Legislature(2019 - 2020)SENATE FINANCE 532

03/18/2019 09:00 AM FINANCE

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09:01:05 AM Start
09:03:05 AM Presentation: Spring Revenue Forecast
10:41:01 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ - Spring Revenue Forecast TELECONFERENCED
+ - Oil & Gas Production Tax Audit Update TELECONFERENCED
+ - Severance Tax - Order of Operations TELECONFERENCED
<Item Above Rescheduled to 3/22/19>
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 18, 2019                                                                                            
                         9:01 a.m.                                                                                              
9:01:05 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:01 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Senator Cathy  Giessel; Senator  Mia Costello;  Senator Gary                                                                    
Stevens; Senator Chris  Birch; Bruce Tangeman, Commissioner,                                                                    
Department  of   Revenue;  Dan  Stickel,   Chief  Economist,                                                                    
Economic  Research   Group,  Tax  Division,   Department  of                                                                    
Revenue; Ed King, Chief Economist,  Office of Management and                                                                    
PRESENT VIA TELECONFERENCE                                                                                                    
Colleen  Glover,  Director,   Tax  Division,  Department  of                                                                    
PRESENTATION:  SPRING REVENUE FORECAST                                                                                          
               OIL & GAS PRODUCTION TAX AUDIT UPDATE                                                                            
Co-Chair Stedman discussed housekeeping.                                                                                        
^PRESENTATION: SPRING REVENUE FORECAST                                                                                        
               OIL & GAS PRODUCTION TAX AUDIT UPDATE                                                                          
9:03:05 AM                                                                                                                    
BRUCE TANGEMAN, COMMISSIONER,  DEPARTMENT OF REVENUE, stated                                                                    
he  would  be reviewing  the  spring  update, which  was  an                                                                    
update to  the more  robust fall forecast.  He had  not seen                                                                    
notable  changes to  the fall  forecast. He  noted that  the                                                                    
price from the  fall had risen approximately  $1 for FY2019.                                                                    
The FY2020 oil  price had been shown at $64  and had gone up                                                                    
to $66; the outyears were the  same.  Production for FY 2019                                                                    
was slightly  down and expected  to be slightly down  for FY                                                                    
9:04:36 AM                                                                                                                    
Commissioner  Tangeman  discussed the  presentation  "Spring                                                                    
2019 Revenue Forecast Update," (copy on file).                                                                                  
Commissioner Tangeman turned to Slide 2, "Overview":                                                                            
      Revenue Forecast & Changes from Fall Forecast                                                                          
      ANS Oil Price Forecast                                                                                                 
      Oil Production Forecast                                                                                                
      North Slope Lease Expenditures Forecast                                                                                
      Oil Credits Forecast & Tax Bonding Update                                                                              
Commissioner Tangeman  showed Slide 3, "Spring  2019 Revenue                                                                    
Commissioner Tangeman  stated he would speak  to the revenue                                                                    
forecast fall to  spring changes. He would  speak briefly to                                                                    
the oil production  forecast but that more  details could be                                                                    
made  available from  the Department  of Natural  Resources.                                                                    
He  relayed would  discuss  North  Slope Lease  expenditures                                                                    
9:05:22 AM                                                                                                                    
Commissioner Tangeman  displayed Slide 4, "10-  year Revenue                                                                    
Forecast and  Comparison to Fall  Forecast," which  showed a                                                                    
series  of data  tables that  illustrated the  delta between                                                                    
unrestricted  general  fund  petroleum revenue  (UGF),  non-                                                                    
petroleum  revenue, and  total revenue,  with the  permanent                                                                    
fund transfer  from SB  26 legislation.  He pointed  out the                                                                    
decrease in  FY2019 of $89  million for FY2019 in  UGF, with                                                                    
an increase  in FY2020  of $39  million. He  reiterated that                                                                    
there was not  much change expected in  the revenue forecast                                                                    
for the next decade.                                                                                                            
9:06:35 AM                                                                                                                    
Co-Chair Stedman thought  that although it would  be of some                                                                    
interest to see  out to FY 28, the committee  was focused on                                                                    
the  FY2019 through  FY2021 numbers.  He asked  for a  rough                                                                    
idea  of how  the  total  for FY2019  and  FY2020 was  split                                                                    
amongst its components.                                                                                                         
9:07:13 AM                                                                                                                    
Commissioner  Tangeman  discussed   Slide  5,  "Reasons  for                                                                    
Changes to FY19 / FY20 Unrestricted Revenue forecast":                                                                          
     FY19 unrestricted revenue forecast  is reduced by about                                                                    
     $89m  compared to  the  fall  forecast, despite  higher                                                                    
     forecasted  near-term oil  prices. The  primary changes                                                                    
     to the FY19 forecast are:                                                                                                  
     ?Production Tax reduced by $80m:                                                                                         
          ?Higher Oil Prices, though partially offset by                                                                      
          lower production, increased the production tax                                                                        
          forecast by $25m.                                                                                                     
          ?Lower  than Expected  FERC payments,  Higher than                                                                  
          Expected   Refunds,  and   other  Company-Specific                                                                  
          items  reduced  the  production  tax  forecast  by                                                                  
     ?Non-Petroleum CIT  reduced by  $15m due to  lower than                                                                  
     expected payments in December 2018.                                                                                        
     ?Other  revenues reduced  by $2m  due to  a variety  of                                                                  
     smaller nonpetroleum forecast changes.                                                                                     
     ?Royalties increased  by $8m  due to higher  oil prices                                                                  
     and despite lower production.                                                                                              
     The   unrestricted  revenue   forecast   for  FY20   is                                                                    
     increased by about $39m compared  to the fall forecast.                                                                    
     The primary changes to the FY20 forecast are:                                                                              
     ?Production  Tax  increased  by   $45m  due  to  higher                                                                  
     prices, partially offset by lower production.                                                                              
     ?Royalties increased by $19m due to higher oil prices                                                                    
     and despite lower production.                                                                                              
     ?Non-Petroleum CIT reduced by $15m primarily due to                                                                      
     weaker nonprecious minerals prices.                                                                                        
     ?Other revenues reduced by $10m due to a variety of                                                                      
     smaller nonpetroleum forecast changes.                                                                                     
Commissioner Tangeman explained that  the numbers netted out                                                                    
to the  reduction of $89  million in FY2019 and  $39 million                                                                    
in FY2020.                                                                                                                      
9:09:29 AM                                                                                                                    
Co-Chair  Stedman  asked  about  Federal  Energy  Regulatory                                                                    
Commission   (FERC)  payments   mentioned  by   Commissioner                                                                    
Tangeman and  noted that the  state did not make  payment to                                                                    
DAN STICKEL,  CHIEF ECONOMIST, ECONOMIC RESEARCH  GROUP, TAX                                                                    
DIVISION, DEPARTMENT OF REVENUE,  explained that there was a                                                                    
settlement   of   some   prior  year   tariff   calculations                                                                    
pertaining  to how  tariffs  for  the Trans-Alaska  Pipeline                                                                    
System  (TAPS)  were  determined.   He  explained  that  the                                                                    
dispute  involved FERC.  There  had been  multiple years  of                                                                    
calculations for  which the agreement  of a  methodology for                                                                    
making the TAPS  tariff calculations had been  settled.  The                                                                    
Department  of  Revenue  had done  some  modelling  and  had                                                                    
determined an estimate  of the receipts of  $160 million for                                                                    
FY2019.  He  said  that  the  actual  receipts  came  in  at                                                                    
approximately half of what had been expected.                                                                                   
9:11:09 AM                                                                                                                    
Co-Chair Stedman asked where the funds were received.                                                                           
Mr. Stickel stated it was  General Fund (GF) money that came                                                                    
to the state.                                                                                                                   
Co-Chair  Stedman  asked  for   an  explanation  in  greater                                                                    
Mr. Stickel  explicated that  the funds had  to do  with the                                                                    
tariffs  that were  deducted  when  calculating prior  years                                                                    
taxes. He  used the example  of 2014, when producers  used a                                                                    
certain tax tariff to arrive  at their gross value and their                                                                    
net value,  they paid the  tax based  on the tariff  used at                                                                    
that  time.  He  said  that the  settlement  resulted  in  a                                                                    
slightly  lower  TAPS  tariff for  that  calendar  year,  so                                                                    
producers  had  refiled their  taxes  using  the lower  TAPS                                                                    
tariff,  resulting  in a  higher  net  and gross  value  and                                                                    
additional  tax  liability  to the  state.  Along  with  the                                                                    
refiling, there  would be additional tax  liability and make                                                                    
an  additional   payment  or  use  credits   to  offset  the                                                                    
9:12:33 AM                                                                                                                    
Co-Chair  Stedman summarized  that  as the  cost of  running                                                                    
TAPS fluctuated  it effected  the net  value because  it was                                                                    
under  a  net tax,  which  moves  tax  receipts up  or  down                                                                    
depending on the settlement. He  stated that the expectation                                                                    
from the original  forecast had not turned out  as robust as                                                                    
anticipated, which resulted in the adjustment.                                                                                  
Mr. Stickel answered in the affirmative.                                                                                        
9:13:08 AM                                                                                                                    
Co-Chair  von  Imhof  asked   about  "higher  than  expected                                                                    
refunds" as listed on Slide 5.                                                                                                  
Mr.  Stickel  replied that  the  language  pertained to  the                                                                    
migrating credits  issue surrounding  the SB 21  tax regime.                                                                    
He  stated that  companies gave  an estimated  payment on  a                                                                    
monthly  basis based  on the  amount of  per taxable  barrel                                                                    
credits that  could be applied  against production tax  in a                                                                    
particular month. At the end of  the year there was a "true-                                                                    
up"; if  there had  been price  volatility during  the year,                                                                    
any per  taxable barrel of  credits unused in each  month of                                                                    
low prices  could be applied  to higher priced months.   The                                                                    
current years  forecast showed some higher  priced months in                                                                    
the middle of 2018, and  then prices fell substantially. The                                                                    
companies were able to take  some credits earned in December                                                                    
and apply them  to earlier month in that year.  He said that                                                                    
the  state  was  forecasting approximately  $50  million  in                                                                    
refunds to be paid out within the next two months.                                                                              
9:14:52 AM                                                                                                                    
Senator Hoffman asked about the  tax settlement and asked if                                                                    
any of the  funds went to the  Constitutional Budget Reserve                                                                    
Mr. Stickel informed that the  settlement of the tax dispute                                                                    
went to  the CBR; however,  the TAPS  issue was an  issue of                                                                    
the TAPS tariff  outside the tax calculation  and was deemed                                                                    
to  be outside  subject  to  the CBR  deposit  and would  be                                                                    
treated a general fund for forecast purposes.                                                                                   
9:15:51 AM                                                                                                                    
Senator  Hoffman  asked  who   had  handed  down  the  legal                                                                    
Mr. Stickel  stated the information  came from  the previous                                                                    
attorney general, Craig Richards.                                                                                               
Co-Chair Stedman  thought there was a  difference of opinion                                                                    
and an interest  in further research to  review the decision                                                                    
regarding   funds  going   to  the   CBR.  He   shared  that                                                                    
technically the CBR was general  funds but required a three-                                                                    
quarter legislative vote to access  the funds, rather than a                                                                    
simple  majority.  He  shared   the  concern  was  that  the                                                                    
settlements  would be  deposited directly  into the  general                                                                    
fund  which could  artificially lower  or raise  the deficit                                                                    
and effect budgetary decision making.                                                                                           
Co-Chair  Stedman referenced  Senator  Hoffman's point,  and                                                                    
stated  the  members  would engage  in  discussions  on  the                                                                    
9:17:53 AM                                                                                                                    
Senator Hoffman  stated the  legislature could  take general                                                                    
funds and put  them in the CBR because the  account was owed                                                                    
millions of dollars.                                                                                                            
Co-Chair  Stedman  thought  Senator   Hoffman  had  made  an                                                                    
accurate statement. He hoped for  an agreed position between                                                                    
the two branches of government.                                                                                                 
9:18:21 AM                                                                                                                    
Senator Micciche understood there  was a 50-50 split between                                                                    
the  FERC settlement  adjustment and  the per  barrel annual                                                                    
 true up.                                                                                                                       
Mr. Stickel  replied that the  FERC payment was  the largest                                                                    
piece; the  higher than  expected refunds  was approximately                                                                    
$20 million,  the company specific payments  was nearly $30,                                                                    
so the FERC shortfall was about $50 million.                                                                                    
Senator Micciche understood the  FERC shortfall was merely a                                                                    
Mr. Stickel stated  that DOR had known  that that settlement                                                                    
had taken  place and  that the  companies would  be refiling                                                                    
tax returns.  He said that  the department had  gone through                                                                    
each companies' specific calculation  and had estimated what                                                                    
the true up liability would be, with interest.                                                                                  
Commissioner   Tangeman   clarified   that  he   would   not                                                                    
characterize the difference as  a miscalculation; but rather                                                                    
as a change in the forecast amount.                                                                                             
9:20:01 AM                                                                                                                    
Senator  Wielechowski  queried  the effective  oil  and  gas                                                                    
production tax rate in FY2020.                                                                                                  
Mr. Stickel responded that he  did not have the calculation.                                                                    
He agreed to provide the information.                                                                                           
Co-Chair Stedman  stated that there  would be a  fiscal year                                                                    
cash flow  comparison through 2021  on Friday. He  said that                                                                    
the effective tax  rates could be examined  then for varying                                                                    
degrees of price and production.                                                                                                
Co-Chair  Stedman noted  that  the  subcommittee chaired  by                                                                    
Senator  Wilson   was  working  on  settlement   issues  and                                                                    
potential  revenue.  Senator  Wilson would  bring  the  full                                                                    
committee information to consider.                                                                                              
9:22:18 AM                                                                                                                    
Senator  Wielechowski referenced  the  Executive Budget  Act                                                                    
which required the governor to  submit a 10-year fiscal plan                                                                    
each  December. He  noted that  the document  had yet  to be                                                                    
provided  to  the  legislature  and  wondered  when  it  was                                                                    
expected to be available.                                                                                                       
Commissioner Tangeman stated that  the governor's office had                                                                    
the  document  in final  draft  form  and would  present  it                                                                    
within the week.                                                                                                                
Co-Chair Stedman  interjected that he was  not excited about                                                                    
the  10-year  plan  but was  more  concerned  about  getting                                                                    
through  the medium  long-term and  the short-term.  He felt                                                                    
that  the long-term  forecasting used  in the  ten-year plan                                                                    
offered minimal  value to the  committee. He hoped  that the                                                                    
committee could focus more closely on the short term.                                                                           
9:23:41 AM                                                                                                                    
Senator Micciche asked if DOR  could explain the $89 million                                                                    
reduction in FY2019.                                                                                                            
Commissioner Tangeman  responded that the FY2019  budget had                                                                    
passed with  the three-quarter  CBR vote  with a  per barrel                                                                    
forecast of $63.                                                                                                                
Co-Chair  Stedman asked  for an  explanation  to inform  the                                                                    
public  of  the  details  of  the  inner  play  between  the                                                                    
forecast and the budgetary process.                                                                                             
Commissioner  Tangeman  relayed  that when  the  legislature                                                                    
passed  the FY2019  budget the  previous  spring; there  had                                                                    
been a  forecast of $63/bbl,  with a projected  $700 million                                                                    
deficit.  He added  that legislation  had passed  enacting a                                                                    
percent of market value (POMV)  draw (SB 26), and since this                                                                    
was  the  first  time  that  the  earnings  reserve  of  the                                                                    
permanent  fund  was  being accessed  through  a  structured                                                                    
process, both the executive  and legislative branches wanted                                                                    
to make  sure that  revenues drawn  down earlier  were those                                                                    
earning  a lower  return. He  furthered that  the CBR  was a                                                                    
liquid account  that earned  a low  return and  the earnings                                                                    
reserve was geared toward earning  a higher, more long-term,                                                                    
Commissioner Tangeman continued that  there was language put                                                                    
in the  legislation to  ensure the  CBR was  accessed first,                                                                    
with a  process set up  between the permanent funds  and the                                                                    
Department of  Revenue to draw  down, as required,  from the                                                                    
earnings  reserve. He  related  this set  the  stage on  the                                                                    
process of accessing  both the CBR and  the earnings reserve                                                                    
to bring enough revenue to  cover the FY2019 budget. He said                                                                    
that currently,  the price  of oil  was well  above $63/bbl,                                                                    
the forecast was $69/bbl; however,  the full amount had been                                                                    
drawn down from the CBR at  the beginning of the fiscal year                                                                    
and  several cash  calls  had been  made  from the  earnings                                                                    
reserve. He clarified that while  the $89 million might look                                                                    
like  a  possible  supplemental,  there  was  still  revenue                                                                    
available  to cover  the reduction,  based  on the  forecast                                                                    
that had  been put  in place  and the  budget that  had been                                                                    
passed.  There  was  enough  revenue  to  cover  the  FY2019                                                                    
Co-Chair Stedman  clarified that the  net number would  be a                                                                    
smaller  negative number  for FY2019,  which would  increase                                                                    
the CBR by $300 million to $400 million.                                                                                        
9:27:42 AM                                                                                                                    
Senator Wielechowski referenced SB 26  and the POMV draw. He                                                                    
shared  that the  Alaska Permanent  Fund balance  sheet from                                                                    
January 2018 showed  the total fund balance  was $66 billion                                                                    
and $63 billion in January of  2019. He stated that the draw                                                                    
was going  from $2.7  billion to  $2.9 billion  and wondered                                                                    
whether  the decrease  of the  balance and  increase of  the                                                                    
draw was a flaw in the system.                                                                                                  
Commissioner Tangeman  would not characterize  the situation                                                                    
as a flaw. He thought  the balance would change from quarter                                                                    
to  quarter depending  on the  market.  He reminded  Senator                                                                    
Wielechowski  that  the  POMV calculation  was  based  on  a                                                                    
smoothed five-year average.                                                                                                     
Co-Chair Stedman  interjected there  were many  moving parts                                                                    
to the issue.  He agreed that the portion that  was used for                                                                    
dividends and  state services was  an average  of historical                                                                    
9:29:40 AM                                                                                                                    
Commissioner  Tangeman  showed  Slide   6,  "ANS  Oil  Price                                                                    
Commissioner  Tangeman  reviewed  Slide 7,  "Price  Forecast                                                                    
Summary," which showed a table  entitled  ANS Price Forecast                                                                    
 Change  from Fall  2018 Forecast.   He reminded  that there                                                                    
was quite  a bit  of volatility  in the  fall of  2018; when                                                                    
prices   ranged  from   $80/bbl   to   $50/bbl.  The   price                                                                    
forecasting session that took  place amidst the fluctuations                                                                    
caused   a  higher   price  forecasting   by  the   previous                                                                    
administration.  The  new   administration  reviewed  recent                                                                    
happenings  and put  in place  what  it thought  was a  more                                                                    
realistic forecast.                                                                                                             
Commissioner  Tangeman said  that the  spring 2018  forecast                                                                    
had  been implemented  for the  fall 2018  forecast and  was                                                                    
reflected on  the slide  through 2028.  He pointed  out that                                                                    
the   spring   2019   forecast   showed   an   increase   of                                                                    
approximately $1  in the  price of  oil. He  highlighted the                                                                    
biggest  change  was  the  2020  forecasted  increase  of  3                                                                    
9:32:41 AM                                                                                                                    
AT EASE                                                                                                                         
9:32:50 AM                                                                                                                    
Commissioner  Tangeman  spoke  to   Slide  8,  "Reasons  for                                                                    
Revising the Fall 2018 Oil Price Forecast":                                                                                     
     ?DOR revised the  oil price forecast for  FY19 and FY20                                                                    
     up  to   align  with  current  futures   market  prices                                                                    
     ?NYMEX has been shown to be  one of the best methods of                                                                    
     predicting oil prices in the near-term.                                                                                    
     ?Long-term   (FY  21+)   oil  price   forecast  remains                                                                    
     unchanged from the fall.                                                                                                   
     ?Real  (in 2019  dollars)  price  forecast for  FY2021+                                                                    
     remains in the low to mid $60's.                                                                                           
9:34:23 AM                                                                                                                    
ED KING,  CHIEF ECONOMIST, OFFICE OF  MANAGEMENT AND BUDGET,                                                                    
presented  Slide  9,  "Potential  Macroeconomic  and  Global                                                                    
Drivers of Price Change":                                                                                                       
     A speculative  and non-exhaustive  list of  things that                                                                    
     could happen  beyond Alaska which could  affect ANS oil                                                                    
     Potential Macroeconomic Drivers:                                                                                           
     1.  Recession.  Global  growth could  be  disrupted  by                                                                  
     recession, pushing down demand. ( -)                                                                                       
     2.  China.  Chinese  economic  growth  could  drive  up                                                                  
     demand if/when trade dispute is resolved. ( + )                                                                            
     Potential Microeconomic Drivers:                                                                                           
     1.   New  fields.   New  energy   resources  could   be                                                                  
     developed, increasing supply. ( -)                                                                                         
     2. Shale.  Shale producers  could hit  capacity limits,                                                                  
     allowing demand to surpass supply. ( + )                                                                                   
     3.  Production  technology. More  efficient  production                                                                  
     technology could increase supply. ( -)                                                                                     
     4.  Vehicle  efficiency. Emerging  transportation  tech                                                                  
     could lower demand for fossil fuels. ( -)                                                                                  
     Potential Geopolitical Drivers:                                                                                            
     1. OPEC  / Saudi Arabia.  OPEC and/or SA  could enforce                                                                  
     higher or lower production levels. ( ? )                                                                                   
     2.  Iran. Sanction  waiver  renewals  could be  denied,                                                                  
     reducing supply. ( + )                                                                                                     
     3.  Regime change.  Iran/Venezuela regime  change could                                                                  
     occur, disrupting supply. ( + )                                                                                            
     4.   Venezuelan  recovery.   State-owned  PDVSA   could                                                                  
     stabilize operations, increasing supply. ( -)                                                                              
Mr. King  thought that upward price  pressure would continue                                                                    
through  the  next  three  months.   He  stressed  that  the                                                                    
department  did not  know what  was going  to happen  in the                                                                    
future and that there were a  lot of things that would prove                                                                    
their forecast wrong.                                                                                                           
9:36:34 AM                                                                                                                    
Mr.  King referenced  slide 10,  "EIA Annual  Energy Outlook                                                                    
Price Forecast,"  which showed  a line graph  entitled  Real                                                                    
(Inflation-adjusted)   Oil   Prices   and   Forecasts.    He                                                                    
explained that  the Energy  Information Agency  forecast had                                                                    
been  released in  January 2019,  it provided  the range  of                                                                    
potential  future  pricing  on   which  the  department  was                                                                    
9:37:02 AM                                                                                                                    
Mr. King  discussed Slide  11, "Petroleum  Analyst Consensus                                                                    
Price Forecasts,"  which showed a line  graph entitled  Real                                                                    
(Inflation-adjusted) Oil  Prices and Forecasts.  He  did not                                                                    
think there should be anything  alarming in the forecast. He                                                                    
felt  that  the  current  forecast   was  online  with  what                                                                    
analysts and  markets were predicting. He  believed that for                                                                    
budgeting  purposes  the  numbers   were  supported  by  the                                                                    
9:37:29 AM                                                                                                                    
Mr. King turned  to Slide 12, "Summary  of Price Forecasts,"                                                                    
which  showed  a  line   graph  entitled   Real  (Inflation-                                                                    
adjusted)  Oil  Prices and  Forecasts.   He  noted that  the                                                                    
current,  near-term   forecast  followed  the   NYMEX  curve                                                                    
because  the department  was  using the  curve  as the  best                                                                    
indicator  of   near-term  prices.   He  noted   that  NYMEX                                                                    
discounted  prices  the  further  out  into  the  future  it                                                                    
predicted,  which was  not the  best predictor  of long-term                                                                    
prices, so  the state  was still analyzing  the best  way to                                                                    
determine what  the long-term prices would  be; however, the                                                                    
current   forecast   was    still   in-line   with   analyst                                                                    
9:37:58 AM                                                                                                                    
Co-Chair  von Imhof  looked at  Slide  7 and  Slide 12.  She                                                                    
noted that  the projected  spring forecast for  2020 through                                                                    
2022 was in  the $66-$67/bbl range, while the  line graph on                                                                    
Slide 12,  illustrating the same forecast  seemed to reflect                                                                    
Mr.  King pointed  out that  the  numbers on  Slide 12  were                                                                    
adjusted for inflation.                                                                                                         
9:38:51 AM                                                                                                                    
Commissioner  Tangeman  showed  Slide  13,  "Oil  Production                                                                    
9:39:13 AM                                                                                                                    
AT EASE                                                                                                                         
9:39:32 AM                                                                                                                    
Commissioner   Tangeman   displayed   Slide   14,   "10-Year                                                                    
Production  Forecast:   Changes  since  Fall   2018  Revenue                                                                    
Sources  Book," which  showed  a line  graph  and table.  He                                                                    
reiterated  that the  forecast was  slightly down  for 2019;                                                                    
and  climbed back  to forecasted  numbers in  2020. He  said                                                                    
that  any  in=depth  conversation  on the  matter  would  be                                                                    
deferred to DNR.                                                                                                                
Co-Chair  Stedman  asked about  the  oil  fields Willow  and                                                                    
Pikka,  and  whether  they  had  been  integrated  into  the                                                                    
Commissioner Tangeman  relayed that  the department  did not                                                                    
assume that  a filed  would come  online in  5 years  as was                                                                    
hoped for,  or that it  would be  at full production  at the                                                                    
estimated time. He said that  prudent way for the department                                                                    
to  account  for  oil  production   was  to  put  a  risking                                                                    
mechanism in  the forecast. He  said that the closer  to the                                                                    
predicted timeline,  the less  risk, but  the further  out                                                                      
the more risk.  He deduced that there would be  an upside to                                                                    
larger fields coming on as expected.                                                                                            
9:41:49 AM                                                                                                                    
Senator  Wielechowski   wondered  about   the  significantly                                                                    
inaccurate forecast for FY2019.  He noted the 2.9 percentage                                                                    
change, to  the negative, between  the fall 2018  and spring                                                                    
2019 numbers.                                                                                                                   
Commissioner Tangeman believed the  2.9 percent decrease was                                                                    
due to the field at Nikaitchuq being down for a period.                                                                         
9:42:26 AM                                                                                                                    
Commissioner Tangeman  showed Slide  15, "North  Slope Lease                                                                    
Expenditures Forecast."                                                                                                         
Mr.  Stickel   referenced  Slide  16,   "Lease  Expenditures                                                                    
Forecast: North Slope Capital  Expenditures," which showed a                                                                    
line graph  entitled  Forecast:   North Slope  Capital Lease                                                                    
Expenditures.   He  relayed the  big  change  made from  the                                                                    
spring  to  the fall  was  to  incorporate some  development                                                                    
costs for some new fields such  as Willow and Pikka. He said                                                                    
that  based  on new  submissions  from  the operators  about                                                                    
their cost  plans as  well as  review of  public information                                                                    
and tax  returns that  had been  received, it  appeared that                                                                    
the cost profile  from the new developments  would be higher                                                                    
than had been expected in the fall.                                                                                             
Mr. Stickel  continued to address  Slide 16. He  stated that                                                                    
the significant  increase up  into the  over $3  billion per                                                                    
year  in  the  2021  to  2022  timeframe  was  when  notable                                                                    
spending  was expected  on new  developments. He  reiterated                                                                    
that a  risking methodology was used  when incorporating the                                                                    
new developments  and applied risk to  the lease expenditure                                                                    
forecast as  well. He said that  if all the new  fields came                                                                    
on as expected  the forecast would prove  to be conservative                                                                    
spending forecast.                                                                                                              
Co-Chair Stedman  asked about  Page 106  of the  Spring 2019                                                                    
Revenue Forecast (copy on file)  and asked whether the carry                                                                    
forward annual losses could be an underestimation.                                                                              
Mr. Stickel replied in the affirmative.                                                                                         
Co-Chair   Stedman   contended   that   the   figures   were                                                                    
significant amounts.                                                                                                            
Mr.  Stickel  referenced  Page 13  of  the  forecast,  which                                                                    
included a  table that laid  out the estimated tax  value of                                                                    
carry  forward losses.  He reminded  the committee  that the                                                                    
numbers  were  based  on  the  risked  estimates  of  future                                                                    
company spending.                                                                                                               
Co-Chair  Stedman  referred  to   the  2019  spring  revenue                                                                    
forecast and clarified that 2023  showed an increase of $440                                                                    
million.  He  thought  that  the  time  was  approaching  to                                                                    
discussion  how the  numbers would  be  integrated into  the                                                                    
cash-flow  analysis,  and  the subsequent  impacts  of  that                                                                    
Mr. Stickel stated  that there would be  a presentation soon                                                                    
that  discussed  the  mechanics of  how  the  carry  forward                                                                    
losses operated.                                                                                                                
9:46:06 AM                                                                                                                    
Senator  Bishop   wondered  whether  the   revenue  forecast                                                                    
included any ANWR spending.                                                                                                     
Mr.  Stickel confirmed  that the  forecast  did not  include                                                                    
ANWR in any form.                                                                                                               
9:46:50 AM                                                                                                                    
Senator Wielechowski  asked whether  the tax value  of carry                                                                    
forward annual  losses on Slide  13 were not  the deductions                                                                    
taken  each year,  but cumulative  for companies  that could                                                                    
not deduct them off their production taxes.                                                                                     
Mr. Stickel  replied in the  affirmative. He  explained that                                                                    
the lease expenditures that were  not able to be deducted in                                                                    
the  year   they  were  earned  were   carried  forward  and                                                                    
multiplied  by   the  35  percent  statutory   tax  rate  to                                                                    
determine the tax value.                                                                                                        
9:47:26 AM                                                                                                                    
Mr.   Stickle  reviewed   Slide   17,  "Lease   Expenditures                                                                    
Forecast: North Slope  Operating Expenditures," which showed                                                                    
a  line graph  entitled   Forecast:   North Slope  Operating                                                                    
Lease Expenditures.   He affirmed  that there had  been only                                                                    
mild adjustments to the  operating expenditures forecast. He                                                                    
continued  that operating  expenditures were  stable at  the                                                                    
existing units, with a slight  bump as new developments came                                                                    
9:48:22 AM                                                                                                                    
AT EASE                                                                                                                         
9:49:03 AM                                                                                                                    
Mr. Stickel  spoke to Slide 18,  "North Slope Transportation                                                                    
Costs  Forecast,"  which  showed  a line  graph  entitled  '                                                                    
Forecast:   North  Slope  Transportation  Costs.' The  slide                                                                    
showed  the costs  of  getting  oil from  the  field to  the                                                                    
market.  He noted  an average  transportation cost  of $8.41                                                                    
for FY2019,  increasing with inflation  for the rest  of the                                                                    
Co-Chair Stedman asked about  Mr. Stickel's previous comment                                                                    
about the Natural Petroleum  Reserve-Alaska (NPRA) not being                                                                    
calculated in the revenue.                                                                                                      
Mr.  Stickel clarified  that some  production form  NPRA was                                                                    
included in  the calculation;  no production  or exploration                                                                    
costs for ANWR were included in the forecast.                                                                                   
Co-Chair Stedman  assumed that the  numbers on Slide  18 did                                                                    
not include the cost of  transporting ANWR volume out, which                                                                    
could put downward pressure on the per barrel TAPS tariff.                                                                      
Mr. Stickel  stated that  production from  ANWR, or  any new                                                                    
development,  would   decrease  the   cost  per   barrel  of                                                                    
transporting  oil  on  TAPS.   He  added  that  any  quality                                                                    
differentials  as well  as feeder  pipeline  costs would  be                                                                    
added into the number; the  overall cost change would depend                                                                    
on the specific development.                                                                                                    
9:51:00 AM                                                                                                                    
Senator  Wielechowski asked  about  the tariff  to ship  oil                                                                    
from Point Thomsen into TAPS.                                                                                                   
Mr. Stickel offered to provide the number later.                                                                                
Co-Chair Stedman recalled that  the cost had previously been                                                                    
9:51:36 AM                                                                                                                    
Senator  Wielechowski asked  whether the  feeder lines  from                                                                    
Point  Thomson to  Prudhoe Bay  were  lease expenditures  or                                                                    
transportation costs.                                                                                                           
Mr.  Stickel  stated that  a  feeder  pipeline from  a  unit                                                                    
boundary would be a feeder  transportation cost, a gathering                                                                    
line  within  the unit  would  be  a lease  expenditure.  He                                                                    
offered to provide more technical information later.                                                                            
9:52:19 AM                                                                                                                    
Commissioner   Tangeman  showed   Slide  19,   "Oil  Credits                                                                    
Forecast and Tax Credit Bonding Update."                                                                                        
Commissioner Tangeman  turned to Slide 20,  "Spring 2019 Oil                                                                    
Credits  Forecast,"  which  showed   a  bar  graph  entitled                                                                    
 Ending  balance   of  credits  available   for  repurchase,                                                                    
assuming  statutory appropriation  for FY  2020+.  He  noted                                                                    
the liability  to the  state would  go to  zero by  2024. He                                                                    
relayed that  $180 million in  payments was included  in the                                                                    
FY2020 budget.                                                                                                                  
9:53:19 AM                                                                                                                    
Senator  Wielechowski  looked  at  the small  print  on  the                                                                    
bottom of Slide 20:                                                                                                             
     Per  AS 43.55.028,  statutory appropriation  is 10%  of                                                                    
     production tax  levied, before credits, when  ANS price                                                                    
     forecast is  $60 or higher. Statutory  appropriation is                                                                    
     15% of production tax levied,  before credits, when ANS                                                                    
     price forecast  is below $60. Does  not include changes                                                                    
     in company behavior or credit  transfers beyond FY 2020                                                                    
    as a result of only making statutory appropriation.                                                                         
Senator  Wielechowski  wondered   what  credits  were  being                                                                    
referred to and how much they totaled in FY2020.                                                                                
Mr. Stickel  informed that that the  statutory appropriation                                                                    
shown on  the slide was  calculated based on  the production                                                                    
tax due  at the 35  percent net rate before  subtracting any                                                                    
credits, including primarily per taxable barrel credits.                                                                        
Senator  Wielechowski   asked  how   much  the   amount  was                                                                    
scheduled to be for 2020.                                                                                                       
Mr.  Stickel  stated  that the  per  taxable  barrel  credit                                                                    
forecast for 2020 was $1.26 billion.                                                                                            
Co-Chair Stedman  asked whether  that was the  $5 or  the $8                                                                    
per barrel credit.                                                                                                              
Mr. Stickel stated that the amount included both credits.                                                                       
Co-Chair Stedman stated that there  was a debate whether the                                                                    
calculation  used to  pay  the credits  should  be on  gross                                                                    
production  tax  value, before  the  per  barrel offset,  or                                                                    
after.  He relayed  that the  debate had  been going  on for                                                                    
some time. He  understood that the state  currently had $800                                                                    
million in outstanding credits.                                                                                                 
Commissioner  Tangeman believed  the amount  was about  $700                                                                    
Co-Chair  Stedman  continued that  the  issue  needed to  be                                                                    
dealt with.  The credits had  been terminated and  the state                                                                    
was not  paying the  liability; the  debate was  whether the                                                                    
payment should be made on a net or gross amount.                                                                                
9:56:39 AM                                                                                                                    
Senator Wielechowski asked about  Slide 19 and asked whether                                                                    
refundable oil tax credits had ever been audited.                                                                               
Commissioner  Tangeman   deferred  to  the   divisions   tax                                                                    
COLLEEN  GLOVER,  DIRECTOR,   TAX  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE, stated that the credits had been audited.                                                                              
Co-Chair Stedman  requested further clarification as  to how                                                                    
the system worked.                                                                                                              
Ms.  Glover stated  that credits  were  100 percent  audited                                                                    
before the state expended fund for credits.                                                                                     
9:58:02 AM                                                                                                                    
Senator Wielechowski asked how  much money had been returned                                                                    
after audits over the years.                                                                                                    
Co-Chair  Stedman  requested  an   estimate  of  the  amount                                                                    
disputed after the credits had been paid, if any.                                                                               
Ms. Glover offered to provide the information later.                                                                            
Co-Chair   Stedman  requested   that   the  information   be                                                                    
available by the end of the week.                                                                                               
9:58:43 AM                                                                                                                    
Senator Bishop asked  if Ms. Glover could  give two examples                                                                    
of a  qualified credit  expenditure and  two that  would not                                                                    
Ms.  Glover   stated  that  there  were   qualified  capital                                                                    
expenditures   and   qualified   lease   expenditures.   She                                                                    
elaborated that  there were  different types  of expenditure                                                                    
depending  on  whether  the  work   was  in  exploration  or                                                                    
Commissioner  Tangeman interjected  that the  state followed                                                                    
federal Internal  Revenue Service  (IRS) code  pertaining to                                                                    
the definition of a capital expenditure.                                                                                        
Co-Chair Stedman  explained that the legislature  used long-                                                                    
established  IRS rules  to avoid  lengthy  legal action  and                                                                    
never-ending debate;  there were some exclusions  to protect                                                                    
the state.  He stated  the industry was  able to  deduct the                                                                    
expenditures on corporate income tax.                                                                                           
10:01:02 AM                                                                                                                   
Co-Chair Stedman  referenced the  Fall 2018  Revenue Sources                                                                    
Book, and the  credits that were shown for the  fall of 2020                                                                    
were $1.9  billion; those  credits are  currently forecasted                                                                    
at  $1.5  billion.  He  noted that  the  difference  in  the                                                                    
numbers for 2021 for statewide  total production tax credits                                                                    
was  $500 million  between  the fall  2018  and spring  2019                                                                    
forecasts.  He  asked for  an  explanation  of the  monetary                                                                    
swings and how one might track the amounts.                                                                                     
Mr.  Stickel  stated  that the  change  between  FY2020  and                                                                    
FY2021  had  to   do  with  the  convention   used  to  show                                                                    
outstanding  repurchasable credits  in  the revenue  sources                                                                    
book.  He said  that the  fall book  showed that  the entire                                                                    
balance of outstanding credits would  be paid off in FY2020,                                                                    
an  assumption  that  had  been   informed  by  the  bonding                                                                    
package, which had been delayed  by litigation. He said that                                                                    
for purposed  of the revenue  forecast what was  now showing                                                                    
was the  statutory appropriation  in FY2020, and  the entire                                                                    
outstanding balance of repurchasable credits in FY2021.                                                                         
Co-Chair  Stedman cautioned  comparing the  yearly books  as                                                                    
the numbers varied.                                                                                                             
10:03:25 AM                                                                                                                   
Commissioner Tangeman  referenced Slide 21,  "Current Status                                                                    
of Tax Credit Bonding (HB 331)":                                                                                                
      House Bill 331 (HB  331) established a corporation for                                                                    
     the purpose  of financing the purchase  of transferable                                                                    
     tax  credits, production  tax credits,  the payment  of                                                                    
     certain  refunds.  The  Corporation  is  authorized  to                                                                    
     issue  up  to  $1 billion  in  subject-to-appropriation                                                                    
     bonds.  In FY2019,  $27  was  million appropriated  for                                                                    
     debt service on bonds issued by the Corporation.                                                                           
     ?Due  to ongoing  litigation, the  Corporation has  not                                                                    
     yet issued  any bonds.  The Complaint alleges  that the                                                                    
     subject-to-appropriation bonds  specified in  HB331 are                                                                    
     in violation of the  state constitution regarding state                                                                    
     debt and financing.                                                                                                        
     ?The  Superior  Court  granted the  State's  motion  to                                                                    
     dismiss on  January 2,  2019. The  State has  moved for                                                                    
     entry  of final  judgment. The  plaintiff appealed  the                                                                    
     case to the Alaska Supreme  Court on February 21, 2019.                                                                    
     As such, it is unlikely  that the suit will be resolved                                                                    
     before the beginning of FY2020.                                                                                            
     ?The   Spring    2019   Forecast    assumes   statutory                                                                    
     appropriation  for FY2020  and  full  credit payoff  in                                                                    
     FY2021   this is  an assumption  for forecast  purposes                                                                    
Co-Chair Stedman  wondered whether current  litigation could                                                                    
affect  the  repackaging  of bonds  for  redistribution.  He                                                                    
queried how the  amounts and types of  expenditures would be                                                                    
tracked in the revenue source book.                                                                                             
Commissioner  Tangeman   stated  that  it  was   a  work  in                                                                    
progress. He addressed  the third bullet on  Slide 21, which                                                                    
was  related  to  the   litigation.  He  addressed  Co-Chair                                                                    
Stedmans  question  whether other state entities  could bond                                                                    
for the financing; nothing had  been decided because nothing                                                                    
had solidified, but if it  was going to another state entity                                                                    
it would move from one  balance sheet to another. He assured                                                                    
the committee that  if a change were made it  would be clear                                                                    
to the  committee and hearing  would be held to  ensure that                                                                    
everyone agreed with the process.                                                                                               
Co-Chair Stedman was not concerned  whether people agreed or                                                                    
disagreed,  he  stressed  that   any  action  taken  by  the                                                                    
committee  needed   to  be   recognized  in   the  financial                                                                    
documents presented  to the legislature.  He hoped  that any                                                                    
action taken  would be easily  recognizable as a  change don                                                                    
the  balance sheet.  He stressed  that substantial  payments                                                                    
and  impacts  would  result  from   decisions  made  at  the                                                                    
committee table.                                                                                                                
10:07:10 AM                                                                                                                   
Senator Hoffman  asked for an explanation  of the plaintiffs                                                                    
in the case and the basis for the legal argument.                                                                               
Commissioner Tangeman  stated there was as  single plaintiff                                                                    
with an  argument based on subject  to appropriation claims,                                                                    
or  the idea  that  one legislature  should not  financially                                                                    
bind future legislatures.  He  said that under the scenario,                                                                    
the balance of the debt that  the state owed would be bonded                                                                    
for and then paid of through  debt service over a few years.                                                                    
He said that the plaintiff  believed that the bonds were not                                                                    
legal because of the subject to appropriations issue.                                                                           
10:08:12 AM                                                                                                                   
Senator  Micciche asked  about  the reason  for dumping  the                                                                    
remaining credit  on to FY2021.  He wondered why  the amount                                                                    
wasn't staggered through a different schedule.                                                                                  
Commissioner  Tangeman anticipated  a  favorable outcome  at                                                                    
the supreme  court level, which  would allow  the department                                                                    
to  clear  the  debt  form the  books  through  the  bonding                                                                    
Co-Chair  Stedman  asked  Commissioner  Tangeman  to  remind                                                                    
committee  members how  the  bonds were  dealt  with in  the                                                                    
forecast for FY2020.                                                                                                            
Commissioner  Tangeman  stated  that  there  would  be  debt                                                                    
service shown to pay off the amount.                                                                                            
Co-Chair Stedman asked about the  structure of the debts for                                                                    
FY2019 and FY2020.                                                                                                              
Commissioner  Tangeman  stated   that  the  spring  forecast                                                                    
showed  the $100  million appropriated  for FY2019  and $184                                                                    
million for FY2020, which was the statutory calculation.                                                                        
10:10:08 AM                                                                                                                   
Co-Chair  von Imhof  looked at  Page 13  of the  Spring 2019                                                                    
Revenue Forecast,  which showed  credits payed by  the state                                                                    
and  per-barrel   credits.  She  observed  that   the  total                                                                    
statewide production  tax credits  for FY2020  was projected                                                                    
at $1.4 billion.  She noted that Slide 20  showed about $600                                                                    
million  in  outstanding  credits for  repurchase,  and  she                                                                    
wondered whether the figure was also shown on page 13.                                                                          
Mr.  Stickel informed  that  Slide 20  and  Slide 21  showed                                                                    
slightly different  views of the  tax credits. He  said that                                                                    
Slide  20 showed  what the  ending balance  and repurchasing                                                                    
amount  would  be  if  the  legislature  were  to  make  the                                                                    
statutory appropriation  for every year under  the forecast.                                                                    
In  that scenario  the state  would pay  a little  over $100                                                                    
million every  year, and the  final amount  of repurchasable                                                                    
credits would  be retired in  2024. The Spring  2019 Revenue                                                                    
Forecast used  a different convention that  assumed that the                                                                    
statutory appropriation was made  for FY2019 and FY2020, and                                                                    
then   the  entire   amount  of   outstanding  credits   was                                                                    
repurchased in FY 2021, rather  than being spread across the                                                                    
4-year time horizon.                                                                                                            
10:11:48 AM                                                                                                                   
Senator Micciche thought  that the purpose of a  bond was to                                                                    
spread the  repayment over time,  but that the  slide showed                                                                    
the payments being made in one lump.                                                                                            
Mr.  Stickel  explained if  the  bonding  was made  for  the                                                                    
outstanding balance  of credits,  from a  revenue standpoint                                                                    
that  retires  the  outstanding   credit  balance,  and  the                                                                    
payments on the  bond are shown in the  budget documents but                                                                    
not the revenue forecast.                                                                                                       
10:12:42 AM                                                                                                                   
Senator   Hoffman  recalled   passage  of   HB  331,   which                                                                    
authorized issuance  of up to  $1 billion in bond  sales. He                                                                    
asked  whether  the  number  would be  the  amount  owed  in                                                                    
FY2018, would the $180 million  be returned to the state and                                                                    
the bonds sold accordingly, or  was there an assumption that                                                                    
the bonds  would be sold  after FY2020 for the  lower amount                                                                    
of $600 million.                                                                                                                
Commissioner  Tangeman admitted  that  he did  not know  the                                                                    
answer. He  thought that Senator  Hoffman was asking  if the                                                                    
state bonded  for the full  amount, come next  spring, would                                                                    
the state have  already spent down the  appropriation if the                                                                    
legislature chose to appropriate the $180 million.                                                                              
Senator  Hoffman  asked  if  the   state  was  going  to  be                                                                    
reimbursed for  the dollars  from the bond  sale or  was the                                                                    
administration going to sell the  bonds at a lower price. He                                                                    
felt  that  following   the  intent  of  HB   331  would  be                                                                    
advantageous given the states fiscal climate.                                                                                   
Commissioner  Tangeman thought  that  the department  should                                                                    
entertain a discussion on the topic.                                                                                            
Co-Chair  Stedman  said  that   there  should  either  be  a                                                                    
reimbursement or  a decrease in  the bond amount,  he warned                                                                    
against adding more debt.                                                                                                       
Commissioner  Tangeman clarified  that the  department would                                                                    
only  bond for  the  balance that  was due  and  not for  an                                                                    
additional amount.                                                                                                              
10:15:16 AM                                                                                                                   
Ms.  Glover  discussed  the presentation  "2013  Oil  &  Gas                                                                    
Production Tax Audit Update" (copy on file).                                                                                    
Co-Chair  Stedman asked  for  Ms. Glover  to  offer a  brief                                                                    
history of oil and gas production audits.                                                                                       
Ms.  Glover  recounted  that   the  department  was  working                                                                    
through the  2013 tax  year. In  the past  there had  been a                                                                    
substantial backlog. For  the past year, the  audit team had                                                                    
been focused on working on the 2012 and 2013 tax years.                                                                         
Co-Chair  Stedman interjected  that  in 2006  the state  had                                                                    
gone  from a  gross  tax  to a  net  tax.  He discussed  the                                                                    
differences.  He related  that  most  expenditures were  not                                                                    
questioned  on tax  returns; however,  there was  occasional                                                                    
differences of opinion on what  items should be deducted. He                                                                    
said that a  review of the net tax was  conducted every year                                                                    
and the  frequency of change  in the states  tax  regime had                                                                    
led to difficulty in keeping  up with regulation and audits.                                                                    
He noted that the states  tax  structure was one of the most                                                                    
complex in the world, with  a sis year statute of limitation                                                                    
for audits.  He stressed that  the concern at the  table was                                                                    
twofold: what was  the status of the audits  and how quickly                                                                    
was the state approaching the statute of limitation.                                                                            
10:19:27 AM                                                                                                                   
Co-Chair Stedman  continued his  remarks. He noted  that the                                                                    
subject was  being discussed in  subcommittee. He  said that                                                                    
the commissioner  had been tasked  to give an update  on the                                                                    
10:20:59 AM                                                                                                                   
Ms. Glover referenced  Slide 2, "Oil &  Gas Production (OGP)                                                                    
Tax Audit Update":                                                                                                              
     ?2012 Audits Complete:                                                                                                     
          ?Reviewed all sections of a taxpayer's return                                                                         
          ?Some sections were 100% audited                                                                                      
          ?Time consuming, but deemed to be necessary with                                                                      
          new tax and new staff                                                                                                 
          ?Scope was wide and materiality was low it was a                                                                      
          learning process                                                                                                      
     ?Stable tax law provides time to get caught up, plan,                                                                      
     and develop better procedures.                                                                                             
     ?Tax Revenue Management System (TRMS) in place                                                                             
     provides better transparency and organization of data.                                                                     
Ms.  Glover noted  that progressivity  had complicated  past                                                                    
audits  and  the  department had  lacked  the  technological                                                                    
tools necessary  for the work.  She shared that  after 2013,                                                                    
the tax  regime was stable  and would make audits  easier to                                                                    
10:22:47 AM                                                                                                                   
Ms. Glover showed Slide 3, "OGP Tax Audit Update":                                                                              
     ?2013 Audits:                                                                                                              
          ?Mostly complete                                                                                                      
          ?Several in review cycle.  Many levels of review:                                                                     
          peer, audit master, supervisor and director.                                                                          
          ?Similar scope as 2012 Audits.  They were worked                                                                      
          together in the early stages.                                                                                         
     ?Stop, Evaluate and Plan                                                                                                   
          ?Focused on improving the audit process starting                                                                      
          with the 2014 Audits.                                                                                                 
          ?Held all-day meeting last week to brainstorm                                                                         
          audit guidelines, timelines and strategy.                                                                             
          ?Plan to hold taxpayer engagement meetings before                                                                     
          we kick off the 2014 Audit                                                                                            
Ms.  Glover  said  that sessions  were  already  planned  to                                                                    
improve  communication  with   taxpayers  about  issues  and                                                                    
risks.  She noted  that 2014  was a  minimum taxpayer  year,                                                                    
which  meant that  not much  time  would be  spent on  lease                                                                    
expenditures, as  that would likely  not be a factor  in the                                                                    
ultimate  tax owed.  She stressed  that  the department  was                                                                    
working  to   be  thoughtful  in  planning   to  execute  an                                                                    
improvement plan.                                                                                                               
10:24:07 AM                                                                                                                   
Co-Chair Stedman asked  whether the work was   busy work  or                                                                    
would it  result substantial audit information.  He wondered                                                                    
how  much  money  would potentially  be  disputed  over  the                                                                    
Commissioner Tangeman stated there  was hundreds of millions                                                                    
of dollars that changed hands  depending on the price of oil                                                                    
and  the amount  of production.  He stated  that significant                                                                    
amounts  of  dollars were  being  audited  and paid  by  the                                                                    
taxpayers each year.                                                                                                            
Co-Chair  Stedman   asked  how  the  funds   came  into  the                                                                    
Commissioner Tangeman stated that  monthly tax payments were                                                                    
made followed by  a true-up payment at the end  of the year.                                                                    
Tax returns were  filed in the spring of  the following year                                                                    
and then  an audit  was done. The  payments, the  true-up at                                                                    
the end of the year, and  the tax return was filed in March,                                                                    
which began the waiting process because of the backlog.                                                                         
Co-Chair  Stedman  understood  that  audits  could  lead  to                                                                    
hundreds  of  millions  of dollars  in  adjustments  to  the                                                                    
figures.  He asked  where the  eventual  funds were  finally                                                                    
Commissioner  Tangeman  informed   that  tax  payments  were                                                                    
deposited into the general fund.                                                                                                
10:26:07 AM                                                                                                                   
Senator Micciche wanted to clarify the phrase "taxpayers."                                                                      
Commissioner Tangeman stated that  the largest taxpayers had                                                                    
historically been Exxon,  ConocoPhillips, British Petroleum;                                                                    
and now included Hilcorp, and several small companies.                                                                          
10:26:55 AM                                                                                                                   
Senator Hoffman considered the audit  backlogs and asked for                                                                    
an explanation of  what the legislature had  done to address                                                                    
the backlog.                                                                                                                    
Commissioner Tangeman responded that  the biggest thing that                                                                    
the legislature  had done to  help was  to put in  place the                                                                    
revenue  management system.  He recounted  that in  2011 and                                                                    
2012 there was an appropriation  to put a revenue management                                                                    
system in place. He believed  the legislature had recognized                                                                    
the  importance  of  the  audit division,  as  well  as  the                                                                    
importance on this  revenue stream to the  state. He thought                                                                    
it  had  been  a   good  working  relationship  between  the                                                                    
executive branch and the legislature.                                                                                           
Co-Chair  Stedman  recalled there  had  been  a $35  million                                                                    
appropriation for the revenue management system.                                                                                
Commissioner Tangeman replied in the affirmative.                                                                               
Co-Chair Stedman  thought that  the money  spent highlighted                                                                    
the significance of the issue.                                                                                                  
10:29:04 AM                                                                                                                   
Senator Wilson considered the timelines  of filing the taxes                                                                    
and the  audits. He  wondered about  the efforts  being made                                                                    
when working  with industry to clarify  regulations in order                                                                    
to improve timeliness.                                                                                                          
Commissioner Tangeman  stated that  the department  had been                                                                    
working with  the private sector to  examine regulations and                                                                    
deregulate, or   clean up  regulations, deleting  those that                                                                    
were not longer needed.                                                                                                         
10:30:34 AM                                                                                                                   
Senator   Wielechowski  praised   the  auditing   management                                                                    
system. He  wondered about risk  of missing out  on auditing                                                                    
spring of 2013 due to the statute of limitations.                                                                               
Co-Chair  Stedman thought  the question  could be  addressed                                                                    
further in the presentation.                                                                                                    
10:31:43 AM                                                                                                                   
Ms. Glover displayed Slide 4, "OGP Tax Audit Update":                                                                           
     ?Future Audits Time and Backlog:                                                                                           
          ?2014 audits complete by 2nd quarter of 2020                                                                          
          ?2015-2017 audits complete by 3rd quarter 2021                                                                        
         ?2018-2019 audits complete by end of 2022                                                                              
          ?Maintain 3-year audit cycle on go-forward basis                                                                      
     ?Continuous Improvement                                                                                                    
          ?Collaborative engagement with all taxpayers                                                                          
          ?Soliciting and incorporating taxpayer feedback                                                                       
          into TRMS                                                                                                             
          ?Standardization of work-papers                                                                                       
           Incorporating lessons learned from prior audits                                                                      
          into the process                                                                                                      
Ms. Glover  stated that the  6-years began the date  the tax                                                                    
return was filed.  The returns were due at the  end of March                                                                    
the following year, the 2013  tax returns were due March 31,                                                                    
2014, the 6-year  limitation would not be  until Merch 2020.                                                                    
She stated that  there was a plan to work  the backlog down.                                                                    
She thought the department  was confident that the statutory                                                                    
cut-off was not  at risk for the 2013 returns.  She spoke to                                                                    
the  timeline   for  future  audits.   She  said   that  the                                                                    
department  was  confident  that there  were  resources  and                                                                    
staff  to  meet  and  maintain the  3-year  audit  into  the                                                                    
Ms. Glover  clarified that when  a taxpayer filed  a monthly                                                                    
return, the  estimated payment  would go to  the GF.  If the                                                                    
assessment after  audit resulted  in additional  taxes being                                                                    
owed, that amount would go to the CBR if won and collected.                                                                     
10:35:20 AM                                                                                                                   
Co-Chair  Stedman  noted that  the  reference  to the  years                                                                    
2015-2017, the  severance tax structure was  calculated on a                                                                    
gross value  and did  not need to  be itemized,  which would                                                                    
speed up the audits.                                                                                                            
Co-Chair  Stedman  noted  that  there had  been  an  earlier                                                                    
question on  settlements and  reiterated concern  that those                                                                    
funds should not  go to the general fund. He  noted that the                                                                    
legislature could move  the funds to the CBR if  it chose to                                                                    
do  so,  but  the  question   was  where  the  funds  should                                                                    
automatically be deposited.                                                                                                     
10:37:08 AM                                                                                                                   
Senator Micciche thought there  was an important distinction                                                                    
between qualified  capital and operating credits  versus per                                                                    
barrel.  He  lamented  that  the  public  often  lumped  the                                                                    
credits together.                                                                                                               
Co-Chair  Stedman thought  that the  net cash  flow analysis                                                                    
discussion  on  Friday  would speak  to  Senator  Micciches                                                                     
10:38:28 AM                                                                                                                   
Senator Micciche  spoke to production risk.  He thought that                                                                    
other  than short-term  production  blips, it  did not  seem                                                                    
like  the downside  risk was  the same  as in  the past.  He                                                                    
wondered why the risk had been averaged.                                                                                        
Commissioner  Tangeman thought  a  detailed analysis  should                                                                    
come  from  DNR. He  felt  that  the  risk factor  grew  the                                                                    
further out in  time production was expected  to come online                                                                    
because of inconstant variables.                                                                                                
Co-Chair Stedman discussed housekeeping.                                                                                        
10:41:01 AM                                                                                                                   
The meeting was adjourned at 10:41 a.m.                                                                                         

Document Name Date/Time Subjects
031819 Revenue Sources Book Spring Update 2019_03152019_1000.pdf SFIN 3/18/2019 9:00:00 AM
DOR 2019 Spring Revenue Forecast
031819 OGP Audit Slides_.pdf SFIN 3/18/2019 9:00:00 AM
Oil and Gas Production Tax Update 2019
031819 Spring Forecast Slides - ERG final.pdf SFIN 3/18/2019 9:00:00 AM
DOR 2019 Spring Revenue Forecast