Legislature(2021 - 2022)SENATE FINANCE 532
01/20/2022 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Revenue Forecast - Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
January 20, 2022
9:00 a.m.
9:00:38 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:00 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman (via teleconference)
Senator Donny Olson
Senator Natasha von Imhof
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
ALSO PRESENT
Dan Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue.
PRESENT VIA TELECONFERENCE
Colleen Glover, Director, Tax Division, Department of
Revenue.
SUMMARY
PRESENTATION: REVENUE FORECAST - DEPARTMENT OF REVENUE
Co-Chair Stedman noted that the committee heard the revenue
forecast from the Department of Revenue (DOR) every year in
the beginning of session. He remarked that //
^PRESENTATION: REVENUE FORECAST - DEPARTMENT OF REVENUE
9:02:27 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, relayed that he had worked
with the state for 2004, and had been in the role of chief
economist since 2016.
Co-Chair Stedman commented that Senator Hoffman was
available online. He discussed meeting protocol.
9:03:32 AM
Mr. Stickel drew attention to an announcement that was
released the previous day concerning internal updates on
oil prices. He explained current futures market prices
indicated an additional $281 million in revenue for FY 22
and an additional $467 million in FY 23. He explained that
everything in the presentation was based on the official
fall forecast released in December but based on current oil
prices there could be extra money for FY 22 and FY 23.
Co-Chair Stedman commented that the committee would have to
consider how to lock in an oil price to work with when
drafting the budget. He said that historically the fall
forecast would be used and then adjust accordingly to the
spring forecast. He thought some policy work needed to be
done for the legislature to have an agreed-upon figure to
work with. He thought there could be a risk of different
price numbers being used, which would be chaotic.
9:06:53 AM
Senator Wielechowski asked whether Mr. Stickel would be
doing updates in the event of large market fluctuations
that could affect the state's investment income.
Mr. Stickel mentioned a projection spreadsheet from the
Alaska Permanent Fund Corporation (APFC) that was updated
monthly. He shared that DOR looked to the UGF revenue and
would send out notifications on a 10 percent variance from
the official forecast.
Co-Chair Stedman clarified that the payout from the
Permanent Fund used 5 percent POMV, with a 5-year lookback,
and would not be affected by any variances. He warned that
other tax revenue could be affected. He understood that if
the variance was less than 10 percent there would be no
update.
Mr. Stickel answered in the affirmative.
Co-Chair Stedman reiterated the importance of having an
agreed upon number.
9:08:27 AM
Mr. Stickel discussed the presentation "Fall 2021 Forecast
Presentation," (copy on file).
Mr. Stickel looked at slide 2, "Agenda":
1. Forecast Background, Economic Indicators, and Key
Assumptions
2. Fall 2021 Revenue Forecast
?Total State Revenue
?Unrestricted Revenue
3. Petroleum Forecast Assumptions Detail
?Oil Price
?Oil Production
?Oil and Gas Lease Expenditures
?Oil and Gas Transportation Costs
?Oil and Gas Credits
9:09:10 AM
Mr. Stickel showed slide 3, "Forecast Background and Key
Assumptions."
Mr. Stickel referenced slide 4, " Background: Fall Revenue
Forecast":
1. Historical, current, and estimated future state
revenue
2. Discussion and information about major revenue
sources
3. Prepared in accordance with AS 37.07.060 (b)(4),
and supports long term plan under AS 37.07.020
4. Official revenue forecast used for Governor's
budget proposal; updated in spring
5. Located at tax.alaska.gov
Mr. Stickel noted that the fall revenue forecast had been
published in December 2021 and was the departments annual
publication containing historical and forecasted revenues.
Data had been gathered from the tax accounting system, the
state accounting system, and numerous state agencies. He
shared those various models had been maintained within the
economic research group for all the states major revenue
sources over the 10-year time horizon of the forecast. The
forecast document fulfilled two statutory obligations; that
the governor provides a revenue forecast for the current
and coming fiscal year, and the statutory requirement for a
long-term fiscal plan document out of the Office of
Management and Budget (OMB). The fall forecast is used to
underlie the initial budget proposal and was followed up by
a spring forecast released in early April.
9:10:43 AM
Mr. Stickel turned to slide 5, "Key Alaska Economic
Indicators":
1. Real State GDP: $50.2 billion in Q3 2021
(annualized)
?Down 0.6% from Q2 2021, up 0.2% from Q3 2020
2. Employment: 304,100 in November 2021
?Up 7,200 (2.4%) compared to November 2020
3. Wages & Salaries: $4.8 billion in Q2 2021
?Up 10.8% from Q1 2021, up 6.6% from Q2 2020
4. Alaska Bankruptcies: 214 for calendar year 2021,
313 for calendar year 2020
?Compared to 400 for calendar year 2019
5. Foreclosures: 78 in Q1 2021, 395 for calendar year
2020
?Compared to 147 in Q1 2020 and 729 for calendar
year 2019
6. Housing Starts: January -November: 1,496 in 2021
vs 1,335 in the same period for 2020
?1,493 for calendar year 2020 vs 1,689 for
calendar year 2019
7. Delinquency Rates: 0.6% for mortgages 30-89 days
delinquent, 0.4% for mortgages 90+ days delinquent at
end of Q2 2021
?Compared to 0.8% for mortgages 39-89 days
delinquent, 0.6% for mortgages 90+ days
delinquent for the same period in 2020
th
Mr. Stickel said that 4 quarter numbers for the GDP would
be released in March. He said that compared to 2020, the
state was up by approximately 7 thousand jobs and compared
to the lows of the Covid recession the state was up by 26
thousand jobs; the state was still down by 51 thousand jobs
from the pre-Covid highs in July 2019. He mentioned that
the biggest job losses were in the areas of hospitality,
tourism, and oil and gas. He related that wages and
salaries in the state had somewhat recovered from the Covid
lows. He discussed federal help with housing during the
COVID-19 pandemic. He said that programs with private
entities and the government had helped to keep people in
their homes.
9:14:00 AM
Senator von Imhof asked about a table to represent the
seven items on slide 5, to better observe trends. She
pondered the mortgage delinquency rate and wondered how
much funding the Alaska Housing Finance Corporation (AHFC)
had remaining from federal pandemic relief funds.
Co-Chair Stedman asked Mr. Stickel to bring the information
to committee, and informed that AHFC would be before the
committee and could speak to the remaining federal funds
for mortgage relief.
9:15:21 AM
Mr. Stickel considered slide 6, "Fall Forecast
Assumptions":
The economic impacts of COVID-19 are uncertain; DOR
has developed a plausible scenario to forecast these
impacts.
Key Assumptions:
o Investments: Stable growth in investment
markets, 5.86% for FY 2022 and 6.20% for FY
2023+.
o Federal: The forecast incorporates stimulus
funding as of 11/30/2021, partially reflecting
IIJA funding.
o Petroleum: Alaska North Slope oil price of
$75.72 per barrel for FY 2022 and $71.00 per
barrel for FY 2023.
o Non-Petroleum: No explicit COVID-related
adjustments for FY 2022 forward, except tourism;
full recovery assumed by 2023.
Mr. Stickel noted that the department had been able to
incorporate preliminary numbers related to forthcoming
infrastructure funding and would review prior to the spring
revenue forecast. He said that the futures market projected
$68/bbl.. for FY 31. He stated that most economic activity
had returned to pre-pandemic numbers except for the tourist
industry.
9:17:44 AM
Co-Chair Stedman asked about the futures price assumption.
Mr. Stickel replied that the quoted number was $68/bbl. in
2031, which was at the end of the ten-year horizon. An
upcoming slide would address oil price specifically.
Co-Chair Stedman asked about looking back at the futures
price yearly for the last eleven years. He did not believe
that todays price could have been predicted 11 years ago.
Mr. Stickel agreed there was a lot of uncertainty around
oil prices. He shared that the department had done analysis
and found that the futures market tended to provide the
lowest error rate.
Co-Chair Stedman expressed concerned that some could
consider there was more certainty in the price than there
actually was.
9:19:34 AM
Senator Olson asked to go back to slide 5. He considered
the foreclosure rate in item 5 and wondered whether there
was a difference between rural and urban Alaska.
Mr. Stickel was sure there was a difference and offered to
provide more detail.
9:20:18 AM
Senator von Imhof asked about POMV projections being
updated monthly. She worried about inflation eroding
returns. She asked whether Mr. Stickel did anything
internally to look at assumption for the next 36 moths
assuming the inflation did not abate to pre-pandemic
levels.
Mr. Stickel stated that the department did not make
significant changes to the projections that came from the
APFC. He noted that the APFC contribution had stability due
to the POMV transfer.
Senator von Imhof thought inflation was hard to track. She
assumed that the department was discussing how inflation
infiltrated their assumptions.
9:22:21 AM
Co-Chair Bishop asked about inflation and what number Mr.
Stickel was using for inflation.
Mr. Stickel noted that the inflation assumption used by DOR
was 2.5 percent annually per Callan and Associates. He said
that there had been talk surrounding whether the inflation
was transitory, and the issue was being closely followed.
Co-Chair Bishop appreciated that DOR was watching the
number for possible readjustment.
Co-Chair Stedman thought current inflation numbers would be
larger than 2.5 percent. He commented that an inflation
cycle of 5, 6, 7 percent the entire return would go into
inflation proofing the permanent fund.
9:24:03 AM
Senator Wielechowski asked what state budgetary costs would
increase if the inflation number was significantly higher.
Mr. Stickel deferred the question OMB. He thought there
would be some items and revenue sources that would be
impacted more than others.
Co-Chair Stedman thought the committee could ask the OMB
director to detail what was indexed to inflation and what
in the budget that was linked to inflation. This would help
the committee craft a budget in preparation for future
inflation numbers.
9:25:45 AM
Co-Chair Bishop commented that the more the state
considered potentially rising inflation the smaller the
supplemental ask in FY 24.
9:26:03 AM
Mr. Stickel displayed slide 7, "Relative Contributions to
Total State Revenue: FY 2021," which showed graphical
representation of relative importance in the sources of
total state revenue:
Total State Revenue: $29.8 Billion
Investment Earnings 65.7 percent
Federal Revenue 25.4 percent
Petroleum 5.3 percent
Other Revenues 2.7 percent
Non-petroleum Corporate Income 0.4 percent
Fisheries 0.3 percent
Tourism 0.1 percent
Mining 0.1 percent
Mr. Stickel noted that there had been two windfalls in FY
21, including an exceptionally high return on the permanent
fund and the revenue from the various federal stimulus
packages.
Co-Chair Stedman noted that the investment earnings revenue
was mainly the earnings of the permanent fund and was not
the 5 percent payout of the fund, which was the revenue
used for the budget.
Mr. Stickel agreed and noted that the permanent fund
returned 29.7 percent for FY 21, and then the POMV was
based on 5.25 percent of the five-year average. He said
there was a significant amount of additional earnings that
amounted to approximately $16 billion.
Co-Chair Stedman asked Mr. Stickel to rework the chart to
include the 5 percent coming into the treasury for
expenditures considered by the committee. He thought it
would provide clarity as to where the revenue was coming
from that would be included in the yearly budget.
Mr. Stickel offered to restate the slide to just show the
UGF revenue to the state.
Co-Chair Stedman thought that would be sufficient.
9:28:58 AM
Senator Wielechowski asked about the return for the Alaska
Retirement Management (ARM) Board. He assumed the ARM board
returns were not included on the slide.
Mr. Stickel noted that the ARM Board returns were not
considered state revenue.
Co-Chair Stedman asked Mr. Stickel to elaborate on the ARM
board revenue.
Mr. Stickel explained that the ARM Board managed retirement
funds for state and other public employees. He said that
returns on the retirement funds were not considered to be
state revenue for the purposes of departments revenue
source document.
Co-Chair Stedman interjected that there would be a chance
for the committee to look deeper into the ARM board returns
and compare them with those of the permanent fund.
9:30:25 AM
Mr. Stickel displayed slide 8, "Fall 2021 Revenue
Forecast."
Mr. Stickel looked at slide 9, "Total Revenue Forecast: FY
2021 to FY 2023 Totals and Percent Change from FY 2021,"
which showed a table that represented another view of total
state revenue from all revenue sources. He relayed that the
state revenue came from four primary sources including
investments, federal receipts, petroleum revenue, and non-
petroleum revenue. He furthered that in addition to those
there were four budget restriction categories: unrestricted
general fund revenues, designated general funds, other
restricted revenue, and federal revenue. He explained how
funds were siloed into restricted and unrestricted revenue
in DOR budget documents. He stated that in FY 21 the state
received $29,764.6 in total state revenue the highest in
the history of the state. Forecasted totals for FY 22 and
FY 23 was $13,370.4 and $14,598.3, respectively. The far-
right column offered the percentage change in FY 20 to FY
23 and FY 22 to FY 23.
Co-Chair Stedman asked for more detail on restricted
revenues. He wondered why it was dropping from $16 billion
in FY 21 to $1.4 billion in FY 22.
Mr. Stickel informed that the largest source of investment
revenue was the earnings on the permanent fund. He pointed
out that the revenue was shown in two places, the POMV
transfer under UGF, and earnings on the Permanent Fund
above the POMV transfer, considered restricted revenue. He
related that for FY 21, when the fund returned almost 30
percent, the transfer to the UGF was $3.1 billion and the
additional earnings were considered restricted revenue,
which was the bulk of the $16.3 billion of other restricted
investment revenue. Going forward the forecast showed more
modest earnings, and earnings above and beyond the transfer
were projected to be less. He noted the decline from $16.3
billion in FY 21, to $1.4 billion in FY 22, which had
entirely to do with the outstanding returns witnessed in
2021.
9:35:17 AM
Co-Chair Stedman thought markets tended to regress to the
mean return, and 30 percent was not the historical average
for the fund. He though the state could expect the number
to be substantially zero, or the number could potentially
venture into the negative.
Mr. Stickel agreed. He added that if the return was shown
to be less than the POMV transfer, the number would veer
into the negative. He said that this had happened in the
past. He stated that the historical return on the permanent
fund had been approximately 9 percent annually and
projections of a 6.2 percent, long-term annual return
incorporated the assumption that returns would be less than
they had been historically going forward.
Co-Chair Stedman informed that the committee would soon
have updates from APFC, and the fund consultants had
projected lower than average long-term returns over the
next decade and had cautioned about the very high price of
the asset classes. He thought that the information
presented today could confuse some people in the building,
and he thought any presentations should explain the
situation in detail.
9:37:47 AM
Senator Wielechowski was confused by the investment
revenue. He questioned the numbers on the slide pertaining
to the percentage of return on the permanent fund.
Co-Chair Stedman explained that the forecasted numbers for
FY 22 and FY 23 needed to be added together.
Senator Wielechowski replied that he had taken the $1.4
billion and divided it by the value of the permanent fund,
which resulted in a 1.6 percent return.
Mr. Stickel stated that there were other small investment
pieces included in the other restricted revenue, above and
beyond the permanent fund. He explained that the value of
the permanent fund, the POMV draw, and the money in other
categories were all part of the equation. He offered to
provide more detail on how the numbers were derived.
Co-Chair Stedman understood Senator Wielechowski's question
and asked for more detail on the figures. He thought
further information from Callan would be helpful.
9:39:38 AM
Senator von Imhof asked to discuss DGF. She recalled Mr.
Stickel had mentioned there was DGF that went into the
"school fund." She which school fund he was referencing.
Mr. Stickel noted that there were at least two school-
related funds. There was a school fund that received a
constitutionally dedicated portion of royalties and the
Public-School Trust fund received revenue from various
sources.
Senator von Imhof asked whether the Higher Education fund
was involved.
Mr. Stickel answered "no."
Senator von Imhof asked about designated funds. She thought
in the past many designated funds were used to fund
different programs each year. She understood that recently,
with issues surrounding the reverse sweep, the DGF went
into the general fund. She asked how the DGF revenue
interrelated with the general fund with the administrations
new approach to the reverse sweep.
Mr. Stickel explained that the revenue forecast showed the
revenue to each of the designated funds and did not address
the question of the reverse sweep. He thought the question
was best addressed by OMB.
Senator von Imhof thought that they were not designated
funds if they ended up in the general fund as unrestricted
funds.
Mr. Stickel noted that any of the DGF were customarily
appropriated for a specific purpose were technically
available for the legislature to appropriate in any way.
Co-Chair Stedman thought Senator von Imhof had posed a good
question about the reverse sweep. He explained that the
administrations refusal to honor the reverse sweep was a
new financial exercise that the committee would need
resources to navigate.
9:42:54 AM
Senator Wilson asked for further explanation on federal
receipts. He mentioned American Rescue Plan Act (ARPA)
funds, and Coronavirus Response and Relief Supplemental
Appropriations Act (CRRSAA) funds.
Mr. Stickel stated that the department had worked with OMB
to work through the federal receipt numbers. He shared that
FY 23 had the last of the Covid-19 related funds. There was
an assumption that federal infrastructure receipts would be
received over a 5-year time horizon. He stated that the 10-
year revenue forecast showed a drop off in the forecast in
the later 2020s. He thought OMB could provide additional
detail.
Co-Chair Stedman understood 40 percent of the federal funds
would be through competitive grants.
Mr. Stickel clarified that in preparing the forecast
conservatively, the department had not included the reverse
sweep, which was why DGF funds were shown as designated
revenue. He noted that return assumption and balances for
the reserved fund the did not include the reverse sweep.
There was a footnote in the Revenue Sources Book that
addressed the topic.
Co-Chair Stedman stated that the footnote was significant.
9:45:35 AM
Mr. Stickel addressed slide 10, "Unrestricted Revenue
Forecast: FY 2021 to FY 2023 Totals," which showed a table
with the following information:
Revenue Type: Unrestricted General Fund
Investment Revenue Alaska Permanent Fund
History FY 21 - $3,091.5
Forecast FY 22 - $3,069.3
Forecast FY 23 - $3,360.6
Investment Revenue Other Investments
History FY 21 - $29.4
Forecast FY - $13.0
Forecast FY 23 - $18.8
Petroleum Revenue
History FY 21 - $1,217.6
Forecast FY 22 - $2,274.6
Forecast FY 23 - $2,082.3
Non-Petroleum Revenue
History FY 21 - $444.3
Forecast FY 22 - $375.1
Forecast FY 23 - $476.1
Subtotal
FY 21 $4,782.8
FY 22 $5,731.9
FY 23 $5,937.7
9:46:54 AM
Mr. Stickel advanced to slide 11, "Unrestricted Revenue
Forecast: FY 2021 and Changes to Two-Year Outlook," which
showed a table reflecting the historical and projected
numbers for Alaska North Slope Oil, Permanent Fund
Transfer, Unrestricted Revenue excluding Permanent Fund
Transfer, and Unrestricted Revenue - Includeing Permanent
Fund Transfer. He cited that oil prices had increased by
$14.72/bbl. for FY 22 to $17.72/bbl., $9.00/bbl. for FY 23
to $71.00/bbl.. He noted that the rise had to do with the
recovery and stabilization of the markets as the economy
recovered from the Covid-19 recession. He cited no change
to the FY 22 forecast for the Permanent Fund transfer,
which was calculated on the first 5 of the previous 6
fiscal years. He said that based on strong returns, the
forecast for the transfer in FY 23 had increased by $153.6.
Mr. Stickel addressed total unrestricted revenue for FY 21,
which was $119.3 above the forecasted number. The numbers
for FY 22 and FY 23 had increase by $1,000.4 and $656.1,
respectively. He noted that the oil production forecast for
FY 21 changed by $119.3, FY 22 by $1,000.4, and FY 23 by
$809.7. He related that current oil markets suggested that
there could be more money above and beyond what was
projected on the slide. He noted that the oil production
forecast was not reflected on the slide. He revealed that
production had increased in FY 22 by 27,000 barrels per
day, and 24,000 barrels per day in FY 23.
Mr. Stickel looked at slide 12, "Unrestricted Investment
Revenue: FY 2021 to FY 2023 Totals," which provided a
table showing more detail on the sources of unrestricted
investment revenue. The permanent fund transfer was
expected to account for between half and two-thirds of
unrestricted revenue every year for the 10-year revenue
forecast. He stressed the importance of the fund as an
asset and a source of revenue for the state. He said that
the fund transfers were just over approximately $3 million
and included a small amount of additional unrestricted
investment revenue that was primarily earnings on cash
balances in the general fund.
9:50:29 AM
Mr. Stickel showed slide 13, "Unrestricted Investment
Revenue: Percent of Market Value (POMV) Transfer
Forecast":
?Permanent Fund total return for FY 2021 of 29.7%
?The statutory POMV rate changed to 5% beginning FY
2022.
?For FY 2019 FY 2021 this rate was 5.25%.
?Forecast assumes Permanent Fund's long-term total
return expectation of 6.20% for FY 2023+; 5.86% for FY
2022.
?Differing Permanent Fund returns and petroleum
deposits could significantly alter actual POMV
amounts.
Mr. Stickel relayed that the transfer from the permanent
fund to the general fund over the next ten years was
estimated to be over $3 billion per year, increasing to
$4.6 billion by FY 31. He reiterated the stability of the
fund as a revenue source for the state.
Senator von Imhof asked if the projection included a $3
billion ad hoc draw.
Mr. Stickel replied that the baseline forecast did not
consider any additional draws beyond the statutory
transfer.
Senator von Imhof asked whether a stress test could be done
that overlayed actual past returns with projected future
returns.
Mr. Stickel replied in the affirmative. He added that a
fiscal model had been made public that considered different
permanent fund return values, including an option to
overlay historical returns in the model.
9:51:36 AM
Mr. Stickel referenced slide 14, "Unrestricted Petroleum
Revenue: FY 2021 to FY 2023 Totals," which showed a table
of the four main sources of petroleum revenue: Petroleum
Property Tax, Petroleum Corporate Income Tax, and
Royalties. He said the property tax was levied by the
state, applied to all oil and gas property in the state,
and was a stable revenue source, generating approximately
$100 million yearly. He added that there was an additional
$400 million generated by municipalities each year.
Mr. Stickel addressed corporate income tax, Which was a tax
on the profits of certain oil and gas companies doing
business in the state. He shared that the Covid-19
recession had been challenging for the oil industry and
that the state had paid out $19 million in refunds for FY
21. He relayed that with the improvement in the oil
industry fundamentals the forecast for positive revenue for
FY 22 was $145 million and $240 million in FY 23. There was
a provision of the Coronavirus Aid, Relief, and Economic
Security (CARES) Act that allowed for corporations to
carryback net operating losses from tax years 2018 through
2020. They could carry those back up to five years and
receive refunds for previous taxes paid; the provision
applied to certain companies that saw losses in the 2020
Covid-19 recession. He said that the net impact of the
provision was $2.4 million in FY 21 and $50 million in FY
22.
9:54:04 AM
Mr. Stickel looked at production tax, which consisted of
the severance tax on petroleum and on the North Slope
included a net profit tax with a gross minimum tax floor.
Given the current price levels, it was expected that most
companies would be paying above the minimum tax through the
time horizon of the forecast. He pointed out to the
committee that the forecasted production tax for FY 22 was
approximately $1 billion and $741 million in FY 23.
Mr. Stickel spoke to royalties, which were the largest
single source of revenue forecasted to bring in
approximately $1 billion over the next two fiscal years. He
added that additional constitutionally mandated deposits to
the permanent fund and the school fund were not reflected
on the slide.
9:55:09 AM
Senator Wielechowski asked what the impact would be to
petroleum corporate income tax if Hilcorp were incorporated
as a C Corp as opposed to an S Corp.
Mr. Stickel could not speak to specific companies due to
confidentiality rules. He stressed that not all companies
doing business in the state were subject to the corporate
income tax. He cited that about 70 percent came from
companies that were subject to the tax. If the state were
to extend the corporate income tax to the additional
companies it could potentially generate $80 million to $100
million in additional revenue at the forecast price.
Senator Wielechowski understood that applying the tax to
companies that operated int eh state and currently did not
pay the corporate income tax could generate $80 million to
$100 million in FY 22 and FY 23.
Mr. Stickel replied in the affirmative.
9:56:16 AM
Senator Wilson asked about carryback provisions and whether
the state had challenged the issue in court.
Mr. Stickel was not sure about challenging the provisions,
but he knew other states had different ways of conforming
to federal tax code. He said that some states had opted out
of the provisions but that the state had not attempted to
do so.
Senator Wilson asked whether the idea had been considered
to protect state revenue.
Mr. Stickel stated that under current law, companies were
not allowed to carryback losses. The CARES Act provisions
were specific to 2018, 2019, and 2020. He said that if the
federal government were to change the law again in the
future, the state would automatically adopt the federal
law, but could opt out through legislation.
Senator Wilson asked whether DOR would put in a piece of
legislation to make the change.
Mr. Stickel thought that the deputy commissioner could
speak to policy issues.
9:58:33 AM
Co-Chair Stedman noted that the deputy commissioner would
be made available to respond to the question.
9:59:03 AM
Senator Wielechowski pointed out that the administration
had testified in committee that it planned to introducing
legislation pertaining to the issue.
Co-Chair Stedman said that the question would be asked of
the deputy commissioner and OMB. He noted that staff could
research past committee minutes for the content of past
conversations on the issue in committee. He said that the
35 percent severance tax rate had been set to match the
federal corporate tax rate. He noted that the federal rate
had been lowered into the 20s and that the issue should be
revisited.
10:00:17 AM
Senator Wielechowski asked whether companies compensated
twice for net operating losses, one at the federal level
and again at the state level.
Mr. Stickel requested clarification of the question.
Senator Wielechowski explained that corporate income taxes
under the CARES Act, allowed companies to go back and
deduct losses. He wondered whether companies were allowed
to deduct losses on federal taxes and then again on their
state taxes and be doubly compensated.
Mr. Stickel stated he would not call it "double
compensation." He explained that, under CARES, if a company
experienced net income loss in 2018, 2019, or 2020, the
loss could be carried back and applied against income and
taxes paid in a prior year and receive a refund. He added
that it would be as if the loss had occurred earlier in the
process. For federal income tax purposes, a company could
retroactively reduce its federal tax liability. He stated
that state tax liability could be reduced to reflect the
current percentage of tax liability.
10:02:32 AM
Mr. Stickel turned to slide 15, " Unrestricted Non-
Petroleum Revenue: FY 2021 to FY 2023 Totals," which
showed a table with additional detail about UGF revenue.
The largest component was taxes, and typically non-
petroleum corporate income tax generated the most revenue
at $102.8 million in FY 21. He furthered the $15 million
was forecasted in FY 22, which reflected net operating loss
related refunds under the CARES act on the non-petroleum
industries. He noted that there were several industries
that had been significantly impacted by the recession. The
tax was projected to increase to $120 million in FY 23. The
net impact of carry-back refunds was a 6.7 million
reduction on FY 21, and $76.7 million in FY 22, and were
incorporated into the numbers on the slide. The state had
received and paid some of the refunds, which were currently
coming to fruition. He pointed out that the Mining License
Tax had brought in $9 million in FY 21, which was expected
to increase to $48.9 million in FY 22. He said that the
increase was related to low collection if FY 21 due to the
impact of Covid-19 and the recession in the mining
industry.
Mr. Stickel continued to address slide 15. He mentioned the
Refined Fuel Surcharge, which generated $6.4 million in FY
21, then was shown as zero for FY 22 and FY 23. He shared
that the omission of the tax in FY 22 and FY 23 was due to
a change made to conform with budget documents presented by
OMB and LFD and would now be shown as designated funds. He
the department forecasted the total non-petroleum revenue
for FY 22 and FY 23 at $375.1 million and $476.1 million,
respectively.
10:05:23 AM
Senator Wilson asked about the Alaska's corporate income
tax structure as compared to other states.
Mr. Stickel explained that a three-factor apportionment
methodology was used for corporate income tax, which
included the share of property, payroll, and sales in
Alaska, compared to the rest of the country. The three
factors were averaged to determine the taxable income. He
said this was like other states and there were many
variations on the apportionment factors, and different ways
states determined the factors. There were several states
that had gone in other directions entirely such as a gross
receipts tax. He said that broadly speaking, the states
methodology was not unusual.
Co-Chair Stedman referenced Senator Wielechowski's earlier
question and stated that not only did the state have a look
back provision on petroleum corporate income tax, but all
corporate income tax; to determine the full impact, the
taxes were all added together.
10:07:25 AM
Senator Olson asked about the reason for the non-petroleum
corporate income tax falling in FY 22.
Mr. Stickel relayed that the $15 million forecast for FY 22
incorporated 476.7 million of estimated refunds due to
CARES. He added that it also incorporated lower historical
levels of payments as some companies were still recovering
from the recession.
10:08:13 AM
Senator Wielechowski was curious about new mines that were
expected to be listened to cause the forecasted increase in
non-petroleum corporate income tax in FY 22 and FY 23.
Mr. Stickel considered the mining license tax and noted
that the state was not incorporating any new, large mines.
He said that the difference between the numbers in FY 21,
compared to FY 22 and FY 23, was that FY 21 collections had
been abnormally low. Several of the mines had experienced
challenges with the COVID-19 pandemic, which had negatively
affected profits. He stated that with the recovery in the
economy, and with higher mineral prices, the collections
were expected to bounce back to historical levels.
10:09:12 AM
Mr. Stickel showed slide 16, "Petroleum Forecast
Assumptions Detail."
Mr. Stickel displayed slide 17, "Petroleum Detail: Changes
to Long-Term Price Forecast," which showed a line graph
of the fall 2021 oil price forecast through 2030 compared
to the spring forecast. He relayed that the department had
made a change to its oil price forecast methodology in
fall. The new methodology looked at the futures market for
the next two years and assumed that prices would increase
with inflation thereafter. He drew attention to the red
dotted line, which showed a steady 2 percent annual
increase to the forecast. Beginning with the fall forecast,
DNR used the futures market for as many years out as
futures market data was available. The change was made to
provide a more accurate and reasonable projection of oil
prices. He shared that the change had been made with the
hope to focus on policy decisions surrounding whether the
oil price forecast was reasonable. The Economic Research
Group had found that the more years of the futures market
incorporated into the forecast, the less possibility of
error in the oil price forecast. There was always
uncertainty around oil price forecasts, but it was found
that the more futures market data used, the better the
forecast. He thought the analysis had been compelling, and
the department had collaborated with OMB and LFD, both of
which had agreed it was a reasonable change.
Co-Chair Stedman asked for the addition of a line on slide
17 representing the futures price back to 2018.
10:12:14 AM
Co-Chair Stedman highlighted slide 18, " Petroleum Detail:
Nominal Brent Forecasts Comparison as of January 11, 2022,"
which showed a line graph comparing how DNR's forecast
compares to others over the next few years. He said that
the Brent crude oil number was used for comparison because
it was a global benchmark crude, had widely available
information and forecasts, and was a competitor in the
market with ANS crude. He relayed that given the recent
run-up in oil prices over the previous month, the forecast
was on the low end for a couple of years and fell in line
with other sources of revenue forecasts in future years.
10:13:19 AM
Mr. Stickel looked at slide 19, "Petroleum Detail: UGF
Relative to Price per Barrel (without POMV): FY 2023,"
which showed a graph showing how unrestricted revenue for
FY 23 would change with different oil prices. He noted that
the baseline forecast was $71/bbl.. for FY 23, and $2.6
billion of UGF revenue, excluding the permanent fund
transfer. Once above the oil price forecast, each
additional dollar of oil price led to approximately $65
million in increased UGF revenue for FY 23.
Co-Chair Stedman thought the committee would ask for future
presentations to include the "working price", he did not
think that any of the oil companies had testified to the
prediction of high oil prices and that they generally
focused on the lower side of prices when budgeting and
making investment decisions. He thought that the committee
should look at the structural deficit under different price
scenarios.
Mr. Stickel stated that in the department's discussions
with oil companies, the $50/bbl.. to $60/bbl.. was
generally used when evaluating project economic. He
stressed that while the hope was for high prices would
continue, investment decisions were made using conservative
numbers. He pointed to Appendix A1 on page 91 of the
revenue sources book:
[https://tax.alaska.gov/programs/programs/reports/RSB.aspx?
Year=2021]
Mr. Stickel relayed that the table showed what the
unrestricted revenue for FY 23, FY 24, and FY 25 would be
at a range of prices from $20/bbl.. up to $120/bbl.. He
said he would be happy to provide additional information.
Co-Chair Stedman commented that it was nice to see a full
range of prices.
10:16:20 AM
Mr. Stickel addressed slide 20, "Petroleum Detail: North
Slope Petroleum Production Forecast," which showed a line
graph showing slight increases to production. The graph
assumed that drilling would resume in existing fields, with
the expectation of new fields coming on. He said that the
official production forecast was one scenario form a wide
range of potential outcomes and depending on how new
developments produced, there was a wide range of
possibilities. He noted that fairly stable oil production
was forecasted.
Co-Chair Stedman commented that he had requested bugle
charts for numerous presentations to illustrate the risk
exposure between high and low prices. He appreciated the
slide and commented that it was easy to discern risk
exposure over different volumes and prices.
10:18:14 AM
Mr. Stickel advanced to slide 21, "Petroleum Detail:
Changes to North Slope Petroleum Production Forecast,"
which showed a line graph depicting the fall forecast for
ANS oil production compared to the spring forecast. He
cited that the forecast had increased for FY 22 and FY 23
due to increased drilling and activity in existing fields.
The graph showed a slight decrease in the forecast in the
out years due to uncertainties surrounding new
developments.
10:19:09 AM
Mr. Stickel looked at slide 22, "Petroleum Detail: North
Slope Allowable Lease Expenditures," which showed a line
graph overlaying a bar graph showing how allowable lease
expenditures had changed over the past decade, as well as a
10-year forecast and information pertaining to average oil
and gas industry employment. The graph showed a strong
correlation between company spending and employment. The
costs for capital and operating expenditures were part of
the production tax calculation, were deducted as such, and
were and an important measure of investment by companies.
He shared that North Slope capital expenditures for FY 21
were $1.5 billion and operating expenditures were $2.4
billion; the two expenditures added together represented a
decrease of $2.7 billion, year over year, in oil industry
investment in the state. The department forecasted a
rebound in FY 22 and FY 23, as companies invested in new
developments and resumed drilling in major fields. He said
that stabilization of capital expenditures was anticipated
at approximately $2 billion per year. He expected that cuts
made over the last year in operating expenditures would be
permanent as companies had discover how to operate more
efficiently. He noted that there was an increase in the
forecast as new companies came online later in the
forecasted period.
10:21:07 AM
Senator Wielechowski asked whether the permanent operating
cuts included jobs and wondered whether there was a
projection for the number of jobs in the oil field going
forward.
Mr. Stickel thought the Department of Labor and Workforce
Development produced employment forecasts. He reiterated
the strong correlation between company spending and jobs.
He thought it would be reasonable to expect and increase in
jobs going forward.
Co-Chair Stedman said that information on the matter would
be brough before the committee.
Senator Wielechowski commented that the state cut oil taxes
in 2013 and had an oil tax initiative and referendum in
2014, changes which involved the expectation of more jobs,
more investment, more revenue to the state, a growing
permanent fund dividend, and 1 billion barrels of oil per
day. He felt that none of those things had come to
fruition. In 2020, there was another initiative that was
supposed to save jobs and the permanent fund dividend,
which resulted in more job losses and the permanent fund
dividend cut by two-thirds. He thought it was important
that there should be some accountability for the lack of
positive results to the state based on the oil tax
structure.
10:23:26 AM
Senator von Imhof noted that the graph on slide 22 started
in 2012, and previous graphs began with 2018. She thought
it would be helpful go back to 2012 in the previous graphs.
She thought it was important to note that there was a lot
of factors that affected capital investment decisions.
Co-Chair Stedman thought that the numbers could go back as
far as 2008. He thought it would be nice to have the slide
replicated with the non-deductible figures above the
capital and operating expenditures. He thought there was
confusion over the cost surrounding property tax and
deductible and non-deductible expenditures. He recognized
that non-deductible numbers would be smaller than the
deductible but felt that the figure was significant in the
overall numerics. He asked the x-axis of the graph on slide
22 include the actual numbers for clarity.
10:26:42 AM
Co-Chair Bishop commented on the employment numbers, and
though the subject was worthy of committee discussion with
the Department of Labor and Workforce Development.
Co-Chair Stedman agreed.
10:27:40 AM
Mr. Stickel spoke to slide 23, "Petroleum Detail: North
Slope Transportation Costs," which showed a bar graph with
a similar history and forecast for transportation costs. He
noted that the costs were also known as net-back costs and
were important because they reduced the value of the oil
that was subject to both tax and royalty. He stated that
the primary costs of transportation were the Trans-Alaskan
Pipeline Tariff and the marine transportation costs. There
were several other minor costs including, feeder pipeline
tariffs and quality bank adjustments. The average
transportation costs for North Slope oil were estimated at
$9.19/bbl. for FY 21, $9.70/bbl. for FY 22, and $9.09/bbl.
in FY 23. The forecast showed expected transportation costs
of under $10 per barrel for the next decade. He related
that any higher costs were expected to be offset by stable
and increasing oil production.
10:28:59 AM
Mr. Stickel referenced slide 24, "Petroleum Detail: Tax
Credits for Purchase Detail," which showed a bar graph.
Illustrating tax credits for purchase detail. He explained
that prior to 2016, there were various credits in statute
which would be applied against liability or turned into
credit certificate that the state could then purchase at
face value. He shared that in 2016 and 2017 the legislature
put in place sunset provisions for the tax credits and all
tax credits available for state purchase had been phased
out. Companies were not earning new credits available for
state purchase but there was an outstanding balance of
approximately $587 million in FY22 for tax credit
certificates for activity performed prior to the sunsets.
He noted that there was statutory formula which suggested
an annual appropriation for purchase of those tax credits,
based on 10 or 15 percent on the estimated production tax
levied before subtracting tax credits. Leading up to 2016,
the legislature funded the full amount of eligible tax
credits for purchase every year, 2016 was the first year
that less than the full amount outstanding was purchased.
He continued that FY 20 and FY 21 were the first years that
no appropriation was made for purchase of the tax credits.
In FY 22, a total of $54 million was appropriated for tax
credit purposes. The chart showed what the buy down would
look like if the statutory appropriation was made for FY 23
and beyond. He said that the FY 23 statutory appropriation
was estimated at $199 million; if that appropriation was
made, and the statutory appropriation each year after that,
the full balance of outstanding tax credits would be paid
off by FY 26.
Co-Chair Stedman noted that the issue, along with budget
cycles and fund sources, would be discussed at the table in
the future. He directed committee attention to the fall
2021 revenue sources book and asked what credits the state
would have to deal with in 2023. He asked for Mr. Stickel
to speak to Cook Inlet. He referenced chapter 8 of the
revenue sources book.
Mr. Stickel noted that table 8-4 of the revenue sources
book could be found on pages 73 and 74 of the pdf. version
of the book. (Copy on file.)
10:32:36 AM
Mr. Stickel stated that in terms of oil and gas credits
that remained available, there was a small producer credit
that had a phase out in place. He said that the largest
credit was the taxable barrel, which was integral to the
oil and gas production tax system and was the primary
remaining credit.
Co-Chair Stedman cited page 75 of the sources book and
requested clarification on the $127 million listed for
qualified capital expenditures. He asked Mr. Stickel to
continue down the list of expenditures for FY 23 as laid on
in the table.
10:33:40 AM
Mr. Stickel reiterated he was looking at Table 8-4 on pages
74 and 75 of the 2021 fall revenue sources book. The top
half of the table looked at credits purchased by the state
and reflected all the outstanding tax credits that were
earned back when companies could turn activity into credits
that could be purchased by the state. He shared that the
table reflected what credits would be purchased with the
$199 million statutory appropriation. He noted the $127
million in FY 23 for various capital expenditures and carry
forward credits for North Slope activity. He reiterated
that those credits had been earned years ago. He relayed
that the same break out was reflected on the slide for
various tax credits connected to the $199 million
appropriation.
Mr. Stickel pointed to the bottom half of the table, which
showed credits used against tax liability. He related that
these current year credits were based on current activity,
the largest of which was the per barrel credit amounting to
approximately $1.2 billion in FY 23. He offered to provide
more detail in the future on the tax system. He spoke to
minor amounts for small producer credits, which were
estimated at approximately $1 million for and $3 million
for non-ANS. The credit had a phase out provision in place.
He said that the expectation for FY 23 was $1.25 million of
credits applies against tax liability and $199 million of
potential state purchase for credits.
Mr. Stickel directed committee attention to line 22,
Carried-Forward Credits Balance and Tax Value of Carried-
Forward Annual Losses, which represented any older tax
credits that were held by companies that were not eligible
for state purchase or had chosen not to request state
purchase. He stated that with the elimination of the
capital expenditure credit, companies that did not have
current production to apply lease expenditures against a
tax calculation, earned a carry forward annual loss, which
was multiplied by the 35 percent statutory tax rate to
estimate the tax value of the carry forward annual losses.
He said that the $785 million on line 22 represented a
potential claim against future tax revenue.
10:37:35 AM
Co-Chair Stedman asked Mr. Stickel to look at the beginning
of the chart that showed the total credits purchased by the
state at $199 million. He wondered how the amount
interacted with the previous slide in the presentation
about oil tax credits for purchase.
Mr. Stickel looked at slide 24 and noted at the end of FY
22 the department estimated $587 million of outstanding tax
credits available for state purchase. He furthered that
calculating in the FY 23 statutory appropriation of $199
million the net result would be $388 million outstanding
at the end of 2023.
Co-Chair Stedman asked whether slide 24 reflected the
numerics of the total credits purchased by the state.
Mr. Stickel replied in the affirmative.
Co-Chair Stedman reminded the public that the expenses
reflected on the slide were a liability that had to be
addressed regardless of personal feelings about the current
tax structure.
10:39:35 AM
Senator Wielechowski observed that the footnote on slide
24:
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 2022
as a result of making no appropriation or only making
statutory appropriation.
Senator Wielechowski pointed out that oil was projected to
be $71/bbl. in 2023. He cited slide 14, which showed the
2023 projected oil and gas production tax to be $741.2
million. He thought that 10 percent of $741.2 million would
be $74 million and not $199 million. He argued that the
state should not be paying out $199 million but $74
million. He cited $785 million in carry forward annual
losses cited in the revenue sources book and wondered where
the figure derived from.
Co-Chair Stedman clarified that there was a per-barrel
credit forecast to be $1.2 billion that would be generated
in FY 23. He furthered that other credits, in the amount of
$199 million, were historically generated by other
companies. He thought it was important to parse the credits
and not to combine them.
Co-Chair Stedman addressed the deductibility of
expenditures in the tax structure as mentioned by Senator
Wielechowski's question. He asked Mr. Stickel to provide
further detail on the accounting process. He expressed
concern for the mounting liability before the state.
10:43:31 AM
Mr. Stickel explained that generally there were two types
of companies doing business on the North Slope. There were
companies with existing production and newer entrants. For
a company that did have current production in revenue,
there was a slope-wide ring fence when calculating their
oil production tax, which allowed them to deduct costs from
the revenue from oil they were producing elsewhere in
calculating their net profits tax. He shared that companies
without current production earned carry-forward lease
expenditures to offset future tax liability. He explained
that the tax value of carried forward annual losses line
in the revenue sources book represented the potential value
of the expenditures that had been made by new entrants into
the future.
10:45:59 AM
Co-Chair Stedman wanted to add that the carryforwards were
not dissimilar to depreciation. He used the analogy of
purchasing real estate, through which it was possible to
deduct expenditures. He stressed that the quicker producers
could recover their cash the more profitable the
investment.
10:50:00 AM
He argued that the deductions of cost had to be allowed to
make the economics work and the question was - how fast the
deduction as allowed and how many years could it be carried
forward. He said that most deductions would be capped. He
discussed the varying ideas at the table about how the
time-value money equation should be handled. He stressed
that the timing of the cashflow would affect the rate of
return.
10:52:02 AM
Senator Wielechowski was concerned about net operating
losses and thought many of the losses were being incurred
on federal lands and fields for which the state would get
zero or very little royalties or production taxes. He
emphasized that the state needed the funds now. He wanted
the people of the state to understand the connection
between the deductible oil tax credits, refundable tax
credits, net operating losses, corporate income tax losses,
and other corporate welfare and the ability to pay a
statutory dividend.
Senator Wielechowski continued his remarks. He thought the
state was giving money away. He thought the reason that //
Co-Chair Stedman thought Senator Wielechowski's point
10:54:28 AM
Co-Chair Stedman wanted to make the point that all oil was
not equal, and depending on the land ownership in the
basin, severance taxes and royalties varied. He said that
when giving incentives it was important to know who owned
the land. He asked Mr. Stickel to give a 2023 breakdown of
field ownership within the basin.
Mr. Stickel agreed to provide the detail for the North
Slope.
Co-Chair Stedman reminded that when setting fiscal
structure and offering stimulus it was important to know
who owned the fields. He wanted to put a finer point on the
funds coming into the state compared with the incentives
the state was giving. He believed that separate ownership
was a legitimate concern.
10:56:54 AM
Senator Olson commented that the issues being discussed had
been discussed at the table for years and thought nothing
had been done about the matter. He thought there was
resistance, particularly in an election year. He suggested
that the committee focus on the big picture.
10:58:14 AM
Senator von Imhof wanted to point out that Senator Olson
and Senator Wielechowski recently mentioned revenue from
fields on federal lands that the state would never receive.
She stressed that much of the revenue in those fields went
directly to Alaskans, bypassing state government.
10:59:12 AM
Mr. Stickel displayed slide 26, "Oil & Gas Production Tax
Audit Status Report."
COLLEEN GLOVER, DIRECTOR, TAX DIVISION, DEPARTMENT OF
REVENUE (via teleconference), noted the new forecast
methodology and clarified that the division would report
both a 10 percent increase and a 10 percent decrease. She
offered to follow up with the committee with more
information regarding corporate income tax or other topics.
Ms. Glover pointed out to the committee that the Oil and
Gas Production Tax program was the only program that had a
6-year statute of limitations for assessments. All other
programs were on a 3-year cycle.
Ms. Glover turned to slide 26, Oil & Gas Production Tax
Audit Update:
?Audit Completion and Catchup Plan:
o 2015 audits complete by 1Q 2022
o 2016-2017 audits complete by 2Q 2022
o 2018-2019 audits complete by 2Q 2023
o 2020 audits complete by 1Q 2024
o Reach and maintain three-year audit cycle by 2Q
2023
?Improvements to Reach Goal
o Automated processes vs manual processes which
was a huge benefit due to teleworking
o Ability for taxpayers to use customer portal
o Effective two-way communications
o Continuous improvement
o Consistent audit practices and documentation
11:02:14 AM
Senator Wilson referenced additional positions requested
for the audit division to help with audits. He thought the
positions had been eliminated. He asked where the
department stood on the additional positions, and whether
the 3-year timeline could be met without them.
Co-Chair Stedman asked Ms. Glover to craft a memo on the
status on the backlog of the tax reviews for collections
and refunds. He asked Ms. Glover to help Mr. Stickel to
break down the carry forward credits for committee
consumption.
Ms. Glover agreed to provide the information.
11:03:37 AM
Senator Wielechowski asked whether Ms. Glover was certain
that the 2015 audit would be completed on time.
Ms. Glover had 100 percent confidence that the audit would
be completed on time.
Co-Chair Stedman thanked the presenters for their time. He
discussed housekeeping.
ADJOURNMENT
11:05:24 AM
The meeting was adjourned at 11:05 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012022 SFIN Fall 2021 Revenue Forecast Presentation 2022.01.20.pdf |
SFIN 1/20/2022 9:00:00 AM |
DOR Fall Revenue Forecast |
| 012022 DOR Response to Senate Finance Presentation 2022.02.06.pdf |
SFIN 1/20/2022 9:00:00 AM |