as  last year.  He announced that the                                                               
purpose  of today's  meeting was  to  have an  overview with  the                                                               
Department of Revenue.                                                                                                          
                                                                                                                                
8:33:54 AM                                                                                                                    
                                                                                                                                
WILLIAM A. CORBUS, Commissioner,  Department of Revenue, would be                                                               
presenting on  behalf of the  Department of Revenue and  he noted                                                               
the presence of the following  from the department: Tomas Boutin,                                                               
Deputy  Commissioner,  Department   of  Revenue,  Dan  Dickinson,                                                               
Director of  the Tax Division;  via teleconference  from Seattle,                                                               
Mike Williams, the new Chief  Petroleum Economist replacing Chuck                                                               
Logsdon,  and Brett  Fried with  Tax Division.   He  informed the                                                               
committee  that  he  would  be   presenting  an  outline  of  the                                                               
Department  of  Revenue's views  on  the  financial condition  of                                                               
state and the fall revenue forecast.                                                                                            
                                                                                                                                
COMMISSIONER CORBUS  conveyed the  three financial  conditions of                                                               
the state:  the short-term,  long-term, and  very long-term.   He                                                               
stated that the  short-term is relatively good;  the long-term is                                                               
bad, and the very long-term after the pipeline should be good.                                                                  
                                                                                                                                
8:37:39 AM                                                                                                                    
                                                                                                                                
TOMAS  H. BOUTIN,  Deputy  Commissioner,  Department of  Revenue,                                                               
commented that  the short-term depends  on three  components: the                                                               
cash  flow,  reserves,  and  liabilities.     The  fall  forecast                                                               
combined  with  the fiscal  year  (FY)  05  budget and  with  the                                                               
submitted FY06 budget shows net surplus  for the two years.  Also                                                               
in  the  OMB [Office  of  Management  & Budget]  FY06  Governor's                                                               
Budget  Fiscal  Summary  the FY06  budget  shows  a  year-to-year                                                               
spending reduction,  so the short-term cash  flow looks positive.                                                               
Mr.  Boutin opted  to  switch topics  from  fund balances  [which                                                               
refers  to budget]  to  cash balances  [which  the Department  of                                                               
Revenue  depicts  to  the  credit rating  agencies  and  are  the                                                               
measurer of liquidity].                                                                                                         
                                                                                                                                
8:39:15 AM                                                                                                                    
                                                                                                                                
MR.  BOUTIN said  that the  general fund  has a  cash balance  of                                                               
about  $290  million and  another  $30  million  is in  a  daily-                                                               
suspended account  until reconciliation and some  portion of that                                                               
will be  general fund.   The Constitutional Budget  Reserve (CBR)                                                               
amounts to  $2.15 billion today  and the permanent fund  has over                                                               
$29.5 billion, which totals a combined liquidity of $32 billion.                                                                
                                                                                                                                
8:39:36 AM                                                                                                                    
                                                                                                                                
MR. BOUTIN stated:                                                                                                              
                                                                                                                                
     What  the  State  Bond   Committee  and  Department  of                                                                    
     Revenue  show the  rating  agencies  for their  reserve                                                                    
     calculations  and  their  measures of  liquidity  is  a                                                                    
     general  fund  in  the   CBR  balances  combined,  plus                                                                    
     permanent fund earnings reserve; and  that we show as a                                                                    
     balance available  for appropriation.   And  we compare                                                                    
     that along  with forecasted  revenues and  current year                                                                    
     in  expected  budgets and  that  is  the liquidity  and                                                                    
     reserves  that   the  credit  rating   agencies,  their                                                                    
     analysts, have always used for  measures of the state's                                                                    
     current fiscal health.   Short-term liabilities consist                                                                    
     of  about $13.8  million annually  for debt  service on                                                                    
     lease  debt  and  $19.7 million  this  year  and  $31.8                                                                    
     million for  FY06 for general obligation  debt service.                                                                    
     Another  9 million  dollars each  year is  for the  so-                                                                    
     called  GARVEE  [Grant Anticipation  Revenue  Vehicles]                                                                    
     bonds,  while those  have a  general obligation  pledge                                                                    
     with them  the debts  service is substantially  paid by                                                                    
     federal receipts.  As an  aside to the discussion about                                                                    
     short-term liabilities, just in  case it would come up,                                                                    
     total general obligation debt  outstanding on last June                                                                    
     30 was  $461.9 million,  including those  GARVEE bonds,                                                                    
     and  state  lease  debt outstanding  was  another  $203                                                                    
     million and  those two  combined we  ... in  the credit                                                                    
     rating   agencies  see   ...   as   our  general   fund                                                                    
     indebtedness.                                                                                                              
                                                                                                                                
8:42:04 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GRUENBERG suggested that perhaps a sheet with all                                                                
the figures would help clarify the Department of Revenue's                                                                      
information.                                                                                                                    
                                                                                                                                
8:42:16 AM                                                                                                                    
                                                                                                                                
MR. BOUTIN obliged Representative Gruenberg's request.  Mr.                                                                     
Boutin asserted:                                                                                                                
                                                                                                                                
     Another  long-term   liability,  but  one  of   a  very                                                                    
     different  nature than  debt, is  the unfunded  pension                                                                    
     liabilities  and total  unfunded  liabilities for  PERS                                                                    
     [Public   Employees'   Retirement   System]   and   TRS                                                                    
     [Teachers'  Retirement  System],   as  of  6/30/03  was                                                                    
     $4.959   billion.     Final  topic   in  the   area  of                                                                    
     liabilities is  the credit ratings; credit  ratings are                                                                    
     a direct  measure of  the state's  financial condition.                                                                    
     The three credit ratings  agencies track state revenues                                                                    
     and budget  process and  maintain regular  contact with                                                                    
     the  State Bond  Committee and  Department of  Revenue.                                                                    
     They   receive  formal   presentations  from   Governor                                                                    
     Murkowski and/or  members of the cabinet  three or four                                                                    
     times  a year.   The  state general  obligation ratings                                                                    
     are AA  from Standard  and Poors,  AA II  from Moody's,                                                                    
     and a  AA from Fitch  Ratings.  To varying  degrees the                                                                    
     ratings anticipate  a so-called  fiscal solution.   And                                                                    
     so,  if you  will, a  fiscal plan  that has  yet to  be                                                                    
     adopted  is already  discounted in  the rating,  and by                                                                    
     fiscal solution  I mean a  plan that  matches recurring                                                                    
     revenues   with  expenditures,   the  rating   agencies                                                                    
     anticipate one will be  adopted...Based on their belief                                                                    
     that the  state will  have no choice  but to  adopt one                                                                    
     and if the  state didn't adopt one after  say a current                                                                    
     year and  forecasted year of significant  decline then,                                                                    
     I think, the ratings would  start to reflect that there                                                                    
     wouldn't be  a fiscal  plan, whereas the  ratings today                                                                    
     reflect  that the  rating  agencies  expect that  there                                                                    
     will be one.                                                                                                               
                                                                                                                                
8:45:19 AM                                                                                                                    
                                                                                                                                
MR.  BOUTIN  described  that Moody's  Investors  Services  Global                                                               
Credit   Research  Rating   Update  19   NOV  2004   states  that                                                               
"conservative  financial management  and  adoption of  structural                                                               
fiscal reforms are vital" to maintaining the state's high                                                                       
rating.                                                                                                                         
                                                                                                                                
MR. BOUTIN stated  that the short-term is strong  and "The fiscal                                                               
decisions  made  by the  Governor  have  been recognized  by  the                                                               
credit  rating agencies  that have  followed  the state's  credit                                                               
since statehood."                                                                                                               
                                                                                                                                
8:48:00 AM                                                                                                                    
                                                                                                                                
COMMISSIONER CORBUS turned to the long-term outlook for the                                                                     
state:                                                                                                                          
                                                                                                                                
     The   state  has   a  long-term   structural  financial                                                                    
     problem.  Regular reoccurring  revenues are expected to                                                                    
     be less  than reoccurring expenditures.   That has been                                                                    
     the case  most of the time,  as we look back,  over the                                                                    
     last 10  years.  Just  to illustrate, we would  like to                                                                    
     refresh   your  memory   about  the   history  of   the                                                                    
     Constitutional  Budget Reserve  Fund.    This fund  was                                                                    
     established in 1990 by  a constitutional amendment from                                                                    
     settlements  from  oil,  tax, and  royalty  litigation.                                                                    
     The  idea was  that during  poor revenue  years through                                                                    
     the state, mainly  when the price of oil  is down, that                                                                    
     we   would  borrow   from  the   Constitutional  Budget                                                                    
     Reserve.  And during good  revenue years, years of high                                                                    
     oil  prices, that  we  would  repay the  constitutional                                                                    
     budget reserve.  Unfortunately it  has not quite worked                                                                    
     out that way;  during the last 10-year period  7 out of                                                                    
     10 years  we borrowed out of  the Constitutional Budget                                                                    
     Reserve.    The  state  in  total  has  deposited  $5.6                                                                    
     billion  into the  Constitutional  Budget Reserve  from                                                                    
     oil  settlements and  has  earned  and additional  $1.6                                                                    
     billion.   During this  time frame it  has drawn  out a                                                                    
     total of $5.1  billion, such that the  CBR today equals                                                                    
     $2.1 billion.  It is safe  to say that when the CBR was                                                                    
     set up that  it was intended that we would  still be at                                                                    
     this $5 billion level, but  we find ourselves at the $2                                                                    
     billion that the administration  has been successful at                                                                    
     keeping it at the level  for the last several years but                                                                    
     over time  it has  been depleted.   And looking  to the                                                                    
     future  the outlook  for the  CBR  is not  good.   This                                                                    
     administration has  exercised strong  fiscal discipline                                                                    
     and the price  of oil certainly has helped,  so that we                                                                    
     do  find that  the life  of the  CBR has  been extended                                                                    
     from some of the  earlier projections/predictions.  But                                                                    
     as  we'll discuss  in the  fall  revenue forecast,  the                                                                    
     fund  is  predicted  to be  depleted  sometime  between                                                                    
     September of 2009  and April of 2010,  depending on the                                                                    
     spending   level  that   you  assume,   we're  assuming                                                                    
     somewhere between  $2.4-$2.5 billion  per year  to come                                                                    
     up with those parameters.                                                                                                  
                                                                                                                                
8:51:35 AM                                                                                                                    
                                                                                                                                
COMMISSIONER CORBUS  related that  Governor Murkowski  will under                                                               
no circumstances,  allow the CBR  to fall  below a minimum  of $1                                                               
billion, which is  necessary to cover the volatility  of price of                                                               
oil.   A budget is based  on the certain projected  price of oil.                                                               
If the price  is less then revenues would be  less.  Another $400                                                               
million  is general  capital  for the  general  working fund,  he                                                               
mentioned.                                                                                                                      
                                                                                                                                
8:53:26 AM                                                                                                                    
                                                                                                                                
COMMISSIONER  CORBUS  directed attention  to  the  option of  the                                                               
percent of market  value (POMV) which is still  available for the                                                               
legislature's consideration.   He  encouraged the  legislature to                                                               
reconsider the POMV.                                                                                                            
                                                                                                                                
In closing he  offered to answer any questions  on the Department                                                               
of Revenue's outlook of fiscal conditions.                                                                                      
                                                                                                                                
8:57:45 AM                                                                                                                    
                                                                                                                                
CHAIR WEYHRAUCH asked:                                                                                                          
                                                                                                                                
     You  reviewed  generally  that  the  state's  financial                                                                    
     condition appeared  to be good  in the  short-term, bad                                                                    
     in the  mid-term, and good  in the long-term  with some                                                                    
     major  assumptions  related to  the  gas  and the  ANWR                                                                    
     development.  The bad in the  mid-term I did not get as                                                                    
     much information on that.   Are we just to believe that                                                                    
     it's going to  be bad in the mid-term  because we don't                                                                    
     have   reoccurring   sources   of   revenue   to   meet                                                                    
     reoccurring sources  of obligations,  and does  it also                                                                    
     assume that  we aren't  going to address  the long-term                                                                    
     liability on  PERS and TERS?   And we are not  going to                                                                    
     address these other issues?                                                                                                
                                                                                                                                
8:58:33 AM                                                                                                                    
                                                                                                                                
MR.  BOUTIN  stated  that  the  short  answer  to  Representative                                                               
Weyhrauch's  question was  yes.   Pension  liabilities are  being                                                               
addressed with payments  and contributions.  There  will be long-                                                               
term changes  in the defined  benefit programs for new  hires, so                                                               
the  unfunded pension  liabilities are  being addressed.   Recent                                                               
pension fund  investment earnings  have been more  favorable than                                                               
they  were during  the 24-30  month  bear market.   He  mentioned                                                               
that in  discussions with credit  rating agencies  the Department                                                               
of Revenue  focuses on the current  year and coming year  for the                                                               
revenue forecast.                                                                                                               
                                                                                                                                
9:01:49 AM                                                                                                                    
                                                                                                                                
DAN DICKINSON,  Director of Tax Division,  Department of Revenue,                                                               
if the Arctic National Wildlife  Refuge (ANWR) legislation passes                                                               
in Congress  this year it  would be  9-10 years before  the state                                                               
starts  receiving  royalties  or  severance taxes  on  a  regular                                                               
basis.    The decade  during  this  period  is how  the  mid-term                                                               
forecast would be defined in the OMB budget.                                                                                    
                                                                                                                                
9:27:57 AM                                                                                                                    
                                                                                                                                
COMMISSIONER  CORBUS stated  that the  Organization of  Petroleum                                                               
Exporting Countries  (OPEC) standard  price goal is  estimated to                                                               
be between $22-28  per barrel.  The current estimate  for the OMB                                                               
budget  is $25.50,  which  is  in the  mid-range  of  OPEC.   The                                                               
current  forecast  prices were  set  last  October and  much  has                                                               
happened since then.  Commissioner  Corbus claimed currently [the                                                               
department]  is less  certain about  OPEC  maintaining the  given                                                               
price range.  In recent times  oil prices are hard to predict due                                                               
to less reliability.                                                                                                            
                                                                                                                                
9:30:00 AM                                                                                                                    
                                                                                                                                
COMMISSIONER    CORBUS   provided    some    reasons   for    the                                                               
unpredictability of oil prices:                                                                                                 
                                                                                                                                
     In 2004, we  had a drop of  $18 a barrel over  a 49 day                                                                    
     period, which  is rather substantial but  these type of                                                                    
     changes  in the  price of  oil are  not uncommon  as we                                                                    
     look  back  over history.    In  the build-up  for  the                                                                    
     second Iraqi oil  in 2003, we had a $15  drop over a 48                                                                    
     day  period.   And  back in  1991,  in connection  with                                                                    
     first Iraqi  oil we  had a  drop of  $15 over  a 37-day                                                                    
     period.  And  today the price of oil is  about $42, and                                                                    
     that is $8 higher than it  was a month ago.  Prices are                                                                    
     jumping around.   It  has been said  that we  are going                                                                    
     through a  wild ride.   The  overall factors  that have                                                                    
     impacted  the recent  price of  oil  are... the  demand                                                                    
     from  China, the  second largest  consumer  of oil  and                                                                    
     their growth  and demand has been  spectacular over the                                                                    
     last  several   years;  uncertainty  on   supply  side;                                                                    
     interruptions  in  Iraq,  Russia threatens  strikes  in                                                                    
     Nigeria;  the value  of dollar  has gone  down and  has                                                                    
     certainly  impacted the  price  of  oil, most  recently                                                                    
     improved  the U.S.  inventories is  one of  the reasons                                                                    
     cited for  a drop  in the  price of  oil, and  the fear                                                                    
     factor, we'll  call it, which  is a combination  of all                                                                    
     the  above  plus  the  threat  of  terrorism  have  all                                                                    
     impacted the volatility in the price of oil.                                                                               
                                                                                                                                
9:32:39 AM                                                                                                                    
                                                                                                                                
COMMISSIONER  CORBUS  stated  that   the  Alaska  oil  production                                                               
forecast is based on currently known  reserves.  In FY05 there is                                                               
an estimated  average production  from the  North Slope  of about                                                               
934,000 barrels  daily.  By  2013, an average production  per day                                                               
should be about  919,000 barrels.  By 2011,  new oil developments                                                               
will account for 48.1 percent of total production.                                                                              
                                                                                                                                
COMMISSIONER CORBUS  related the positive impact  ANWR would have                                                               
on oil production for the state.                                                                                                
                                                                                                                                
9:40:18 AM                                                                                                                    
                                                                                                                                
COMMISSIONER CORBUS  concluded that  the current outlook  for the                                                               
price of  oil is very  high compared  to the past.   Commissioner                                                               
Corbus reminded  the committee  not to forget  that Alaska  has a                                                               
structural  long-term financial  problem.   In fiscal  year 2005,                                                               
the average price of oil has  been $41.84, as it stands the price                                                               
of  oil is  $1.87  below the  projected oil  price  for the  fall                                                               
forecast.    Commissioner  Corbus  suggested  that  the  forecast                                                               
overall  may be  optimistic  for  FY05 oil  revenues.   The  next                                                               
update for  the revenue forecast will  be in April of  this year,                                                               
he noted.                                                                                                                       
                                                                                                                                
9:47:00 AM                                                                                                                    
                                                                                                                                
MR.  DICKINSON  mentioned  that  the  Department  of  Revenue  is                                                               
forecasting  comparable   to  some   of  the  other   high  power                                                               
organizations.                                                                                                                  
                                                                                                                                
9:59:18 AM                                                                                                                    
                                                                                                                                
CHAIR  WEYHRAUCH  asked  each  member to  comment  on  the  House                                                               
Special Committee on Ways and Means.                                                                                            
                                                                                                                                
9:59:56 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GRUENBERG  related his  belief  that  it is  most                                                               
important to have an ongoing  House Special Committee on Ways and                                                               
Means.    Over 30  states  have  such  a standing  House  Special                                                               
Committee  on  Ways  and Means  separate  from  appropriation  or                                                               
finance  committees.     Representative  Gruenberg  stressed  the                                                               
importance  of  having  solid   long-range  fiscal  planning  for                                                               
Alaska,  and therefore  he expressed  that the  committee is  far                                                               
more  proactive than  last year.   Representative  Gruenberg also                                                               
mentioned that he would like to have regular meetings.                                                                          
                                                                                                                                
10:01:17 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SEATON noted  his appreciation  for being  on the                                                               
House  Special  Committee  on  Ways  and  Means.    He  expressed                                                               
interest in  reviewing the details of  bills for the sake  of his                                                               
constituents as well as the sake of the House.                                                                                  
                                                                                                                                
10:02:01 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SAMUELS  expressed  his   desire  to  review  how                                                               
revenue measures will impact the economy of the state.                                                                          
                                                                                                                                
10:02:25 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE    WILSON    highlighted   the    importance    of                                                               
preparedness,  and  pointed  out  that  the  surplus  allows  the                                                               
legislature to prepare now so  that the economy is not devastated                                                               
if the price of oil drops.                                                                                                      
                                                                                                                                
10:03:08 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROKEBERG  agreed  that the  structural  long-term                                                               
debt   that   Commissioner    Corbus   presented   is   accurate.                                                               
Representative  Rokeberg  said he  would  much  like to  continue                                                               
working  on the  committee  expenditure forecast.   He  suggested                                                               
that the legislature should create  a forecasting model for near-                                                               
term and mid-term expenditures; thus  focusing on issues that are                                                               
going to impact the budget.                                                                                                     
                                                                                                                                
10:04:14 AM                                                                                                                   
                                                                                                                                
CHAIR WEYHRAUCH  related that he  looked forward to  working with                                                               
Commissioner  Corbus throughout  the  session.   Chair  Weyhrauch                                                               
explained  that the  House of  Representatives started  the House                                                               
Special Committee on Ways and Means in order to address                                                                         
measures.  The committee is committed to looking at the ways                                                                    
currently used to finance government.                                                                                           
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Special Committee on Ways and Means meeting was adjourned at                                                                    
10:08:15 AM.                                                                                                                  
                                                                                                                                
                                                                                                                                

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