Legislature(2017 - 2018)SENATE FINANCE 532

04/28/2017 09:00 AM FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
09:03:49 AM Start
09:04:57 AM Presenation: Senate Fiscal Plan
01:33:08 PM HB111
03:26:01 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Recessed to 1:30 p.m.
+ Presentation: Senate Fiscal Plan TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      April 28, 2017                                                                                            
                         9:03 a.m.                                                                                              
9:03:49 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 9:03 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Shelley Hughes                                                                                                          
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Natasha von Imhof                                                                                                       
MEMBERS ABSENT                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
ALSO PRESENT                                                                                                                  
Senator  Kevin Meyer;  Senator Cathy  Giessel; Senator  John                                                                    
Coghill;  Senator Pete  Kelly;  Representative Chris  Birch;                                                                    
Representative   Dave   Talerico;  Representative   Charisse                                                                    
Millett;  Representative   George  Rauscher;  Representative                                                                    
Chuck   Kopp;   Representative   Colleen   Sullivan-Leonard;                                                                    
Representative Cathy  Tilton; Representative  Tammie Wilson;                                                                    
Representative   Mike   Chenault;  David   Teal,   Director,                                                                    
Legislative   Finance   Division;   Representative   Colleen                                                                    
Sullivan-Leonard;    Representative    Jennifer    Johnston;                                                                    
Representative    DeLena   Johnson;    Representative   Lora                                                                    
Reinbold;  Representative Dan  Saddler; Representative  Gary                                                                    
Knopp;   Alexei   Painter,  Analyst,   Legislative   Finance                                                                    
Division;  Rob   Carpenter,  Analyst,   Legislative  Finance                                                                    
Division;  Kara  Moriarty,  President  and  Chief  Executive                                                                    
Officer, Alaska  Oil and Gas  Association; Dan  Seckers, Tax                                                                    
Counsel,  ExxonMobil;   Scott  Jepsen,  Vice   President  of                                                                    
External  Affairs  and Transportation,  ConocoPhillips;  Pat                                                                    
Foley,  Senior Vice  President -  Alaska Operations,  Caelus                                                                    
Energy;  Jeff Hastings,  Managing  Member,  Kuukpik SAE  and                                                                    
CEO,  SAExploration;  Kate   Blair,  Government  and  Public                                                                    
Affairs Manager, Tesoro.                                                                                                        
PRESENT VIA TELECONFERENCE                                                                                                    
Damian Bilbao, Vice President of Commercial Ventures, BP.                                                                       
HB 111    OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                             
          HB 111 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
PRESENATION: SENATE FISCAL PLAN                                                                                                 
Co-Chair MacKinnon noted that  Co-Chair Hoffman would not be                                                                    
present  at the  meeting.  She informed  that Senator  Kevin                                                                    
Meyer had joined the committee at the table.                                                                                    
9:04:57 AM                                                                                                                    
AT EASE                                                                                                                         
9:05:34 AM                                                                                                                    
^PRESENATION: SENATE FISCAL PLAN                                                                                              
9:06:17 AM                                                                                                                    
Co-Chair  MacKinnon  emphasized  that Alaska  was  facing  a                                                                    
particularly  difficult fiscal  challenge.  She  spoke to  a                                                                    
$2.78 billion revenue  shortfall in the FY18  budget, and an                                                                    
over $4  billion deficit the  previous year. She  noted that                                                                    
the  state had  removed over  $10 billion  from its  savings                                                                    
accounts,  and  planned  to withdraw  close  to  another  $3                                                                    
billion. The Senate believed it  had presented a plan to the                                                                    
other body, and had tried  to propose responsible cuts and a                                                                    
spending limit to continue downward  pressure on the budget.                                                                    
Additionally,  the Senate  had  proposed structural  reforms                                                                    
targeted at the largest cost drivers of the state.                                                                              
Co-Chair  MacKinnon  continued,   stating  that  the  Senate                                                                    
required   reductions   from   the  other   body   and   the                                                                    
administration,  as well  as an  obligation  to institute  a                                                                    
spending  limit before  accessing use  of Alaska's  earnings                                                                    
reserves.  She emphasized  that the  earnings reserves  were                                                                    
the only thing available to  address a $2.78 billion revenue                                                                    
9:08:08 AM                                                                                                                    
DAVID   TEAL,   DIRECTOR,  LEGISLATIVE   FINANCE   DIVISION,                                                                    
conveyed that  the committee  had asked  him to  discuss the                                                                    
Senate  version of  SB 26  [a  bill relating  to the  Alaska                                                                    
Permanent   Fund  and   the  structure   of  funding   state                                                                    
government -  reported out of  the Senate  Finance Committee                                                                    
on 3/10/17]. He stated that  the bill touched every Alaskan,                                                                    
not only  because it  set a formula  for the  Permanent Fund                                                                    
Dividend (PFD),  but because it  affected the way  the state                                                                    
funded  government and  the level  of  funding available  to                                                                    
government. He summarized  that SB 26 had  provided a fiscal                                                                    
plan.  He shared  that he  would address  two issues  at the                                                                    
     1. Why do we need a fiscal plan?                                                                                           
     2. Does the SB 26 plan offer a solution to our fiscal                                                                      
Mr.  Teal  discussed the  presentation  "SB  26 -  A  Fiscal                                                                    
Plan,"  (copy   on  file).  He   showed  slide   2,  "Budget                                                                    
Reductions Since  FY13," which  had a graph  entitled 'Total                                                                    
Agency  Operating  Budgets,   Statewide  Items  and  Capital                                                                    
Budget  Compared to  Revenue.' He  explained that  the slide                                                                    
gave a good indication that  the state had a fiscal problem.                                                                    
He referred to the graph,  which showed a line depicting the                                                                    
state's Unrestricted  General Fund  (UGF) revenue.  The bars                                                                    
indicated  UGF expenditures.  The dark  portion of  the bars                                                                    
represented agency operations,  the lighter blue represented                                                                    
statewide  items,  and  the yellow  portion  showed  capital                                                                    
Mr. Teal continued  discussing the chart of  slide 2, noting                                                                    
that despite  tremendous reductions  in spending  (from $7.8                                                                    
billion in FY 17 down to  $4.1 billion in the current year),                                                                    
the  state faced  a large  deficit. The  state faced  a $2.5                                                                    
billion  deficit for  FY 18,  considering the  higher spring                                                                    
forecast  numbers for  production  and  price. He  continued                                                                    
that  not too  far in  the  past, there  were reserves  that                                                                    
could have absorbed  a deficit of $2.5  billion, however the                                                                    
state was in  its 6th consecutive year of  spending that had                                                                    
exceeded revenue.                                                                                                               
9:11:15 AM                                                                                                                    
Mr.  Teal turned  to slide  3,  "End-of-Year Budget  Reserve                                                                    
Balances,  FY07-FY18," which  showed a  bar graph  depicting                                                                    
the   Statutory   Budget   Reserve  Fund   (SBR)   and   the                                                                    
Constitutional Budget  Reserve Fund (CBR)  from FY 07  to FY                                                                    
Mr. Teal directed attention to  the $16.3 billion balance at                                                                    
the end of  FY 13, and noted that the  six years of deficits                                                                    
had reduced  the state's reserves  to about $2.5  billion at                                                                    
the end  of FY 18.  The calculation  assumed that the  FY 17                                                                    
and FY  18 deficits  would be filled  by drawing  money from                                                                    
the  CBR. He  shared  that the  outlook  was for  continuing                                                                    
deficits. He  did not want to  turn the meeting into  a long                                                                    
discussion  of the  implications  of  revenue covering  less                                                                    
than  half  of  current  expenditures.  He  considered  that                                                                    
talking about  what the  state would  do when  reserves were                                                                    
gone  was  comprised  of  many   policy  decisions  and  was                                                                    
precisely why the committee was considering SB 26.                                                                              
Mr. Teal  emphasized a point  before leaving the  slide: the                                                                    
CBR  served not  only  as  a shock  absorber  to absorb  the                                                                    
deficits, but also as a  cash management tool. He added that                                                                    
even in  times of surplus,  the state started the  year with                                                                    
little  revenue and  high  cash outflow.  To  fill the  cash                                                                    
needs early in  the year, funds were borrowed  from the CBR.                                                                    
He relayed  that the Office  of Management and  Budget (OMB)                                                                    
believed there should  be a minimum balance  of $2.5 billion                                                                    
in the CBR to serve the  function of a cash management tool.                                                                    
He emphasized that  the amount was the bare  minimum for the                                                                    
purpose, and did not leave much  room for the CBR to be used                                                                    
as a shock absorber.                                                                                                            
9:13:30 AM                                                                                                                    
Mr.  Teal spoke  to  slide  4, "What  Does  A Solution  Look                                                                    
     1. Healthy Reserve Balances?                                                                                               
          - No less than $2.5 billion in the CBR?                                                                               
          - An Earnings Reserve Account (ERA) that is                                                                           
     2. A Sustainable Budget?                                                                                                   
          - A balanced budget? How fast? How big?                                                                               
          - Time for a phased approach? How much time?                                                                          
Mr. Teal  thought that slide 4  presented several questions,                                                                    
not statements,  because there would be  disagreement on how                                                                    
to  measure success  in addressing  the  fiscal problem.  He                                                                    
stated  that he  could  not define  "healthy reserves,"  but                                                                    
rather considered it a policy  question whether it meant the                                                                    
bare  minimum  (the $2.5  billion  that  OMB cited);  or  if                                                                    
"healthy  reserves" signified  that the  state was  building                                                                    
fund  balances.  He thought  some  might  say "I  just  want                                                                    
stable/growing reserves  and I  don't particularly  care how                                                                    
we do it,"  while others may note that the  path was just as                                                                    
important as  the destination.  He mentioned  questions with                                                                    
major policy  implications pertaining  to the amount  of the                                                                    
PFD, the size of government,  and how much individuals would                                                                    
have to pay.                                                                                                                    
Mr.  Teal  indicated  that  points  1 and  2  on  the  slide                                                                    
overlapped. He considered that the  points could be the same                                                                    
question  phrased a  different  way.  He saw  point  1 as  a                                                                    
direct response  to the problem  of vanishing  reserves, and                                                                    
point 2 as a better way  to emphasize the path to a solution                                                                    
rather than the destination alone.  He pondered if the state                                                                    
should try to balance the  budget immediately, or if a glide                                                                    
path was acceptable or even preferable.                                                                                         
Mr. Teal  asserted that  it was possible  to balance  at any                                                                    
level given a sufficient amount  of revenue. He asked how to                                                                    
choose  the  expenditure  level that  will  be  balanced  by                                                                    
revenue. He  thought that choosing  a path  forward involved                                                                    
many policy  decisions, some of  which were addressed  by SB
9:16:03 AM                                                                                                                    
Senator Micciche  asked to  return to  slide 4.  He wondered                                                                    
about the philosophy the  Legislative Finance Division (LFD)                                                                    
might  have. He  referred to  the  question of  policy on  a                                                                    
healthy   fund  balance.   He  wondered   what  Mr.   Teal's                                                                    
definition of  "adequate fund balance" was,  particularly in                                                                    
the  CBR. He  did  not believe  that  government's role  was                                                                    
being a bank, particularly  when discussing potential future                                                                    
revenues  coming  from  Alaskans.  He  did  not  think  that                                                                    
building  a   fund  balance  was   a  primary   function  of                                                                    
government.  He  thought   adequate  funding  for  essential                                                                    
services was a better definition.                                                                                               
Mr. Teal  agreed with  OMB that $2.5  billion was  a minimum                                                                    
balance  for  cash flow,  but  preferred  to see  a  minimum                                                                    
balance of $5  billion, which was roughly  equivalent to one                                                                    
year's  budget.  He  emphasized that  he  was  offering  his                                                                    
personal opinion as requested.  He thought building reserves                                                                    
beyond  $5 billion  was fine  as long  as the  needs of  the                                                                    
citizens were met first. He  pondered if the state needed to                                                                    
build reserves  to weather another fiscal  challenge such as                                                                    
the state was  experiencing. He hated to  imagine what would                                                                    
have  happened if  the  state  had not  had  $16 billion  in                                                                    
9:19:21 AM                                                                                                                    
Mr. Teal discussed slide 5, "What Does SB 26 Do?":                                                                              
     1. A Payout from the ERA to the General Fund (that                                                                         
    greatly reduces the deficit and revenue volatility)                                                                         
     2. A Payout from the ERA for Dividends                                                                                     
     3. A Payout (Revenue) Limit                                                                                                
     4. An Appropriation Limit                                                                                                  
     5. Additional Royalties to the General Fund                                                                                
Mr. Teal thought  the most significant policy  change in the                                                                    
bill  was  the  use  of  permanent  fund  earnings  to  fund                                                                    
government  operations.   The  provision  was   the  primary                                                                    
deficit filler. A Payout from the  ERA (of 5.25% for 3 years                                                                    
then  falling to  5%) went  to  the General  Fund (GF).  The                                                                    
payout amounted  to $1.8 billion  that would grow  over time                                                                    
under  the  baseline   assumptions.  The  provision  greatly                                                                    
reduced the  size of the  deficit, and also  reduced revenue                                                                    
volatility  by providing  a source  of revenue  that was  as                                                                    
large  or  larger than  the  state's  traditional source  of                                                                    
revenue  (oil). He  added that  the  payout helped  diminish                                                                    
fluctuations and reduced the amount  that was needed to draw                                                                    
from the CBR.                                                                                                                   
Mr. Teal pointed out that  the bill also revised the formula                                                                    
for  dividends. Instead  of  basing  dividends on  permanent                                                                    
fund  earnings, it  would be  based  on the  balance of  the                                                                    
permanent  fund. A  25%  share of  the  total payout,  which                                                                    
amounted  to about  $1,000 annually,  would be  paid out  as                                                                    
dividends.  He thought  some might  wonder how  the dividend                                                                    
amount  affected  the  problem  of  vanishing  reserves.  He                                                                    
explained that  as dividends went  up, the  government share                                                                    
of  the  payout  went  down. He  emphasized  that  dividends                                                                    
clearly and directly affected the health of reserves.                                                                           
Mr.  Teal addressed  the payout  limit, which  would further                                                                    
reduces  revenue volatility  by cutting  off revenue  peaks.                                                                    
The limit would also increase  future payouts to the general                                                                    
fund  and  to dividends.  He  continued  that there  was  an                                                                    
appropriation limit (spending limit)  in the bill that would                                                                    
cut off  revenue peaks beyond  those affected by  the payout                                                                    
limit.  He  noted that  neither  of  the limits  would  take                                                                    
effect  in  the  standard  model  scenarios  that  would  be                                                                    
demonstrated later  in the  presentation. He  qualified that                                                                    
the lack  of limit  modelling did not  mean the  limits were                                                                    
ineffective,  it meant  the  limits would  kick  in only  if                                                                    
revenues  were  much  higher  than   expected  in  the  base                                                                    
scenario.  He  stated  that the  base  scenarios  were  with                                                                    
fairly  stable  earnings  (at  the  rate  projected  by  the                                                                    
permanent fund) and midline oil price assumptions.                                                                              
9:23:08 AM                                                                                                                    
Mr. Teal  continued discussing slide  5, and noted  that LFD                                                                    
did  not  worry  much  about modeling  scenarios  with  high                                                                    
revenue  because the  situation was  not a  problem for  the                                                                    
state. He emphasized that it was  easy to have a fiscal plan                                                                    
when deficits  were eliminated. He thought  it was important                                                                    
to know  that if the  state had  the good fortunate  of high                                                                    
revenue,  the limits  would restrain  expenditures, and  may                                                                    
not  work  under the  models  that  would  be shown  in  the                                                                    
Mr. Teal  pointed out that  SB 26 redirected  some royalties                                                                    
to the  General Fund. He  pointed out that  the constitution                                                                    
required that  25 percent  of royalties go  to the  fund. It                                                                    
was  possible to  place  another 25  percent  on new  fields                                                                    
(about 30  years old), which  amounted to about  $60 million                                                                    
to  $70 million  per  year, and  growing.  The funding  flow                                                                    
helped increase GF revenue and reduce deficits.                                                                                 
Mr. Teal  reviewed slide 6,  "Baseline SB 26,"  which showed                                                                    
an interactive graph. He stated  that the graphs were a shot                                                                    
of a model output under  baseline assumptions, which were an                                                                    
OMB  growth  forecast. He  pointed  out  that there  was  an                                                                    
increasing  expenditure line,  with  the  budget growing  by                                                                    
about $1  billion between FY  17 and  FY 26. He  stated that                                                                    
the forecast was not completely  adjusted for inflation, but                                                                    
had  retirement assistance  growing from  approximately $200                                                                    
million to $450 million.                                                                                                        
Mr.  Teal  informed that  LFD  had  used the  Department  of                                                                    
Revenue  (DOR) spring  price forecast  when formulating  the                                                                    
graphs, as well  as a P10 production  forecast. He continued                                                                    
that  LFD  had  received  some  new  numbers  from  DOR  the                                                                    
previous day, but  had not had time to build  them in to the                                                                    
model. He  recalled that  the committee had  been in  a long                                                                    
discussion with  DOR about the production  forecast, and the                                                                    
fact that  FY 18 had a  stale number for oil  production. He                                                                    
confirmed  that LFD  had adjusted  for the  stale number  by                                                                    
using the P10 forecast,  which signified that outcomes would                                                                    
be  at or  above the  forecast 90  percent of  the time,  or                                                                    
below for 10 percent of the time.                                                                                               
Mr. Teal thought  the P10 forecast would be  very similar to                                                                    
the revised forecast,  but had not had a  chance to compare.                                                                    
He  clarified  that  the forecast  removed  the  12  percent                                                                    
production decline (from FY 17  to FY 18) that had concerned                                                                    
many  members. He  specified that  the  forecast started  at                                                                    
approximately 475,000 barrels  of oil per day  with a shower                                                                    
decline  than the  mid-production  forecast  would have.  He                                                                    
thought it was a reasonable  adjustment to the forecast, and                                                                    
should be just  about the same as when the  new numbers were                                                                    
built into the model.                                                                                                           
9:27:16 AM                                                                                                                    
Co-Chair   MacKinnon  clarified   that  the   graphs  showed                                                                    
particular  assumptions under  the  baseline of  SB 26.  She                                                                    
thought most models would be  wrong, and emphasized that the                                                                    
committee was  trying to use  the best information  that was                                                                    
available  to  forecast  and test  particular  actions.  She                                                                    
stated that  when the committee was  specifically looking at                                                                    
the budget growth  as represented on the charts,  it was not                                                                    
an endorsement,  but rather  a projection by  OMB as  to how                                                                    
the budget would grow if nothing else transpired.                                                                               
Mr. Teal  clarified that the models  were projections rather                                                                    
than  predictions.  He  furthered   that  LFD  used  numbers                                                                    
provided by  DOR, the Department of  Natural Resources, OMB,                                                                    
and  by the  Alaska  Permanent Fund  Corporation (APFC).  He                                                                    
emphasized that  as model builders,  LFD did not want  to be                                                                    
put  in the  position of  using its  own assumptions,  which                                                                    
would  determine the  output.  Rather, LFD  tried to  choose                                                                    
assumptions  which were  the best  numbers  from those  best                                                                    
qualified to  produce the numbers.  He thought  the baseline                                                                    
assumptions were a reasonable  starting point, and suggested                                                                    
that OMB's  expenditure projection  kept up  with inflation.                                                                    
He emphasized that  the models were interactive  in order to                                                                    
enable the committee to look at different scenarios.                                                                            
Co-Chair  MacKinnon  asked  about the  'UGF  Revenue/Budget'                                                                    
projection  graph  on   slide  6,  and  made   note  of  the                                                                    
differently  colored   bars  that  represented   funding  to                                                                    
support  state  services.  She asked  Mr.  Teal  to  provide                                                                    
clarity for those that might be listening to the meeting.                                                                       
9:30:17 AM                                                                                                                    
Mr.  Teal agreed  to provide  some detail  on the  bars, but                                                                    
first  commented  that  there  was one  more  assumption  to                                                                    
consider on the  graphs; that the Permanent Fund  had a rate                                                                    
of return  of 6.95  percent. He  stated that  the assumption                                                                    
made the model function.                                                                                                        
Mr. Teal referred  to the 'UGF Revenue/Budget'  graph in the                                                                    
upper  left  of  slide  6, and  directed  attention  to  the                                                                    
expenditure  line  that  reflected   the  OMB  forecast.  He                                                                    
explained that the bars represented  state revenue, and were                                                                    
broken into  pieces according to  revenue source.  He stated                                                                    
that the  blue portion  of the bars  represented traditional                                                                    
revenues  (oil  and  other  things).  Additionally,  it  was                                                                    
possible to see the CBR  draw represented in the yellow bar,                                                                    
which drastically diminished starting in  FY 18 as the state                                                                    
began to draw  a payout from the ERA. He  explained that the                                                                    
yellow bar  stacked on top  of the traditional  revenue bar,                                                                    
leaving a deficit.                                                                                                              
Mr.  Teal posited  that when  there  was a  deficit, it  was                                                                    
assumed  it  would  be  filled from  the  CBR.  He  directed                                                                    
attention to the 'Budget Reserves'  Graph on the lower left,                                                                    
which showed a declining CBR balance.                                                                                           
Mr. Teal  looked at the graphs  on the lower right  of slide                                                                    
6, which  showed dividend information.  He pointed  out that                                                                    
the 'Permanent  Fund' graph showed  the balance of  the fund                                                                    
growing to approximately $70 billion  by 2026, which was 108                                                                    
percent of the  fund's FY 17 value after  being expanded for                                                                    
He indicated  that the  Permanent Fund  was keeping  up with                                                                    
inflation  and not  being depleted  under  the scenario.  He                                                                    
referred to  the 'Dividend Check'  graph on the  upper right                                                                    
of the slide,  which showed dividends at  roughly $1000, and                                                                    
fairly  flat  over  time  under  the  current  scenario.  He                                                                    
thought  the  committee was  paying  most  attention to  the                                                                    
quadrants of  revenues and expenditures, which  would change                                                                    
the  most over  time. He  thought that  dividends would  not                                                                    
change much;  but that expenditures, revenues,  and deficits                                                                    
would be subject to greater change.                                                                                             
9:34:07 AM                                                                                                                    
Senator von  Imhof looked at  the 'Dividend Check'  graph on                                                                    
the top right of the slide.  She asked about the red 'status                                                                    
quo' line, which she assumed  included having $10 billion in                                                                    
the  ERA  along  with  $45  billion in  the  corpus  of  the                                                                    
permanent fund  invested in the  same way it  was currently.                                                                    
She discussed a scenario predicated  on the event that SB 26                                                                    
did  not  pass, money  was  taken  from  the ERA  through  a                                                                    
majority vote, and  APFC made different decisions  in how it                                                                    
invested the  ERA. She  thought a full  quarter of  the fund                                                                    
could  be prudently  invested (with  lower  risk) to  manage                                                                    
cash  flow. She  thought the  state would  not see  the full                                                                    
investment value  in the ERA  if the  bill did not  pass and                                                                    
draws on the ERA began.  She emphasized that the state could                                                                    
not manage  cash flow while  having investments  that locked                                                                    
up cash for  many years. She shared  concerns that dividends                                                                    
could drop precipitously if such a scenario would occur.                                                                        
Mr. Teal thought that Senator  von Imhof was being very mild                                                                    
in  her assessment.  He pointed  out that  the 'Status  Quo'                                                                    
line on  the 'Dividend Check'  graph assumed that  the state                                                                    
could continue to pay dividends if  SB 26 was not passed. He                                                                    
asserted that  if the bill  was not passed, there  would not                                                                    
be $1.8 billion (and growing)  going to the GF. The deficits                                                                    
would then  be filled from  the CBR. He continued  that once                                                                    
the CBR was  gone in FY 19, government would  have to be cut                                                                    
by 50 percent immediately, or  the state would have to begin                                                                    
to use money from the ERA.  If there was a $2.5 billion draw                                                                    
from  the ERA  to fill  the  deficit, the  account would  be                                                                    
depleted rapidly  and there  would be  no dividends.  He was                                                                    
not  sure the  committee wanted  to discuss  the status  quo                                                                    
scenario if  the bill were not  to pass, and opined  that it                                                                    
simply did not work. There  was not sufficient cash to avoid                                                                    
beginning a structured  draw from the ERA as  SB 26 proposed                                                                    
to do. He thought the problem  went far beyond the impact of                                                                    
lowered returns,  and emphasized that the  'Status Quo' line                                                                    
showing large dividends simply would  not happen due to lack                                                                    
of funds.                                                                                                                       
9:38:04 AM                                                                                                                    
Senator  Micciche stated  that  he had  a  problem with  the                                                                    
model, but  thought it was  the best tool for  examining all                                                                    
the components being  considered. He stated that  part of SB
26 was to enable a  dividend in perpetuity. He asserted that                                                                    
the  reason for  the  meeting was  to  demonstrate that  the                                                                    
Senate  fiscal   plan  worked.   He  referred   to  previous                                                                    
testimony by  DOR that indicated  a 12 percent  decline from                                                                    
523,000 barrels  per day to  459,000 barrels per day  in oil                                                                    
production; even  though there had been  a two-year increase                                                                    
in  oil production.  He pointed  out that  the P10  forecast                                                                    
still   demonstrated  a   nine   percent   decline  in   oil                                                                    
Senator  Micciche   continued  discussing  the   model,  and                                                                    
emphasized   that  there   was  an   extremely  conservative                                                                    
assumption on likely oil production  in the subsequent years                                                                    
shown  on the  model.  He emphasized  that  there were  many                                                                    
layers of conservatism layered in the graphs.                                                                                   
Co-Chair  MacKinnon   asked  that  Mr.  Teal   continue  his                                                                    
presentation  so  that  Alaskans could  understand  how  the                                                                    
legislature  was  trying  to   measure  any  proposal  being                                                                    
considered. She asserted that the  plan tried to ensure that                                                                    
the corpus  of the  PF was  protected. She  asked if  it was                                                                    
accurate  that  in  a baseline  model,  the  fund  performed                                                                    
better than the status quo scenario.                                                                                            
Mr. Teal answered in the affirmative.                                                                                           
Co-Chair MacKinnon  noted that  the baseline model  under SB
26 assumed  a Percent  of Market Value  (POMV) draw  at 5.25                                                                    
percent  for the  first  few  years, dropping  down  to a  5                                                                    
percent draw that would lower with time.                                                                                        
Mr. Teal concurred.                                                                                                             
Co-Chair  MacKinnon   relayed  that  Co-Chair   Hoffman  and                                                                    
herself had  met with the  governor to discuss  the Senate's                                                                    
plan. She  relayed that the  governor had  originally stated                                                                    
to  all  Alaskans that  the  legislature  should look  at  a                                                                    
manageable draw from the Permanent  Fund earnings to protect                                                                    
the people's dividend. She was  supportive of the statement,                                                                    
but  thought the  administration had  modified its  goals in                                                                    
recent days.  She mentioned  oil and gas  tax reform  and an                                                                    
income tax on Alaskans. She  interjected that her intent was                                                                    
to protect  the dividend.  She thought the  'Dividend Check'                                                                    
graph on  slide 6 contained optimistic  projections that did                                                                    
not  reflect  the actual  challenge  that  both bodies  were                                                                    
facing in trying  to meet payroll for the  government at its                                                                    
current size. She stated that  the Senate's effort to reduce                                                                    
payroll  was difficult  to accomplish  without a  supportive                                                                    
Co-Chair MacKinnon  pointed that while  FY 19 might  seem as                                                                    
though  it  was far  in  the  future,  it  was in  fact  the                                                                    
following year (for planning purposes).                                                                                         
Mr.  Teal  affirmed  that   the  legislature  was  currently                                                                    
working on the FY 18 budget.                                                                                                    
Co-Chair MacKinnon asked when the FY 18 budget began.                                                                           
Mr.  Teal specified  that the  FY  18 budget  began July  1,                                                                    
Co-Chair MacKinnon  noted that the school  district operated                                                                    
on yet another schedule, and  were budgeting a different way                                                                    
than  state  agencies.  She   thought  that  some  budgetary                                                                    
numbers could be confusing.                                                                                                     
9:43:50 AM                                                                                                                    
Mr.  Teal   commented  on   Senator  Micciche's   choice  of                                                                    
assumptions.  He  thought  that the  assumptions  used  were                                                                    
reasonable,  and leaned  towards conservative.  He commented                                                                    
that the  assumptions that went  in to the baseline  were be                                                                    
justifiably conservative.  He thought  it was better  to err                                                                    
on  the  side  of  caution, and  have  more  (revenue)  than                                                                    
previously assumed.                                                                                                             
Senator Hughes appreciated  the fact that the  P10 value was                                                                    
conservative,  but shared  concerns about  the 6.95  percent                                                                    
Permanent  Fund  investment  return rate.  She  thought  the                                                                    
number seemed  high, and wondered  what would happen  if the                                                                    
actual return fell short of what was projected.                                                                                 
Mr.  Teal stated  that  there  was a  reason  that LFD  used                                                                    
numbers  provided  by  APFC,  which  had  the  knowledge  to                                                                    
project  rates  of  return.  He   continued  that  APFC  had                                                                    
modified its projection slightly  over the years. Previously                                                                    
the projected  rate of  return was 8  percent, and  the APFC                                                                    
had generally  met its investment  targets. He  relayed that                                                                    
Angela Rodell,  the Executive  Director of  the corporation,                                                                    
believed that  a 6.95 percent  projected rate of  return was                                                                    
achievable.  He reminded  that the  Retirement  Board had  a                                                                    
projected target of 8 percent,  so he considered that a 6.95                                                                    
percent projected  rate on long-term investments  of a well-                                                                    
balanced portfolio seemed achievable.                                                                                           
Senator Hughes thought she had  heard Ms. Rodell assert that                                                                    
a  projected 5  percent rate  of  return made  her a  little                                                                    
uncomfortable.  She hoped  that the  actual return  would be                                                                    
higher,  but  reiterated  that the  6.95  percent  seemed  a                                                                    
little high.                                                                                                                    
9:47:25 AM                                                                                                                    
Senator  Micciche relayed  that  the committee  had spent  a                                                                    
great  deal  of  time  with  APFC  as  well  as  independent                                                                    
evaluators.  He clarified  that many  experts had  testified                                                                    
that 6.95  percent was  an expected return  rate as  for any                                                                    
sovereign investment  fund. He thought it  was important for                                                                    
people to realize  that the projected rate of  return was an                                                                    
appropriate and conservative number.                                                                                            
Co-Chair MacKinnon commented that  APFC had a portfolio that                                                                    
was  balanced   differently  than  the  stock   market.  She                                                                    
continued  that APFC  had a  core base  of real  estate that                                                                    
showed gains differently than the  stock market. She pointed                                                                    
out that the stock market  was currently moving upward under                                                                    
the new  administration. She asserted  that the  6.9 percent                                                                    
projected  rate  of return  was  reasonable,  as was  the  5                                                                    
percent and 5.25 percent draw.                                                                                                  
Co-Chair  MacKinnon   continued,  and   referenced  previous                                                                    
testimony by  Ms. Rodell that  opined that the  draw amounts                                                                    
were  reasonable.  She  furthered that  actuaries  from  the                                                                    
administration  had backed  up  the  calculations that  were                                                                    
included  in  SB  26.  She  informed  that  the  legislation                                                                    
included a drop in the POMV  payout, as well as a three-year                                                                    
review  to confirm  that the  assumptions were  accurate and                                                                    
the  Permanent  Fund  principal   and  other  state  savings                                                                    
accounts were not being stressed.                                                                                               
Mr. Teal emphasized that any  time a model output was shown,                                                                    
it was important to use  words of caution. Mr. Teal reminded                                                                    
that   the   graphs    in   the   presentation   represented                                                                    
projections, and  that the future  was uncertain.  He stated                                                                    
that  LFD  expected the  committee  to  understand that  its                                                                    
policy decisions  had to address  the uncertainty.  The base                                                                    
scenario used  stable earnings and  oil prices,  despite the                                                                    
fact that it was known that both items would be volatile.                                                                       
Mr.  Teal stated  that the  precision of  the model  was not                                                                    
high; suggested  that the  committee should  consider trends                                                                    
when looking at numbers, rather  than looking at the numbers                                                                    
themselves.  He asserted  that LFD  was within  a margin  of                                                                    
error  of $200  million, which  was the  best that  could be                                                                    
done. He  highlighted that  it was very  easy to  change the                                                                    
assumptions being  used, and it  was up to the  committee to                                                                    
see how  well a  model survived with  different assumptions.                                                                    
He suggested that the committee  look at the projections for                                                                    
FY 18 revenue, one of which had been $7 billion.                                                                                
9:52:12 AM                                                                                                                    
ALEXEI  PAINTER,  ANALYST,   LEGISLATIVE  FINANCE  DIVISION,                                                                    
referred to  the lowest projection  for FY 18, which  was in                                                                    
the spring  2016 forecast  and had  been $500  million lower                                                                    
than the  current forecast. The highest  projection was made                                                                    
when   oil   was  $120   per   barrel,   and  had   forecast                                                                    
approximately $7  billion of revenue  for FY 18.  He thought                                                                    
the difference between  projections in the long  term may be                                                                    
plus or minus $5 billion, probably not minus $5 billion.                                                                        
Co-Chair  MacKinnon  asked  about  the base  model  and  the                                                                    
assumption of  a $180  million capital  budget for  UGF. She                                                                    
asked  if  he  recalled  the size  of  the  previous  year's                                                                    
capital budget UGF spending.                                                                                                    
Mr.  Teal  recalled  that  there  was  $96  million  of  UGF                                                                    
spending  in  the previous  year's  capital  budget, and  it                                                                    
thought it would  probably be less than $100  million in the                                                                    
current year.  He stated that  the $180 million was  a long-                                                                    
term  assumption, and  he could  modify the  assumption when                                                                    
the committee began looking at an active model.                                                                                 
Co-Chair  MacKinnon  stated that  she  raised  the issue  in                                                                    
order to provide understanding that  the committee had tried                                                                    
to put stressors  within the budgeting scenario  to test the                                                                    
Mr.  Teal  continued,  cautioning  that  the  models  should                                                                    
always be stress tested by  using less favorable assumptions                                                                    
regarding earnings, oil prices, and other factors.                                                                              
Mr. Teal  pointed to slide 6,  and referred to the  table of                                                                    
numbers under  the 'Budget Reserves'  graph. He  referred to                                                                    
the  protection of  the Permanent  Fund and  funding a  flat                                                                    
dividend.  He stated  that the  table showed  in that  FY 18                                                                    
about three  quarters of the projected  $2.5 billion deficit                                                                    
was  filled  under  the   baseline  assumptions,  leaving  a                                                                    
deficit of about $600 million.  The deficits declined in the                                                                    
future, with  86 percent filled  before relying on  the CBR.                                                                    
He asked the committee  to remember precision, and suggested                                                                    
that the 86 percent was a trend.                                                                                                
Mr. Teal  thought it was critical  to note that the  CBR was                                                                    
not  empty in  FY  19  as slide  3  implied  - the  scenario                                                                    
provided time to  deliberate. He stated that with  SB 26 the                                                                    
CBR,  although it  was  declining, would  last  a number  of                                                                    
years. He  pointed out that the  chart of the bottom  of the                                                                    
slide  showed the  deficit,  and the  years  to exhaust  the                                                                    
9:56:21 AM                                                                                                                    
Senator  Meyer  thought  it seemed  using  2.89  percent  to                                                                    
calculate  CRB  earnings was  quite  low.  He asked  if  the                                                                    
number was based on historical returns for the CBR.                                                                             
Mr.  Teal stated  that  the CBR  did not  earn  much as  the                                                                    
returns were  correlated with the investment  strategy. When                                                                    
there was little  money in the CBR, and  there was potential                                                                    
demands on using  the money, it could not be  put into long-                                                                    
term  investments. The  funds would  essentially be  held as                                                                    
cash or cash-equivalents,  and therefore it would  not be in                                                                    
a portfolio designed to generate higher earnings.                                                                               
Co-Chair  MacKinnon relayed  that  DOR Commissioner  Randall                                                                    
Hoffbeck  had made  the decision  because there  could be  a                                                                    
required call on cash to liquidate most of the CBR.                                                                             
Senator  Meyer   thought  that  some  had   speculated  that                                                                    
inflation could  go up considerably  in the near  future due                                                                    
to  the new  president and  stimulus to  the economy  in the                                                                    
Lower 48. He  asked a higher rate of 5  percent would impact                                                                    
the financial picture.                                                                                                          
Mr. Teal  looked at the  interactive models. He  stated that                                                                    
he skipped slide  7, which had shown the  Senate budget, and                                                                    
was a  reduction of about  $185 million from  the governor's                                                                    
proposed budget.                                                                                                                
In  order to  discuss different  hypothetical scenarios,  he                                                                    
thought  it  was  best  to  look at  the  graphs  and  enter                                                                    
different  inflation   rates,  different   capital  budgets,                                                                    
different  budget  cut   scenarios,  and  different  revenue                                                                    
measures. It was also possible  to stress-test the scenarios                                                                    
with  higher oil  prices and  lower returns,  to demonstrate                                                                    
that  SB  26  could  hold up  under  some  difficult  fiscal                                                                    
assumptions. He  cautioned that there was  no guarantee that                                                                    
the assumptions  being used were  not very  optimistic, even                                                                    
though LFD was taking a conservative approach.                                                                                  
10:00:43 AM                                                                                                                   
Senator Meyer wondered  how LFD chose to use  a 2.25 percent                                                                    
inflation factor.                                                                                                               
Mr.  Teal stated  that  2.25 was  the  assumption that  APFC                                                                    
Co-Chair  MacKinnon suggested  that the  committee test  the                                                                    
model starting  with Senate recommendations for  cuts in the                                                                    
current  year's budget,  which  she  thought totaled  around                                                                    
$185 million. She thought a  variety of scenarios could then                                                                    
reflect if  the state's  reserves were growing,  and whether                                                                    
the corpus of the Permanent Fund was affected.                                                                                  
Mr. Painter  entered a target  cut of $185 million  into the                                                                    
interactive spreadsheet.                                                                                                        
Co-Chair MacKinnon commented  that it was possible  to see a                                                                    
slight uptick  in the state's  reserves after  inputting one                                                                    
year's worth of cuts.                                                                                                           
Mr. Painter  pointed out the  graph on the bottom  left, and                                                                    
noted that changing a variable  to include the proposed $185                                                                    
million in  cuts reduced the deficit,  and thereby increased                                                                    
the balance of the CBR in  future years. He did not think it                                                                    
was  quite enough  to turn  the trend  upwards, but  thought                                                                    
that  more  cuts  would  achieve   the  desired  effect.  He                                                                    
clarified that the $185 million  mentioned was the reduction                                                                    
below the governor's proposed budget  (but not below FY 17 -                                                                    
the  baseline  for the  model  was  the governor's  proposed                                                                    
10:02:51 AM                                                                                                                   
Senator  Micciche recalled  that  the  committee had  viewed                                                                    
similar models before  the spring forecast had  come out. He                                                                    
commented that  the estimate of  a 9 percent decline  in oil                                                                    
production was  conservative. He  wanted to  look at  a more                                                                    
probable production  estimate, if the scenario  just assumed                                                                    
the  two  years  was  more  of a  trend  rather  than  being                                                                    
considered  an anomaly.  He  mentioned a  long  list of  new                                                                    
projects  expected  to  be  online by  2021.  He  asked  Mr.                                                                    
Painter to add $100 million  of other revenue on the summary                                                                    
Mr.  Painter  stated that  it  was  difficult to  show  what                                                                    
Senator Micciche  was requesting, and that  he would instead                                                                    
show the funds as additional budget reductions.                                                                                 
Senator  Micciche observed  that inputting  $285 million  in                                                                    
reductions  showed  the  state rebuilding  its  savings.  He                                                                    
looked at revenue for FY 18.                                                                                                    
10:06:15 AM                                                                                                                   
Senator  Micciche asked  Mr. Painter  to  address the  motor                                                                    
fuel tax on the interactive  graphs, and to drop the capital                                                                    
budget variable to  a more realistic number.  He wondered if                                                                    
Co-Chair  MacKinnon  was  comfortable dropping  the  capital                                                                    
budget to $100 million.                                                                                                         
Senator Micciche  perceived that with the  requested changes                                                                    
to the  graph, one could  observe that  by FY 19  there were                                                                    
increased CBR  savings, and the  ERA started  growing rather                                                                    
rapidly.  He thought  that  the bill  would  build the  CBR,                                                                    
would balance the  budget within two years,  and would begin                                                                    
to grow state  savings. He stated that the  committee was on                                                                    
guard against  over-capitalizing government. He  mentioned a                                                                    
spending cap  and a  revenue limit, which  were part  of the                                                                    
concept of the plan.                                                                                                            
Vice-Chair  Bishop believed  that the  proposed fiscal  plan                                                                    
was the beginning of sound economic policy for the state.                                                                       
Senator von  Imhof observed  that one  of the  components of                                                                    
the plan  was spending  in the future.  She thought  that if                                                                    
there had  previously been  a spending  cap in  place, there                                                                    
would be more  in reserves. She asserted  that one important                                                                    
component of the  fiscal plan was a spending  cap, which was                                                                    
at  about  $4.1  billion  for  UGF.  She  thought  that  the                                                                    
spending  cap,  in  concert  with  a  POMV  draw,  could  be                                                                    
considered redundant.  She mused  that if  revenue increased                                                                    
in  the   future,  there  could  be   pressure  to  increase                                                                    
spending. She  thought it would take  discipline and resolve                                                                    
by  future legislators  to refrain  from increased  spending                                                                    
and  be  thoughtful  about what  expenses  to  address.  She                                                                    
thought a spending  cap would keep a level  of discipline in                                                                    
place  and was  a  core  requirement of  the  plan. She  was                                                                    
pleased that there was a spending cap in SB 26.                                                                                 
10:11:22 AM                                                                                                                   
Mr.  Teal   referred  to  Senator  von   Imhof's  "belt  and                                                                    
suspenders"  analogy relating  to  redundancy. He  discussed                                                                    
the payout limit,  and thought some might  be concerned that                                                                    
funds  could not  be spent.  He explained  that there  was a                                                                    
choice  between spending  $10 million  per  year forever  or                                                                    
spending $200 million one time.  If the legislature chose to                                                                    
operate  under   the  revenue  limit,   there  would   be  a                                                                    
continuous $10 million per year  to support operating budget                                                                    
increases. He  thought the spending  limit was  different in                                                                    
that  it did  not  reduce the  draw from  the  ERA like  the                                                                    
revenue limit did.  He thought that the  two measures worked                                                                    
well together.                                                                                                                  
10:14:13 AM                                                                                                                   
Senator Hughes asked to look at  the top of the center table                                                                    
on the  interactive graph sheet.  She directed  attention to                                                                    
the  target cut,  and thought  the reduction  factor in  the                                                                    
model over time was incredibly  important so as to avoid the                                                                    
need for additional revenue measures.  She also resisted the                                                                    
necessity to have the deficit  be zero, and thought downward                                                                    
pressure to  continue to make reductions  was important. She                                                                    
thought  the temptation  would be  to  continue to  increase                                                                    
spending,  rather  than  continue to  make  reductions.  She                                                                    
emphasized that it was necessary  to not only think of state                                                                    
services, but communities and the  private sector. She hoped                                                                    
line 8 (target cut) would continue  to be present as part of                                                                    
the  model, and  thought  reductions were  the  best way  to                                                                    
bring down the deficit.                                                                                                         
Senator  Meyer  referred  to  Senator  Hughes  comments.  He                                                                    
mentioned that  the Senator  and he both  sat on  the Senate                                                                    
Labor   and   Commerce   Committee,   which   had   recently                                                                    
extensively considered an income  tax bill. As proposed, the                                                                    
bill  would go  into effect  in FY  20, and  would bring  in                                                                    
additional  revenue  of $600  million  to  $700 million.  He                                                                    
estimated  that the  Senate was  proposing an  approximately                                                                    
$250 million deficit for FY 20,  so there would be a surplus                                                                    
of  $400   to  $500  million  extra   funds  collected  from                                                                    
Alaskans. He  considered that  the scenario  would encourage                                                                    
over-spending as Senator von Imhof had suggested.                                                                               
Co-Chair MacKinnon  stated that  the purpose of  the meeting                                                                    
was to acknowledge that it  was short-sighted to consider an                                                                    
income  tax  at  the  current time.  She  thought  that  the                                                                    
economists  in   the  Labor   and  Commerce   Committee  had                                                                    
suggested  that the  state not  do everything  at once.  She                                                                    
thought  leaving  a deficit  was  not  a  bad thing  if  one                                                                    
believed  that government  still  had an  opportunity to  do                                                                    
things  more   efficiently  and  perhaps   provide  services                                                                    
10:18:47 AM                                                                                                                   
Senator  Micciche asked  to look  at  the 'Budget  Reserves'                                                                    
graph on  slide 6.  He commented  on possible  increased oil                                                                    
production. He asked Mr. Painter  to add a price increase of                                                                    
$2 per barrel to the forecast.                                                                                                  
Mr.  Painter stated  that  there  was not  a  way to  merely                                                                    
change the  price of  oil in the  forecast, but  rather only                                                                    
change the P40  assumption, which meant that there  was a 60                                                                    
percent likelihood (according to DOR)  that the price of oil                                                                    
was lower, and  a 40 percent likelihood that  it was higher.                                                                    
The  change  would   equate  to  a  few   dollars  of  price                                                                    
adjustment in  the early  years, and  8 or  10 by  the later                                                                    
Mr.   Painter  turned   to  a   worksheet  showing   revenue                                                                    
forecasts, which showed  there was an increase  to the price                                                                    
of oil by $4 in FY 18, and up to $10 by FY 26.                                                                                  
Senator   Micciche   acknowledged   that  there   would   be                                                                    
fluctuation  in  oil prices.  He  mentioned  the POMV  draw,                                                                    
which  he thought  would eliminate  variability. He  thought                                                                    
the fiscal plan used conservative estimates.                                                                                    
10:22:23 AM                                                                                                                   
ROB  CARPENTER,   ANALYST,  LEGISLATIVE   FINANCE  DIVISION,                                                                    
addressed  points  made  by  Senator  Micciche  and  Senator                                                                    
Hughes; suggesting that the  committee observe an inflation-                                                                    
growth  model.   He  noted  that   the  same   results  were                                                                    
observable, which  budget constraints  in the out  years. He                                                                    
noted  that the  OMB  10-year  plan was  flat  in the  early                                                                    
years,  with 2.5  percent growth  after. He  emphasized that                                                                    
the volatility in the projections was significant.                                                                              
Co-Chair   MacKinnon  relayed   that  it   was  the   Senate                                                                    
Majority's position  that the  administration had  the power                                                                    
and opportunity to help Alaskans in  a way that might not be                                                                    
observable  yet. She  mentioned  contract negotiations,  and                                                                    
thought there  were tools  at the  administration's disposal                                                                    
that  provided an  opportunity to  balance  the budget.  She                                                                    
pointed out  that the only  way the  plan worked was  due to                                                                    
the blend of the POMV and  the improvement of oil price. She                                                                    
emphasized that the  state would be facing  huge deficits if                                                                    
a percentage of the Permanent  Fund earnings was not planned                                                                    
to be used to blend revenues together.                                                                                          
Co-Chair  MacKinnon thought  the point  of the  presentation                                                                    
was  that it  was  possible to  balance  the budget  without                                                                    
additional taxes if it was based  on cuts. If the Senate was                                                                    
able to achieve  $300 million in cuts, no  new revenue would                                                                    
be needed  anywhere. She  thought a  willing House  body and                                                                    
administration  were  needed  to accomplish  the  cuts.  She                                                                    
asserted  that  the  Senate  would   continue  to  pursue  a                                                                    
responsible budget  with a spending limit  that structurally                                                                    
reformed  different programs  that were  huge cost  drivers.                                                                    
She emphasized  that reductions,  a spending limit,  and use                                                                    
of the ERA were a cornerstone of fiscal policy.                                                                                 
10:26:56 AM                                                                                                                   
Senator Hughes  added to  Senator Meyer's  remarks regarding                                                                    
the lack  of a number on  the income line in  the model. She                                                                    
was  led  to  believe  by financial  professionals  that  an                                                                    
income  tax would  increase the  economic  recession in  the                                                                    
state. She was  concerned about the proposal  from the House                                                                    
Majority,  and thought  creating surplus  revenues would  be                                                                    
very damaging to the economy.                                                                                                   
Senator von Imhof  stated that the income tax  model did not                                                                    
show the economic  and population impacts in  the event that                                                                    
an income tax was implemented.  She asserted that those with                                                                    
the most income were generally  the most mobile. She told an                                                                    
anecdotal  story  about the  State  of  Connecticut and  the                                                                    
impact  of high  wage  earners leaving  the  state after  an                                                                    
income tax had been imposed.                                                                                                    
10:28:55 AM                                                                                                                   
Mr.  Teal thought  it  was up  to the  committee  to make  a                                                                    
determination  if it  felt comfortable  with the  model, the                                                                    
assumptions,  and   the  policy  choices  that   were  being                                                                    
Senator  Micciche  thought  the  goal for  the  day  was  to                                                                    
clarify  that there  was not  a remaining  $500 million  CBR                                                                    
draw  forever. He  thought  people  wanted different  things                                                                    
from the government, and had  different expectations. He did                                                                    
not think  it was possible  to cut forever, and  thought the                                                                    
government  needed  to  be made  as  efficient  as  possible                                                                    
without over-capitalizing.  He thought asking more  from the                                                                    
economy was reckless.                                                                                                           
Senator Micciche  continued, and  stated that  the committee                                                                    
was  focused  on  perpetual   dividends.  He  asserted  that                                                                    
without the changes  proposed in the plan,  the existence of                                                                    
dividends by 2026 was at  risk. He directed attention to the                                                                    
'Permanent  Fund'  graph  on the  slide,  which  showed  the                                                                    
status quo  scenario reflecting a $10  billion difference in                                                                    
the  corpus of  the  fund. He  envisioned  that someday  the                                                                    
corpus  of   the  fund  and   POMV  draw   would  adequately                                                                    
capitalize the  operation of  the government  in perpetuity.                                                                    
He  was  excited about  the  plan,  and hoped  others  would                                                                    
recognize its value.                                                                                                            
10:32:08 AM                                                                                                                   
Vice-Chair  Bishop commented  that now  the state  was on  a                                                                    
pathway towards  diversification and protection the  ERA, he                                                                    
assumed that the  state's credit rating would  rise once the                                                                    
bill became law.                                                                                                                
Co-Chair MacKinnon  reminded that the state  had a bicameral                                                                    
legislature  with a  strong executive  branch. She  asserted                                                                    
that  the  Senate's  plan  worked,  and  there  were  policy                                                                    
choices  in all  facets of  the plan.  She thought  that the                                                                    
probability of  success depended upon the  House, the Senate                                                                    
and the  administration reaching an agreement.  She restated                                                                    
that  it was  necessary to  have a  responsible budget.  The                                                                    
Senate was asking the House  to reconsider a spending limit.                                                                    
She thought  it was  necessary to continue  restructure some                                                                    
of the largest cost drivers of the state.                                                                                       
Co-Chair  MacKinnon discussed  the value  of education.  She                                                                    
referred  to  Senator  Hughes   and  education  reform.  She                                                                    
thought that groups of Alaskans  were not receiving the same                                                                    
education benefits  as others.  She stated that  the Senate,                                                                    
along  with  the  administration,   was  trying  to  advance                                                                    
structural reform to the K-12  education system. She thought                                                                    
that  if the  state could  achieve  a spending  limit and  a                                                                    
responsible  budget, the  Senate would  consider use  of the                                                                    
ERA  to create  a durable  structure for  Alaska and  ensure                                                                    
long-term dividends for all Alaskans.                                                                                           
Co-Chair MacKinnon discussed the afternoon agenda.                                                                              
10:36:24 AM                                                                                                                   
1:32:29 PM                                                                                                                    
CS FOR HOUSE BILL NO. 111(FIN)(efd fld)                                                                                         
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     relating  to carried-forward  lease expenditures  based                                                                    
     on losses  and limiting those lease  expenditures to an                                                                    
     amount  equal  to  the  gross value  at  the  point  of                                                                    
     production of  oil and gas  produced from the  lease or                                                                    
     property  where  the  lease expenditure  was  incurred;                                                                    
     relating to  information concerning tax  credits, lease                                                                    
     expenditures, and  oil and gas  taxes; relating  to the                                                                    
     disclosure of that information  to the public; relating                                                                    
     to an  adjustment in  the gross value  at the  point of                                                                    
     production;  and  relating  to  a  legislative  working                                                                    
1:33:08 PM                                                                                                                    
Co-Chair MacKinnon discussed the agenda.                                                                                        
1:33:51 PM                                                                                                                    
AT EASE                                                                                                                         
1:34:03 PM                                                                                                                    
KARA  MORIARTY,  PRESIDENT   AND  CHIEF  EXECUTIVE  OFFICER,                                                                    
ALASKA OIL  AND GAS ASSOCIATION, discussed  the presentation                                                                    
"Senate Finance  Committee -  HB 111,"  (copy on  file). She                                                                    
stated that  the Alaska Oil  and Gas Association  (AOGA) was                                                                    
the state's professional oil and  gas trade association; and                                                                    
its  members   represented  the  majority   of  exploration,                                                                    
production, and refining companies  in the state. She stated                                                                    
that  HB  111 represented  the  seventh  change in  oil  tax                                                                    
policy in twelve years.                                                                                                         
Ms.  Moriarty thought  that some  had misrepresented  AOGA's                                                                    
position  on past  oil tax  policy changes  in the  previous                                                                    
decade.  She stated  for the  record that  industry had  not                                                                    
asked the  legislature to  make any  changes in  the current                                                                    
year.  She  asserted  that the  current  tax  structure  had                                                                    
clear, undeniable  proof existed that the  law attracted new                                                                    
companies  to the  state and  had created  a fiscal  climate                                                                    
that encouraged companies to invest  more, which had in turn                                                                    
facilitated the ultimate goal of  getting more oil in to the                                                                    
Trans-Alaska pipeline system. Ms.  Moriarty wondered why the                                                                    
legislature  was considering  abandoning and  reversing what                                                                    
she considered to be a successful policy.                                                                                       
Ms. Moriarty looked at slide 3, "House Majority Goals":                                                                         
     There  is  no  silver  bullet for  solving  our  fiscal                                                                    
     problem. To  maintain the Alaska  that we want  to live                                                                    
     in,  we  need  a   durable  solution  that  includes  a                                                                    
     combination  of measures:  a  Percent  of Market  Value                                                                    
     draw  from the  Earnings  Reserve  Account (within  the                                                                    
     Alaska Permanent  Fund); a reasonable  broad-based tax;                                                                    
     a   moderate   and   protected  PFD   payout;   and   a                                                                    
     restructuring  of   the  oil   and  gas   tax  credits.                                                                    
     Implemented together,  these four pillars will  lay the                                                                    
     foundation for a prosperous future for all Alaskans.                                                                       
     - Reps.  Paul Seaton &  Neal Foster (House  Finance Co-                                                                    
Ms. Moriarty discussed slide 4, "Governor Walker's Goals":                                                                      
     Alaska  is  facing  annual deficits  of  more  than  $3                                                                    
     billion - even  after budget cuts of 44  percent in the                                                                    
     past four years. Without a  plan we'll burn through our                                                                    
     budget  reserves  in  less  than  two  years.  The  New                                                                    
    Sustainable Alaska Plan calls for a combination of                                                                          
          1. Spending reductions                                                                                                
          2. Sustainable use of Permanent Fund earnings                                                                         
          3. Modest tax increases                                                                                               
          4. Oil and gas tax credit reform                                                                                      
Ms. Moriarty  showed slide  5, "Senate  Resources CS  for HB
     HB 111 "eliminates the state's  cash exposure by ending                                                                    
     the program  of refundable oil  and gas tax  credits to                                                                    
     small  or new  companies.  Transitions to  a system  of                                                                    
     carrying  forward  operating  losses  for  use  against                                                                    
     future tax  liability, while  protecting the  basic tax                                                                    
     components in statute today."                                                                                              
     Senate  Resources   Committee,  Summary   of  Committee                                                                    
     Substitute, 4/24/17                                                                                                        
Ms. Moriarty suggested  that it was the goal  of the leaders                                                                    
of the  House, Senate,  and the  governor to  eliminate cash                                                                    
credits   as  proposed   by  the   bill.  She   thought  the                                                                    
elimination of  the credits  would increase  government take                                                                    
and impact the economics  of several potential projects. She                                                                    
stated  that  the  version  of  the  bill  being  considered                                                                    
addressed  several concerns  AOGA had  outlined in  previous                                                                    
bill hearings. She considered that  previous versions of the                                                                    
bill had multiple  sections that had nothing to  do with oil                                                                    
and gas  tax credits  and were simply  tax increases  on the                                                                    
industry.  She   thought  the  Senate   Resources  Committee                                                                    
version  of the  bill seemed  to be  focus primarily  on the                                                                    
goal of eliminating cash credits.  She mentioned a memo from                                                                    
AOGA  dated  March 13,  2017  that  had addressed  technical                                                                    
questions and concerns (copy on file).                                                                                          
1:37:45 PM                                                                                                                    
Ms. Moriarty spoke  to slide 6, "Senate Resources  CS for HB
111 Meets Governor's Goals":                                                                                                    
     HB   1111   resolves   four  high   priority   concerns                                                                    
     identified by the governor:                                                                                                
     1.  Transition   Alaska  away  from  the   business  of                                                                    
         providing cash credits/rebates to the oil and gas                                                                      
     2.  Reduce  the state's liability related  to potential                                                                    
         large future investments                                                                                               
     3.  Defer the  state's direct participation in the cost                                                                    
         of a new project until it comes into production                                                                        
     4. The oil industry should participate as part of the                                                                      
         overall fiscal plan for Alaska                                                                                         
     Source: DOR Presentation 4/14/17                                                                                           
Ms.  Moriarty referred  to a  statement  by Commissioner  of                                                                    
Revenue Randall  Hoffbeck that  suggested the  blended gross                                                                    
tax/net  tax structure  was well  designed  for the  state's                                                                    
Ms.  Moriarty continued  discussing  slide  6, and  believed                                                                    
that  with the  elimination of  cash credits,  the state  no                                                                    
longer  had participation  in new  projects. She  emphasized                                                                    
that not  only did the  oil industry participate as  part of                                                                    
the  state's fiscal  plan, but  it was  the state's  largest                                                                    
taxpayer  to date.  She continued  that the  state took  the                                                                    
largest profit  share at every  oil price, and HB  111 would                                                                    
increase government  take. She  referred to a  recent report                                                                    
from OMB that outlined  different categories of expenditures                                                                    
per capita,  but failed to mention  different income streams                                                                    
per capita.  She detailed  that in  FY 16,  the oil  and gas                                                                    
industry  contributed just  over $2.1  billion to  state and                                                                    
local governments, which equated  to over $2,800 per Alaskan                                                                    
in the previous fiscal year.                                                                                                    
Ms.  Moriarty  stated  that  she had  a  personal  stake  in                                                                    
solving the  state's fiscal issues. She  urged the committee                                                                    
to  not pursue  changes that  would dramatically  impact the                                                                    
investment climate for Alaska.  She thought the state needed                                                                    
a  policy  that  would  continue  to put  more  oil  in  the                                                                    
pipeline, which would benefit the  entire state economy. She                                                                    
thanked the committee for the opportunity to testify.                                                                           
Co-Chair  MacKinnon acknowledged  Senator  Cathy Giessel  in                                                                    
the gallery.                                                                                                                    
1:41:32 PM                                                                                                                    
DAN SECKERS,  TAX COUNSEL, EXXONMOBIL, testified  in support                                                                    
of  the  CS  by  the  Senate  Resources  Committee.  He  was                                                                    
supportive  of the  comments of  the previous  testifier. He                                                                    
underscored the concern that oil  tax credits (cash credits)                                                                    
reform  had been  transformed into  changing  policy in  the                                                                    
state  when companies  were struggling.  He thought  that an                                                                    
effort  to  raise taxes  when  companies  were losing  money                                                                    
would not help  the economy. He thought the  proposed CS did                                                                    
address the central issue of  the reform of cashable credits                                                                    
while allowing the state to remain globally competitive.                                                                        
Mr. Seckers continued  his remarks, and thought  that the CS                                                                    
being  considered maintained  the  core structure  of SB  21                                                                    
[oil and  gas tax  legislation passed  in 2013].  He thought                                                                    
that SB 21  had led to more production,  revenues, and jobs.                                                                    
He  stated  that  ExxonMobil had  never  qualified  for  the                                                                    
cashable tax credit  program, and did not  expect to qualify                                                                    
for the program in the future.                                                                                                  
1:44:40 PM                                                                                                                    
Mr. Seckers  mentioned the  memo authored  by AOGA  that was                                                                    
referenced by the previous  testifier. He discussed concerns                                                                    
about  elements of  the bill,  including  the net  operating                                                                    
loss (NOL) carry-forwards. He referred  to Section 23 of the                                                                    
bill,  which  provided that  the  NOL  tax credit  would  be                                                                    
carried  forward  as  an  operating  loss.  He  thought  the                                                                    
provision also  created an ordering rule,  and provided that                                                                    
the current  year expenses  were claimed  before an  NOL was                                                                    
claimed. He discussed the current  tax structure and thought                                                                    
there would be  a crossover point, at which time  the tax on                                                                    
the  net profit  would equal  the  tax on  gross profit.  He                                                                    
thought the  additional deductions had no  value. He thought                                                                    
the  recovery  of  losses  was foundational  to  a  net  tax                                                                    
system,  and to  eliminate  the recovery  would make  Alaska                                                                    
less competitive.                                                                                                               
Mr. Seckers  considered the  credits that  could be  used to                                                                    
reduce  the minimum  tax. He  thought the  CS was  not clear                                                                    
with regard  to application  of credits against  the minimum                                                                    
tax. He  thought the more  clarity provided in  statute, the                                                                    
better off everyone would be.                                                                                                   
Mr. Seckers addressed the issue  of gross revenue exclusion,                                                                    
which  he   thought  many  fields  would   qualify  for.  He                                                                    
reiterated the  need for  clarity in  the bill  to establish                                                                    
the intent of the legislature.                                                                                                  
Mr. Seckers highlighted an issue  in Section 23 of the bill.                                                                    
The  section  provided  for uplift  and  he  commented  that                                                                    
ExxonMobil  was  unlikely to  ever  qualify  due to  current                                                                    
production. The  section stated that  the uplift  could only                                                                    
be  used  once  the  field  (generating  the  uplift)  began                                                                    
commercial   production,  which   he   thought  created   an                                                                    
ambiguity. He recalled that HB  247 [oil and gas legislation                                                                    
passed the previous year]  changed law regarding determining                                                                    
qualifications for  a gross  revenue exclusion.  He wondered                                                                    
about  the definitions  of  'production'  and thought  there                                                                    
should be standardization of terms.                                                                                             
Mr.  Seckers   concluded  by  saying  that   Alaska  was  an                                                                    
important part  of ExxonMobil's  portfolio, and  the company                                                                    
planned  to be  in  the state  for many  years  to come.  He                                                                    
thought that  if taxes  were increased,  opportunities would                                                                    
diminish accordingly. He  thought that the goal  of having a                                                                    
globally  competitive  fiscal regime  was  one  of the  most                                                                    
important issues for the state.  He understood the cash flow                                                                    
crisis, as  well as the  attention paid to  cashable credits                                                                    
and how  the issue was  being addressed. He  reiterated that                                                                    
the  CS preserved  the core  structure  of SB  21, which  he                                                                    
believed  had been  working by  leading to  more production,                                                                    
and had led to more royalty payments and taxes.                                                                                 
1:51:40 PM                                                                                                                    
Vice-Chair  Bishop  asked  if  ExxonMobil  had  changed  its                                                                    
capital investment  strategy globally since the  downturn in                                                                    
oil prices.                                                                                                                     
Mr. Seckers relayed that ExxonMobil  had taken a harder look                                                                    
at investments,  and stated that in  low price environments,                                                                    
investments received greater scrutiny.                                                                                          
Co-Chair  MacKinnon  referred  to the  previous  testifier's                                                                    
mention of SB  21, and asked Mr. Seckers to  specify oil tax                                                                    
policy rather  than use a bill  number. She asked if  he was                                                                    
familiar with  the advisory opinion  issued in March  by the                                                                    
tax director from DOR. She  wondered if Mr. Seckers would be                                                                    
challenging  the  interpretation,  and whether  he  saw  the                                                                    
opinion as  a new interpretation,  or rather as  an accurate                                                                    
description of tax policy that had been in place.                                                                               
Mr. Seckers  stated that he  was familiar with  the advisory                                                                    
opinion,  and  it  was  still  under  consideration  by  his                                                                    
company.   He  thought   the   impact   on  the   ExxonMobil                                                                    
Corporation may not be as  severe as for other taxpayers. He                                                                    
did not agree with the  opinion. He thought that the opinion                                                                    
was a  strained interpretation and  was not sure  it matched                                                                    
the  intent of  SB 21.  He stated  that the  corporation had                                                                    
been surprised by the opinion, but would follow the law.                                                                        
Co-Chair  MacKinnon questioned  DOR's interpretation  of the                                                                    
Senate Resources  Committee version of HB  111. She referred                                                                    
to Ms.  Moriarty's earlier comments and  had understood that                                                                    
DOR took  the position  that the  bill would  decrease costs                                                                    
for taxpayers.  She wondered if testifiers  were speaking to                                                                    
the advisory  opinion or to  the bill being  considered. She                                                                    
thought  current policy  had been  reinterpreted differently                                                                    
by the administration's tax director.  She thought there was                                                                    
a different alignment as to  how different components of tax                                                                    
policy were in play and how deductions were taken.                                                                              
1:56:07 PM                                                                                                                    
Mr. Seckers recalled that the  reference to the tax increase                                                                    
was  from  the  CS  rather than  the  advisory  opinion.  He                                                                    
continued  that  the impact  of  the  bill was  relative  to                                                                    
various companies.  He did  not know  the foundation  of the                                                                    
assessment by the department in  saying that there was a tax                                                                    
decrease. He discussed the contents  of the advisory opinion                                                                    
as  related  to  the  CS.  He  thought  that  the  CS  would                                                                    
represent  an  immediate  tax  increase   for  a  number  of                                                                    
companies due to being subjected to a minimum tax.                                                                              
Co-Chair  MacKinnon stated  that the  committee was  working                                                                    
with  DOR to  understand why  the Senate  CS would  decrease                                                                    
Co-Chair  MacKinnon asked  if  ExxonMobil received  cashable                                                                    
credits from the state.                                                                                                         
Mr. Seckers stated that the  corporation had never qualified                                                                    
for, nor received any cashable credits from the state.                                                                          
1:58:47 PM                                                                                                                    
AT EASE                                                                                                                         
2:01:38 PM                                                                                                                    
SCOTT  JEPSEN,  VICE  PRESIDENT   OF  EXTERNAL  AFFAIRS  AND                                                                    
TRANSPORTATION,  CONOCOPHILLIPS, discussed  the presentation                                                                    
"Senate Finance  Committee - SCS CSHB111\P"  (copy on file).                                                                    
He turned  to slide 2,  "Activities Since Tax  Reform (SB21)                                                                    
     · Added two rigs to the Kuparuk rig fleet, 2013-2014                                                                       
     · Two new-build rigs delivered in 2016                                                                                     
        •Doyon 142 and Nabors CDR3                                                                                              
        •Averaged 4.5 rigs at Kuparuk/Alpine during 2016                                                                        
     · Sanctioned ERD Rig in 2016                                                                                               
     · North East West Sak - DS1H                                                                                               
     · New drill site at Kuparuk (DS 2S) - on stream a year                                                                     
     · Sanctioned 18 additional wells at Alpine CD5                                                                             
     · Sanctioned Greater Mooses Tooth 1 in 2015                                                                                
     · Permitting Greater Mooses Tooth 2                                                                                        
     · Willow discovery and acquisition of 737,000 state                                                                        
       and federal acres in December 2016 lease sale                                                                            
     · Significant other industry investment                                                                                    
Mr. Jepsen  emphasized that  the list  of activities  on the                                                                    
slide  represented billions  of  dollars  of investment  and                                                                    
tens of  thousands of barrels  of new production  coming on-                                                                    
stream.  He  highlighted  the Will  discovery,  which  could                                                                    
equate  to  100,000  of  barrels per  day  and  billions  of                                                                    
dollars  of  investment.  He  relayed   that  SB  21  had  a                                                                    
substantial  impact on  the state  in  terms of  production,                                                                    
jobs, revenue,  and getting more  oil down  the Trans-Alaska                                                                    
pipeline  system. He  discussed the  Greater Mooses  Tooth 1                                                                    
project, which  had employed 1,000 people.  He mentioned new                                                                    
exploration potential.                                                                                                          
Mr. Jepsen  thought everyone was well  aware that production                                                                    
had increased in 2016. He  discussed increased production in                                                                    
2017.  He directed  attention to  a bar  graph on  the lower                                                                    
right  hand corner  of the  slide,  to show  ConocoPhillips'                                                                    
capital investment  in the state.  He highlighted  that 2012                                                                    
was  the last  year of  Alaska's Clear  and Equitable  Share                                                                    
(ACES),  and the  company had  invested  about $800  million                                                                    
while  oil prices  were about  $100 per  barrel. Every  year                                                                    
since the company's capital budget had gone up.                                                                                 
Mr.  Jepsen  noted  that  ConocoPhillips   peak  year  as  a                                                                    
corporation was 2014,  when it spent about  $17 billion. The                                                                    
company had about  $1 billion invested in  Alaska. He stated                                                                    
that  part of  the reason  ConocoPhillips still  invested in                                                                    
the  state was  because there  was a  competitive investment                                                                    
climate.  He thought  SB 21  had been  a key  to sanctioning                                                                    
various projects. He  stated that the decision  to invest in                                                                    
all of the  projects listed on the slide  had been dependent                                                                    
upon the economics and tax investment climate at the time.                                                                      
2:06:43 PM                                                                                                                    
Senator  Micciche asked  what increased  production did  for                                                                    
reducing  the  proportion  of  expense  for  a  company  and                                                                    
therefore the return to the state.                                                                                              
Mr. Jepsen  explained that  when ConocoPhillips  produced an                                                                    
incremental  barrel on  the North  Slope,  it decreased  the                                                                    
overall transportation cost for  every barrel that went down                                                                    
TAPS.  He  stated  that  the company's  cost  for  TAPS  was                                                                    
largely fixed,  so the  greater the  number of  barrels, the                                                                    
cost  per  barrel decreased,  which  in  turn increased  the                                                                    
taxable  value for  the state  (both for  royalty taxes  and                                                                    
severance tax purposes).                                                                                                        
Senator Micciche  asked if increased production  resulted in                                                                    
a  lower  transportation  cost  per  barrel  and  a  greater                                                                    
proportion of dollars that went to the state.                                                                                   
Mr. Jepsen answered in the affirmative.                                                                                         
Mr. Jepsen looked  at slide 3, "FY 2017 Cash  Flow - Current                                                                    
Law -  all 2016 RSB  Assumptions," which showed a  graph. He                                                                    
wanted to  expand on a  comment by a previous  testifier. He                                                                    
stated that  ConocoPhillips was  not a  member of  AOGA, but                                                                    
did  support Ms.  Moriarty's testimony  provided earlier  in                                                                    
the meeting.  He thought that  the company was in  line with                                                                    
most of  her earlier  comments with regard  to the  bill. He                                                                    
thought that one  of the goals of SB 21  had been to provide                                                                    
a leveled  share of  revenue over a  broad range  of prices,                                                                    
and he thought the  chart demonstrated the accomplishment of                                                                    
the goal.                                                                                                                       
Mr. Jepsen  continued to  discuss the bar  graph on  slide 2                                                                    
and pointed out the y-axis  that depicted net cash flow, and                                                                    
the x-axis showed  oil price. He described  the colored bars                                                                    
which represented  the different  shares of cash  flow under                                                                    
current law.  He highlighted  the state share  in the  $60 -                                                                    
$100  per barrel  price range,  which  he felt  demonstrated                                                                    
that the  intent of  SB 21 had  been accomplished.  He noted                                                                    
that the  graph showed that  the state share was  always the                                                                    
largest of the categories. He  highlighted that in the lower                                                                    
price  quadrant,  the state  share  was  positive while  the                                                                    
investor  share  was negative.  He  alleged  that the  state                                                                    
share had  components of gross  taxes including  royalty and                                                                    
property tax.                                                                                                                   
Mr. Jepsen  continued discussing  slide 3. He  observed that                                                                    
the state share was  always approximately 20 percent greater                                                                    
than the investor share. He  thought that SB 21 had achieved                                                                    
a balance and  had provided a better  investment climate. He                                                                    
thought that if the balance  was changed by increasing taxes                                                                    
to  order to  increase  the state's  take,  it would  impact                                                                    
investments in the state.                                                                                                       
2:10:15 PM                                                                                                                    
Mr. Jepsen showed slide 4, "Summary":                                                                                           
     •  Total  cost  matters.  Alaska is  a  high  region  -                                                                    
     increasing taxes increases costs  and makes Alaska less                                                                    
     •  The  House  version,  CSHB111,  would  significantly                                                                    
     increase the tax structure  and would negatively impact                                                                    
     ConocoPhillips investment decisions.                                                                                       
     •  SCS CSHB111  addresses refundable  cash credits  and                                                                    
     keeps Alaska competitive.                                                                                                  
          • NOL carry forward provisions may not provide                                                                        
          benefit at low oil prices.                                                                                            
     • The  fundamental structure  of SB21  is working  - it                                                                    
     has  it has  stimulated investment,  resulting in  jobs                                                                    
     and  increased  production for  the  first  time in  14                                                                    
     years. Let it continue to work.                                                                                            
Mr.  Jepsen  felt  that   there  was  currently  significant                                                                    
competition  for investment  dollars, particularly  from the                                                                    
shale  plays in  the Lower  48. He  pointed out  that prices                                                                    
were down, cash flow was down,  and the ability to invest in                                                                    
new  projects was  limited by  the amount  of cash  that was                                                                    
available. He  discussed large purchases  of acreage  in the                                                                    
Permian  Basin  [a  sedimentary  basin  largely  in  Western                                                                    
Texas]. He  commented that  in the area  of the  basin wells                                                                    
were cheap to  drill, cheaper to operate,  closer to market,                                                                    
had lower transportation costs,  and fewer regulatory issues                                                                    
than in Alaska.                                                                                                                 
Mr. Jepsen discussed  the concept of total  cost and factors                                                                    
such   as  taxes,   royalty   rates,   capital  costs,   and                                                                    
transportation  costs. He  asserted  that  Alaska was  high-                                                                    
cost,  and  for  ConocoPhillips,  the  cost  of  supply  was                                                                    
approximately  $40 to  $50 per  barrel. In  other locations,                                                                    
the company  could develop resources  for $35 per  barrel or                                                                    
less, which  he thought was consistent  across the industry.                                                                    
He  warned that  if the  legislature increased  the cost  to                                                                    
companies,  the  companies  would be  less  competitive  and                                                                    
would thereby direct less profit to the state.                                                                                  
Mr.  Jepsen commented  that HB  111,  as it  had passed  the                                                                    
House,  represented a  substantial tax  increase that  would                                                                    
have negatively  impacted investments  by companies  such as                                                                    
ConocoPhillips.  He was  pleased that  the Senate  Resources                                                                    
Committee  had  adopted  a  CS   that  did  not  change  the                                                                    
fundamental  tax structure,  but  did  address cashable  tax                                                                    
credits. He  commented that like  ExxonMobil, ConocoPhillips                                                                    
had  never  qualified  for  cashable  credits  and  had  not                                                                    
generated an NOL to date.                                                                                                       
Mr.  Jepsen  thought the  provisions  in  the bill  did  not                                                                    
affect  ConocoPhillips;  and  if  the  bill  passed  in  its                                                                    
current  form, it  would not  have a  significant impact  on                                                                    
investments. He asserted that the  CS preserved the core tax                                                                    
framework under  the current tax  law, which he  thought was                                                                    
important.  He emphasized  the importance  of  how the  bill                                                                    
would be translated from statute into regulation.                                                                               
2:14:15 PM                                                                                                                    
Mr. Jepsen  spoke to the issue  of NOLS. He referred  to the                                                                    
comments of  previous testifiers,  and he thought  that NOLS                                                                    
might  not  provide  benefit  to the  investor  at  low  oil                                                                    
prices.  He   observed  that  since  2013   there  had  been                                                                    
significant  investments  in  the   state,  which  had  been                                                                    
leveraged  by having  a positive  tax climate.  He mentioned                                                                    
increased   jobs,   greater    production,   benefits   from                                                                    
throughput in  TAPS, and  greater revenue  to the  state. He                                                                    
thought  the bill  preserved  the core  of  the current  tax                                                                    
framework,  and   thought  it  would  result   in  continued                                                                    
investment in the state.                                                                                                        
Senator Hughes  asked if  Mr. Jepsen  could speak  about the                                                                    
NOL carry-forwards at low oil prices.                                                                                           
Mr. Jepsen  discussed the carry-forward  of NOLS.  He stated                                                                    
that  currently if  a company  incurred a  NOL, it  would be                                                                    
carried  forward as  an  expense, and  the  amount would  be                                                                    
deducted from  cash flow before calculating  taxes and using                                                                    
per-barrel credits. If  there was a period of  low prices, a                                                                    
company could  meet the minimum  tax without needing  to use                                                                    
the  NOL carry-forward.  He explained  that if  the NOL  was                                                                    
applied  before  the per-barrel  credits,  the  NOL was  not                                                                    
providing a benefit.                                                                                                            
Senator Micciche asked to turn  back to slide 3. He inquired                                                                    
about  the negative  cash flow  reflected on  federal taxes,                                                                    
and asked if the tax impact was not isolated to Alaska.                                                                         
Mr. Jepsen  answered in  the negative.  He stated  that when                                                                    
there was negative cash flow,  it would be reflective of the                                                                    
overall position as a company.                                                                                                  
Senator Micciche asked if there  would be negative cash flow                                                                    
on federal taxes if Alaska was isolated.                                                                                        
Mr. Jepsen  stated that ConocoPhillips  could still  incur a                                                                    
negative federal tax liability.                                                                                                 
2:18:03 PM                                                                                                                    
PAT  FOLEY,  SENIOR  VICE  PRESIDENT  -  ALASKA  OPERATIONS,                                                                    
CAELUS  ENERGY, testified  about the  bill. He  commented on                                                                    
the  price of  oil and  the budget  deficit. He  stated that                                                                    
Caelus had  laid off  about 20 percent  of its  workforce in                                                                    
the  previous  year and  a  half.  He informed  that  Caelus                                                                    
previously  had   capital  budgets  of   approximately  $200                                                                    
million, but  in 2017  the capital budget  was less  than $2                                                                    
million. He  expressed admiration for the  tenacity that the                                                                    
state  government was  displaying  in  tackling the  state's                                                                    
fiscal problems.                                                                                                                
Mr. Foley understood  that there would be  a transition away                                                                    
from  cashable tax  credits. He  beseeched the  committee to                                                                    
find a  way to get earned  tax credits paid. He  stated that                                                                    
Caelus  viewed   its  relationship  with  the   state  as  a                                                                    
partnership.  He believed  that the  long-term solution  for                                                                    
the  state  was  to  grow North  Slope  oil  production.  He                                                                    
emphasized that  tax policy  would affect  future investment                                                                    
in the state.                                                                                                                   
Mr. Foley  referred to  a presentation  the previous  day by                                                                    
Rich  Ruggiero   (copy  on  file),  and   his  reference  to                                                                    
competitiveness. He  agreed with  the presenter  that Alaska                                                                    
needed to  remain competitive  to attract  future investment                                                                    
dollars. He  recounted that the  consultant had  pointed out                                                                    
the  complexity  of  the  tax structure  in  the  state.  He                                                                    
referenced slide  15 in  Mr. Ruggiero's  presentation, which                                                                    
showed what a project would look  like if a company had cash                                                                    
credits. He  discussed the bill  as it had been  passed from                                                                    
the House.                                                                                                                      
Mr.  Foley discussed  the difficulty  of attracting  funding                                                                    
for projects with  an unexpectedly lower rate  of return. He                                                                    
drew attention  to slides  20 through  24 of  Mr. Ruggiero's                                                                    
presentation,  which addressed  the difference  of the  same                                                                    
tax regime  between legacy producers  versus a  new entrant.                                                                    
He  found  it   surprising  that  in  the   $70  per  barrel                                                                    
environment, the same  big project was worth  six times more                                                                    
(net present  value) to a  large company. He  explained that                                                                    
the difference  had to do  with the tax efficiency  of lease                                                                    
expenditures.  He alleged  that  when a  large company  made                                                                    
investments,  it could  avoid a  tax liability  immediately.                                                                    
Conversely, when a new entrant  made the same investment, it                                                                    
received the  benefit of  the investment  dollars 5  or more                                                                    
years in the future.                                                                                                            
2:23:54 PM                                                                                                                    
Mr.  Foley   further  discussed  the  presentation   by  Mr.                                                                    
Ruggiero, and  could not prove  or disprove the  claims made                                                                    
therein. He opined  that the cashable tax credit  was put in                                                                    
place  to  help   level  the  playing  field   to  make  the                                                                    
investment of a new entrant on  similar footing to that of a                                                                    
big producer.                                                                                                                   
Mr.  Foley   discussed  Caelus'  purchase  of   assets  from                                                                    
Pioneer, and considered that Pioneer  left the state because                                                                    
they could  make a greater  return on investment  dollars in                                                                    
their core Texas business. He  stated that Caelus bought the                                                                    
assets because the price was  right, the assets were worthy,                                                                    
and there  was an  attractive tax policy  in place.  The tax                                                                    
credits reduced the  capital that was required  to make some                                                                    
Mr. Foley  discussed tax credits and  subsequent earnings by                                                                    
the state. He  mentioned Caelus' Nuna Project,  which had $1                                                                    
billion yet  to be expended  for oil production  starting in                                                                    
2019. He estimated that peak  oil production for the project                                                                    
would  be  25,000  barrels  per  day.  He  referred  to  the                                                                    
company's Smith  Bay project, and  after drilling  two wells                                                                    
the  company  believed  there  was  more  than  six  billion                                                                    
barrels  of  oil in  place.  He  thought extraction  of  the                                                                    
resource   would   cost   about  $10   billion   in   future                                                                    
investments, and was  unsure of when and how  much oil could                                                                    
be extracted commercially.                                                                                                      
2:26:26 PM                                                                                                                    
Mr. Foley discussed  HB 111, which he  thought represented a                                                                    
significant  tax increase  after losing  the benefit  of tax                                                                    
credits. He  opined that the  bill destroyed  project value,                                                                    
did not  encourage investment,  and did  not result  in more                                                                    
oil through TAPS. He thought  the Senate Resources Committee                                                                    
version of  the bill was  a great improvement over  the bill                                                                    
that was passed  from the house. He thought  the new version                                                                    
of  the   bill  expanded  utilization  of   the  tax  credit                                                                    
certificates he had.                                                                                                            
Mr.  Foley  asked  the  committee   to  consider  two  minor                                                                    
modifications  of the  bill: the  addition  of a  production                                                                    
threshold in Section 23  (pertaining to lease expenditures),                                                                    
and expansion of  a definition in Section  12 (pertaining to                                                                    
alternate  tax credits  for exploration).  He explained  his                                                                    
reasoning and  gave examples of how  the modifications could                                                                    
be made  and what entities  might benefit from  the changes.                                                                    
He  qualified that  his suggested  changes  did not  address                                                                    
issuances or  validity of tax  credits, but rather  only the                                                                    
time frame.                                                                                                                     
2:29:24 PM                                                                                                                    
Mr.   Foley  referred   to   previous  testifiers   comments                                                                    
regarding  the ordering  of tax  calculation. He  asked that                                                                    
the will of  the legislature be captured  in statute, rather                                                                    
than relying upon regulation and departmental practice.                                                                         
Mr. Foley believed Caelus could  be part of the solution. He                                                                    
thought the  goal of the  legislature was to  increase North                                                                    
Slope production and increase  oil through TAPS. He asserted                                                                    
that the  tax policy and  decisions made by  the legislature                                                                    
would  affect  how  much investments  were  made  and  would                                                                    
thereby affect  job and future revenues.  He appreciated the                                                                    
challenge faced by the legislature,  and believed the Senate                                                                    
had  a good  plan to  provide for  a complete  resolution of                                                                    
some of the  fiscal problems faced by the  state. He pleaded                                                                    
the committee to take immediate action.                                                                                         
2:32:06 PM                                                                                                                    
Senator Micciche commented that  the state was obsessed with                                                                    
leveling  the playing  field.  He asked  if  there were  any                                                                    
wells that  Mr. Foley knew of  that differentiated companies                                                                    
by size  in an  attempt to level  the playing  field through                                                                    
credits and other benefits.                                                                                                     
Mr.  Foley asserted  that it  was  not an  issue of  company                                                                    
size. He thought  that Alaska had a  tremendous oil business                                                                    
for  40 years,  and there  had  been a  narrowing number  of                                                                    
participants. He  thought if  the state's  goal was  to have                                                                    
more companies on the North  Slope, he thought it made sense                                                                    
to have tax policy that encouraged newcomers.                                                                                   
Vice-Chair Bishop  asked if Caelus had  changed its position                                                                    
on how it directed capital around  the world in the last two                                                                    
Mr. Foley  restated that historically the  company had spent                                                                    
about $200 million on an  annual capital budget, and in 2017                                                                    
the  company's capital  budget was  $2 million.  He reported                                                                    
that  currently  Caelus  was  putting  100  percent  of  its                                                                    
capital into Alaska.                                                                                                            
Senator  Olson referred  to Mr.  Foley's comments  about the                                                                    
legislature  acting  expeditiously  to resolve  the  state's                                                                    
fiscal issues. He  wondered Mr. Foley had  also considered a                                                                    
broad-based tax as part of the state's fiscal solution.                                                                         
Mr.  Foley  had no  opinion  about  the right  solution  for                                                                    
Alaska's fiscal  issues. He believed  in finding  a solution                                                                    
that  did  the greatest  amount  of  good for  the  greatest                                                                    
number of people in the state.                                                                                                  
2:34:58 PM                                                                                                                    
DAMIAN  BILBAO, VICE  PRESIDENT OF  COMMERCIAL VENTURES,  BP                                                                    
(via teleconference),  thought the  Senate Resources  CS for                                                                    
HB 111  was an  improvement from the  version passed  by the                                                                    
other body.  He asserted that  the bill would  amend current                                                                    
oil  policy that  had a  proven record  of positive  results                                                                    
including   increased   production   in   TAPS,   additional                                                                    
exploration success, and new players  on the North Slope. He                                                                    
encouraged  the  committee to  put  policies  in place  that                                                                    
would enable future production.                                                                                                 
Mr. Bilbao  shared four  principles that  BP used  to assess                                                                    
oil fiscal policy:                                                                                                              
     1.  Does  the  policy  encourage  more  oil  production                                                                    
     through TAPS.                                                                                                              
     2. Is  the policy an  extension in the life  of Prudhoe                                                                    
     Bay and the Kuparuk River Unit.                                                                                            
     3. Does  the policy increase the  number of independent                                                                    
     companies on the North Slope.                                                                                              
     4.  Does the  policy refrain  from picking  winners and                                                                    
Mr. Bilbao made note of  increased oil production in TAPS in                                                                    
2016, and as well in the  first quarter of 2017. He asserted                                                                    
that Prudhoe Bay and Kuparuk  were the backbone of the North                                                                    
Slope, with  new fields needing  production from  the legacy                                                                    
fields  to  be  able  to  continue to  flow  down  TAPS.  BP                                                                    
believed that  more companies  on the  North Slope  was good                                                                    
for  the  state  and  good for  industry.  He  thought  that                                                                    
increased   government   take   and   an   unstable   fiscal                                                                    
environment  discouraged  new   independent  companies  from                                                                    
coming to  Alaska. He  thought that the  bill fell  short of                                                                    
satisfying BP's fourth principle of oil fiscal policy.                                                                          
2:38:06 PM                                                                                                                    
Mr.  Bilbao read  excerpts from  an editorial  entitled "Oil                                                                    
taxes  would  be  bad  for   young  engineers,"  written  by                                                                    
University  of  Alaska  Fairbanks engineering  students  and                                                                    
published in the  Juneau Empire on April 19,  2017 (copy not                                                                    
on file):                                                                                                                       
     That  same  dream  is  what compels  us  to  voice  our                                                                    
     thoughts  on the  debate  going on  in  Juneau. In  our                                                                    
     mind, implementing punitive taxes  on the industry that                                                                    
     serves  as  the  backbone  of our  state's  economy  is                                                                    
     short-sighted  and  at  odds  with  prudent  long  term                                                                    
     In our view, House Bill  111, the current oil tax bill,                                                                    
     will  jeopardize the  opportunities  we young  Alaskans                                                                    
     are preparing  for in school.  It is not a  question of                                                                    
     whether Alaska  has sufficient natural  resources, like                                                                    
     oil and  gas, to sustain  our economy for  decades into                                                                    
     the future.  Just this year, Alaskans  have heard about                                                                    
     incredible new  discoveries that could provide  a major                                                                    
     boost  to the  state's oil  production. Companies  like                                                                    
     Caelus, ConocoPhillips, and Repsol  are sitting on huge                                                                    
     finds that  could re-energize our oil  and gas industry                                                                    
     for  decades. As  engineers in  training,  we want  the                                                                    
     opportunity  to be  a part  of bringing  those projects                                                                    
     from concept to reality.                                                                                                   
     …as students looking at the  prospect of trying to find                                                                    
     meaningful employment  in Alaska  in the  coming years,                                                                    
     we  hope our  views  will carry  some  weight to  those                                                                    
     receptive  to our  plight. We  are a  diverse group  of                                                                    
     individuals  from   all  over   the  world   who  bring                                                                    
     different  viewpoints  and  experiences with  us.  What                                                                    
     unites us  is a  passion for  engineering and  a deeply                                                                    
     vested  interest  in  Alaska's  future.  Squeezing  the                                                                    
     industry that  serves as our  state's bread  and butter                                                                    
     will  not  improve  our  prospects,  or  those  of  any                                                                    
     Alaskans, for family-sustaining jobs.                                                                                      
     Please, to  our elected officials and  policymakers, as                                                                    
     you struggle  with the pressing  issue of how  to solve                                                                    
     the  state's cash  flow problem,  take no  actions that                                                                    
     might  provide a  short-term boost,  but  will lead  to                                                                    
     fewer   opportunities  for   the  next   generation  of                                                                    
     Alaskans. Regardless,  we appreciate  the hard  work of                                                                    
     our public  servants who are  working around  the clock                                                                    
     to plug  the budget  hole, and  trust that  policy will                                                                    
     outweigh  politics  when  deciding which  choices  will                                                                    
     benefit Alaskans most in the long run.                                                                                     
Mr. Bilbao thanked the authors of the editorial on behalf                                                                       
of BP.                                                                                                                          
2:41:38 PM                                                                                                                    
AT EASE                                                                                                                         
2:44:23 PM                                                                                                                    
JEFF  HASTINGS,  MANAGING  MEMBER,   KUUKPIK  SAE  AND  CEO,                                                                    
SAEXPLORATION,  discussed the  presentation "Senate  Finance                                                                    
Committee"  (copy on  file). He  thanked  the committee  for                                                                    
giving him  the opportunity to  offer the perspective  of an                                                                    
Alaskan contractor.                                                                                                             
Mr. Hastings looked at slide 2, "Kuukpik - SAE - Born in                                                                        
   · Our team has been partnered with the Kuukpik                                                                               
     Corporation for the past 20 years                                                                                          
  · The company employs an average of 400 people per year                                                                       
  · The Kuukpik-SAE JV is a consistent revenue source to                                                                        
        o Kuukpik Corporation and its shareholders                                                                              
        o The village of Nuiqsut                                                                                                
        o The hundreds of Alaskan families that benefit                                                                         
          from each program                                                                                                     
   · We are committed to preferentially hire Native                                                                             
    Alaskans, Alaska residents and Alaskan Contractors                                                                          
       o We are proud of our 80%+ Alaskan hire rate                                                                             
Mr.   Hastings  relayed   that  Kuukpik-SAE   was  a   prime                                                                    
contractor,  sometimes  an explorer,  and  a  holder of  tax                                                                    
credit certificates.  He directed attention to  the graph on                                                                    
slide 2  entitled 'Aklaq 3D  Seismic Program,'  which showed                                                                    
the effect  on various groups  in the state. He  pointed out                                                                    
that  the  Aklaq  program had  benefitted  more  than  1,000                                                                    
Alaska  families.  The  project   had  generated  about  $57                                                                    
million  in revenue,  $49  million of  which  was earned  by                                                                    
Alaskan contractors and suppliers.                                                                                              
2:46:37 PM                                                                                                                    
Mr.  Hastings  turned  to  slide 3,  "Our  Core  Business  -                                                                    
Collecting Seismic Data":                                                                                                       
   · Seismic Operations are the pointy end of the spear -                                                                       
     we create the data so exploration wells can be drilled                                                                     
   · Seismic data is critical information, essential to the                                                                     
     success of an exploration program                                                                                          
   · Recently, use of new technology is producing higher                                                                        
     resolution images of the subsurface                                                                                        
        o Information that is a direct correlation to the                                                                       
          new   discoveries   which   have   recently   been                                                                    
   · The information gathered from the seismic data is                                                                          
     critical to finding new opportunities, new reserves to                                                                     
     sustain us into the future.                                                                                                
Mr.  Hastings  likened the  collection  of  seismic data  to                                                                    
owning and operating a cat scan.                                                                                                
Mr.  Hastings showed  slide 4,  "Why is  Seismic Exploration                                                                    
   · We do not drill for or develop oil                                                                                         
       o We do the CAT scan…we are not the surgeons                                                                             
   · When the Tax Credit Program was created by the State                                                                       
     and affirmed by the voters-we started and completed                                                                        
     several multimillion dollar projects under the program                                                                     
        o Special provisions were written for .023 and .025                                                                     
          credits specifically to incentivize companies to                                                                      
          collect seismic data because without it, there is                                                                     
          less exploration drilling                                                                                             
        o Seismic is treated differently because the                                                                            
          companies that pay to have seismic collected may                                                                      
          not be the company that will ever drill wells.                                                                        
        o The State receives something of immediate value                                                                       
          when Seismic tax credit projects are completed                                                                        
          and the data is delivered.                                                                                            
2:49:07 PM                                                                                                                    
Mr.   Hastings  discussed   slide  5,   "Historical  Seismic                                                                    
Investment,"  which showed  a graph  representing historical                                                                    
annual  seismic revenue  from 2012  through  2017. He  noted                                                                    
that embedded in  the blue bars on the graph  was the number                                                                    
of  seismic programs  that were  shot in  each year  for the                                                                    
entire industry in the state.                                                                                                   
Mr. Hastings  drew attention to  three vertical red  bars on                                                                    
the graph  representing milestone  dates for the  passage of                                                                    
SB 21, and  tax credit appropriation cuts. He  pointed out a                                                                    
dramatic  increase  in revenue  and  the  number of  seismic                                                                    
programs acquired  after the passage  of SB 21.  He asserted                                                                    
that  there had  been an  increase in  capital spending,  an                                                                    
increase in  exploration drilling, and  increased production                                                                    
as  a direct  result of  SB 21.  He pointed  out an  over 50                                                                    
percent reduction in  the amount of activity  in the seismic                                                                    
industry  in the  state after  the tax  credit appropriation                                                                    
cut.  He  observed  that  the   cuts  had  negative  effects                                                                    
including decreased  capital spending within  the contractor                                                                    
community, less  confidence in the  state to settle  what it                                                                    
owed, and reduced liquidity to continue investments.                                                                            
Mr. Hastings continued discussing  slide 5, and thought that                                                                    
the  chart represented  a  barometer of  the  health of  the                                                                    
exploration industry in the state.  He thought the state had                                                                    
asked  the industry  to invest  in  seismic and  exploration                                                                    
drilling; and the companies had  done so in partnership with                                                                    
the  state.  He felt  that  investment  confidence had  been                                                                    
Senator Micciche asked  about the average mean  on the graph                                                                    
on  slide  5.  He  considered  the five  to  ten  years  for                                                                    
permitting,  development, and  production;  and wondered  if                                                                    
there  was   a  right  spend  estimate   for  adequate  data                                                                    
Mr.  Hastings  thought  that  there   had  been  a  dramatic                                                                    
increase in  the number  of programs,  and the  amount being                                                                    
spent after the passage of SB  21. He pointed out that there                                                                    
had not  been many  independents or seismic  explorers going                                                                    
to  work   in  2013.  He   discussed  the  expense   of  new                                                                    
technology, and  thought SB  21 had allowed  for the  use of                                                                    
advanced technology  to find bigger  deposits that  had been                                                                    
previously overlooked.                                                                                                          
2:54:43 PM                                                                                                                    
Mr. Hastings  spoke to slide 6,  "The Impact of HB  111 SRES                                                                    
CS on Kuukpik/SAE":                                                                                                             
   · 120 day clock on seismic .025's is a great start                                                                           
        o Our applications are simple                                                                                           
        o Once data is delivered and verified by the DNR,                                                                       
          DOR has the ball                                                                                                      
             ƒBoth of these tasks should be able to run in                                                                     
   · Bill language does not fully address DOR Tax Division                                                                      
     Advisory Bulletin 2017-01                                                                                                  
        o This bulletin destroyed the secondary market for                                                                      
          pure seismic explorers                                                                                                
   · Expand the corporate income tax language                                                                                   
   · Set a payment schedule                                                                                                     
   The State of Alaska created a  program to incentivize the                                                                    
   seismic industry to invest millions and hire thousands of                                                                    
   Alaskans. Our work is the first step  in putting more oil                                                                    
   down the pipeline. We played by the rules you set out and                                                                    
   now we need the State to live up to their end of the                                                                         
Mr. Hastings  lauded the Senate Resources  Committee for its                                                                    
work in  making changes  to the bill.  He thought  there was                                                                    
good elements  in the committee's  version of the  bill, but                                                                    
suggested some  elements could be tweaked.  He reminded that                                                                    
an absence of cash payment  from the state, the industry had                                                                    
to rely  on the  secondary market. He  considered that  in a                                                                    
low  price environment,  there was  not a  way to  get to  a                                                                    
credit  if the  floor was  hardened. He  thought that  there                                                                    
would be no way to be  paid back for what the explorers were                                                                    
owed. He suggested there should  be a consideration for NOLs                                                                    
that could  not be carried  forward for seismic  explorers -                                                                    
either add the ability to go  below the floor, or expand the                                                                    
tax  language to  include other  corporate taxpayers  in the                                                                    
Mr.  Hastings continued  to discuss  slide 6.  He emphasized                                                                    
that  his company  was accountable  to its  shareholders. He                                                                    
emphasized that without a plan  to be reimbursed for the $80                                                                    
million in  tax credits it  was owed, it was  detrimental to                                                                    
the fiscal health of his company.                                                                                               
Mr.  Hastings  considered that  the  state  had created  the                                                                    
program to  incentivize the seismic industry,  which was the                                                                    
first step in  getting oil to the pipeline.  He wondered how                                                                    
to return to what had  been considered an investment between                                                                    
the state and the seismic proprietors.                                                                                          
2:59:11 PM                                                                                                                    
Mr. Hastings turned to slide 7, "The Reality":                                                                                  
   · For SAE, the delayed tax credit payout forced the                                                                          
     company to a crossroads                                                                                                    
        o Option 1: seek protection under the chapter 11                                                                        
          bankruptcy code and leave all our Alaska vendors                                                                      
        o Option 2: restructure the company and work with                                                                       
          our Alaskan subcontractors and suppliers to find                                                                      
          a way to extend payments                                                                                              
   · We chose to restructure - eliminating 98% of our                                                                           
     shareholders equity, the majority of which was held by                                                                     
     employees, many of whom are Alaskans                                                                                       
     We are Alaskans and are committed to staying                                                                               
Mr. Hastings commented  on the effects of  volatility in the                                                                    
tax structure.  He commented that the  appropriations vetoes                                                                    
had  forced  the  company  to   consider  bankruptcy  or  to                                                                    
restructure  the company  to  adjust  outgoing payments.  He                                                                    
discussed  his  history in  the  state,  and discussed  lost                                                                    
equity in the  company. He was appreciative of  the work the                                                                    
Senate Resources  Committee had  done, but felt  more needed                                                                    
to be done to change the bill.                                                                                                  
He reiterated that  the seismic business was  a barometer of                                                                    
the health of  the oil and gas industry, as  it was first in                                                                    
the  exploration   effort  and  the  first   expense  to  be                                                                    
eliminated when areas were no  longer deemed competitive. He                                                                    
thought the  state had the  ability to continue  the working                                                                    
partnership with  industry that  developed after  passage of                                                                    
SB 21.  He asserted that  the industry needed  confidence in                                                                    
the state's plan to pay  its liabilities and have a reliable                                                                    
tax  system. He  urged the  committee  to work  to keep  the                                                                    
industry competitive.                                                                                                           
3:02:36 PM                                                                                                                    
Senator Hughes  asked about  the value  of tax  credits that                                                                    
were not paid to Mr.  Hastings' company, and for an estimate                                                                    
of the total owed to all seismic companies.                                                                                     
Mr. Hastings  shared that his  company had  certificated $24                                                                    
million of  $90 million worth  of tax credits that  had been                                                                    
assigned. The  company was still  waiting for  the remaining                                                                    
balance  to be  issued by  DOR. He  qualified that  for this                                                                    
reason  the company  had thought  that the  Senate Resources                                                                    
Committee's addition of a 120-day  clock on issuances of the                                                                    
credits was  important. He  referred to  the 023  versus the                                                                    
025 credits,  for which  there was  no timeline.  He thought                                                                    
that his  company had  about $44  million worth  of assigned                                                                    
025 tax credits.                                                                                                                
Senator  Micciche   asked  if   all  of  the   seismic  data                                                                    
commissioned   by   potential  producers   that   controlled                                                                    
acreage,   or  if   the   company  sometimes   independently                                                                    
collected  seismic data.  He wondered  about the  proportion                                                                    
between the two activities.                                                                                                     
Mr.  Hastings  explained  that as  a  prime  contractor  the                                                                    
company was  contracted by  legacy producers  or independent                                                                    
companies  to collect  data, which  the producers  owned and                                                                    
was proprietary. He  relayed that an area  where there might                                                                    
be fractured lease holes, or  in times of low capital budget                                                                    
spending;  there  was  a more  vibrant  speculative  seismic                                                                    
industry.  He thought  that increased  activity from  SB 21,                                                                    
especially  the  increased  seismic  program,  had  been  70                                                                    
percent proprietary work and 30 percent speculative work.                                                                       
Senator  Micciche  assumed  that  the $66  million  in  owed                                                                    
credits was all speculative.                                                                                                    
Mr. Hastings answered in the affirmative.                                                                                       
3:06:40 PM                                                                                                                    
Senator Olson asked about the  company restructuring (due to                                                                    
unpaid  tax credits)  that Mr.  Hastings had  mentioned, and                                                                    
asked what kind of effect it had on the people of Nuiqsut.                                                                      
Mr.  Hastings  stated that  the  people  of Nuiqsut  were  a                                                                    
direct beneficiary of the revenues  of the company (it was a                                                                    
51/49 partnership)  and there was a  net profitability share                                                                    
to the  village. When the  company did not  receive revenues                                                                    
that were  owed, the village  did not as well.  He specified                                                                    
that the village had not  received expected revenues for the                                                                    
last two years.                                                                                                                 
Senator Olson referred to earlier  comments and asked if Mr.                                                                    
Hastings was in  favor of the concept  that seismic activity                                                                    
was the  only activity that  benefitted from a  120-day time                                                                    
Mr. Hastings  remarked that his  company's tax  credits were                                                                    
not  under a  scenario that  could move  an NOL  forward. He                                                                    
stated that  if the tax  credits and the application  of the                                                                    
tax credits  were not complex  in nature,  he did not  see a                                                                    
reason why they should not be  a benefit. He thought that if                                                                    
types  of tax  credits were  not equal  perhaps they  should                                                                    
have a  slightly different  time frame;  however in  no case                                                                    
should the tax credits be open-ended.                                                                                           
3:09:22 PM                                                                                                                    
Vice-Chair  Bishop was  frustrated  that the  state was  not                                                                    
paying its bills. He thanked  Mr. Hastings for the preferred                                                                    
hiring  practices  of his  company.  He  wondered about  the                                                                    
hiring  practices  of  other  companies.  He  asked  if  the                                                                    
company rented all its rolling stock and camps.                                                                                 
Mr.  Hastings stated  that  when  SB 21  was  put in  place,                                                                    
Kuukpik/SAE  had  partnered  with Alaska  Equipment  Rentals                                                                    
(AER)  in Fairbanks  to purchase  rolling stock  and invest.                                                                    
The  partnership continued,  which  had  been favorable  for                                                                    
both  companies over  the previous  few years.  He commented                                                                    
that   Alaska   sub-contractors  had   extended   themselves                                                                    
financially, and he appreciated AER doing so.                                                                                   
Vice-Chair Bishop  commented that  after AER  went out  on a                                                                    
limb, it was now perhaps bankrolling the state.                                                                                 
Mr. Hastings viewed the investment  in seismic projects as a                                                                    
Vice-Chair Bishop apologized to  Mr. Hastings, and all other                                                                    
parties that had not been  paid for outstanding tax credits.                                                                    
He remarked that a promise made was a debt unpaid.                                                                              
3:11:58 PM                                                                                                                    
Senator  Hughes referred  to questions  by Senator  Micciche                                                                    
regarding  the remaining  $66 million  in  tax credits,  and                                                                    
speculative seismic  work. She wondered  if there was  a way                                                                    
to  determine  what  portion  of  speculative  work  yielded                                                                    
production. She  referred to slide  5, and  the illustration                                                                    
of  dropping activity  after  the  tax credit  appropriation                                                                    
cut.  She   commented  on  the  future   and  wondered  what                                                                    
prospects  could expected  for future  generations based  on                                                                    
seismic  data gathering.  She asked  if  Mr. Hastings  could                                                                    
speak  to  the  importance of  speculative  and  proprietary                                                                    
Ms.  Hastings  thought  that   new  technology  had  clearly                                                                    
demonstrated how  important seismic activity was  in finding                                                                    
new reserves. He used the  example of Colville River area, a                                                                    
small area of the North  Slope. He commented that there also                                                                    
new drilling  technology to  increase drilling  recovery and                                                                    
increase production.  He observed  that the increase  in the                                                                    
amount  of   seismic  activity   was  directly   related  to                                                                    
discoveries that had  happened. He thought that  the drop on                                                                    
the graph  on slide 5  was related  to the combination  of a                                                                    
low commodity price and a  lack of confidence working in the                                                                    
Mr.  Hastings  thought  that unless  the  level  of  seismic                                                                    
activity and exploratory wells  continued to increase, there                                                                    
would be  an issue with  the amount  of product in  TAPS. He                                                                    
was concerned it would not  be possible to replace reserves.                                                                    
He thought the  industry needed confidence that  there was a                                                                    
good   investment  environment   in   the   state,  and   an                                                                    
environment that was competitive on a global scale.                                                                             
3:16:15 PM                                                                                                                    
Senator Hughes  asked Mr. Hastings to  speak specifically to                                                                    
the  speculative  work and  what  percentage  turned out  to                                                                    
bring in revenue.                                                                                                               
Mr. Hastings  discussed the speculative market,  and the 10-                                                                    
year period  before the data  became public. He  stated that                                                                    
the  speculative   market  allowed  (especially  at   a  low                                                                    
commodity  price) for  more people  to participate,  look at                                                                    
the seismic  data, lease the property,  and more exploratory                                                                    
wells to potentially be drilled.                                                                                                
Co-Chair MacKinnon  noted that the legislature  had tried to                                                                    
pay  for  tax  credits  multiple times,  but  had  not  been                                                                    
3:18:21 PM                                                                                                                    
KATE BLAIR,  GOVERNMENT AND PUBLIC AFFAIRS  MANAGER, TESORO,                                                                    
read from her written testimony (copy on file):                                                                                 
     For the  record, my  name is  Kate Blair  and I  am the                                                                    
     Public  and Government  Affairs Manager  for Tesoro  in                                                                    
     Tesoro   Corporation   is   an   integrated   refining,                                                                    
     logistics,  and marketing  company  with assets  across                                                                    
     the western  United States. We operate  7 refineries in                                                                    
     6 states, including  our first in Nikiski.  We also own                                                                    
     a  series  of  pipelines,   tank  farms,  marine,  rail                                                                    
     assets, and a network of  retail fuel stations. We have                                                                    
     a proud 48  year legacy in Alaska,  supplying jet fuel,                                                                    
     gasoline, and diesel to Alaskans.                                                                                          
     Tesoro  does not  weigh in  on oil  and gas  production                                                                    
     taxes in Alaska, as we  are not a production tax payer,                                                                    
     however any  loss of production in  Alaska would affect                                                                    
     the   in-state  refinery   and  potentially   make  our                                                                    
     economics   more   challenging.   We   have   therefore                                                                    
     testified  on previous  versions  of this  bill to  ask                                                                    
     that your colleagues  be mindful of any  changes to the                                                                    
     current production tax system  and its potential effect                                                                    
     on overall production.                                                                                                     
     Tesoro  relies on  access to  in-state  crude from  the                                                                    
     Cook Inlet  and the North  Slope. We refine  every drop                                                                    
     of oil that  comes out of the Cook Inlet  basin, and we                                                                    
     purchase  approximately one-third  of TAPS  throughput,                                                                    
     160,000-170,000 barrels  of North Slope crude  per day,                                                                    
     shipping it from  Valdez for refining in  Nikiski or to                                                                    
     our refineries along the west  coast. Last year, Tesoro                                                                    
     signed  a  royalty oil  contract  with  the State  that                                                                    
     allows us  to purchase  20,000- 25,000 barrels  per day                                                                    
     of the State's royalty share  of oil, with a benefit to                                                                    
     Alaska of $45-56 million.                                                                                                  
     The testimony  of the  producing companies  will inform                                                                    
     you on how the current  CS will affect their investment                                                                    
     decisions   and  ultimately,   production.  We   would,                                                                    
     however, like  to comment  on the  changes made  to the                                                                    
     refinery  infrastructure  tax credits,  which  directly                                                                    
     affects Tesoro.                                                                                                            
     Tesoro is  not advocating  for an extension  or changes                                                                    
     to the refinery tax credit  itself. Our concern is with                                                                    
     how  the  credit's  value will  be  realized  with  the                                                                    
     removal of the Tax Credit Fund.                                                                                            
     The  CS  maintains  the   cashability  of  the  credit,                                                                    
     however it creates ambiguity in  how credit refunds are                                                                    
     paid  through the  appropriation  process, which  could                                                                    
     create a system where the  state is picking winners and                                                                    
     losers.  The CS  directs the  Department of  Revenue to                                                                    
     adopt   regulations,  standards,   and  procedures   to                                                                    
     allocate  the  money   among  claims.  Without  clearly                                                                    
     defined regulations, such as  those established for the                                                                    
     tax credit  fund, we are concerned  that the department                                                                    
     could consistently allocate funds  in a way that favors                                                                    
     one type  of tax  payer over another.  We ask  that you                                                                    
     consider  adding language  in Section  6 that  requires                                                                    
     the appropriation of funds to  reflect the same process                                                                    
     and regulations as the current  tax credit fund, with a                                                                    
     statutory  limit  and  a clear  process  to  allocating                                                                    
     available money.                                                                                                           
3:22:10 PM                                                                                                                    
Ms. Blair continued speaking from her written testimony:                                                                        
     Additionally,   because  the   credit  is   subject  to                                                                    
     appropriation  by the  legislature without  a statutory                                                                    
     lower  limit, it  is possible  that no  funds could  be                                                                    
     allocated to  refund credits and those  credits must be                                                                    
     carried forward  to future years, however,  the current                                                                    
     carry-forward limit  is five years.  Hypothetically, if                                                                    
     there  is  no  money  appropriated  over  a  five  year                                                                    
     period, those earned credits  could expire before their                                                                    
     value is realized by the company that has earned them.                                                                     
     We  recommend  that  the  committee  alter  the  carry-                                                                    
     forward  period on  the credit  from  the current  five                                                                    
     year  limit to  mirror production  credits that  do not                                                                    
     have a carry-forward time limit  and provide an uplift.                                                                    
     This would  provide consistency in the  tax policy, and                                                                    
     ensure that companies  that make qualified investments,                                                                    
     under  the current  refinery infrastructure  tax credit                                                                    
     program,  can realize  the value  of  the credits  that                                                                    
     they earn and  the time value of  their money. Further,                                                                    
     because the bill  is scheduled to sunset  in 2019, this                                                                    
     would  be a  relatively short  commitment by  the state                                                                    
     and  would  provide  the refiners  assurance  that  the                                                                    
     credits they earn  will retain their value  if money is                                                                    
     not appropriated for their rebates.                                                                                        
Senator von  Imhof asked for  a copy of Ms.  Blair's written                                                                    
Ms.  Blair  agreed   to  provide  a  written   copy  of  her                                                                    
Senator Micciche  discussed Alaskan ownership  of companies.                                                                    
He mentioned the preferential  hiring practices as discussed                                                                    
by  Vice-Chair  Bishop. He  asked  about  the proportion  of                                                                    
resident hire at the Nikiski refinery.                                                                                          
Ms. Blair spoke  to the company's resident  hire rate, which                                                                    
was approximately  97 percent for  employees in  Alaska. She                                                                    
reminded  that resident  hire  was  calculated by  permanent                                                                    
fund dividend eligibility.                                                                                                      
Co-Chair MacKinnon discussed the schedule for the following                                                                     
3:26:01 PM                                                                                                                    
The meeting was adjourned at 3:26 p.m.                                                                                          

Document Name Date/Time Subjects
042817 Revised 4 28 17 SFC SB26.pdf SFIN 4/28/2017 9:00:00 AM
SB 26
042817 COP HB 111 Senate Finance Testimony Apr 28 2017.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
042817 Hastings_HB111 Senate finance testimony final.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
042817 AOGA Testimony SFIN HB 111 04 28 17.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
042817 HB 111 SFIN Official Testimony Tesoro.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
HB 111 Marks Cost Recovery Hard Floor Crossover 042817.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
HB 111 Public Testimony Letters 1.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
HB 111 Public Testimony Letters 2.pdf SFIN 4/28/2017 9:00:00 AM
HB 111
HB 111 Public Testimony Crondahl.pdf SFIN 4/28/2017 9:00:00 AM
HB 111