Legislature(2011 - 2012)SENATE FINANCE 532
02/02/2012 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB9 | |
| SB53 | |
| SB137 | |
| Department of Revenue: Fy 13 Revenue Forecast | |
| Department of Revenue: State Savings Account and Budget Reserves Overview | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | SB 9 | TELECONFERENCED | |
| += | SB 53 | TELECONFERENCED | |
| += | SB 137 | TELECONFERENCED | |
| *+ | SB 160 | TELECONFERENCED | |
| *+ | SB 161 | TELECONFERENCED | |
| *+ | SB 162 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
February 2, 2012
9:07 a.m.
9:07:16 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:07 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lesil McGuire, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Senator Betty Davis; Darwin Peterson, Staff, Senator Bert
Stedman; Bryan Butcher, Commissioner, Department of
Revenue; Bruce Tangeman, Deputy Commissioner, Department of
Revenue.
PRESENT VIA TELECONFERENCE
Lenny Dees, Audit Master, Department of Revenue.
SUMMARY
SB 9 RAISE COMP. SCHOOL ATTENDANCE AGE/TRUANCY
SB 9 was REPORTED out of committee with a "do
pass" recommendation and with a new fiscal impact
note from the Department of Education and Early
Development.
SB 53 COMMISSION ON THE STATUS OF WOMEN
CSSB 53(FIN) was REPORTED out of committee with a
"do pass" recommendation and with a new fiscal
impact note from the Office of the Governor.
SB 137 SUICIDE AWARENESS & PREVENTION TRAINING
SB 137 was REPORTED out of committee with a "do
pass" recommendation and with a zero fiscal note
from the Department of Education and Early
Development.
SB 160 BUDGET: CAPITAL
SB 160 was SCHEDULED but not HEARD.
SB 161 APPROP: OPERATING BUDGET/LOANS/FUNDS
SB 161 was SCHEDULED but not HEARD.
SB 162 APPROP: MENTAL HEALTH BUDGET
SB 162 was SCHEDULED but not HEARD.
DEPARTMENT OF REVENUE:
FY 13 Revenue Forecast
State Savings Account and Budget Reserves
Overview
SENATE BILL NO. 9
"An Act relating to compulsory school attendance; and
relating to the crime of contributing to the
delinquency of a minor."
9:08:23 AM
SENATOR BETTY DAVIS, introduced SB 9 and stated that the
bill would change the compulsory age from 16 to 18 years
old. Currently, anyone who was 16 years of age could drop
out of school. The legislation would raise the age to
insure that students either stayed in school until they
were 18 or graduated early.
Senator Olson asked if there was a change to the required
entry age. Senator Davis responded in the affirmative and
added that at the present time, a child was not required to
be in school until they were seven years of age; the bill
would change the mandatory entry age to six years old.
Co-Chair Stedman discussed a fiscal note from Department of
Education and Early Development in the amount of $14.8586
million in general funds for the estimated increase in the
foundation formula.
9:10:14 AM
Co-Chair Hoffman MOVED to report SB 9 out of committee with
individual recommendations and the attached fiscal note.
There being NO OBJECTION, it was so ordered.
SB 9 was REPORTED out of committee with a "do pass"
recommendation and a new fiscal impact note from the
Department of Education and Early Development.
SENATE BILL NO. 53
"An Act reestablishing the Alaska Commission on the
Status of Women; and relating to the purpose and
powers of the Alaska Human Relations Commission."
9:10:59 AM
Co-Chair Hoffman MOVED to ADOPT the proposed committee
substitute for SB 53, Work Draft 27-LS0107\M (Martin,
1/31/12) as a working document.
Co-Chair Stedman OBJECTED for the purpose of discussion.
DARWIN PETERSON, STAFF, SENATOR BERT STEDMAN, discussed two
changes in the work draft. Language had been inserted into
lines 12 and 13 that specifically designated that one of
the commission's public members not only had to be a single
mother, but also must be the head of a household with a
child in it. He noted that the language had been added to
address concerns raised by Senator McGuire. The second
change on page 2, lines 27 through 31 was added in response
to a concern raised by Co-Chair Hoffman that the commission
could become "urban centric"; language had been inserted
into these lines that required the meetings to be held on a
rotating basis across the state and that no consecutive
meetings could be held in the same region of the state.
9:12:41 AM
Co-Chair Stedman WITHDREW his OBJECTION. There being NO
FURTHER OBJECTION, Work Draft 27-LS0107\M was ADOPTED.
Senator Davis explained that the bill recreated the Alaska
Commission on the Status of Women and that it would enable
the state to monitor women's successes in order to gather
important information. She offered that the changes in the
committee substitute made the legislation better.
Co-Chair Stedman discussed a fiscal note from the Office of
the Governor in the amount of $515,400 in general funds for
travel per diem and staff positions.
9:14:21 AM
Co-Chair Hoffman MOVED to report CSSB 53(FIN) out of
committee with individual recommendations and the
accompanying fiscal note. There being NO OBJECTION, it was
so ordered.
CSSB 53(FIN) was REPORTED out of committee with a "do pass"
recommendation and a new fiscal impact note from the Office
of the Governor.
SENATE BILL NO. 137
"An Act requiring suicide awareness and prevention
training for certain school personnel."
Senator Davis stated that SB 137 would provide training in
recognizing the signs of suicide to administrators,
teachers, and other school district employees throughout
the state. She urged the passage of the bill and observed
that the fiscal note, which had previously reflected a
$60,000 request, was now a zero fiscal note.
Co-Chair Stedman thanked Deputy Commissioner Morse for his
timely response to the committee's request to find cheaper
training alternatives and indicated that the Commissioner's
efforts had resulted in the zero fiscal note.
9:16:49 AM
Co-Chair Hoffman MOVED to report SB 137 out of committee
with individual recommendations and the accompanying fiscal
note. There being NO OBJECTION, it was so ordered.
SB 137 was REPORTED out of committee with a "do pass"
recommendation and with a zero fiscal note from the
Department of Education and Early Development.
9:17:16 AM
AT EASE
9:17:21 AM
RECONVENED
^DEPARTMENT OF REVENUE: FY 13 REVENUE FORECAST
9:21:58 AM
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE (DOR),
presented the "overview of fall 2011 revenue forecast"
(copy on file) and discussed the slide on page 2 titled
"outline for presentation."
· Fall 2011 Revenue Forecast for FY2012 and 2013
• Total Revenue
• Unrestricted Revenue
• NonOil Revenue
· Components of Production Tax Forecast
• Oil Production Forecast
• Oil Price Forecast
• Lease Expenditures Forecast/Oil Company
Spending
• Tax Credits
Commissioner Butcher discussed the slide on page 4 titled
"FY 12 and FY 13 total revenue." He explained that the
slide was a "big picture view" of the total state revenue
for FY 12 and FY 13. The forecast showed total state
revenues of $16.5077 billion for FY 12 and $16.5151 billion
for FY 13. He furthered that the slide was inclusive of
state revenue from all sources.
9:23:36 AM
Co-Chair Stedman queried if the oil revenue figures under
the unrestricted and restricted categories represented the
net or gross of the 20 percent capital costs. Commissioner
Butcher replied that the figures represented the net
revenue.
Co-Chair Stedman observed that in the past, the Finance
Committee had encouraged DOR to present the gross revenue
produced in the state and to "net out the 20 percent
credit." He stated that he would like DOR to present the
state's financial picture in its entirety or footnote the
slides, so that the gross could be seen without having to
do calculations. He observed that most people probably did
not realize that the figures on the slide represented the
net revenue. Commissioner Butcher indicated that DOR would
do so in the future.
Commissioner Butcher discussed the slide on page 5 titled
"FY 12 and FY 13 General Fund unrestricted revenue" and
stated that it represented unrestricted revenue broken down
by the following sources: royalties, production tax,
corporate income tax, property tax, and non-oil revenue.
The slide showed that the state received between one-half
to two-thirds of its total unrestricted revenue from
production tax, and approximately one-quarter from
royalties; about 92 percent of the revenues were oil
related, while around 8 percent were non-oil related.
Commissioner Butcher spoke to the slide on page 6 titled
"FY 12 and FY 13 unrestricted non-oil revenue detail" and
explained that the slide broke down the unrestricted, non-
oil revenue by its source as follows: corporate income,
mining, insurance premiums, tobacco, motor fuel, other
taxes, and revenue generated off investments. The slide
estimated non-oil revenues at $712.6 million in FY 12 and
$721.7 million in FY 13.
9:26:19 AM
Co-Chair Stedman asked for further explanation on slide 5
and queried if the $8.2177 billion in total unrestricted
funds for FY 13 included the approximately $1 billion in
royalties that were going to the Permanent Fund.
Commissioner Butcher replied that it did not. Co-Chair
Stedman observed that there were about $9.2 billion in
total oil revenues relative to $721 million from all other
sources and noted that the public should be aware of the
"magnitude" of the two numbers.
Commissioner Butcher presented the slide on page 7 titled
"components of production tax calculation." and explained
that the main components of the production tax calculation
were the level of production, the price, the lease
expenditures, and what tax credits were received and
administered by DOR towards oil production.
9:27:40 AM
Commissioner Butcher explained the slides on pages 9 and 10
titled "three categories of forecasted production."
· Currently Producing: Includes base production and
enhanced recovery production from investment in rate
enhancing activities (perforations, stimulations, well
workovers, gas and water injection support).
· Currently Under Development: New projects that are
currently funded or awaiting project sanction in near
future.
· Currently Under Evaluation: Includes technically
viable projects in the stage where engineering, cost,
risk and reward are being actively evaluated. Unfunded
but are considered to have a high chance of being
brought to fruition.
Commissioner Butcher stated that the first category
examined the wells and fields that were currently producing
and that it involved making forecasts on where production
would continue to go over the next ten years. He added that
the second category consisted of new projects that were in
development and were working towards production. He stated
that the third category was the most speculative of the
three and was the most difficult to figure out. He pointed
out that DOR wanted to factor in what appeared to be a
development that would occur, but that it did not want to
become too speculative and include something that may not
be realized. He cited shale oil on the North Slope as an
example of a development that was in its early stages and
was not factored into the forecast; projects like these had
not yet been deemed economical. He added that due to the
speculative nature of some of these potential developments,
DOR did not always include them in its forecasts.
Commissioner Butcher discussed slide on page 11 titled
"factors that affect production forecasting."
· GEOLOGY
•Rock type and formation characteristics
•Depth, thickness, pressure
•Oil & gas characteristics (oil gravity,
viscosity, water content, etc.)
· DEVELOPMENT PLAN
•Well density and development rate
•Well bore size and completion technique
•Artificial lift and enhanced oil recovery
•Facilities & surface operations
· COMMERCIAL
•Project economics
•Oil price and market conditions
•Government Policy: access, regulation, taxation
· PRODUCTION PROFILE
•History stage of 11
History, depletion
•Use production profile to extrapolate trends
· TIMING
Commissioner Butcher stated that timing was very
unpredictable and difficult to control and observed that
the price of oil at the point of production was a critical
timing factor.
Commissioner Butcher explained the slide on page 12 titled
"forecasted ANS production FY 2011-2021." He indicated that
10 years was the farthest out that DOR was comfortable
forecasting to. He stated that the currently producing
portion of the graph made up the bulk of the production in
the near years and that the under development category was
layered on top of that. The under evaluation category
represented the smallest portion and would occur a number
of years out. He concluded that projects that were under
evaluation and not yet under development would take quite a
few years to reach production.
9:32:10 AM
BRUCE TANGEMAN, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
discussed the slide on page 13 titled "ANS production." He
stated that the slide was also a chart that was included on
page 39 of the Revenue Sources Book. The third column over
was a new column that DOR had included. The currently
producing, under development, and under evaluation
categories were combined to determine the total Alaska
North Slope (ANS) production; the calculation of decline or
incline would be based on those three columns combined. He
opined that DOR had been overly optimistic in the past with
its production forecasting and stated that the third column
had been added to put another sideboard on the discussion.
Although the far right column was DOR's official forecast,
there were varying degrees between columns regarding how
confident DOR was with forecasting the category. He
furthered that DOR was confident with forecasting the
currently developing category, but that it was less
confident with the under development projects because they
were more speculative. He stated that all three columns
would require additional capital and operating
expenditures; the under development category would be
funded to certain level, but it might not be fully funded.
He explained that the under evaluation category was even
more speculative and that it would require additional
capital in order to be projected accurately. He offered
that the third column enabled a discussion about the change
in percentage from the prior year and that it would help
DOR determine what production would ultimately be.
Co-Chair Stedman queried how much weight DOR put on
constraints that were placed on processing facilities. Mr.
Tangeman answered that the currently producing category was
forecasted on a well for well basis and that it reflected
what was actually being produced. He stated that for the
under development and under evaluation categories, the
state relied heavily on information gathered from producers
and that it was assumed that constraints were included in
the producer's forecast.
9:35:29 AM
Co-Chair Stedman stated that in the future, the committee
would take a look at constraints on the processing
facilities of the North Slope oil producers. He noted that
some producers were water constrained or gas constrained,
but that they should be oil constrained. There would be a
presentation in the Senate the following day dealing with
the issue of constraints on producing facilities. He
queried what impact the constraints would have on
production forecasting and expressed concerns that there
was potential for "bottlenecks" in the Prudhoe Bay and
Kuparuk oil fields. He noted that the potential
bottlenecking was "above ground", but that DOR's
projections were "below ground." Commissioner Butcher
replied that DOR would look into the issue of constraints
for the committee. He furthered that DOR's production
forecasts had historically been optimistic and that the
department was trying to figure out how to present a more
accurate forecast. He explained that DOR received its
forecasting information from the operators and that it
appeared as though operators tended to give a more
optimistic view of production; as a result, the state had
seen overly optimistic forecasts. He concluded that DOR was
doing everything it could to ascertain how to deliver a
more accurate forecast.
Co-Chair Stedman noted that Alaska had large quantities of
heavy oil and wondered how it was factored into the
forecast. Commissioner Butcher replied that heavy oil was
not included in the forecast because it was not yet viewed
as economic. He stated that it would be part of Alaska's
future, but that it was so premature and distant that
determinations about the timing or the scope of heavy oil
production could not accurately be made. He added that DOR
had discussions regarding heavy oil every year.
Mr. Tangeman furthered that while DOR did not forecast the
production side of heavy oil, it had forecasted
expenditures regarding heavy and shale oil.
9:39:51 AM
Senator McGuire inquired if the data provided by the
producers was vetted by individual departments. She
referenced Commissioner Butcher's previous comments
regarding an operator's tendency to be overly optimistic
about its future activities, and queried if the data from
producers was vetted with Department of Natural Resources
(DNR). Mr. Tangeman responded that DOR gathered publicly
available information, as well as information from the DNR.
DOR's forecasts relied heavily on data from the Alaska Oil
and Gas Conservation Commission (AOGCC), particularly
regarding the currently producing segments, because AOGCC
had a firm handle on the thousands of currently producing
wells.
Senator McGuire admitted that it [DOR's process] made sense
for projects that were under development, but noted that
projects that under evaluation would be hard to
prognosticate. She wondered how data from producers
regarding projects that were under evaluation was vetted.
Commissioner Butcher replied that DOR met with AOGCC and
DNR to determine where the permitting process was at and
that DOR looked at "our best estimate". He noted that
information came from a variety of companies that were
operating in Alaska and that as a result, some information
was more reliable than others; larger companies tended to
be more accurate in their reporting information than the
smaller ones were. He added that that DOR looked at the
information with a "skeptical eye" to insure that it was
not repeating the optimism of a specific company.
Mr. Tangeman furthered that this was part of the
speculative nature of projects that were under evaluation
or under development. He explained that DOR dealt with the
possible versus the probable and that DOR looked with the
developers and the industry to see whether the project was
not only probable, but that it would also have the
necessary capital to be brought on line.
Co-Chair Hoffman asked if his interpretation of slide 13
was correct and queried if there were no projects under
development in FY 11. Commissioner Butcher responded that
because FY 11 had passed, everything in that time period
had either produced or not produced; as a result, there was
no number for under development for that year.
Co-Chair Hoffman noted that in 2012, there was a slight
increase to 26,000 barrels per day (bbl/d) and that by
2017, there was more than a six fold increase to 180,000
bbl/d [in reference to the under development column on
slide 13]. He observed that it appeared that at least until
2017, new oil would be increased and added to the pipeline.
Commissioner Butcher replied that the oil field Liberty was
under devolvement, but that it had been delayed; Liberty
was scheduled to come on line between 2015 and 2016. He
stated that Liberty was a good example of an under
development project that was expected to come on line, but
was being pushed back for various reasons that were out of
DOR's control.
9:44:35 AM
Co-Chair Stedman pointed out the linear decline in slide
13's currently producing column and wondered how the state
would get the estimated 7 billion barrels in oil reserves
to market if the producing potential was being driven to
zero. He queried if there was a possibility of leaving
billions of barrels of oil in the ground and asked what the
future held for Alaska's oil. Commissioner Butcher
responded that the forecast did not take that aspect into
account and that DOR simply compiled data as "we see it".
He furthered that DOR would be unable to answer that
question. He added that eventually, Alaska would be at the
point of zero production, but that DOR did not believe it
would be in the next 10 years; he hoped it would be many
decades into future.
Mr. Tangeman pointed out that if things went as planned, as
the state approached the "bottom line", there would be new
projects that were under development and under evaluation.
He furthered that 10 years into the future, there could be
new technology available to help bring heavy and shale oil
on line. He concluded that the under development and under
evaluation categories would continue to be a number going
forward, but that different segments of the North Slope
might be supplying those two columns.
Co-Chair Stedman asked what DOR's views were on the North
Slope Basin. Commissioner Butcher replied that the reserves
in the basin were plentiful and that information from DNR
suggested that if federal lands were included, there were
"tens of billions of barrels" of conventional oil, "tens of
billions of barrels" of heavy oil, and potentially the same
amount of shale oil left in the basin. He offered that the
question facing the state was at what point is technology
able to bring those areas on line economically. He
furthered that the price of oil was a major factor
regarding economics and that a higher price generally meant
that oil was more economical. He recalled that when oil
prices rose to near $150 a barrel, other renewable energy
sources had taken the place of oil for many uses. He
concluded that if the price of oil were at $200 a barrel
over a number of years, the world might be facing a
different reality for oil in terms of what it was used for;
it was an uncertain future not only regarding technology
and the price of oil, but also what role oil will play.
Co-Chair Stedman stated that even if DOR used $100 per
barrel of oil as a baseline and did not account for
reserves that were technically unachievable, that it still
did not answer the question regarding the amount of
feasible reserves in Alaska's basin. He inquired what DOR's
or DNR's opinions were regarding the amount of reserves in
Alaska's basin that were feasible today. Commissioner
Butcher responded that there was a roughly estimated 30
billion to 40 billion barrels of conventional oil on the
North Slope if the Outer Continental Shelf (OCS), the
Arctic National Wildlife Refuge (ANWR), and the National
Petroleum Reserve-Alaska (NPRA) were included. He added
that about 70 percent of the state lands in that area had
been minimally explored and that the estimate could be too
high or too low. He spoke about the uncertain nature of oil
geology and warned that the estimate might be inaccurate
unless more exploration was conducted.
9:49:09 AM
Co-Chair Stedman recalled that when Alaska's oil basin was
originally opened, the estimate was for about nine and a
half billion barrels and that court work had been done,
which had estimated that there were seven to eight billion
barrels left; he asked if the estimate numbers were
"ballpark" accurate. Commissioner Butcher replied that the
numbers were ballpark accurate regarding the oil on state
lands; however, much of the potential development was in
the federal waters of the OCS and the state would not gain
taxes or royalties off of it. He mentioned that the state
could gain benefits from development on the OCS as follows:
more throughput to the pipeline, better operation from the
pipeline due to more flow, a lighter mix of fluids in line
to help move heavy and viscous oils, and the possible
passage of a revenue sharing bill with the federal
government. He added that the revenue sharing bill still
had to pass congress and that DOR did not have any control
over what happened to the legislation; the state's
potential for federal revenue could be greater in the
future.
Co-Chair Stedman stated that the committee was spending
extra time dealing with public perceptions and offered that
there were instances where Alaska's populace was
intentionally delivered with misinformation. He related
that the committee had spent considerable time discussing
the future of Alaska and how the state would maintain
fiscal responsibility while still meeting its needs. He
stated that his impression of what DOR was saying was that
the state did not need to prepare for the imminent shutdown
and removal of the Trans-Alaska Pipeline System (TAPS). He
pointed out that if there were seven billion to eight
billion barrels left in the basin, that preparing for the
shutdown of TAPS would not be a "fruitful" exercise and
queried whether this would be an accurate assessment.
Commissioner Butcher responded that Co-Chair Stedman was
correct and that DOR had never asserted that the pipeline
would shut down as a result of low throughput. He added
that as the throughput in TAPS dropped, it would become
more costly to transport oil though the line; however, DOR
had never taken the position that the pipeline would shut
down in 10 or 20 years.
Co-Chair Stedman queried if DOR would recommend that the
state spend time dealing with probable outcomes, rather
than focusing on improbable outcomes. Commissioner Butcher
responded that Co-Chair Stedman was correct and that DOR
was optimistic that the state would make decisions that
would result in improving its future.
Mr. Tangeman offered that the future for Alaska did look
bright. He referenced new pipeline activity in the Lower 48
and the large reserves of oil on the North Slope, and
shared that he hoped the negative numbers on the right hand
column [in reference to slide 13] would turn positive.
9:54:46 AM
Senator McGuire applauded the big picture, realistic look
that the forecast brought. She wondered if there had been
any discussion with the producers regarding improving or
expanding facilities on the North Slope in order to provide
better access for developing Prudhoe Bay. Commissioner
Butcher indicated that DNR would be better able to respond
to the question and explained that DOR did not focus much
on what occurred prior to production. He added that DOR
would look into the matter and would determine if
facilities were an issue.
Mr. Tangeman spoke to slide 14 titled "production forecast-
improvements in methodology" and stated that it reflected
some improvements in the way DOR was forecasting
production.
• Created standardized reporting forms for
production and reserve forecasting information.
• Petroleum Engineer and Petroleum Economists
compiled the forecast information instead of
reinterpreting data previously received.
• For first time, department received down time
estimates requested historically and never
provided.
• Followed up and met second time with industry to
confirm department's assumptions and ensure
forecast results were reasonable with the
companies' projections.
• Production forecasting requires consideration of
each project's geology, development plans,
commerciality, production profiles, decline
curves and timing.
• Department uses extensive well and field specific
data acquired from producers, AOGCC, and DNR.
• New field development is very important in
mitigating decline rates.
Mr. Tangeman related the importance of having a
standardized reporting form for production and reserve
forecasting, and that the first attempt at using the forms
the prior interim had been successful. He stated that
implementing the standardized forms had been a learning
curve for both DOR and the private sector, but that it had
initialized the process through which private companies
would know their reporting requirements. The new forms also
meant that DOR would be receiving standardized information
from companies. He furthered that down time estimates may
not have been included in the past, but that they were
included now; he indicated that the estimates may not be
important, but that DOR was going through a learning
process in order to ascertain what was needed to achieve
the most accurate forecast possible.
Mr. Tangeman explained the slide on page 15 titled
"conclusion on production."
• Production forecasting requires consideration
of each project's geology, development plans,
commerciality, production profiles, decline
curves and timing.
• Department uses extensive well and field
specific data acquired from producers, AOGCC,
and DNR
• New field development is very important in
mitigating decline rates.
9:59:31 AM
Senator Thomas referenced overly optimistic production
projections and proprietary information concerns regarding
the sources of DOR's data. He queried if it would be
prudent to change the language in some of the state's
leases, or have the state take a more active role in the
evaluation of properties in order to get a better concept
of the actual potential for development. Commissioner
Butcher replied that it was not something that DOR had
actively discussed. He added that DOR received the
information that it needed from the companies and that much
of the information was confidential. He added that it was
not something that DOR had considered, but that it was
something that it could think about in the future.
Mr. Tangeman followed up the question and shared that DOR
relied heavily on AOGCC because it had well by well data
that covered thousands of wells. DOR's current production
forecaster did a well by well analysis for the decline
curves in the currently producing sections. AOGCC provided
real time information that was critical for the production
forecaster to use in establishing the currently producing
column. He furthered that DOR was very comfortable with the
results and the type of analysis that its forecaster was
using; the production forecaster's fall of 2009 forecast
for the fall of 2011 regarding the Kuparuk oil field was
within 39 barrels a day. He acknowledged that this was a
short sample period, but that it "bodes" well for DOR's
longer-term projections. He added that the next six, seven,
or eight years would determine if those projections were
accurate, but that he thought that DOR was on the right
track.
Senator Thomas asked what percentage of the land in the
projections was federal. Mr. Tangeman replied that the
forecast included only state lands and did not project OCS
or ANWR; the projections were inclusive of projects that
were under development or under evaluation that DOR felt it
had a good handle on, which would be coming on line in the
next ten years.
Senator Thomas asked if it would be fitting to refer to the
production as "state ANS production". Mr. Tangeman
responded in the affirmative.
10:03:07 AM
Co-Chair Stedman asked for a clarification on slide 12. He
asked if the y axis was in the right starting point for FY
12. Mr. Tangeman responded that the average production for
2011 was 603,000 bbl/d and that due to the monthly highs
and lows, analyzing the chart on a month to month basis was
problematic. He believed that the 574,000 bbl/d average for
2012 was probably the top of the under development line,
currently. He added that on a month by month basis, the
state might be over 600,000 bbl/d and bellow.
Co-Chair Stedman inquired if 575,000 bbl/d was the number
reflected for 2013. Mr. Tangeman responded that 574,000
bbl/d was the average for 2012 and that 555,000 bbl/d was
the projection for 2013.
Commissioner Butcher responded to an earlier question by
Senator Thomas and clarified that there was one federal
development that was included in the forecast; the
Northstar oil development was currently factored in the
projections and the Liberty oil field, which was another
federal water development, was also factored in a few years
out. He directed the committee's attention to page 39 of
the Revenue Sources Book and stated that there was a slide
on the page that showed taxable barrels; he furthered that
this showed that virtually all production, with the
exception of a small amount, reflected barrels of oil that
were taxable by the state. He concluded that the number of
federal barrels would get larger when Liberty came on line.
Co-Chair Hoffman queried how much time the administration
spent researching and pushing the oil producers on the
issue of when it became economically viable to extract the
oil. He referenced the current oil price of $110 a barrel
and asked if DOR reviewed the leases and evaluated the
economics to make oil companies produce, as required by the
leases. He believed that pursuing this approach would
result in additional barrels of oil in the pipeline.
Commissioner Butcher replied that DNR would be better
suited to provide an answer regarding that aspect of leases
and that DOR did not have an answer to the question. He
offered that there would probably be more insight regarding
the currently producing areas than there would be for
exploration side of the issue. He stated that many of the
billions of estimated barrels of oil on the North Slope
were yet to be found through exploration, but that much of
oil was found in areas that were being developed. He
reiterated that DNR could provide insight on the matter.
10:07:39 AM
Co-Chair Stedman observed that in the future, the committee
would be asking the question of what else might become
feasible under current terms or as result of alterations.
Commissioner Butcher discussed the slide on page 17 titled
"price forecast methodology."
• Oil Price Forecasting Session held October 3,
2011, included 26 Participants from DOR, DNR,
DOL, OMB, University, Legislative Finance and
outside participants
• Forecasting Session Presentations included
supply, demand, geopolitics, financial markets,
outside expert forecasts, etc.
• FY 20112016: Average of participant forecast from
Forecasting Session blended equally with NYMEX,
EIA, and analysts to derive price forecast.
• Beyond FY 2016: Constant real price, 2.5%
inflation
• Change in ANSWTI differential methodology due to
widening differential
Commissioner Butcher recalled that several decades ago, the
chief economist for DOR would produce an estimate on the
oil price for the current fiscal year and out years; there
were a lot of questions as to how the estimate was done and
how DOR had reached its conclusions. He related that the
Senate Finance Committee used to hire the Cambridge Energy
Research Associates in order to give another view of what
the oil price would be. He indicated that a few years
prior, DOR had changed the way it was forecasting the price
of oil to a more transparent and open route.
Commissioner Butcher pointed out that DOR had held meetings
with rating agencies, which had resulted in an upgrade by
Standard & Poor's (S&P); one of the positive aspects of the
state's forecasting, which was pointed out by S&P in
particular, was the conservative price forecasting. In the
last 6 or 7 years, there was only one year that the price
of oil was under what DOR had forecasted. He stated that
the rating agencies could see that the state was not
intentionally over inflating its forecasted price to
increase revenue.
Commissioner Butcher related that another new focus of the
forecast was trying to determine the significance of the
change in ANS crude prices compared to the price of West
Texas Intermediate (WTI) oil; the differentials had changed
considerably in the last year. Experts across the world
based their estimates on what the price of Brent [another
classification of crude] and WTI oil was, but did not look
specifically at ANS. He stated that DOR had always looked
at what the WTI price was and that the price of ANS tended
to be $2 dollars a barrel under WTI. He shared that around
a year prior, the price of ANS had "shot up", but that
WTI's price did not; at one point, ANS crude was selling
for $28 a barrel premium of WTI. He pointed out that the
shift in price differentials was unexpected and that a good
portion of the oil price forecasting session was spent
trying to analyze the change. He related that the consensus
was that the price differential between ANS and WTI would
narrow; the question was whether the price of WTI would
rise to match ANS, or whether ANS would fall to match the
WTI price. He stated that the "glut" of oil in the central
U.S. tended to be the explanation regarding the cause of
the differential between the ANS and WTI prices; there were
not enough pipelines to get the oil to market and as a
result, the region had more oil than it could get rid of.
He furthered that most of the experts believed that there
would be more pipelines coming on line in the central U.S.
over the next several years and that the difference in
price between ANS and WTI would shrink. He added that it
was expected that primarily, the price of WTI would rise to
match ANS.
10:14:45 AM
Commissioner Butcher explained the slide on page 18 titled
"ANS-WTI oil price differential" and noted that the WTI
price was represented by the zero line. He pointed out that
the price of ANS crude tended to be just a little under
WTI, but that the price differential had "skyrocketed" in
ANS's favor about a year ago. He concluded that about a
month prior, the price of ANS crude had dropped to around
$4 to $6 premium of WTI, but that the price had recently
risen back up to around $12 to $13 premium of WTI crude.
Commissioner Butcher discussed the slide on page 19 titled
"ANSWTI oil price forecast differential methodology."
• Forecast the BrentWTI Differential using futures
• Use the BrentWTI futures spread
• Forecast the ANSBrent Differential using history
• Use an assumption based on the historical
ANSBrent differential
• Taken together these make the ANSWTI Forecast
• (BrentWTI) + (ANSBrent) = ANSWTI
• BrentWTI = $26, ANSBrent = $1
• $26 + $1 = $25
• This differential narrows over time (currently $16
per barrel) averaging $18.41 for FY 2012
• Differential peaked at ~$29 during Sept 2011;
dropped to a low of ~$7 for a few days at end of
December 2011; has climbed to ~$13 today
• RSB uses a differential of $18.41 for FY 12 and as
of January 30, 2012 the average differential FYto
date was $18.22
Commissioner Butcher explained that the differential
between ANS and WTI crude prices had been expanding over
the last month and that depending on what occurred in the
next five months, it would be a dollar or so off the
projection.
Co-Chair Stedman explained to the public that the Finance
Committee had moved away from WTI a few years prior and had
been using Brent in its forecasts. He noted that it was
good that there was not a difference in opinion with
Commissioner Butcher on the state's forward pricing models.
Commissioner Butcher related that DOR had spent quite a bit
of time discussing the difference between comparisons to
Brent and comparisons to WTI.
Senator Thomas asked for a clarification and queried if the
"glut" of oil in Cushing, Oklahoma had resulted in an
increase to the price of west coast ANS. He further
inquired if the price change had been a result of the
regions' inability to distribute oil or because someone had
taken advantage of the market. Commissioner Butcher
responded that the shift was more due to WTI's price being
depressed than it is was due to ANS going up. He furthered
that currently, ANS and Brent tended to have a $1 price
difference in terms of the European, Alaskan, and west
coast markets. The price of WTI had been coming back up
more than ANS had been falling. He stated that he had made
a blanket statement about [the Lower 48] not having
pipeline capacity, which had been larger focus; however,
there had been many ideas regarding the cause of the
discounted WTI price. He stated that one reason for the
drop in the WTI price was that refineries in the central
U.S. had been altered to deal with thicker oil instead of
the lighter oil that had been refined in the past. Once the
shale oil became available, producers were left with
refineries that were unable to refine the lighter oil to
the same degree as the heavy oil. As a result, there were
refineries that were being over used and there were some
that were not being used at all. He observed that it had
taken a few years for the industry to adapt to the new type
of oil production in the U.S.
10:19:21 AM
Commissioner Butcher spoke to the slide on page 20 titled
"price forecasts as of October 2011" and stated that the
slide showed a snapshot of oil price forecasts from DOR and
other experts. He related that the different world analysts
tended to be much more optimistic than everyone else on
what the price would be. He shared that NYMEX's price
forecast was usually more optimistic than DOR's in the
short-term, but that it was more pessimistic in the out
years. He concluded that DOR's price forecast tended to
fall in the middle and that the state's forecasting was in
line with what other experts expected the price to be.
Commissioner Butcher discussed the slide on page 21 titled
"fall 2011 DOR oil price forecast" and stated that it
provided a snapshot of the actual prices for FY 11, the
projected price for FY 12, and the projected prices from FY
13 through FY 16. He noted that the right column showed the
nominal numbers and that the column on the left reflected
the real numbers if the 2.5 percent inflation rate was
taken into account.
Mr. Tangeman addressed the slide on page 23 titled "lease
expenditure forecast methodology."
Request capital and operating lease expenditure
projections from North Slope unit operators in the
fall and the spring of each year in writing for the
next five years from the current year
• Meet with and request spending projections
from companies that are not currently
producing but have announced drilling and/or
development plans
• Review and coordinate with production
forecast regarding anticipated developments
outside the five year time horizon received
from operators
• Update longterm capital and operating
expenditure projections based on new
information
Mr. Tangeman pointed out that the first bullet point was a
larger segment of what the state was currently dealing with
and that the tax credit system had generated a lot of
interest "in this area". He said that DOR needed to take
into account the capital and operating expenditure
projections of companies that were not currently producing
but had development or drilling plans.
Mr. Tangeman explained the slide on page 24 titled
"forecasted North Slope expenditures, FY 2012 - FY 2016"
and noted that some new explorers were not producers yet,
did not have a tax liability, but were included in the
chart; the red bars in particular represented these
explorers. He pointed out that the slide was a forecast,
but that the next several slides would enable the committee
to look back at capital and operating expenses in order to
see what had actually occurred. He warned that the slide 24
showed out year growth, but that it was just a forecast.
Mr. Tangeman discussed the slide on page 25 titled
"historical actual expenditures, FY 2007 - FY 2011."
Co-Chair Stedman directed the presentation back to the
slide on page 24. He requested that DOR provide a breakdown
of the expectations provided by the industry. He also
wanted the projections to be shown with a one year delay.
Mr. Tangeman replied that DOR would provide the
information.
Co-Chair Stedman recalled that during the testimony the
prior year, there had been a significant difference between
some of the discussions and the documents that were
submitted. He wanted to be sure that everyone agreed on the
information in front of the committee. Mr. Tangeman
reiterated that DOR would provide that information and that
DOR had gone from a gross tax to a net tax five years ago.
He furthered that DOR was receiving new information and
that it was learning process.
Mr. Tangeman discussed the slide on page 25 titled
"historical actual expenditures, FY 2007 - FY 2011" and
stated that it showed some of the actual expenditures that
had taken place. He pointed out that the actuals could be
used to form some assumptions going forward and that under
the net tax system, looking back at actuals was not an
option. He stated that the full impact of ACES was
"probably" considered by the industry later in FY 09 when
decisions were being made about capital programs. He
furthered that in FY 10, the capital expenditures had
peaked and that operating expenditures had surpassed
capital expenditures in FY 11.
10:26:06 AM
Co-Chair Stedman inquired if the capital expenditures could
be broken down into categories and requested DOR to prepare
a document showing a running total of capital expenditures
dealing with the state's tax credits. He also requested the
cash value on the immediate deduction of capital
expenditures and noted that the figure was close to $1
billion per year, but that it was rarely talked about. He
explained that in the future, he was interested in having
the committee track expenditures that were going into the
oil basin, the incremental increase in oil and production,
and the resulting net revenue to the treasury; furthermore,
he wanted to compare the net revenue to the state's costs
to see if Alaska, from a cash flow perspective, was moving
forwards or backwards. He directed DOR to include the
production decline, the approximately $4 billion in state
credits, and the immediate write-off of capital
expenditures when it prepared the document. Commissioner
Butcher replied that DOR would be happy to prepare the
requested document for the committee.
Mr. Tangeman addressed the slide on page 26 titled "FY 2011
& FY 2012 wellhead values, north slope capex and opex" and
stated that DOR had just received the data for December the
prior day. He explained that the slide showed where the
state currently was in FY 12 compared to FY 11 regarding
its capital expenses, operating expenses, and wellhead
values. He pointed out that although the wellhead values
for FY 11 and FY 12 were consistent, the values for the
first six months of FY 12 were 39 percent higher than in FY
11. He explained that the chart on the bottom left showed
that as of December, the North Slope capital expenditures
were down 13 percent when compared to FY 11. He pointed out
that the bottom right chart showed that in FY 12, the
operating expenditures on the North Slope were up 19
percent when compared to FY 11. He concluded that the slide
updated the capital and operating expenditures through
December of 2011.
Commissioner Butcher asked if Lenny Dees could address the
last few slides.
10:30:42 AM
LENNY DEES, AUDIT MASTER, DEPARTMENT OF REVENUE (via
teleconference), discussed the slide on page 28 titled
"credits applied against production tax liability, by
fiscal year($M)." He explained that the slide showed the
amount of tax credits that had been offset against
production tax liabilities since the inception of Petroleum
Profits Tax (PPT) and ACES. He added that DOR had estimated
the last two years on the chart because it had not received
final true up for those years. He pointed out that DOR
projected that by late FY 12, there will have been a total
of $2.5 billion in credits that were deducted against tax
liabilities.
Co-Chair Stedman asked for a definition of "deducted
against tax liabilities". Mr. Dees clarified that the
statutes allowed for oil producers to deduct certain
credits for expenditures against their tax liability. He
explained that the first line on the slide reflected
Capital Expenditure Credits, through which a company could
deduct 20 percent of the amount of certain capital
expenditures against its production tax liability. He
stated that the second line represented Transitional
Investment Expenditure (TIE) Credits. He further explained
that TIE Credits were available to most companies in 2007
to 2008; TIE Credits enabled a producer to deduct
expenditures that were accrued during the 5 years prior to
the onset of PPT if the expenditures would have qualified
as capital expenditures under the PPT and ACES statutes. He
stated that the third line was for companies that had tax
liabilities, but produced less than 50,000 barrels of oil
per day; in this case, the statutes allowed for a small
producer credit in the amount of the $12 million per year.
The fourth line reflected exploration activities that met
certain requirements under Section 43.55.025 of the Alaska
State Statutes; producers could claim a 30 percent or 40
percent tax credit for those activities. Mr. Dees explained
that the main point of slide 28 was to show the amount of
money that the producers withheld from the state as a
result of tax liability reducing credits. He furthered that
if the tax credits had not existed, the funds depicted on
slide would have come to the state in the form of tax
liabilities.
10:35:22 AM
Co-Chair Stedman asked if Mr. Dees could make some
footnotes to the slide on page 28 that were similar to the
ones on page 29. Mr. Dees responded in the affirmative.
Mr. Dees discussed the slide on page 29 titled
"transferable tax credits certificated claimed by fiscal
year($M)." He stated that companies that were not yet
producing and were still in the exploration or development
stage could submit a tax credit application to DOR for a
Transferable Tax Credit Certificate. Slide 29 showed the
applications that DOR had received since the inception PPT
and ACES from companies that did not yet have production
tax liabilities, but that still wanted to participate in
the credit program. He stated that DOR had received about
$1.7 billion in applications for Transferable Tax Credits
Certificates. He pointed out that the left column showed a
breakdown of the different credit types and noted that
there were footnotes on the slide that referenced statutes.
He listed the different categories of credits in the far
left column.
Mr. Dees discussed the slide on page 30 titled "credits
applied against production tax liability, by fiscal year."
He explained that the first line showed that $1.5 billion
in credits had been issued out of the $1.7 billion in
applications. He explained that under Section 43.55.028 of
the Alaska State Statutes, the credits could be converted
to a cash refund by the state because most of the companies
that were applying for transferable certificates did not
have production tax liabilities. The second line showed
that the state had paid out about $1.3 billion in return
for the certificates through 2012.
10:39:39 AM
Co-Chair Hoffman asked if the information on slides 28, 29,
and 30 had been audited. Commissioner Butcher replied that
DOR conducted a "table audit" before a tax credit was paid
out, but that a more thorough review was done during the
same time that a company was audited for its larger
production taxes.
Co-Chair Hoffman queried how many companies had gone
through a thorough audit under the new tax structure.
Commissioner Butcher replied that the audit for 2006, which
was trued after the first quarter of 2007, had been
completed and that DOR was currently working on the 2007
audit, which was trued up at the end of the first quarter
of 2008. He stated that DOR was within its statutory
guidelines for completing the audits, but that it would
like to "catch up" on them. He added that DOR felt that it
was making progress towards completing audits more
efficiently. He pointed out that the state's transition
from a gross to a net tax had been difficult for auditors
and companies to adjust to and offered that DOR expected a
more streamlined process now that most of the transition
was over. He also mentioned that DOR had hired some new
auditors.
Co-Chair Hoffman wondered if DOR needed additional dollars
in order to get the Department "caught up" with the backlog
of audits. Commissioner Butcher replied that he could talk
to the division more about funding. He explained that DOR
expected that the tax database revenue system would make a
huge difference in the department and furthered that the
database had been funded in the prior fiscal year at $34.7
million. He added that DOR expected to get the first
programs of the database in place in approximately two
years and that all the tax types should be included in 2 to
5 years. He concluded that DOR believed that the database
would replace a lot of the manual work that auditors were
doing and would greatly decrease the time it took to
complete the audits.
Co-Chair Stedman mentioned that the FY 12 data had
potential Cook Inlet credits and that there were
projections for FY 13. He requested column targets for FY
13 so that the committee was not only looking at the
history, but also the next fiscal year.
Senator Thomas requested that DOR provide a single number
for the total amount of the credits that had been taken, as
well as total of the expected credit requests from 2008
till the present time. Mr. Tangeman replied that the $4
billion that Co-Chair Stedman had referenced earlier was
the estimate through 2012 and that the estimate through
2013 was just under $5 billion.
10:44:26 AM
Co-Chair Stedman requested DOR to adjust the estimate to
reflect the immediate write-off of capital expenditures.
Mr. Dees discussed slide 31 titled "production tax credits"
and stated that it was a graphical depiction of the total
credits that had been earned and taken against production
tax liability. He explained that the numbers for slide 31
were found on slide 32.
Mr. Dees explained the slide on page 32 "production tax
credits." He stated that the slide showed that the total
production tax credit impact through FY 12 was about $4
billion. He added that the top line for FY 12, which was the
tax credit certificate line, would probably grow by another
$200 million; the anticipated growth would be due to an
expected increase of applications when companies submitted
their final true ups in March of 2012.
Co-Chair Stedman inquired what the projection was for the
production credit impact in FY 13 and referenced page 31 of
the Revenue Sources Book. Mr. Dees replied that the
projection for FY 13 was $875 million.
Co-Chair Stedman noted that the committee would spend more
time addressing tax credits in the future and requested
that DOR present the slide with the FY 13 projections added
in. Mr. Dees responded that DOR would make the requested
changes.
Senator Thomas asked for a brief explanation of the
declining values of the potential petroleum property taxes
on slide 5 and pages 90 and 91 of the Revenue Sources Book.
He inquired if the declining values were due to the Judge
Gleason decision. Commissioner Butcher replied that DOR
would get back to the committee with a response.
10:48:29 AM
Co-Chair Stedman stated that if there was a difference of
opinion within DOR [regarding Senator Thomas' question],
that the department could provide projections and potential
outcomes. He added that a good portion of the funds [from
property taxes] were going to the communities and that the
net effect to the state was not linear. He requested DOR to
include the effect of the funds going to the communities in
future presentations. Commissioner Butcher responded that
DOR would make the requested changes.
^DEPARTMENT OF REVENUE: STATE SAVINGS ACCOUNT AND BUDGET
RESERVES OVERVIEW
Commissioner Butcher stated that the presentation would
give the committee a general idea of what the prior fiscal
year had looked like and what was happening during the
current fiscal year. He introduced Angela Rodell, the new
Deputy Commissioner of the Tax Division for the Department
of Revenue, and remarked that her background as a financial
advisor gave her a great familiarity with Alaska's state
funds.
Commissioner Butcher presented "an update on the state's
savings accounts overview."(copy on file)
Commissioner Butcher discussed the slide on page 3 titled
"General Fund and other non-segregated investments". He
indicated that in 2011, the short-term investments did
poorly, but that long-term investments did well. He pointed
out that the world had gone through a recession in the
latter half of 2008 through 2009, but that the Permanent
Fund, the retirement funds, and the Constitutional Budget
Reserve had made in excess of 21 percent. He explained that
coming into FY 12, there had been a sizable drop in the
U.S. and world stock markets regarding uncertainty over the
debt in Europe and that the state's long-term investments
had lost a considerable amount. He furthered that the
state's investments had rebounded a great deal in the
second quarter of FY 12, but that the state had a ways to
go to get back to where it was before FY 11. He stated that
the General Fund and other non-segregated investments
(GeFONSI) were a mix of short to intermediate investments
and that liquidity was very important to the fund. He added
that the forecast for GeFONSI was 3.2 percent, but that the
actual number for FY 11 was 1.72 percent due to low
investment yields. He concluded that in the current fiscal
year to date, GeFONSI was at a little less than 1 percent.
10:52:28 AM
Commissioner Butcher spoke to the slide on page 4 titled
"Constitutional Budget Reserve (CBR) Fund (main & sub)" He
explained that the CBR was separated into two categories,
which were invested differently. The main fund was invested
more conservatively, while the sub fund was invested for a
long-term return. He stated that the main fund had a return
of 2.64 percent in FY 11 and that the sub fund had a return
of 21.13 percent; however, in the current fiscal year to
date, the main fund had a return of 2.08 percent and the
sub fund was at negative return of 4.07 percent. He
explained that the drop in the investment returns was
reflective of changes in the markets during the first half
of FY 12.
Co-Chair Stedman requested DOR to provide the net
investment and unrealized gains to the CBR. He related that
it would be helpful to know what the state had started with
in the CBR. Commissioner Butcher responded that DOR would
be happy to provide the information.
Co-Chair Stedman directed DOR to discuss its internal
structure with the committee. Commissioner Butcher replied
that DOR had been meeting quarterly with its chief
investment officer, taking minutes, and reviewing documents
and that there was transparency throughout the process. He
indicated that DOR would be willing to release documents
from the quarterly meetings.
10:54:39 AM
Co-Chair Stedman stated that there should be documentation
in the file showing DOR's process. Commissioner Butcher
replied that DOR would provide the information in the
future.
Commissioner Butcher spoke to the slide on page 5 titled
"Power Cost Equalization (PCE) fund." He related that the
forecast for the fund was for 7 percent and that it was a
fairly aggressive investment; as a result, the fund had
returned just over 22 percent in FY 11. He pointed out that
the fund was down about 4 percent in the current fiscal
year.
Co-Chair Hoffman asked if the $716 million on the slide
included the $400 million in appropriations. Commissioner
Butcher replied in the affirmative.
Co-Chair Hoffman noted that during "that period" there was
a loss of $36 million instead of a return of 21 percent to
the PCE fund and queried what the cause of the loss was. He
offered that the assertion of a 21 percent return in FY 11
was untrue. Commissioner Butcher responded that while the
slide showed the returns, it also included transfers for
PCE payments out of the fund. He furthered that DOR could
provide the committee with more details about the breakdown
of returns and transfers out of the fund.
Co-Chair Stedman requested DOR to provide a monthly
breakdown of the PCE Fund's returns and transfers; he
explained that it would enable the committee to match the
timing of the fund's cash flows with its returns.
Commissioner Butcher responded that DOR would provide the
requested information.
Co-Chair Hoffman further requested that DOR include the
positive or negative rates of return to the fund.
Commissioner Butcher indicated that DOR would be happy to
do so.
Co-Chair Hoffman queried if DOR anticipated a 7 percent
rate of return to the PCE fund for the next fiscal year.
Commissioner Butcher responded that the fund was invested
for a 7 percent return. Co-Chair Hoffman clarified that his
question was if DOR expected to realize the return or not.
Commissioner Butcher responded that he was unsure of what
would happen in the next 7 months of the fiscal year.
Co-Chair Hoffman inquired if rate of return was set too
high and if it should be adjusted to a lower, more
realistic rate, such as 5.5 percent. Commissioner Butcher
replied that 7 percent was historically achievable, but
that the volatility of the market over the last 5 or 6
years had made it a harder rate of return to achieve than
5.5 percent.
Co-Chair Stedman clarified that one issue was that the
payout rate was too high to sustain the PCE fund in the
long-term; furthermore, the payout rates drove the rate of
return targets higher in order to prevent erosion of the
fund's principle. He further explained that the target rate
of return was too high and that there was too much risk
exposure. He pointed out that the operating and capital
budgets had returns closer to 4.25 percent to 4.75 percent
and that there was a concern that the statute within PCE,
which set the rate at 7 percent, was inadequate.
Co-Chair Hoffman offered that DOR should have realized the
issue regarding PCE's payouts and rate of return and that
it should have come forward with modifications to the
program. He referenced a recent infusion into the PCE fund
and stated that the legislature felt that the fund should
be at a sustainable rate of return. Commissioner Butcher
responded that DOR would come forward with a
recommendation.
10:59:17 AM
Commissioner Butcher spoke to the slide on page 6 titled
"public school trust fund (principle and income accounts)."
He stated that the principle made about 17 percent in FY 11
and that it was up slightly in the current fiscal year. The
principle was invested with moderate risk, but the income
from the fund was invested with low risk for liquidity
purposes.
Co-Chair Stedman indicated that the time allotted for the
meeting was almost out and requested an accelerated
walkthrough of the remaining slides.
Commissioner Butcher explained the slide on page 7 titled
"PERS & TRS." He stated that the slide showed a breakdown
of the PERS and TRS retirement investments. He explained
that due to the timing of transfers, the returns between
the two funds never matched exactly. Both PERS and TRS
returned a little over 21 percent in FY 11 and were both
down a little under 5 percent in the current fiscal year.
He noted that there were questions regarding why the high
returns to the funds in FY 11 did not "close the gap" in
the unfunded liability; he explained that the actuaries had
forecasted a rate of return of 8.25 percent for the two
funds, but that the Alaska Retirement Management Board
(ARMB) had determined that the target rate should be at a
more conservative figure of 8 percent. He furthered that
the adjusted target rate of return had resulted in a less
"rosy" investment picture than before the change.
Co-Chair Stedman commented that Callan Associates and the
ARMB would be in front of the committee in several weeks
and that the subject would be covered in more detail at
that time.
Commissioner Butcher spoke to the slide on page 8 titled
"APFC." He stated that the Alaska Permanent Fund
Corporation (APFC) had experienced a return on investments
of a little over 20 percent in FY 11. He pointed out that
APFC had peaked with a market value of $40 billion, before
its decline in 2008. He furthered that the APFC value was
currently at $38.6 billion and that although the fund was
healthy, it had not fully recovered from the recession of
2008.
Co-Chair Stedman commented that the APFC would also be in
front of the committee after the ARMB.
Commissioner Butcher spoke to the slide on page 10 titled
"FY 2012 investment revenue forecast." He stated that the
slide detailed the investment revenue forecast. The left
side depicted the FY 11 actual returns on investments from
the funds. The right side showed the FY 12 forecast's
actuals through December 31, 2011 and the estimated
forecast numbers for the second half of FY 12. He noted
that Permanent Fund had generated revenue of just under $7
billion in FY 11, but that the fund was down almost $2
billion in the current fiscal year. He furthered that DOR
expected the Permanent Fund to rebound in the next 6
months, but that the forecast was still for a net reduction
in FY 12.
Co-Chair Hoffman requested that DOR provide the committee
with a report of the Permanent Fund earnings reserve
account for the last 5 years. He offered that at one time
the reserve account was under $1 billion, but that it was
currently in excess of $2 billion. Commissioner Butcher
replied that the DOR would provide the requested
information.
Co-Chair Stedman discussed the agenda for the following
meeting.
ADJOURNMENT
11:03:37 AM
The meeting was adjourned at 11:04 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR State Savings Accounts Update 2 1 12.pdf |
SFIN 2/2/2012 9:00:00 AM |
DOR Overview |
| 12 02 02 SenFin DOR Fall 2011FC [Read-Only].pdf |
SFIN 2/2/2012 9:00:00 AM |
DOR Overview |
| Response to 2 2 12 S FIN.pdf |
SFIN 2/2/2012 9:00:00 AM |
DOR: FY13 Overview |
| S FIN 2 2 12 APFC earnings reserve.pdf |
SFIN 2/2/2012 9:00:00 AM |
DOR: FY13 Overview |
| S FIN 2 2 12 Credits.pdf |
SFIN 2/2/2012 9:00:00 AM |
DOR: FY13 Overview |
| S FIN 2 2 12 PCE Analysis - FY11 FY12.pdf |
SFIN 2/2/2012 9:00:00 AM |
DOR: FY13 Overview |
| S FIN 2 2 12 CBRF Analysis Chart.pdf |
SFIN 2/2/2012 9:00:00 AM |
DOR: FY13 Overview |