Legislature(2017 - 2018)SENATE FINANCE 532
01/22/2018 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: 2017 Fall Revenue Forecast | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
January 22, 2018
9:02 a.m.
9:02:57 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Peter Micciche
Senator Donny Olson
Senator Gary Stevens
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
Sheldon Fisher, Commissioner, Department of Revenue; Dan
Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue; Ken Alper, Director, Tax
Division, Department of Revenue.
SUMMARY
^PRESENTATION: 2017 FALL REVENUE FORECAST
9:03:24 AM
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself.
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, introduced himself.
Commissioner Fisher stated that the presentation had been
crafted for brevity. He offered to expound upon any issues
pertinent to the committee.
Commissioner Fisher discussed the presentation, "Fall 2017
Revenue Forecast Presentation," (copy on file). He looked
at Slide 2, " FORECASTING METHODS: Timeline":
• December 2016: Fall 2016 Forecast and Revenue Sources
• Book
• Early April 2017: Spring 2017 Forecast
• Late April 2017: Spring 2017 Alternative Scenario
? 4% Production Decline Scenario, Letter to Co-Chairs
? Used in modeling by Department of Revenue, Office of
• Management and Budget, and Legislative Finance
• October 2017: Preliminary Fall 2017 Forecast
? Non-standard, provided to assist special session
• December 2017: Final Fall 2017 Forecast and
• Revenue Sources Book
• March 2018: Spring 2018 Forecast
Commissioner Fisher related that the department had
traditionally issues a spring and fall forecast in December
and April, respectively. He explained that the forecast was
particularly important for the current fiscal climate,
which had prompted the department to issue alternative
scenarios in April 2017 and October 2017. He relayed that
the March 2018 forecast would be an update of the December
2017 forecast.
Commissioner Fisher read Slide 3, "Fall 2017 Production
Forecast." He stated that production had not changed since
the issuance of the Fall 2017 preliminary forecast.
9:06:46 AM
Commissioner Fisher discussed Slide 4, "PRODUCTION
FORECAST: ANS History and Forecast by Pool," which showed a
graph depicting historical production from the North Slope.
He said that the information to the left of the dotted line
was actual production and the information to the right was
the forecast. He noted that there had been historical
decline but the few years prior to the current period had
seen an increase in production. He pointed out that to the
right it was indicated that production would be largely
flat. He referenced the small pink sliver on the chart that
represented new fields, which were forecasted to add small
amounts of production.
9:08:16 AM
Commissioner Fisher displayed Slide 5, "PRODUCTION
FORECAST: ANS High and Low Case," which showed a line graph
that charted the high, official, and low forecasts. He
explained that each case had a differing probability of
likelihood: the official forecast was a probability of 50
percent(P50); the high case, 10 percent(P10); the low case,
90 percent(P90).
Senator Micciche asked whether the P50 was an average
between the high case and the low case.
Commissioner Fisher informed that the P50 represented the
Department of Natural Resources (DNR) best guess as to what
would actually happen. He qualified that it was not a
direct average but reflected an average probability.
Senator Micciche felt that the high case seemed
unreasonably close to the official forecast. He thought
that the situation had improved since the forecast was
made.
Commissioner Fisher thought Senator Micciche made a great
point and noted that potential development in the Alaska
National Wildlife Refuge (ANWAR) had been announced since
the forecast was released and was not reflected in the
numbers.
9:11:33 AM
Commissioner Fisher spoke to Slide 6, "PRODUCTION FORECAST:
ANS Comparison to Prior Forecast," which showed a line
graph that depicted the difference between the three
different forecasts from a production perspective. He
pointed out to the committee the flattening of expectations
around production illustrated on the slide and noted that
over time the difference between the forecasts expanded and
increased.
9:12:39 AM
Commissioner Fisher read Slide 7, "Fall 2017 Price
Forecast."
Commissioner Fisher reviewed Slide 8, "PRICE FORECAST:
Historical ANS Price, June 2016+," which showed a graph of
oil pricing from June 2016 through December 2017. He said
that to date, the FY 18 price was $58 per barrel. He stated
that the assumption built into the recent forecast was an
FY 18 price of $56 per barrel. He relayed that the
anticipation was that there would be additional revenue in
FY 18, as the price increased. He related that at this
pricing, the $1 per barrel difference represented $40
million in revenue to the state.
Vice-Chair Bishop requested further clarification on the $1
per barrel difference and what that meant to the state.
Commissioner Fisher explicated that $1 of production was
worth approximately $40 million in revenue to the state. He
indicated that a slide at the end of the presentation would
offer further clarity. He said that changes in the price
curve affected this number because as the state moved up
the price curve, and oil companies moved from paying the
minimum to paying above minimum; the return to the state
was not linear.
Vice-Chair Bishop asked about the $35 per barrel credit and
more revenue at higher prices.
Commissioner Fisher stated that there would be slides to
address the issue later in the presentation.
Co-Chair MacKinnon understood that the state received a
larger share of revenue than companies under the minimum
tax.
9:16:37 AM
Commissioner Fisher presented Slide 9, "PRICE FORECAST:
Impact of Spare Capacity," which showed a bar and line
graph entitled, "World Liquid Fuels Production and
Consumption Balance." He said that the slide, created by
the Energy Information Agency, presented a supply and
demand characterization of the international oil market. He
pointed out that for the last four quarters there had been
declining inventory, which had been an impetus for the
price increase in the marketplace. He looked to the
righthand side of the graph, which showed that anticipated
increase in production and consumption; the expectation was
that production would increase faster than demand, sparking
a period of growing inventory.
9:18:00 AM
Commissioner Fisher spoke to Slide 10, "PRICE FORECAST:
Nominal ANS Price Distribution," which showed a line graph
that provided the per barrel price of oil through FY 27,
projected using percentages from 10 percent to 90 percent.
He said that the Governor's budget assumed a $56 per barrel
in FY 18, $57 in FY 19, $58 in FY 20, continuing with the
50 percent expectation going forward.
Senator von Imhof thought breaking the numbers down by
quarter in 2018 was helpful. She noted that the slide
listed the per barrel price of oil at $51.79, when the
actual current price was $69. She wondered whether an
updated forecast could be run before the spring forecast.
Commissioner Fisher replied that the department would run
any scenario, any time. He added that he would not be able
to run a scenario that reflected an official opinion from
the department but would run scenarios at the request of
the committee.
9:22:01 AM
Commissioner Fisher discussed Slide 11, "PRICE FORECAST:
Brent Forecasts Comparison to DOR ANS Forecast: November
2017," which showed a line graph entitled, "Real Oil Prices
and Forecasts." He stated that slides 11 and 12 were
companion slides. The solid black line represented actual
oil pricing, the dotted black line reflected the
department's forecast. Further, the blue line represented
financial analyst's forecasts, the red line reflected the
futures market forecast, and the green line represented the
United States Energy Administration forecast. He cautioned
that the EIA had a long-term forecast and a short-term
forecast; and the short-term forecast was reflected on the
graph. He said that the EIA long-term forecast would be
updated in February 2018. Slide 11 showed where the market
had been in November 2017.
Commissioner Fisher looked at Slide 12, "PRICE FORECAST:
Brent Forecasts Comparison to DOR ANS Forecast: November
2018," which showed a line graph entitled, "Real Oil Prices
and Forecasts." He said that the slide reflected the
current market. He observed that there had been meaningful
movement when compared to slide 11. He felt that the
forecast had been in the range of where other analysts and
experts had expected oil priced to be, looking at slide 12
it was clear that the expectations had moved below
marketplace. He expected that adjustments in the forecast
would be made in FY 18 and FY19, and possibly for years
beyond. He shared that in reviewing the EIA forecast from
January 2018 had predicted that long-term oil pricing would
stabilize at $60 per barrel. He felt that the department's
long-term forecast remained consistent with experts and
that the next several years would be challenging to
project.
9:26:04 AM
Senator von Imhof wondered what caused the green line to
sharply jump up in 2020 on slides 11 and 12.
Commissioner Fisher replied that the line reflected an
artificial jump. He detailed that the upper portion of the
line was the Energy Authorities long-term forecast, which
would be revised in February 2018; the expectation was that
there would then be a more rational blending of the lower
and upper portions of the line.
Senator Micciche thought that more frequent predictions
would be helpful. He noted the difference between the
spring forecast and the current forecast reelected on slide
6. He though that the effects on the LFD model in the long-
term was substantial and that future revenue should be
viewed as a range and not just a number. He thought that
the future assumptions looked positive and described the
forecast as "rosy".
Vice-Chair Bishop thought that it would be wiser to
forecast more conservatively and to use caution.
9:29:55 AM
Co-Chair Hoffman concurred with Vice-Chair Bishop. He
referenced the Institute of Social and Economic Research
(ISER), which had said that prices were looking better but
could quickly fall. He felt that it was important to hope
for the best but not to depend on hope when planning for
the state's future.
Co-Chair MacKinnon thought there was a variety of opinions
in the legislature pertaining to oil price, just as in the
market. She hoped for the best but would plan for the
reasonable.
9:31:22 AM
Mr. Stickel read Slide 13, "Fall 2017 Cost Forecast." He
stated he would discuss the forecast for lease expenditures
and credits.
Mr. Stickel discussed Slide 14, "COST FORECAST: North Slope
Capital Lease Expenditures," which showed a line graph that
illustrated anticipated capital lease expenditures by
companies on the North Slope. He said that capital costs
and operating costs were both deductible and the production
tax calculation became an important part of the revenue
calculation once the minimum tax was exceeded (prices in
the mid-60s and above). He directed committee attention to
the orange and blue lines, which indicated the spring and
fall forecasts for capital costs, respectively. He
explained that the numbers were based primarily on figures
from operators and some public information on new
developments that entered into the forecast. He noted that
between the spring and fall forecasts it had been
determined that a lot of work had been done by companies to
reduce cost and to make the state's current oil price
regime workable. There had been a downward shift for costs
for existing units and an increase in the assumptions for
new developments. He relayed that no potential ANWAR costs
had been considered. He stated that the overall picture,
with some of the cost reductions, showed lower capital
spending when compared to the spring forecast over the next
few years, with a higher forecast into the early 2020s.
Co-Chair MacKinnon thought that the production numbers had
been underrepresented and wondered when more realistic
numbers would be embedded in the forecast.
Mr. Stickel agreed that, historically, declining production
had been forecasted while production was stabilizing. He
stressed that the current forecast painted a fairly stable
production picture going forward. He thought that DNR could
speak to the details, but that DOR was tracking closely to
the forecast, if not below, and the projections were for a
relatively stable production outlook for the next decade.
Co-Chair MacKinnon asked whether there was a decline
forecasted in the current DOR model.
Mr. Stickel stated that there was a small decline in the
forecast for the next decade, but it was not the
significant decline that had been reflected in previous
forecasts.
Co-Chair MacKinnon queried the percentage of the forecasted
decline.
Mr. Stickel replied that he did not have that figure.
Commissioner Fisher thought the decline was less than 3 or
4 percent. He agreed to provide an official number.
9:36:01 AM
Mr. Stickel displayed Slide 15, "COST FORECAST: North Slope
Operating Lease Expenditures," which showed a line graph
that compared the spring and fall forecasts for operating
expenditures. He noted a similar trend of downward pressure
on operating expenditures for the next several years, as
companies had achieved a lot of efficiencies and reduced
costs at legacy fields. He pointed to 2022 and 2023, where
operating expenditures increased compared to the spring
forecast, which was because of the new fields. He explained
that the effect of the new fields was an increase in
capital expenditures by 2024, with additional increases in
operating expenditures.
9:37:19 AM
Mr. Stickel spoke to Slide 16, "COST FORECAST: North Slope
Transportation Costs," which showed a line graph that
reflected transportation costs. He noted that the biggest
transportation cost was the tariff for moving oil through
the Trans-Alaska Pipeline System (TAPS). He shared that the
pipeline had a stable cost of operating on an annual basis,
the cost of more oil moving through the pipeline was
divided by an increased number of barrels, which decreased
the per barrel cost. He said that slight increases in
transportation costs were expected but by the end of the
decade, but those costs were expected to decrease by $3 per
barrel.
Vice-Chair Bishop wondered whether transportation costs
would flatten or decrease with the lower operating and
capital costs.
Mr. Stickel replied that there was a slight decline in the
production forecast, and that the figures were in nominal
terms and the increase could be attributed to inflation.
Senator Micciche surmised that past tax regimes rewarded
spending that may not have been fruitful in production for
the state. He asked whether changes in the regime had
resulted in more benefit on production increases.
Mr. Stickel responded that companies responded to
incentives and the current system incentivized oil
production.
9:40:29 AM
Mr. Stickel read to Slide 17, "Fall 2017 Credits Forecast."
He relayed that there had been a system by which companies
could earn tax credits for various types of spending and
the legislature would fund those credits through
appropriation. He said that the state had eliminated the
ability for companies to receive cash-free purchase for the
credits but that there were currently approximately $1
billion in outstanding tax credits that were available for
state purchase. He said that the forecast assumed that $100
million of those credits would be transferred to the major
oil companies and used to off-set prior year liabilities,
leaving about $900 million in outstanding repurchasable tax
credits. He relayed that AS 43.55.028 gave guidance to the
legislature in what a yearly appropriation could be to help
fund the credits. That guidance provided for 10 or 15
percent of the taxes collected to be made available for
repurchase of the credits. He shared that there was
question as to whether the 10 or 15 percent should be
applied to the gross tax or the net tax after credits - the
department had based their interpretation on application to
the gross tax.
Mr. Stickel reviewed Slide 18, "Illustration of Tax and
Credit Calculations," which showed a table entitled, "FY
2019 production tax illustration Spring 2017 ~140 million
taxable barrels." He related that the slide walked through
the calculation based on the spring forecast of what the
department had estimated the statutory appropriation would
be for FY 19. He related that the gross value estimated at
$7 billion for North Slope oil, minus lease expenditures,
and providing a production tax value of $1.4 billion, a 35
percent statutory tax of $490 million, and multiplied by
the 10 percent multiplier, gave an estimated appropriation
of $49 million for the spring forecast.
Co-Chair MacKinnon remarked that the Governor had short-
funded tax credits. She asserted that the statutes were law
and that the Governor's proposed budget did not include
full funding of the statutory obligation.
9:43:45 AM
Commissioner Fisher stated that the proposal that the
governor had included in his budget was one that would
address the tax credits in a manner that was beneficial to
both the state and credit holders. The notion was that the
state would approach the credit-holders and offer to
purchase the credits at a discount. The administration
thought the proposal had value to the credit-holders, it
would allow them to receive all their outstanding credits,
which the department believed it could do at a cost below
the comparative cost of capital. He furthered that the
state would use the discount to pay the cost of interest on
bonds that the state would issue; the state would pay the
credits by issuing bonds and then use the discount to pay
the cost of interest incurred on the bonds. He added that
the state proposed 10-year amortization of the bonds; the
first two years would be interest only, then three years of
growing principal, followed by 5 years of flat
amortization. He said that the notion was to try and move
the repayment of the debt into a period where the state had
greater cashflow with which to pay the debt. He added that
the intention to provide companies with capital that they
could reinvest in the state as capital.
9:47:45 AM
Co-Chair MacKinnon stated that the administrative team had
vetoed the payment of tax credits multiple times, which had
created a backlog of credits that the legislature had tried
to pay. She found it difficult that the administration was
trying to find creative ways to short-fund the statutory
obligation through the changing of state policy. She
wondered what should have been included, under current
state law, in the Governor's proposal.
Commissioner Fisher replied that approximately $206 million
should have been included; $27 million was in the proposal,
leaving a difference of nearly $180 million.
Co-Chair MacKinnon maintained that the proposed Governor's
budget was underfunded and not transparent. She contended
the statutory changes necessary to support the proposed
budget had been unsuccessfully pitched to the legislature
in the past. She lamented that there was $125 million in
short-funding on the tax credits alone.
9:50:46 AM
Co-Chair MacKinnon clarified that there had been a tax
credit program, through which the legislature had paid
beyond the statutory obligation. She lamented that during
the current administration the state had switched to the
calculation based on the statutory obligation. Payment had
been vetoed several times that would have paid off a
substantial portion of the existing obligation. She
lamented that now the state was going to have those that
held the credits pay for the state to borrow money to meet
the statutory obligation to pay the credits - and call it a
discount.
9:51:45 AM
Commissioner Fisher clarified that the administration's
proposal was not asking the companies to pay in order for
the statutory obligation to be met. He explained that
companies were being asked to pay a discount based on the
difference between paying immediately, and what that
statutory obligation would be overtime. He said that the
notion was that the state would pay again in FY 19 the
present value of what was owed in 2020; the company would
get their 2020 money in 2019, but a little bit less. He
reiterated that the plan was optional and thought that
companies would agree to the deal because they would get
their money faster and at a cheaper rate than borrowing
from the marketplace.
Co-Chair MacKinnon asked whether the proposal covered that
$170 million from FY 19 that should have been included in
the budget.
Commissioner Fisher answered in the affirmative. He said
that the interest that the state would pay over the term of
the debt would be covered by the discounted future years.
9:54:15 AM
Senator Micciche thought the proposed 10 percent discount
seemed high. He wondered whether there was an
administrative fee attached to the time/value judgement. In
reference to the no-net cost to the state in the proposal,
he asked whether the administration had considered future
debt and bonding capacity to the state and what the
potential long-term costs could be.
Commissioner Fisher agreed that the 10 percent was a little
rich. He explained that the number had been put forward
with the idea that the base amount would be 10 percent,
then through an overwriting royalty interest, the companies
could buy down to closer to 5 or 6 percent. He said that
the 5 or 6 percent was the minimum necessary for the state
to cover costs. He said that the logic behind choosing 10
percent was to address the concerns of those who might feel
like there was not enough benefit to the state, while also
showing that the state was willing to engage in a structure
where the state would share the risk; the overriding
royalty interests had no value without production.
Commissioner Fisher detailed that the administration had
reached out to credit holders in the industry in an effort
to understand their position in order to craft a deal that
would be acceptable to companies.
9:57:22 AM
Commissioner Fisher addressed the question of bonding
capacity. The administration had received feedback from
credit agencies that the credits were an existing
obligation and that the future bonding capacity of the
state would not be significantly altered because it would
only change one from of liability to another.
9:57:57 AM
Senator Micciche clarified that the $170 million that Co-
Chair MacKinnon had been speaking to the supplemental
requests that were peppered through the budget, which the
committee struggled with.
Commissioner Fisher thought that she had been speaking to
the difference between the $27 million and the $206
million. He appreciated the clarification.
9:58:27 AM
Co-Chair MacKinnon informed that the committee would be
hearing from Deven Mitchell, Executive Director, Alaska
Municipal Bond Bank Authority, Department of Revenue to
discuss the state's debt capacity.
9:59:35 AM
Mr. Stickel thought the discussion illustrated why the
department wanted to include the credits forecast slide in
the presentation.
Mr. Stickel presented Slide 19, "Illustration of Tax and
Credit Calculations," which showed a table entitled, "FY
2019 production tax illustration Final Fall 2017 ~169
million taxable barrels." The slide showed an illustration
of the calculation of the statutory appropriation for FY
19. He noted that, compared to the spring forecast, there
was higher gross value for oil on the slope. He pointed out
that the higher production forecast offset the lower market
price, that combined with reductions in company spending
showed more pre-tax profit expected on the slope. That
forecasted pre-tax profit of $3.5 billion equated to $1.2
billion in tax before credits at the 35 percent nominal tax
rate. He furthered that the tax rate would be multiplied by
a 15 percent multiplier because the forecasted price was
below $60 per barrel and would result in a $206 million FY
19 expectation for the statutory appropriation.
10:01:12 AM
Mr. Stickel turned to slide 20, "FY 2019 Statutory Credit
Appropriation":
Key Changes from Spring to Final Fall:
Production forecast increased
? 29 million more taxable barrels
? $1.0 billion more gross value
Cost forecast decreased
? $1.1 billion less deductible costs
Tax before credits increased
? $2.1 billion more profit x 35% = $750 million
Different Statutory Appropriation Multiplier
? Appropriation is 15% of tax before credits when
price forecast <$60, 10% when price forecast is $60+
10:02:11 AM
Senator Micciche whether HB 111 had changed the 4 percent
minimum on the way the tax was calculated.
Mr. Stickel stated that the minimum tax at 4 percent was
not changed. There had been changes to how the different
credits could be applied below that minimum tax.
10:02:55 AM
Mr. Stickel discussed Slide 21, "CREDITS FORECAST:
Outstanding Tax Credit Obligations," which showed a bar
graph entitled "Ending balance of credits available for
repurchase, assuming statutory appropriation for FY 2019+."
The slide considered the next decade and the outstanding
balance of tax credits, most of which were available for
purchase at the end of FY 18. He said that the remaining
$200 million of credits became payable in FY 19 and FY 20.
He related that the blue bar showed the expectation of the
ending balance of credits for each year compared to the
grey bar, which represented the statutory appropriation. He
relayed that if the statutory appropriation was made every
year form 2020 onward, under the forecast the credits would
be exhausted by 2024.
Co-Chair MacKinnon wondered why the state would borrow over
a 10-year period if the credits could be paid off in less
time.
Commissioner Fisher thought the legislature had the voice
to decide. He expressed that he administration had thought
the 10-year period would allow for the credits to be paid
off, from a company perspective, in the current period. He
was happy to run calculations on shorter periods of time
and work with the legislature on the matter.
10:04:52 AM
Commissioner Fisher showed Slide 23, "FORECAST CHANGE:
Production Tax Revenue":
• Oil price forecasts decreased slightly from
spring forecast
• Oil production long-term forecasts have
stabilized versus spring forecast
• FY 2018 production tax revenue forecast increased
from
• Preliminary Fall Forecast by $173 million
o Large unexpected prior-year production tax
payments were received after the preliminary
forecast was compiled.
o Price forecast increased by $2 per barrel.
• Lease expenditures expected to fluctuate over the
forecast period due to forecasted new production.
Companies have cut costs for existing fields but
new fields will add costs, versus spring forecast
• Companies cited Alaska investment instability and
uncertainty regarding the state fiscal system, as
factors impacting decision making
Commissioner Fisher turned back to Slide 6 to address Co-
Chair MacKinnon's comment about decline. He said that the
grey line reflected the 4 percent decline. He observed that
the blue line representing the current fall 2017 forecast
was relatively flat when compared against the 4 percent
decline.
Co-Chair MacKinnon asked whether paying the credits for
work that had benefitted the state, such as seismic data,
could be prioritized differently than other spending.
Commissioner Fisher stated that seismic data was
prioritized the same as other work under the current regime
and under the proposed program. He was not sure he fully
understood her question but would provide further
information at a later date.
Co-Chair MacKinnon referred to a company that had done
seismic exploration on the state's behalf and had "dropped
seismic" on property that had not belonged to the state,
that would benefit the state but would benefit the company
to a greater extent. She aske whether there was a way to
prioritize the credits for data was not going to be as
meaningful to the state.
Commissioner Fisher said he would get back to the
committee.
10:09:01 AM
Co-Chair MacKinnon relayed that the company that had
performed the seismic work had made a plea for payment of
the credits to the committee.
Commissioner Fisher related that conversations with the
seismic companies had given the impression of support for
the program. He stated that one feature anticipated to be
included in the plan was the concept that seismic companies
would waive their right to confidentiality of data in
exchange for the lower tax rate.
Co-Chair MacKinnon asked that the department follow-up with
her office concerning possible preferential treatment being
given to those offering seismic data. She requested more
information about how far the state had come in processing
the seismic data.
10:11:54 AM
Commissioner Fisher continued to discuss Slide 23. He
shared that part of his goal in addressing tax credits was
to bring a sense of stability and closure for the state and
the industry.
Commissioner Fisher discussed Slide 24, "FORECAST CHANGE:
Comparison of Spring and Fall 2017 Forecasts for FY 2018,"
which showed a data table. He detailed that the left-hand
side showed FY 18 compared to the preliminary fall
forecast, and the right-hand side compared the spring
forecast and the subsequent changes.
10:13:43 AM
Commissioner Fisher displayed Slide 25, ""FORECAST CHANGE:
Comparison of Spring and Fall 2017 Forecasts for FY 2019,"
which showed a data table which was a similar comparison as
slide 24, but for FY 19.
Commissioner Fisher spoke to Slide 26, "GFUR Relative to
Price per Barrel, FY 2019," which showed how UGF was
anticipated to change with the price of oil. He observed
that as pricing increased the line steepened, which had to
do with the point where companies began paying above the
minimum tax.
10:15:06 AM
Commissioner Fisher read slide 27, "Fall 2017 Total Revenue
Forecast." He stated that the following slides were offered
as context for discussion.
Commissioner Fisher reviewed slide 28, "REVENUE FORECAST:
2017 to 2019 Totals," which showed a data table related to
2017 to 2019 totals.
Commissioner Fisher presented slide 29, "REVENUE FORECAST:
2017 to 2019 Unrestricted Petroleum Revenue," which showed
a data table showing the 2017 to 2019 unrestricted
petroleum revenue.
Commissioner Fisher turned to slide 30, "REVENUE FORECAST:
2017 to 2019 Unrestricted Non-Petroleum Revenue," which
showed a data table.
10:16:14 AM
Commissioner Fisher spoke to Slide 31, "WRAP-UP: Changes to
10-Year Unrestricted Revenue Outlook," which showed three
data tables: ANS Production Changes from Prior Year, GF
Unrestricted Revenue ($ millions) Final Fall 2017 vs
Prelim Final 2017, and GF Unrestricted Revenue ($ millions)
Final Fall 2017 vs Official Spring 2017. He drew
attention to the first table, which reflected the slight
decline that was in the current forecast. He detailed that
the latter two graphs were comparisons between forecasts.
The comparisons showed the unrestricted revenue compared to
the final fall forecast and the difference year over year
between the official spring forecast and the preliminary
fall forecast. He noted that both scenarios showed an
increase in the FY 18 forecasted revenue of $250 million.
Senator von Imhof asked whether the change between FY 18
and FY 19, from $2,082.0 to $2,047.0, was not from
production but was a price estimate.
Commissioner Fisher stated that the comparison was
dependent upon the baseline being considered. He furthered
that in the official spring forecast changes had been made
to both price and production. He referred to slide 6, which
showed the official spring 2017 forecast in orange. He said
that the difference between the between the current
forecast and the official spring forecast (the blue line
and the orange line) was part of the change that was
driving the increase in the forecast.
Senator von Imhof asked why there was a drop in final fall
revenue in FY 19.
Mr. Stickel interjected that FY 18 had some one-time
payments (unexpected production tax payments) that were not
expected for FY 19.
Commissioner Fisher looked at the top of Slide 31, which
showed a modest 1 percent decline between FY 18 and FY 19,
which was also a component to consider.
10:20:42 AM
Co-Chair Hoffman commented that none of the forecasts came
close to funding 50 percent of the current cost of
government. He asked whether there had been a pipeline
tariff rate case settlement that the state would receive in
2018.
Mr. Stickel recalled that the revenue impact of the
pipeline settlement was largely baked into the forecast,
and thought the total was about $165 million, $150 million
of which was production tax. He expected that companies
would use credits to offset the majority of the production
tax share. He said that FY 19 included $25 million in
positive revenue, aside from the use of some of the
credits.
10:22:27 AM
Co-Chair MacKinnon received a note that indicated that the
legislature had provided the ability for the company that
had done the seismic data to wait for their tax credit.
She asked if the commissioner could discuss the
department's role in certification of seismic tax credits.
Commissioner Fisher stated that under the repurchase
program that the administration was contemplating, there
was a potential set of rules for seismic operators that
would involve allowing for a discounted tax rate in
exchange for the companies waiving confidentiality of data.
10:25:54 AM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
thought it was important to recognize that the seismic
credits had been a subset of the exploration tax credit
system and were reviewed by tax division staff alongside
all other tax credits; this review was considered a full
audit and the operating loss credits (023) were preliminary
offerings that could be audited and amended years later.
Alternatively, the rewarding of the exploration (025)
credits was a final and required a more complete audit,
which had resulted in some delay. He said that the audit
done by staff confirmed the spending levels and legitimacy
of the contracts and expenditures, and assured vendors were
paid. He furthered that in the case of the seismic credits,
DNR confirmed the completeness of the data relating to the
seismic shoot. He related that there had been a company
with a large suite of credit projects that were in the
review process and with the passage of HB 111 in 2017, the
legislature had made it clear that they wanted to be sure
that the company could get in line for the credits and not
suffer for the time it was taking DOR to audit their
information. He stated that because of that the state had
been able to issue a conditional certificate to the seismic
companies in the process, which had enabled those companies
to be in the 2017 cue. He revealed that in reality most of
the actual reviews were done by December 31, 2017, and the
numbers finalized - but there were a handful of incomplete
audits that would be considered with the 2017 group once
completed.
Mr. Alper related that there had been no guidance for 2016,
other than first in - first out, which was considered pro-
rationing, so the state was going to buy all of the 2016
open certificates dollar for dollar. The 2017 credits had
an additional layer that had been added through HB 247 [oil
and gas tax credit legislation passed in 2016]. The
legislation had directed that priority had to be given for
Alaska resident hire to companies and sub-contractors. He
reported that where the seismic credits fell in the ranking
would depend on the analysis of their hire. He guessed that
because the companies were small, and their work was done,
they would rank highly. He shared that baking the
assumption about the rank ordering into the calculation of
discounted offerings in the bond program was a challenge.
10:30:27 AM
Co-Chair MacKinnon acknowledged that the matter was
complex. She asked if Mr. Alper could relay whether the
department was paying tax credits from the previously
mentioned settlement.
Mr. Alper stated that the settlement had led to incremental
tax liability and changes to tariffs; companies would
refile their taxes and establish liability. He believed
that once the numbers were determined the expectation was
that some of the obligation would be offset by purchasing
tax credits. He did not believe any of the transactions had
occurred yet and hoped to facilitate the process quickly
and efficiently for companies.
Senator Micciche asked about the administration's credit
payment plan with the bonding financing. He understood that
under the program any geologic and geophysical data,
without any limitation, would no longer hold
confidentiality with DNR. He surmised that this meant any
well data, whether seismic or credible operator, which he
believed were different. He wondered about the value of un-
commissioned seismic confidentiality and the
confidentiality of commissioned well data.
Commissioner Fisher recognized the difference. He said that
the issue was under discussion.
10:33:48 AM
Senator Micciche appreciated the consideration of a bond
financing program. He thought it was a viable proposal. He
was not sure about including the un-commissioned seismic
data and was glad that the administration was investigating
the matter.
Mr. Alper stated that the seismic data that was funded by
tax credits was released for public consumption after 10
years. He said that in offering the lower discount rate,
companies would waive the 10-year confidentiality
privilege, making the seismic data public immediately.
10:35:07 AM
Co-Chair MacKinnon asked why seismic data that was not done
on the state's property was valuable to the state.
Mr. Alper thought it was in the state's interested to get
additional development anywhere in the state. He furthered
that oil produced outside of state land paid production
taxes and diluted the per barrel cost of operating the
pipeline. He noted that ANWAR was not on state land and no
seismic data had been collected there in modern times, but
such data would now benefit the state.
10:35:58 AM
Senator Micciche thought Mr. Alper would agree that there
were tiers of value to the state.
Mr. Alper agreed, and reminded that the state as a
landowner collected royalties, which was the majority of
the revenue received from industry under the current
regime. He stressed that the state preferred to get the
royalty rather than the alternative.
Senator Stevens expressed consternation. He worried that
the assumption was that the price of oil would go up, which
was not necessarily true. He reminded the committee that
oil prices were volatile and thought it was foolish to
continue to operate under the hope that oil prices would
increase. He felt that the state needed to find alternative
revenue generators and stop depending on oil revenues alone
to fund Alaska.
Co-Chair MacKinnon commented that the committee understood
the consequences of relying solely on oil revenue to fund
the state. She asserted that the focus was currently on tax
credits because oil had been the largest producer of
revenue to-date. She acknowledged that there were other
non-petroleum sources of revenue. She had asked the
administration to consider the foregone revenue that the
state could receive in tax credits from other industries.
Co-Chair MacKinnon discussed housekeeping and expressed
confidence and appreciation for the work done by
Commissioner Fisher.
ADJOURNMENT
10:41:06 AM
The meeting was adjourned at 10:41 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012218 Fall 2017 Revenue Forecast Presentation SFIN 20180119 ds.pdf |
SFIN 1/22/2018 9:00:00 AM |
FY 19 Operating Budget |