Legislature(2007 - 2008)Anch LIO Rm 220
12/10/2008 09:00 AM Senate LEGISLATIVE BUDGET & AUDIT
| Audio | Topic |
|---|---|
| Start | |
| Approval of Minutes | |
| Revised Program - Legislative (rpls) | |
| Executive Session | |
| Preliminary & Final Audits | |
| Other Committee Business | |
| Roundtable Discussion | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
LEGISLATIVE BUDGET AND AUDIT COMMITTEE
Anchorage, Alaska
December 10, 2008
9:02 a.m.
MEMBERS PRESENT
Representative Ralph Samuels, Chair
Senator Lyman Hoffman, Vice Chair
Representative Mike Chenault
Representative Mike Hawker
Representative Mike Kelly
Senator Johnny Ellis
Representative Reggie Joule (alternate)
Senator Gene Therriault
MEMBERS ABSENT
Representative Mike Doogan
Senator Lyda Green
Senator Bert Stedman
Representative Kevin Meyer
Senator Charlie Huggins
OTHER MEMBERS PRESENT
Representative Paul Seaton
COMMITTEE CALENDAR
APPROVAL OF MINUTES
REVISED PROGRAM - LEGISLATIVE (RPLs)
EXECUTIVE SESSION
PRELIMINARY & FINAL AUDITS
OTHER COMMITTEE BUSINESS
ROUNDTABLE DISCUSSION GAS FISCAL DESIGNS: DAVID WOOD, DAN
DICKINSON, STEVE PORTER, LARRY PERSILY
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DAN FAUSKE, CEO/Executive Director
Alaska Housing Finance Corporation (AHFC)
Department of Revenue
State of Alaska
Anchorage, Alaska
POSITION STATEMENT: Presented information and answered
questions regarding RPL 04-9-1042.
MARK ROMICK, Director
Planning & Program Development
Alaska Housing Finance Corporation (AHFC)
Department of Revenue
State of Alaska
Anchorage, Alaska
POSITION STATEMENT: Presented information and answered
questions regarding RPL 04-9-1042.
AMANDA RYDER, Director Division of Administrative Services
Department of Commerce, Community, & Economic Development
Juneau, Alaska
POSITION STATEMENT: Presented information and answered
questions regarding RPL 08-9-0120.{
CHERYL SUTTON, Staff
to Representative Samuels
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Answered questions regarding the selection
process for consultants hired by the committee.
DAVID WOOD, Ph.D.
David Wood & Associates;
Consultant to the Legislative Budget and Audit Committee
Alaska State Legislature
Lincoln, United Kingdom
POSITION STATEMENT: During the roundtable discussion, answered
questions.
DAN DICKINSON, CPA;
Consultant to the Legislative Budget and Audit Committee
Alaska State Legislature
Anchorage, Alaska
POSITION STATEMENT: During roundtable discussion, answered
questions.
LARRY PERSILY, Consultant to the Legislative Budget and Audit
Committee
Alaska State Legislature
Washington, D.C.
POSITION STATEMENT: Provided comments during the roundtable
discussion.
ACTION NARRATIVE
CHAIR RALPH SAMUELS called the Legislative Budget and Audit
Committee meeting to order at 9:02:49 AM. Representatives
Chenault, Hawker, and Kelly (via teleconference), and Senators
Hoffman (via teleconference) and Ellis were present at the call
to order. Representatives Joule (alternate) and Senator
Therriault arrived as the meeting was in progress.
Representative Seaton was also present.
^APPROVAL OF MINUTES
9:05:02 AM
CHAIR SAMUELS requested the November 7, 2008, minutes be
corrected on page 8 to reflect that the committee hired Bob
Pawloski, not Mike Pawloski.
REPRESENTATIVE HAWKER made a motion to approve the minutes from
the November 7, 2008 meeting, as amended. There being no
objection, the minutes from the November 7, 2008, meeting were
approved as corrected.
^REVISED PROGRAM - LEGISLATIVE (RPLs)
9:05:43 AM
CHAIR SAMUELS turned the committee's attention to the RPLs
before it.
REPRESENTATIVE HAWKER made a motion that RPL 04-9-1042, HUD -
Neighborhood Stabilization Program, in the amount of $19.6
million to the Alaska Housing Finance Corporation (AHFC) be
approved.
CHAIR SAMUELS objected for purposes of discussion.
9:06:36 AM
DAN FAUSKE, CEO/Executive Director, Alaska Housing Finance
Corporation (AHFC), Department of Revenue, State of Alaska,
requested that Mark Romick be allowed to explain to the
committee the nuances of this federal money.
MARK ROMICK, Director, Planning & Program Development, Alaska
Housing Finance Corporation (AHFC), Department of Revenue, State
of Alaska, explained that the Neighborhood Stabilization Program
was part of the Housing and Economic Recovery Act of 2008 in
which Alaska was allocated the minimum floor of $19.6 million.
There are a number of requirements associated with the money, he
said. A specific formula directs how the money must be
allocated around the state based on the areas of highest
foreclosure, highest notices of default, highest areas of
low/moderate income neighborhoods, and the highest risk of
future potential foreclosure. According to the formula, those
areas of highest need are the southcentral region, Fairbanks,
and the Kenai Peninsula. Based on the formula that AHFC used,
there is a distribution for all of those major areas as well as
some of the outlying areas that had less of a need under the
definition of the federal rules. These outlying areas were all
put together into a "balance of state" category. He said AHFC
used $500,000 as the cutoff for inclusion in that "balance of
state" category so that areas outside of those major urban areas
would have a sizeable pot of money to apply for to actually
accomplish something. The money can be used for the acquisition
or rehabilitation of foreclosed, abandoned, or blighted
properties. He noted that committee members have copies of the
plan that was approved by the AHFC Board of Directors and
submitted to HUD on December 1, 2008.
REPRESENTATIVE HAWKER asked how much abandoned, foreclosed, or
blighted property there is in Alaska.
MR. ROMICK replied Alaska does have some foreclosed properties.
He said Alaska is one of the 10 lowest states in total number of
foreclosures. According to Realty Track, a national foreclosure
tracking system, about 1400 properties of all types are in
foreclosure or have been foreclosed on in Alaska, a relatively
small number compared to the rest of the United States. He said
there are abandoned properties, although AHFC does not know how
many, and there are blighted properties that AHFC knows of. He
stressed that AHFC is absolutely confident all of the money will
be utilized.
9:11:13 AM
MR. FAUSKE added that according to the third quarter 2008
National Delinquency Survey, Alaska had 93,537 loans serviced
with a total past due of 2.66 percent - 1.37 percent past due 30
days, .52 percent past due 60 days, and .76 percent past due 90
days or more. The foreclosure inventory at the end of the
quarter was .88 percent and at the start of the quarter it was
.43 percent. Seriously delinquent, 90+ days, is 1.64 percent,
he continued. So, Alaska is well within any kind of historical
norms. California is at 6.7 percent and Florida is similar.
There are areas that AHFC will concentrate, but Alaska is not in
any kind of serious foreclosure situation. He said he thinks it
is important to accept the funds because there are things that
can be done.
9:12:29 AM
REPRESENTATIVE HAWKER questioned whether Alaska really has a
problem for which money is actually needed.
MR. ROMICK responded that on a national scale it is a problem
that had money applied to it. In Alaska it is probably the
opposite; the state does not have a big problem. He said Alaska
has been given an opportunity to make some inroads into getting
rid of abandoned and blighted properties in lower income
neighborhoods and other places around the state, as well as
making a significant stab at addressing some issues related to
homelessness.
REPRESENTATIVE HAWKER asked what will ultimately occur with the
property that AHFC acquires.
MR. ROMICK answered that to a certain extent it will depend on
what is proposed to the AHFC. Funds will be made available
through a competitive process and people will come to the AHFC
and apply under one of the categories. He said that after
talking to the nonprofits expressing interest thus far, AHFC
will likely be able to produce about 186-200 new units of
affordable housing in Alaska and those could be anything from a
single family home that was purchased from foreclosure,
rehabbed, and then resold, or the acquisition and renovation of
a blighted or abandoned multi-family property.
9:14:36 AM
REPRESENTATIVE HAWKER commented that AHFC is essentially looking
at getting into the turning of real estate.
MR. ROMICK said, "Basically, yes."
REPRESENTATIVE HAWKER asked what happens to the money once AHFC
turns the real estate.
MR. ROMICK replied that under the bill there are some rules
related to program income. For instance, if someone uses this
money to buy a single family home and renovates and resells it,
he or she must repay AHFC the amount of money received from the
program. He said that under the bill there is a four-year
window in which AHFC can then reallocate that money for other
purposes within the state. After that period of time the money
must go back to the federal government.
REPRESENTATIVE HAWKER asked whether the "acquirer" is AHFC or
can an individual receive this money to buy property.
MR. ROMICK responded that, technically, AHFC could. The
individual must then resell the property to an eligible
household and repay to AHFC the amount of federal money that was
used to buy and renovate the property. That money then goes
back into the pool.
REPRESENTATIVE HAWKER inquired whether the individual can keep
the profits.
MR. ROMICK answered, "If there were any, but it is very specific
in the bill that nobody is going to make any money ... off the
resale." He said this economic recovery act came out of the
foreclosure crisis that is facing the United States. The intent
of Congress was to take abandoned and foreclosed properties that
are devaluing neighborhoods and the market-in-whole and get them
into private hands as fast as possible. There are two
particular themes that run through the bill, he continued.
First, is that in the churning of these properties back into
individual homeowner's hands, the banks should not make any
money - a provision in the bill says no foreclosure can be more
than 10 percent below market value. So someone has to sell the
property at 10 percent discount on average. Second, is that any
proceeds of the sale be recaptured by the federal government
through the program income rules. Mr. Romick said he thinks the
program is designed to be focused on nonprofit organizations
that have a mission to provide affordable housing and to cover a
nonprofit's administrative costs of managing the project or
doing the rehabilitation.
9:17:17 AM
MR. FAUSKE added that this is not dissimilar from what is being
experienced with the federal government through the Federal
National Mortgage Association (Fannie Mae), the Federal Home
Loan Mortgage Corporation (Freddie Mac), and others, where the
intent is honorable for what the government is attempting to do.
For example, California has been allocated $529 million, Florida
$541 million, Nevada $71 million, and Ohio $258 million. It is
a fairness issue, he said, and he wishes there was more leeway
as to what the monies can be used for in terms of the absolute
problems facing particular states. On the Fannie Mae and
Freddie Mac side, Alaska is about 140 basis points out of the
market. He said he thinks this money can be put to good use,
but the rules are what they are and AHFC is going to do its best
to apply them diligently and effectively.
9:18:50 AM
REPRESENTATIVE JOULE noted there is often a lag time in Alaska
on some of these national issues. Is a lag time anticipated on
this particular issue so that it may come later, he asked.
MR. FAUSKE replied he does not view Alaska as immune. He said
he thinks more of Alaska's issues will revolve around the
state's economy and employment rates, and not on a financial
collapse seen in other states. While Alaska's market has
slowed, it is stable and market values are holding in the vast
majority of the state. He said he does not anticipate a lag
time unless it is accompanied by some other dramatic economic
event. His assessment is that Alaska is in good shape and has a
vibrant market, but the state should still be cautious.
MR. FAUSKE offered his hope that over time Alaska can come to
some agreement with the federal government as to source of
funds. He said that right now the tax-exempt market is
basically shut down and experiencing tremendous upheaval. Down
the road that affects municipal and state governments, student
loan corporations, and others that access that tax-exempt
market. "I think we have to get smart about leveraging and ...
how we access capital and be prepared and ready to access that
capital market," he said. He pointed out that in other states
one of the greatest sources of revenue for city, municipal, and
state governments is sales taxes based on the sales of
automobiles - a problem that Alaska does not have.
9:23:36 AM
REPRESENTATIVE KELLY inquired whether AHFC considered declining
these funds.
MR. FAUSKE responded that AHFC always has discussions as to
whether monies would be harder to access and more cumbersome
than they are worth. Although AHFC concluded there is a need
for it, there was more discussion on what other uses the money
could go towards, such as homeless situations, homeless trusts,
and different types of grants. However, the federal government
is fairly stringent as to what it wants this used for. So, yes,
AHFC did analyze that aspect of it and concluded the money could
be put to good use.
REPRESENTATIVE KELLY sought assurance that this program will not
result in, yet again, making loans to people who cannot repay
them. He said he is nervous about the program and would like
more debate, but understands the deadline.
9:26:52 AM
MR. FAUSKE assured the committee that AHFC will apply its normal
due diligence in its grant writing and evaluation of the
projects that are proposed. He said AHFC will not hand out
money without scrutiny. Additionally, AHFC wants to see the
recipients be successful as it guides them through the process.
MR. ROMICK added that anyone approaching AHFC about purchasing
single family homes for resale would have to use underwriting
guidelines consistent with what AHFC uses for its own programs
in regard to what a person can afford. Thus, it would be fixed
loans based on people's actual income; there would be no
subprime or variable rate lending. He said AHFC agrees
wholeheartedly that there would be absolutely no purpose in re-
creating the situation that got the country here in the first
place.
9:28:20 AM
SENATOR THERRIAULT said he shared part of Representative Kelly's
concern, but he would support this with Mr. Fauske's assurance
that AHFC will be careful with how it puts the money out. He
expressed his concern that the economic decline could be
protracted and cause people to become overextended.
MR. FAUSKE again assured the committee that AHFC will be very
careful.
9:29:13 AM
A role call vote was taken. Representatives Hawker, Joule, and
Samuels and Senators Hoffman, Ellis, and Therriault voted in
favor of approving RPL 04-9-1042. Representative Kelly voted
against it. Therefore, RPL 04-9-1042, HUD - Neighborhood
Stabilization Program, was approved by a vote of 6-1.
9:30:15 AM
REPRESENTATIVE HAWKER made a motion that RPL 08-9-0120, Payment
in Lieu of Taxes (PILT) in the amount of $3,638,623 to the
Department of Commerce, Community and Economic Development
(DCCED) revenue sharing be approved.
CHAIR SAMUELS objected.
9:30:47 AM
AMANDA RYDER, Director Division of Administrative Services
Department of Commerce, Community, & Economic Development
(DCCED) explained that the Department of Commerce, Community, &
Economic Development (DCCED) is requesting $3,638,623 for the
Payment in Lieu of Taxes Program. She said this is a federal
program designed to compensate boroughs for lost revenue and
lost opportunities for development on federal lands within
Alaska boroughs. The funding is distributed directly to
organized boroughs and the funding being requested by DCCED is
for unorganized boroughs, she said. The department will then
distribute the money to communities in the unorganized boroughs
based on a per capita basis.
MS. RYDER, in response to Representative Hawker, related that
the federal government appropriated this funding in the $700
billion economic stimulus package [of 2008]. The department was
misinformed by the federal government that the funds would be
coming in the fiscal year (FY) 2010 budget, so DCCED placed the
funding in its FY 2010 budget. The department later found out
that the stimulus package included funding for FY 2009.
REPRESENTATIVE HAWKER commented that this is definitely more
than had been anticipated. He asked whether DCCED is taking
steps to assure that the recipients do not rely on and expect
this level of funding in the future.
MS. RYDER responded that DCCED is concerned that communities
make good decisions in developing their budgets over the years
and do not put this funding in their base. She said these funds
are authorized through state fiscal year 2013. It is unknown
whether the funds will be re-authorized after that and the
department will inform communities of this. When the community
revenue sharing is sent out, the department will write letters
to the communities discussing the implications of putting these
funds into their base budgets. Also, Bill Rolfzen, the local
government specialist in charge of the revenue sharing programs,
will be informing each community by phone. Additionally, a
local government specialist in the Division of Community and
Regional Affairs (DCRA) trained communities in budget
development, so local government specialists are very aware of
these programs and that they need to inform their communities
about the implications of putting this funding in their base.
9:34:24 AM
A role call vote was taken. Representatives Chenault, Hawker,
Kelly, Joule, and Samuels and Senators Hoffman, Ellis, and
Therriault voted in favor of approving RPL 08-9-0120.
Therefore, RPL 08-9-0120, Payment in Lieu of Taxes, was approved
by a vote of 8-0.
^EXECUTIVE SESSION
9:35:16 AM
REPRESENTATIVE HAWKER made a motion that the committee under
Uniform Rule 22 go into executive session for the purpose of
discussing confidential audit reports under the authority of AS
24.20.301. There being no objection, the committee went into
executive session at 9:35 a.m.
CHAIR SAMUELS brought the meeting back to order at 9:59 a.m.
^PRELIMINARY & FINAL AUDITS
9:59:15 AM
REPRESENTATIVE HAWKER made a motion that the preliminary audit
on the Department of Commerce, Community, & Economic Development
Board of Public Accountancy 08-20056-09 be released to the
agency and the board for response. There being no objection, it
was so ordered.
9:59:30 AM
REPRESENTATIVE HAWKER made a motion that the following final
audit reports be released as public documents: Department of
Administration (DOA), Governance Framework for Selected
Information System Security Controls; Department of Health and
Human Services (DHHS), Statewide Suicide Prevention Council
sunset audit; and the Alaska Court System, Board of Governors of
the Alaska Bar Association sunset audit. There being no
objection, it was so ordered.
CHAIR SAMUELS noted that those motions were made with the
understanding that the Legislative Audit Division will not post
the security audit report itself to the web site.
^OTHER COMMITTEE BUSINESS
10:00:08 AM
REPRESENTATIVE HAWKER made a motion that the committee amend its
contract with Dr. David Wood & Associates for an amount not to
exceed $140,000.
CHAIR SAMUELS objected. He said the contract as fulfilled is
slightly over [the authorized amount] and he wants to have
enough to cover any extra work, such as questions from committee
members that come in between now and the start of the next
legislature on January 20, 2009 He said he is also extending
the termination dates for Mr. Porter, Dr. Wood, and Mr.
Dickinson until January 31, 2009, to provide transition time for
the next committee chairman or legislature.
SENATOR THERRIAULT inquired whether the work that Dr. Wood has
done so far has exceeded the $75,000 that was already
authorized.
CHAIR SAMUELS understood that it is a couple of thousand dollars
over, mostly due to the phone calls made to Dr. Wood by
committee members.
SENATOR THERRIAULT surmised that Chair Samuels wants to prepare
for covering any additional work that is done between now and
the new legislature.
CHAIR SAMUELS replied, "Yes."
SENATOR THERRIAULT asked whether Chair Samuels has had
conversation with the committee's incoming chairman.
CHAIR SAMUELS responded he does not yet know who the incoming
chairman is. He said he has had preliminary conversation with
Representative Dahlstrom regarding holding a meeting to hand off
information on the variety of issues before the committee.
10:02:26 AM
SENATOR THERRIAULT inquired whether the current contract was
specifically for Dr. Wood's report and presentation. He
understood Dr. Wood is not necessarily expecting anything beyond
that.
CHAIR SAMUELS answered correct, but the amount went slightly
over because of committee members phoning Dr. Wood with
questions unrelated to the report. Dr. Wood billed the
committee for those questions at an hourly rate which totaled
$8000 above and beyond. He said that as committee chairman he
is not going to assign Dr. Wood any new work; it will be the
incoming committee's prerogative as to whether to extend the
contract with more work. He said this would completely cover
any questions on the report that come up now or during the first
month of the new legislature.
SENATOR THERRIAULT commented that there is a wealth of
information in the report and it is going to take some time to
digest it. He asked how contact with Dr. Wood came about to
hire him.
10:03:52 AM
CHAIR SAMUELS said it was very difficult to find somebody who
had not done a lot of work for say, Exxon at Point Thomson, or
who did not have a lot of baggage with committee members, or who
worked for the administration. The committee looked to find
somebody who was qualified but did not have a conflict or so
much political baggage that he or she would be disregarded.
10:04:52 AM
CHERYL SUTTON, Staff, to Representative Samuels, Alaska State
Legislature, concurred with Chair Samuels' explanation. She
said the committee was looking for someone with no previous
involvement in these issues and who had worked on worldwide
fiscal design, particularly in gas. There is only a handful of
such people in the world, she said, and it boiled down to Dr.
Wood not having prior involvement, being more than qualified to
do this work, and available to do the work.
10:05:24 AM
[CHAIR SAMUELS removed his objection.]
There being no further objection, the motion to amend the
contract with Dr. Wood & Associates was approved.
CHAIR SAMUELS reiterated he would be extending the
aforementioned contracts until January 31, 2009.
The committee took an at-ease from 10:06 a.m. to 10:12 a.m.
10:06:00 AM
The committee took an at-ease from 10:06 a.m. to 10:13 a.m.
^ROUNDTABLE DISCUSSION
CHAIR SAMUELS announced that the committee would now turn its
attention to the roundtable discussion.
10:13:49 AM
CHAIR SAMUELS related, "It's a decrease in total taxes by
producing the gas."
DAVID WOOD, Ph.D., David Wood & Associates;, Consultant to the
Legislative Budget and Audit Committee, Alaska State
Legislature, suggested that perhaps the fiscal stability issue
around the world is worth expanding upon. He reminded the
committee that there are a number situations in which contracts
have been signed with fiscal stability clauses and the
expectation of the producers was that fiscal stability would be
maintained. Over the past four years those guarantees of fiscal
stability have been eroded, and consequently the producers have
settled agreements to dilute the terms.
CHAIR SAMUELS posed a scenario in a net profit system like
Prudhoe Bay in which all the money comes from one field. He
recalled that hearing testimony that the problem with
progressivity is "doing this on a barrel to oil equivalent."
Chair Samuels inquired as to the other methods that could be
used with the cost allocations in a net profit system in order
to know what to take off of gas versus oil.
DR. WOOD explained that in most oil and gas fields more than one
fluid is produced, and therefore it's quite common to have oil
and gas come to surface from one well stream. However, the
critical point is that the two are sold as separate revenue
streams in many cases. Therefore, [cost] allocations can be
split on a volume basis or, more equitably perhaps, on an energy
content basis. However, there can be more difficulties if there
are "a lot of historic process facility." Again, it's a matter
of being aware of the different revenue streams, of which there
may be more than two. To look at an existing producing field,
it does become a more complicated accounting matter, he said.
However, it's not insurmountable as there are examples of such
from around the world. He reminded the committee that the focus
of his report was not Prudhoe Bay.
10:18:35 AM
DAN DICKINSON, CPA;, Consultant to the Legislative Budget and
Audit Committee, Alaska State Legislature, offered that one
example is from Alaska. In the late 1990s there was the Central
Gas Facility which produces gas as part of the production
process for which no charges accrue and the facility also
produces natural gas liquids (NGLs) and gas that's sold for
which the costs were deductible for tax purposes and royalty.
In this process, how much was part of production or post
production had to be determined for every piece of equipment and
cost. After several years and lawsuits, finally a position was
settled upon. Mr. Dickinson said:
It is very complex to do allocations because
ultimately all allocations are arbitrary. ...
allocations are done all the time and you simply have
to figure out what makes the most sense, whether it's
volumes or economics or some combination of the two
and you come up with something that you hope won't
produce bizarre results when the allocation is
supplied over a wide variety of circumstances. So, we
have some history with that.
10:20:02 AM
LARRY PERSILY, Consultant to the Legislative Budget and Audit
Committee, Alaska State Legislature, inquired as to whether the
allocation would be changed monthly as the split of British
thermal units (Btus) between gas and oil changes as a field
ages. He related his understanding that as a field changes
there would have to be a system that updates the allocation,
which could cause more problems.
DR. WOOD offered that if [the allocation] was done on a volume
or energy basis, it would be fairly straight forward because
each month the appropriate volumes or energy contents for the
two streams would be available. Going forward, the allocations
would be on that basis. Using such an approach builds in the
fact that over time there will be changes.
CHAIR SAMUELS surmised that from the onset there's a flaw in a
scenario in which the costs in a net profit system are allocated
on a barrel of oil equivalent (BOE) basis, but the progressivity
isn't [allocated] in that manner. He recalled that Dr. Wood
cautioned the committee with regard to the BOE in the
progressivity tax on gas. "So, if you do that when you're
allocating costs in a net profit system, it's all about the
costs, then how do you get to the next step then of a
progressive system on knowing how much each one is making," he
asked.
10:21:49 AM
DR. WOOD clarified that the problem isn't with the BOE, but
rather the problem is that the two streams are being put
together in the BOE. With an allocation of costs, the energy
that's being split out can still be used. The opposite thing is
being done, he said.
MR. PERSILY offered that by separating the two streams, the gas
revenue is being taxed separately from the oil revenue.
Therefore, the problem of the less profitable gas when it's
combined with oil that drives down the oil tax is avoided.
MR. DICKINSON pointed out that Dr. Wood's first three examples
retain the BOE equivalency, the [two streams] are separated so
that if one goes negative it goes to zero but the other [stream]
doesn't. Mr. Dickinson reiterated Mr. Persily's statement that
the critical point is the separation, not the allocation method
to achieve the separation.
10:23:25 AM
REPRESENTATIVE HAWKER surmised, then, that if there were a
perfect alignment and consistency between the price equivalency
and the energy equivalency, then "who cares." However, there's
a disconnect that sometimes is extreme. The separation, he
further surmised, is necessary so as to be able to address the
lack of price equivalency with energy equivalency.
DR. WOOD concurred; the ability to treat the two streams
separately, in cases of extreme disconnect, is the key.
10:24:31 AM
REPRESENTATIVE SEATON inquired as to how that applies to the
cost allocation and the credit on cost. He posed an example in
which there was a lower tax on gas and credits that are
allocated against oil, which has a higher tax. In such a
situation, he inquired as to how that would be justified so that
industry isn't allowed to take costs from the lower tax rate
against the higher tax rate in which the state would pay more.
DR. WOOD explained that in the case of new capital investment
specifically focused on one stream, it would be appropriate that
the investment credits would also be allocated to that
particular stream. In the case of a shared facility that's
being used for oil and gas, clearly there could be a situation
in which one stream has preferential relief as a consequence of
using the credits. Therefore, it becomes more complex in those
situations, although such could be addressed in regulations.
10:26:17 AM
CHAIR SAMUELS recalled from the prior day's testimony that with
current progressivity, the tax on progressivity of oil would be
reduced by producing the natural gas unless some changes were
made. He related his understanding that it would have to be
reduced so that the entire total tax burden would decrease.
Therefore, all the gas would be produced, but less money would
be received.
MR. DICKINSON, referring to a handout entitled "Alaska Oil and
Gas Taxes Additional Roundtable Examples," directed attention to
[the slide entitled "How did we get here - 4 fold increase in
tax UPDATED"]. He highlighted that between 2004 and 2008, the
tax paid by industry increased by 11 times, a 1,100 percent
increase in total taxes paid between 2004-2008. In that same
timeframe, the tax base, the value times the volume, increased
2.2 times. Therefore, the taxes are five times higher in 2008
as they were in 2006 as a consequence of the tax changes. Over
that same time period, the royalty increased by 2.3 versus 2.2
in the base test with no changes. The aforementioned confirms
that fundamentally it is correct to assert that the
progressivity and the other changes as a consequence of 2006-
2007 reforms was a five-fold increase in the production tax.
MR. DICKINSON, referring to the slide entitled "Combined
Progressivity Example 1," explained that it illustrates how
progressivity might work for an oil producer and what would
happen if gas was added and what would happen to the taxes under
the current regime. He recalled that Ms. Davis presented
something similar to the legislature back in January. The slide
assumes .7 million barrels a day, which amounts to 255 million
barrels for the year, which for oil translates into 255 million
barrel equivalents. The Alaska North Slope (ANS) price used was
the December 2007 price of $79.72. The transportation cost to
get the oil from the North Slope to the market used was $6.00.
Therefore, the gross value at the point of production was
$73.38, which when multiplied by the barrel equivalent amounts
to $18.7 billion of gross value at the point of production.
Since only the royalty portion is being taxed, 87.5 percent is
taken and thus there's $16 billion. The upstream costs were $4
billion. Therefore, the taxable value (PTV) amounts to $12
billion. To determine the progressivity on that one must divide
through by the barrel, which amounts to 223. The barrels
divided through the dollars results in a progressivity base of
$53.98. He reminded the committee of the $30.00 collar that
isn't subject to progressivity, which results in [a
progressivity base of] $23.98. Once the starting rate of $23.98
is multiplied by .4 percent it results in a progressivity rate
of 9.59 percent that is then added to the 25 percent base rate,
which amounts to a total rate of 34.59 percent. That total rate
is multiplied by the PTV [of $12 billion] and results in a total
tax of $4.2 billion.
10:31:28 AM
MR. DICKINSON then moved on to the slide entitled "Combined
Progressivity Example 2," which assumes that some gas is being
produced. For the example, the assumption is that the gas and
oil will be equal amounts at about 4.2 billion cubic feet (bcf).
Once the bcf is converted to a daily amount and then converted
into a BOE, the result is the exact same amount of gas in barrel
equivalent. He noted that numbers were designed to do so, with
the 50:50 mix of gas and oil. He then offered the assumption
that ring fencing existed and the gas was being produced in a
stand-alone field. He noted that all of the figures were from
the TransCanada application and the figures are a lot lower than
the Black & Veatch numbers used yesterday. TransCanada used the
Henry Hub price of $6.00 and the $.75 adjustment to reach the
Alberta price, a tariff of $2.88. Therefore, the gross value at
the point of production is $2.45, which when multiplied by the
volume amounts to about $3.7 billion and the taxable wellhead
piece is determined. He noted his assumption that there are no
costs involved for gas. If this example were in Prudhoe Bay,
fundamentally when gas is being produced there will be very
small incremental costs. In response to Chair Samuels, Mr.
Dickinson confirmed that he's assuming the gas treatment plant
(GTP) is rolled into the tariff. In fact, the $2.88
transportation to market tariff does include a component for the
GTP in TransCanada's analysis. The notion is that 8.5 cubic
feet a day [of gas] is being pressured and put back into the
ground, and essentially some pipelines and removal of some of
the components and [the gas] is ready to go into a gasline with
minimal additional costs. Any additional costs would make the
example more extreme, he related. He then continued his
calculation by pointing out that there is $3.5 billion of
taxable value and the same calculation is performed in order to
determine the nonroyalty piece, which results to an equivalent
of $14.70 BOE. The aforementioned, he clarified, means there is
no progressivity because there's nothing over 30, which means
that stand-alone gas would pay no progressivity.
10:34:44 AM
MR. DICKINSON, referring to the slide entitled "Combined
Progressivity Example 3," explained that it calculates what
happens if oil is being produced in Prudhoe Bay and then the gas
is added. To determine the total annual barrel equivalents, the
oil and gas as barrel equivalents are added together, which
amounts to 511 million annual barrel equivalents. Then the two
taxable values are added together, which amounts to about 15,300
billion. Mr. Dickinson then performed the same progressivity
calculation on the combined barrel equivalents of oil and gas.
The same process is followed such that the total barrels are
taken and the nonroyalty portion is determined, which is then
turned into a dollar per barrel amount of $34.34 from which the
$30 collar is removed. Therefore, the starting point is $4.34
multiplied by the .4 percent, which amounts to 1.7 percent
additional that's added to the 25 percent rates. The
aforementioned results in a total tax rate of 26.7 percent,
which ultimately amounts to total taxes of $4.1 billion. The
taxes have decreased by $69.4 million. "So, I was paying
something for oil. The day I turned the gas on, the day ... we
got the gas ... state revenues go down," he stated.
CHAIR SAMUELS surmised, though, that state revenues decrease for
the tax portion, but the royalty portion would remain.
MR. DICKINSON noted his agreement that for this one piece, the
revenues would decrease. He related the expectation for the
revenues to increase for royalties and for property taxes. He
further related his belief that income taxes will decrease in
the aforementioned scenario.
CHAIR SAMUELS noted that Mr. Dickinson's examples use an ANS
price of $80 and a Henry Hub price of $6.00. If those prices
were more equalized in an environment with progressivity, he
related his assumption that the problem would correct itself.
"If there's a 6:1 ratio, there's not a problem. But every time
it splits, there is a problem. Is that ...," he asked.
MR. DICKINSON acknowledged that there is a point at which the
problem will fix itself. However, it's not 6:1 in the price but
rather 6:1 in the PTV. The problem is that there is a huge
difference in the transportation costs. In other words, $6
barrel equivalent is being subtracted from oil. For the gas, $6
multiplied by $2.88 would be subtracted or something close to
$18 per unit. Even if those were 6:1, the subtraction wouldn't
be. He then acknowledged that there are other equally rational
numbers for which one can find months with a gain. He then
highlighted that in the oil there is a higher rate times a lower
tax base while on [the gas side] there is a lower rate times a
higher base. There is nothing that automatically says there
will be an increase until the size of each [stream] and the
percentage being taken of each.
10:39:25 AM
CHAIR SAMUELS offered an example in which there isn't a gas
pipeline, but instead a gas to liquids (GTL) or LNG plant.
Therefore, there would be huge costs with relatively small
transportation costs. He related his understanding that with a
GTL plant, the Trans-Alaska Pipeline System (TAPS) tariff would
be paid, the GTLs would be shipped, and there would be a huge
cost to use this huge amount of gas. Furthermore, 40 percent of
the royalty would be lost. "So, if that changed ... one of the
examples was that your transportation for gas is so high that
that's what kind of skews this. If your transportation was
less, but you had to spend $40 billion upfront on Slope work to
build the GTL plant ...," he remarked.
MR. DICKINSON stated his agreement that there would be a huge
cost deduction.
CHAIR SAMUELS pointed out that the transportation costs would be
exactly the same as oil.
MR. DICKINSON added that the oil transportation costs would
decrease because if the number of barrels in TAPS increased
because most of it's a fixed cost. He offered to run such and
provide an example in writing later.
10:42:04 AM
MR. DICKINSON, in response to Representative Seaton, offered his
belief that should a process with a 40 percent gas loss be in
place, the State would review point of production issues. If it
wasn't a process they hadn't envisioned and the legislature
hadn't thoroughly vetted, the rules in place now wouldn't
necessarily be applied.
10:43:16 AM
MR. DICKINSON added that Senator Therriault was accurate in his
comment yesterday that now gas has been incentivized, but Dr.
Wood is also correct in saying that such a situation might be
unstable.
10:44:26 AM
CHAIR SAMUELS observed that in the assumptions in today's prices
a 6:1 ratio comes back into play and there is no progressivity.
Therefore, if gas is at 6 and oil is at 36, this becomes less
relevant because both are at the base.
MR. DICKINSON specified that the progressivity is the problem.
The 6:1 doesn't matter because if neither gas nor oil triggers
progressivity, then it's a non issue.
10:45:04 AM
MR. PERSILY, referring to the Combined Progressivity Example 3,
pointed out that the state would really notice a loss of oil
progressivity revenues, if the environment was such that oil was
at $120-$140 a barrel and gas was at $6 or $7. In such a case,
the state would lose a significant amount of money.
MR. DICKINSON said that he can't agree with Mr. Persily because
the rates would be higher. In working with these models, he
related that there are so many moving parts that one has to
"look and see." If oil is at $150, the progressivity is so high
...
MR. PERSILY interjected, "that even when you factor in gas,
you're still coming out with a lot of money in the bank."
MR. DICKINSON characterized it as a fairly complex set of
interactions.
MR. PERSILY surmised:
So, it also depends not just ... at a very high oil
price we're going to get so much progressivity. But,
as you said, it's not so much the Henry Hub price of
gas, but the price after tariffs. So, if it ends up
costing $4 or $5 to move gas to market, that would
lower the production tax value point of tax value on
the gas, which would also then effect that bottom line
quite a bit. Another one of the moving parts.
MR. DICKINSON noted his agreement. He then relayed that he had
attempted to set up simplified formulas to isolate which factors
are controlling. He said he wasn't able to summarize in a
simplistic way such that he could say if "X" increases then "Y"
decreases.
10:47:24 AM
REPRESENTATIVE SEATON questioned whether this is a restatement,
the same effect, of the presentations from other consultants
during which there was discussion about moving progressivity
down the scale.
MR. DICKINSON answered that it's the same effect as the
presentation that didn't address the interplay between oil and
gas but rather the point at which incremental effects yield
results counter to what is desired. In other words, incremental
increases in revenues generate more tax than money to the
company. He indicated [the example he provided today] is a sub-
example of the aforementioned. The concern is about the
incremental effects, which are different from average effects.
REPRESENTATIVE SEATON asked whether companies would only
experience less revenue if there were low oil prices and very
high gas prices, including a fairly low transmission price on
gas. He requested a scenario in which the company is better off
not producing gas if progressivity is applied.
10:50:17 AM
MR. DICKINSON declined to do so at this time, but offered to
provide the answer in writing.
REPRESENTATIVE SEATON related his understanding that the
combination of the two could reduce the state's take, but he
said he didn't recall presentation of a situation [in which the
companies would receive less revenues].
CHAIR SAMUELS recalled that yesterday Senator Therriault said
that one could argue that this entire feature is an incentive to
start developing gas. However, politically the question is how
long will a system in which the gas isn't flowing but the [oil]
is, in the amount of 300,000 barrels a day, last. The
aforementioned then leads to a discussion regarding fiscal
certainty and whether it's a stable system. He then requested
that Mr. Dickinson run some numbers for a situation in which gas
prices spike, but oil prices do not. He suggested that Mr.
Dickinson prepare an interactive model in which members could
plug in production numbers and prices such that members could
run a suite of options.
MR. DICKINSON agreed to do so.
10:53:51 AM
REPRESENTATIVE KELLY surmised that there is a definite impact
when one crosses the line between natural gas and oil. There
seems to be the need for a placeholder for gas pricing, but the
consultants have seemed to suggest [there should be clear
lines]. Therefore, as the members listen to the presenters,
there should also be some common notion with regard to the
decision path regarding whether the current system will work as
is or whether it needs to be altered. He expressed his hope
that the administration is involved so as to be more efficient
with this.
CHAIR SAMUELS cautioned the committee against addressing
matters, such as the cost allocation method and fiscal
certainty, one at a time as it may result in a never-ending
debate. Therefore, he suggested members think of all the
matters at once in the context of one fix.
REPRESENTATIVE KELLY concurred.
10:57:37 AM
REPRESENTATIVE SEATON expressed concern with the split
allocation and trying to cost allocate and credit allocate. He
asked that some general principles be laid out on the table with
regard to cost and credit allocations.
MR. DICKINSON agreed that those issues should be reviewed. He
said that although he hasn't reviewed these issues, it seems
that credits should be reviewed but nothing done with them. He
pointed out that credits are always in dollars. Currently, a
credit can be generated for a new endeavor that is in the middle
of the National Petroleum Reserve-Alaska (NPR-A) and be applied
to oil that's being generated from Prudhoe Bay. If the
legislature is comfortable with such ring fencing, such can
continue. The critical point is what happens when two streams
with different characteristics are combined and odd things
result. The notion, he opined, is that once there is separation
between oil progressivity and gas progressivity, it can
ultimately be combined for the credit worth. Mr. Dickinson
expressed the need to examine the notion of separating the two
streams for purposes of determining the credit because there is
no inherent reason to do so.
11:01:11 AM
DR. WOOD concurred, adding that the complication is primarily
with existing fields that already have some historical equipment
in place. The aforementioned will have to be addressed on a
field-by-field basis. He pointed out that there are several
different mechanism that can be and are used to allocate costs.
Although credits complicate the process, they shouldn't
invalidate the process, he remarked.
REPRESENTATIVE SEATON posed a scenario in which oil had a higher
tax rate and gas had a lower tax rate. He inquired as to how to
allocate those costs in order to ensure that the state isn't
reducing the tax on something that's very profitable to
compensate for something that isn't quite as profitable.
DR. WOOD pointed out that ring fencing is used in many parts of
the world. If there's a chance that there will be a large
discrepancy between the two streams and the equipment involved,
usually some ring fencing would be applied to limit that.
REPRESENTATIVE SEATON asked how one would allocate the costs of
infield drilling for oil and gas in a place like Prudhoe Bay if
there are different tax rates on the two streams.
11:04:17 AM
DR. WOOD said it is difficult to answer specifically on Prudhoe
Bay without having the opportunity to review the field. He said
he believes that rules can be established that clearly specify
that there are some restrictions on what can be allocated
specifically to oil and allocated specifically to gas. It is a
question of setting up a set of fairly generic rules and
applying those. The fact that they are shared facilities should
not necessarily be a problem.
MR. DICKINSON explained that there are two basic kinds of
allocations. There is a volumetric allocation based on some
count of something and there is an economic allocation. In the
economic allocation, the driver would look at the total value of
two sets of products, and if it is a 9:1 ratio then costs get
allocated 9:1. Somehow "widgets" and "nonwidgets" must be on a
same basis and throughout the world that is typically done on a
dollar basis - what is the value. This sometimes has very
bizarre results as values change dramatically. However, bizarre
results can also happen if units are used and values change
dramatically. The classic case is a joint process where one
product is losing money and one product is making lots of money.
So the losing product is shut down "and it turns out in the
joint process you were making it and the only costs were what
was selling it, so it shouldn't carry any cost." So, the
debates go on and on, but every example will fall into one of
those two baskets. Second, there is a fixed and a variable
piece. The formulas can get very complex. Ultimately a formula
is arrived at "that doesn't make sense to everyone" and then
that is what gets applied.
11:07:08 AM
SENATOR THERRIAULT inquired whether there are regimes that use
volume of Btus produced. Since each separate stream generates a
fixed unit of Btus, would that be a sensible way to separate
those costs, he asked.
DR. WOOD explained that different regimes use different systems.
Some use volume, some use energy values or Btus. A case can be
argued both ways. Anomaly situations can come up in both cases
as Mr. Dickinson said. One must come up with a set of rules and
accept that there is going to be some anomalies for that, but
overall it should be rules that achieve the long-term
expectation, rather than saying that for this particular piece
of equipment it does not work very well. He opined that in the
longer term simple rules can be set up that will work using
either volume or energy values and factoring in a whole range of
different fixed variable costs.
SENATOR THERRIAULT suggested that the legislature not move
forward in a piecemeal fashion. He said he thinks whatever the
legislature does, if it is deemed sensible and politically
possible, that it be viewed as a package that moves the state
toward success in open season. Legislators are now getting
information on how to evaluate the current system and are
understanding that there is an incentive built into the current
system to get gas into production at high oil prices, in which
case the price of the tax is diluted.
11:09:36 AM
ADJOURNMENT
There being no further business before the committee, the
Legislative Budget and Audit Committee meeting was adjourned at
11:09 a.m.
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