Legislature(2019 - 2020)SENATE FINANCE 532
03/18/2019 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Spring 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
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
None
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
Budget.
PRESENT VIA TELECONFERENCE
Colleen Glover, Director, Tax Division, Department of
Revenue
SUMMARY
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
2020.
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
Forecast."
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
update.
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
$105m.
?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
FERC.
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
detail.
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
liability.
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
(CBR).
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
opinion.
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
matter.
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
miscalculation.
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,
return.
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
budget.
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
values.
9:29:40 AM
Commissioner Tangeman showed Slide 6, "ANS Oil Price
Forecast."
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
percent.
9:32:41 AM
AT EASE
9:32:50 AM
RECONVENED
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).
?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
prices.
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
focusing.
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
fundamentals.
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
expectations.
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
$62-$63/bbl.
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
Forecast."
9:39:13 AM
AT EASE
9:39:32 AM
RECONVENED
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
analysis.
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
integration.
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
online.
9:48:22 AM
AT EASE
9:49:03 AM
RECONVENED
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
forecast.
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
$.28.
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
million.
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
director.
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
qualify.
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
production.
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
only.
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
process.
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
audits.
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
execute.
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
years.
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
treasury.
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
deposited.
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
future.
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
concern.
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.
ADJOURNMENT
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 |