Legislature(2015 - 2016)HOUSE FINANCE 519
01/26/2016 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Fall 2015 Revenue Forecast by Commissioner Randall Hoffbeck and Chief Economist John Tichotsky | |
| Fy17 Budget Overview: Dept. of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| *+ | HB 256 | TELECONFERENCED | |
| *+ | HB 257 | TELECONFERENCED | |
| *+ | HB 255 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 26, 2016
1:33 p.m.
1:33:54 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 1:33 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Randall Hoffbeck, Commissioner, Department of Revenue; John
Tichotsky, Chief Economist, Tax Division, Department of
Revenue; Dan DeBartolo, Director, Division of
Administrative Services, Department of Revenue.
SUMMARY
HB 256 APPROP: OPERATING BUDGET/LOANS/FUNDS
HB 256 was SCHEDULED but not HEARD.
HB 257 APPROP: MENTAL HEALTH BUDGET
HB 257 was SCHEDULED but not HEARD.
HB 255 BUDGET: CAPITAL
HB 255 was SCHEDULED but not HEARD.
FALL 2015 REVENUE FORECAST BY COMMISSIONER RANDALL HOFFBECK
AND CHIEF ECONOMIST JOHN TICHOTSKY
FY17 BUDGET OVERVIEW: DEPT. OF REVENUE
Co-Chair Thompson reviewed the agenda for the current
meeting. He acknowledged that Representative Gara had
joined the meeting.
^FALL 2015 REVENUE FORECAST BY COMMISSIONER RANDALL
HOFFBECK AND CHIEF ECONOMIST JOHN TICHOTSKY
1:34:35 PM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced the PowerPoint presentation: "Fall 2015 Revenue
Forecast Presentation." He relayed he would be making some
opening statements and turning the presentation over to Dr.
Tichotsky.
Co-Chair Thompson indicated that Representative Gattis and
Co-Chair Neuman had joined members at the table.
Commissioner Hoffbeck began with slide 3: "Structure of
Revenue FY 2013, FY 2014, FY 2015". He mentioned that the
department had never included the chart in its previous
presentations. He pointed out that it showed two things:
unrestricted revenues, and the total value of the pie. He
pointed out that in FY 13 the unrestricted revenues were
about 44 percent of all revenues in the amount of $6.9
billion. By FY 14 the unrestricted revenues had shrunk to
31 percent with a total revenue of $5.4 billion. In FY 15
unrestricted revenues declined to 26 percent or $2.3
billion. Based on discussions with Mr. Tichotsky and
looking at long-term forecasts the new status quo for
unrestricted revenue would fall between the numbers from FY
14 and FY 15 [31 percent to 26 percent] rather than 50
percent of total revenue - the previous status quo
percentage.
Commissioner Hoffbeck turned to slide 5: "Methods: What Do
We Forecast at DOR?":
Mostly Petroleum and Non-petroleum Revenue
· We directly forecast Petroleum Revenue
· The largest component, accounting for 75% of
state unrestricted revenue in FY 2015
· "Petroleum Revenue" includes severance taxes,
royalties, corporate income tax, and all other
revenue from oil companies
· We directly forecast Non-petroleum Revenue
· We use someone else's forecast for Investment Revenue
· We use the Federal Revenue authorized for spending as
the forecast
· It is typically 20%-30% more than actually gets
spent.
· DOR compiles all different revenue streams and
compiles them in the annual Revenue Sources Book
Commissioner Hoffbeck explained that the state was heavily
dependent upon oil revenues within the forecast. He relayed
that non-petroleum revenues included corporate income
taxes, fees, and other taxes. He reported that the
department used Callan Associates to forecast investment
revenue. He relayed that the state spent 20 percent to 30
percent less of authorized federal revenue due to not
completing all eligible projects in any given year.
Co-Chair Neuman wondered if there was an increase of
federal funds coming to the state. Commissioner Hoffbeck
responded that they were about the same.
Co-Chair Neuman commented that there had been efforts made
by the prior administration to be more accurate in its
forecast and wondered about the current administration's
accuracy. He thought the forecast was considerably higher
than the state's actual revenues. He wondered about what
policies the Commissioner had implemented to ensure the
precision of the revenue forecast. Commissioner Hoffbeck
responded that the issue was discussed in the revenue
forecast but opined that it was important to know the
state's total authorization of federal revenue. The
authorizations generally fell into the restricted revenue
category which did not impact what was available for state
spending. He happily offered to present the information in
a different form if the committee wanted him to do so.
Co-Chair Neuman was looking at how the department came up
with its forecast.
1:39:11 PM
Representative Edgmon commented that regarding federal
funds, it was his impression that Alaska's take was
significantly more under the 5-year federal highway bill.
He had also heard in the previous day that money for water
and sewer was greater. He was wondering if the state would
be receiving more federal revenue in the future.
JOHN TICHOTSKY, CHIEF ECONOMIST, TAX DIVISION, DEPARTMENT
OF REVENUE, responded that in terms of forecasted numbers
it had not moved the needle.
Commissioner Hoffbeck turned to slide 6: "Oil Revenue
Forecasting":
Three Factors for Production Tax Revenue Forecast
REVENUE = (Net value * Tax Rate) - Credits taken
against liability
Net value = (Price*Production) - Costs
1. Price
2. Production
3. Costs
1. Capital expenditures
2. Operating expenditures
3. Transportation cost
Commissioner Hoffbeck explained that the three components
that determined how much the state collected in petroleum
property tax was price, production, and cost.
Co-Chair Neuman thought there had been a discussion
previously about net value. He remembered the commissioner
talking about how changes in gross value might make a
difference. He asked him to comment. He did not want to
scare the industry. Commissioner Hoffbeck responded that in
the past Alaska had a gross value tax under the ELF
(Economic Limit Factor) tax system, which came before the
PPT (Petroleum Production Tax) tax structure. If the state
was on a gross tax system the calculations would be
simplified dramatically. However, the state was currently
operating on a net tax system.
Co-Chair Neuman remarked that with a gross tax the
calculations would be simplified because there would not be
a need to go through all of the deductions. He wondered if
ultimately the money the state took in would be the same.
Commissioner Hoffbeck stated that it depended on how a
gross tax was structured. He suggested that it could
certainly be structured so that it would result in a
similar revenue stream. Co-Chair Neuman remarked, "That was
the point I was trying to make."
Representative Kawasaki reported that at an Alaska Oil and
Gas Association (AOGA) lunch he had heard that over the
last 15-year time span that costs for production had risen
90 percent. He wondered, in terms of net value
calculations, if the audits under Alaska's Clear and
Equitable Share (ACES) had been completed. He wondered at
what point the finance committee would get to review them.
Commissioner Hoffbeck responded that the Department of
Revenue (DOR) was currently doing the 2009 audits, which
was the beginning of the ACES audits. He added that the
first audits had to be out by the middle of March.
Representative Guttenberg asked about transportation costs.
He wondered if the court cases concerning the Trans-Alaska
Pipeline System (TAPS) evaluation affected the well head
price. Commissioner Hoffbeck answered that the recent court
case that disallowed some of the strategic reconfiguration
costs was requiring the state to go back in to recalculate
the related audits - part of the reason the audits were
currently delayed. It impacted the amount of deductible
transportation costs.
1:43:25 PM
Representative Guttenberg asked how they were expected to
impact future projections. He suggested moving forward
rather than backwards. He wondered if it was solidifying
the transportation deductions off of the well head
evaluation. Commissioner Hoffbeck answered that he believed
the court case referenced 2009 through 2011. It would
obviously impact the amount of deductible transportation
costs for those years.
Commissioner Hoffbeck advanced to slide 7: "Fall 2015
Highlights":
· Input changes relative to the 2015 Spring Forecast.
· Oil price forecasts have been reduced for all
years in the forecast.
· Long term prices now expected to settle
around $50 - $70 real.
· Capital expenditures forecasts have been reduced
for all years in the forecast.
· Oil production forecasts have been reduced for
all years in the forecast.
· Correspondingly, unrestricted revenues have been
revised downward.
· Revenue impacts largely due to change in oil price
assumptions.
· Lease expenditure (or investment) in the oil fields
expected to decline, which will lead to less expected
"new" production in the future.
· Many projects have been deferred until oil prices
improve.
Commissioner Hoffbeck relayed that long-term meant over 3
years.
Vice-Chair Saddler mentioned that for many years the oil
price and oil revenue forecasts were erroring on the side
of the generous. It was always necessary with the
legislature to calculate less money than was expected to
come in. The previous administration had never felt it
necessary to true-up the past couple of revenue forecasts.
He wondered if any changes had been made to the calculation
method that the commissioner had inherited that would give
the legislature any greater or lesser confidence in the
accuracy of the forecasts.
Commissioner Hoffbeck stated that the method the current
administration used was very similar to what had been used
in the past. In the prior year the administration had done
a true-up (in November or December of 2015). The spring
forecast was adjusted again and the current fall forecast
was changed. Every time the administration had made the
adjustments it seemed pessimistic. However, oil prices had
continued to drive downwards. The administration had a bias
to be on the conservative side, particularly on the
production side. Even with the administration's bias the
state had not been able to keep up with the drop in oil
prices.
Representative Gara mentioned some people had talked about
cutting the small producer tax credits. He wanted to know
how much the state was spending in terms of deduction
allowances. He relayed that there were 2 classes of
existing producers under SB 21; producers of the post 2002
fields who paid a lower tax rate, and the producers of the
pre 2002 fields who paid a higher tax rate. He reported
that the tax rate at $100 per barrel for the big fields was
about 20 percent and the small fields was about 13 percent.
He suggested that the lower tax rate fields and the higher
tax rate fields received a 35 percent deduction for capital
expenditures and a 35 percent deduction for their operating
expenditures. He wanted to know how much the deductions
were costing the state in revenue. He supposed that not
many tax payers received a deduction rate significantly
higher that their tax rate. Nor did they get to deduct
everything in the first year, they usually amortized. He
asked for an estimate from the most recent taxable year
regarding how much the state had paid for the two classes
of fields in terms of capital and operating deductions.
Commissioner Hoffbeck responded that he would provide as
much information as possible without disclosing tax payer
confidential information. Representative Gara conveyed that
an estimate would be fine.
1:48:29 PM
Co-Chair Neuman suggested including the additional
production of oil and gas that it created in revenue.
Representative Gattis thought the question was whether the
incentives produced the results the state was hoping for.
It was really a financial question. She thought both sides
should be presented.
Co-Chair Neuman indicated that a more in-depth look would
occur when examining the Governor's legislation.
Mr. Tichotsky stated that he would be looking at an
overview of the production forecast. In order to produce a
revenue forecast the elements of production, price, and
cost were necessary. He turned to slide 9: "Production
History and Forecast." He noted the long-term trend from
1977. Production was upwards of 2 million barrels of oil
per day early on. Five years into the future from 2016
showed a plateau of about 500 thousand barrels per day and
the natural curve reducing.
Mr. Tichotsky continued to slide 10: "ANS Production
Forecast Comparison." He explained that the graph showed
the revisions of the forecast between spring 2015 and fall
2015 strictly driven by price. He highlighted that the
production was about the same, but it shifted from near-
term to slightly farther out.
Co-Chair Neuman commented that the information currently
being presented was not the same as the information he had
received from Alaska Oil and Gas Association (AOGA). He
thought the state had seen a consistent leveling off of
production. He wondered why there was such a difference
between the red line and the blue line in 2017 and the
spring and fall forecast of outgoing years. He also asked
about the rapid reduction in the production of oil. Mr.
Tichotsky responded that the scale was not very large.
Currently, when looking at the production for FY 16 the
state seemed to be hitting the new fall forecast figure. A
decline could be seen just past 2019. He explained that the
department ran the production forecast such that it
interviewed the producers to find out their short and long-
term plans and integrated the information into the
production forecast. Typically the state had solid
information going out 5 years, the horizon of the
producers. Following the 5-year period production generally
declined with uncertainty. In the short-term the difference
between the red line and the blue line was price driven and
driven by the information collected in September 2015 and
October 2015.
1:53:13 PM
Representative Pruitt assumed that the new field discovered
by Armstrong Oil and Gas and Repsol was not included in the
numbers Mr. Tichotsky used. Mr. Tichotsky was not able to
comment on a company-specific field because of issues of
confidentiality. He transitioned to slide 11: "ANS Oil
Production Forecast." He explained that generally when the
department did a production forecast it took into account
the volumes from developed reserves currently producing -
fields without major investment. They were not adjusted for
risk at all. The department also looked at volumes from
undeveloped reserves and additional accelerated developed
reserves - oil from projects that would add incremental oil
to existing fields or bring new fields into production. The
fields had to have senior management approval, have
allocated funds, and be within the budget. The department
risk-adjusted these fields because there were two levels of
risk that occasionally occurred: either producers over-
estimated the number of barrels per day or they ran into
timing issues. Often price was a huge driver. Additionally,
the department looked at volume from contingent resources,
projects likely to occur in the future that did not meet
the current requirements. Other projects were discussed but
were not included in the department's production forecast
because of not meeting certain criteria.
Representative Pruitt clarified that the state needed to
make sure that a project was at a certain point prior to
incorporating it into the state's forecast. He wondered if
he understood correctly. Mr. Tichotsky responded
affirmatively. He added that the state would be booking the
likelihood of the investment being made and oil being
produced.
Representative Pruitt commented that there were projects on
the horizon that the state held off on that could
eventually be seen in a future forecast. Mr. Tichotsky
remarked that Representative Pruitt had an excellent point.
The state created rules in order to have certainty in the
production forecast. There were things the state was aware
of that were not included because they did not pass the
state's certainty threshold.
Mr. Tichotsky thought slide 12: "ANS Production Forecast"
spoke to Representative Pruitt's point. He drew attention
to the two plus signs showing production that occurred.
Beginning in 2016 the production forecast that was used was
represented by the dark line, the adjusted expected
investment case. He noted that if there was little or no
investment occurring in the reserves then the state would
get the low investment case (basically taking what was
currently being produced and taking it down the decline
line). There was also the unrisked investment case which
showed the oil that could be produced if all the projects
that were talked about came online. The department
considered the upper bound of what was likely to happen,
the lower bound of what could, and then drew a line between
the two, which became the basis of the state's production
forecast.
1:58:03 PM
Co-Chair Neuman pointed to the top dotted line on the chart
labeled "Unrisked Investment Case." He noted that the line
increased out past 2020. He wondered if it was a possible
scenario. Mr. Tichotsky answered, "Correct."
Co-Chair Neuman asked if it would be closer to the state's
anticipated forecast. Mr. Tichotsky explained that the
department used the risked forecast because it tried to
take into account things that might not occur. For example
there might be an issue where a producer drilled and did
not get as many barrels as anticipated, or the project was
pushed out because of timing. Co-Chair Neuman understood.
Mr. Tichotsky discussed looking at the upside potential of
production on slide 14: "ANS Production Forecast" He
explained that the dark blue skin represented the volumes
of developed reserves, the currently producing line. The
next skin (red area) represented what was past the
threshold where senior management was committed to
investing the money. The third skin represented the volume
from contingent resources. There were further skins that
represented upside potential for undeveloped reserves and
contingent resources.
Vice-Chair Saddler referred to slide 14. He asked about the
upside potential and wondered if it assumed all oil taxes
and credits were held steady. He wondered about the state's
underlying assumptions on the upside. Mr. Tichotsky
responded, "Correct." He furthered that all of the state's
assumptions were based in the current tax structure.
Vice-Chair Saddler asked if the upsides could not
materialize if the state raised or diminished the tax
credits. Mr. Tichotsky remarked that it could be a logical
conclusion based on market economics.
Mr. Tichotsky continued to slide 16: "Alaska North Slope
Crude West Coast Price." He explained that the chart
reflected the price of oil in June 2014 at a high of
$113.17. The current day's price was around $26.23.
Mr. Tichotsky explained slide 17: "Alaska North Slope West
Coast, West Texas Intermediate and Brent Crude Prices 2009
through 2016." There were three different oil markers. The
first was Alaska North Slope Crude (ANS) which was Alaska's
marker selling primarily to the West Coast and occasionally
to Asia. The second oil marker was West Texas Intermediate
(WTI) which was the marker for midland America. During the
period of 2011 through 2014 the crude marker was much lower
priced than ANS or Brent. Brent was the British water born
crude. He reported that the economic research group noticed
that ANS tracked Brent crude quite well during the period
of 2009 through the present. Whereas, WTI did not. He
pointed out that in the lower price environment all three
markers converged.
2:03:06 PM
Mr. Tichotsky turned to slide 18: "Key Oil Price Drivers":
· Supply & Demand
· There are two main factors to monitor
· Global spare capacity, since it is both a
reflection of supply and demand. In other
words, the Organization of Petroleum
Exporting Countries (OPEC) spare capacity
(flipping a switch) is key.
· Cost of developing new oil supply.
· Current Events
· Weak global demand.
· Cost of supplying the marginal barrel has
decreased dramatically.
· OPEC (Saudi Arabia) maintains market share and
accepts lower prices.
· Cost of supply has fallen as new sources have
been defined and developed.
· Oil shale is a prime example.
Mr. Tichotsky flipped to slide 19: "OPEC's view of supply
and demand…" He explained that OPEC's theory was that North
American production of shale oil would collapse at $80,
then it changed to $60, and to an even lower price
currently with adequate supplies available on the market.
However, looking at OPEC's recent report their view of
supply relative to their crude production was one where
they saw a recovery of demand in the third quarter of 2016.
He was uncertain whether it would materialize. One of his
economists was interested in the issue of spare capacity
and pointed out that in the 80's there was about 20 percent
to 30 percent spare capacity and the world was consuming
less that than 50 million barrels per day. Currently, the
world consumed over 90 million barrels per day. The spare
capacity was no more than 2.5 million barrels per day. The
conclusion that could be made, especially looking forward
with the U.S. Energy Information Administration (EIA)
forecast was that even though currently in a world where
consumption lacked production, it could easily turn around.
The department's general consensus was that it provided the
opportunity and possibility of price volatility.
Vice-Chair Saddler asked about the disparity between
production and consumption and whether it had distorted the
market share. He understood that Saudi Arabia was trying to
hold onto its market share. With the disparity and the low
prices as they were he wondered if there were any
fundamental changes in where nations were buying their oil
around the world. Mr. Tichotsky advanced to slide 20: "It's
about spare capacity…" and explained that there were two
major issues. The first was that Saudi Arabia was a swing
producer and at high prices it could take advantage of the
basic concept of spare capacity. However, high prices also
promoted unconventional oil development in North America.
What was currently viewed as conventional shale plays in
mid America really turned around. He would not have
anticipated oversupply due to North American production of
shale fifteen years ago. However, it was what had affected
the current markets creating low price environments and
volatility going forward.
2:07:24 PM
Vice-Chair Saddler was concerned whether Alaska would find
its market intact if the price went up. Mr. Tichotsky
remarked that Vice-Chair Saddler had a great question. The
department had started looking at that question in a high
oil price environment when there was a threat of Bakken oil
reaching West Coast markets and crowding ANS crude from the
market. The North American West Coast market was designed
to process ANS crude. Prudhoe Bay went to feed the
California and West Coast markets. Other crudes were close
mimics. The crude market depended on having a crude similar
to maintain refinery efficiencies. What he found was that
whatever ANS produced could be used at the market price on
the West Coast.
Mr. Tichotsky discussed slide 21: "Base Price Forecast
Methodology":
· Price Forecasting Session
· Held a day long oil price forecasting session on
October 6, 2015.
· Speakers provided insight into oil markets,
probability and analysis, modeling, and financial
aspects of commodity markets.
· 37 participants from state government, academia
and the private sector.
· DOR, DNR, DOL, OMB, University, Legislative
Finance and outside participants.
· Participants were asked to forecast P10, mean, and P90
real ANS prices out to FY 2025.
· Real prices were converted to nominal using
a 2.25% inflation assumption.
· Official forecast is based on probabilistic
outcomes the price forecast session.
Mr. Tichotski reported that as part of the department's
price forecasting methodology it held a price forecasting
session on October 6, 2015. There was a vast range of
speakers that came to discuss oil price markets. One of the
benefits was that because of the Permanent Fund Corporation
and the Treasury Department having a strong affiliation
with some of the investment houses, the best commodities
people presented during the session. The participants spent
the day discussing oil markets, probability analysis, and
other topics. The department had its own in-house model
based on what was referred to as "random walk" which took
into account the randomness of oil prices. It also took
into account a jumped diffusion. When oil prices went from
$113 to $20 it was a jump event or a destructive event.
Between oil prices modeling, looking at oil markets, and
listening to several conversations, participants were given
the opportunity to come before the group to give a mean and
a low and high probability of oil prices. Real prices were
converted using a 2.25 percent inflation rate which was
generally used across the state for investments and the
revenue forecast. A probabilistic factor was added as well.
Mr. Tichotsky turned to slide 22: "Consensus view that the
distribution is wide." He added that the department
considered what other folks reported. The slide conveyed
that Alaska's view from the October forecast was not
unusual. Most other forecasts did not go low enough. The
department had not expected prices to collapse to the
extent they did. In general people were looking at
volatility and how it extended out between the present and
2019. Alaska's view was a standard view of what was going
on in the oil markets.
2:12:13 PM
Mr. Tichotsky advanced to slide 23: "Fall 2015 ANS Revenue
Forecast Prices." He explained what it meant to look at
things probabilistically. What the department did with the
current forecast was to look at the average. As the price
forecast moved forward, because the department did its
price forecasting session in October and the report was
published in December in the previous year there was a
large price difference. To compensate, the department
tended to look at what was closer to the "P10's", prices
that the department could anchor off from what was actually
going on in the current markets. For the long-term the
department adjusted back depending on the how the current
market looked. The department looked at the "P50" for the
current year because of the range of possibilities, what
was in the revenue sources book, and what the department
had currently.
Vice-Chair Saddler referred to the chart on slide 23. He
wondered if it included all of the probabilistic estimates
of the reserves and the likelihood of investments. He
wondered if it was an extension of the forecast prices for
a couple of years based on inflation. Mr. Tichotsky
responded that the chart was only looking at the forecast
of prices. It did not reflect the revenue forecast.
Vice-Chair Saddler relayed that he had received information
from First National Bank of Alaska. They projected an
inflation rate of 1 percent to 1.25 percent in Alaska. He
wondered about the inflation rate of 2.25 percent. Mr.
Tichotsky complimented Vice-Chair Saddler on his excellent
question. He responded that given that the state had
optionality it tended to use the Callan inflation forecast
that was used for investment revenue. It gave Alaska the
advantage of having an apples-to-apples comparison of
revenue. It was an open question. If the state had an
inflationary period it could make a difference in some of
the state's decision making. He thought it was a very good
point.
Mr. Tichotsky pointed out the chart on slide 24: "What if
the oil price is…" for the remainder of FY 2016." He
indicated that it reflected one of the favorite questions
that the department was asked several years prior. He came
up with the chart after the question was asked several
times. If someone thought the following six months would
bring $20 per barrel of oil then the average ANS price for
FY 2016 would be approximately $33. If someone thought the
price of oil would go to $60 per barrel of oil then the
forecast price would be about $54 per barrel. Often times,
people looked at the current day's price of $26 which did
not reflect the budget price, as six months of pricing was
already known. In some years often times when there was a
high oil price environment and a low oil price environment
in the same fiscal year an average was taken between the
two. In the current year the state had not seen prices
above $50.
Mr. Tichotsky explained the graph on slide 25: "Historical
ANS West Coast FY Oil Price Bands: Annual Average and
Official Spring 2015 Forecast." He indicated that the green
tick was the deterministic forecast that was used in the
revenue model. However, the department recognized there was
a distribution of prices. In the past, for actual prices,
it showed the range of prices within one year.
2:17:23 PM
Mr. Tichotsky continued that Alaska was in the lower range
or below the lower range of what was expected. However, it
appeared that there would be some price recovery. He
reminded members that the calculations included a 2.25
percent inflation rate. Prices that were $70 nominal in
2025 would be equal to about $60 or below in real terms.
Co-Chair Neuman asked about the average price per barrel of
oil or revenue to the state looking at the 5-year period
from 2015 to 2020. Mr. Tichotsky responded that the average
price for the following year was about $50.
Vice-Chair Saddler asked if it was fair to assume that when
looking at 2025 the top of the range was the P10 and the
bottom of the range was the P90 probability, and the green
band reflected the forecasted price. Mr. Tichotsky
responded that the lower price was the P10 and the higher
price was P90.
Vice-Chair Saddler asked if the price was significantly
more likely to be $40 than $100 in 2016. Mr. Tichotsky
stated that it was most likely to be around $55 or $56.
2:19:28 PM
Representative Gara mentioned the historical fluctuations
of oil prices. He asked if there was a fair amount of
inaccuracy in price forecasting because it was difficult to
do. Mr. Tichotsky stated that his oil price forecast ranged
between $20 and $100 per barrel. He would rather be mostly
right than exactly wrong. He continued that because there
was the issue of spare capacity, no longer controlled by
Oil Producing and Exporting Countries (OPEC), there would
likely be much more price volatility. Some people were
estimating between $50 and $70 per barrel of oil. There
would be events that would help spike up the price of oil.
When people asked one of his teachers about what might
happen to the price of oil, he responded that it would
change. There was a balance between supply and demand and
trying to anticipate it. Volatility was more likely due to
the spare capacity issue.
Co-Chair Neuman stated that forecasting was not a laughing
matter. He emphasized the state's financial issues. He
thought the accuracy in the DOR's forecasting was
absolutely critical looking out 5 or 10 years. Trying to
get the most accurate information to base the state's
budget was crucial. Mr. Tichotsky rebutted that there was a
lot of volatility in the market making it very difficult to
forecast. He emphasized that it was a problem. Co-Chair
Neuman was well aware of it.
Vice-Chair Saddler returned to slide 24. He wanted to make
sure he was reading the slide correctly. He pointed to the
oil price of $40 as an example. If the oil price was $40
then the forecast price would be $43.57. He wondered if he
was correct. Mr. Tichotsky responded positively. Vice-Chair
Saddler confirmed that the information on slide 24 was
helpful.
2:24:03 PM
Representative Gara thought the governor was correct about
figuring out a way to have a more stable revenue stream. He
agreed that the budget deficit was not a laughing matter.
Mr. Tichotsky turned to slide 28: "Comparison - Spring 2015
vs. Fall 2015 Forecasts." He conveyed that most of the
changes were based on price. Very little was based on
production. Looking at the comparison between spring 2015
versus the fall 2015 for FY 16 there was a much lower
price, a little less production, and $600 million less in
revenues than anticipated. The state's economists viewed
the difference of $600 million differently than the Office
of Management and Budget. Generally with the percentage
differences, it was difficult to make predictions.
Mr. Tichotsky compared fall 2015 against the forecast for
2017 there was a $30 difference in price accounting for a
35 percent change. There was a smaller amount of production
and there was a difference of over $1 billion in the
anticipated forecast.
Representative Edgmon referred to a presentation by
Enalytica in the previous year about the increasing
volatility in predicting oil prices due to OPEC's dominance
receding. Also, with the advent of shale oil production in
the United States it was difficult to prepare a break-even
analysis for the various oil producers. He agreed that it
was more difficult to predict oil prices than it might have
been when OPEC was in the driver's seat. Mr. Tichotsky
stated that the oil prices for 2013 and 2014 were the same
to three significant digits. An economist from his team
supplied him the price for 2014 he asked his team member to
recheck the number. The fellow did and confirmed that the
price was the same down to the penny as it was in 2013. The
chances of the number being the same was extremely
unlikely. What it told him as an economist was that the
commodity markets were really stable. However, there was
enough of a change in price and the market was
restructuring enough that it was a different environment
currently.
Representative Edgmon thought he had heard Mr. Tichotsky
report that he predicted there would be volatile
circumstances through 2019. He asked if he was correct. Mr.
Tichotsky explained that the price forecast the DOR
provided that the revenue forecast was based on took the
median rather than incorporating the volatility. The
volatility was being provided as a back story. He suggested
that once volatility set in it was difficult to make
accurate predictions.
Representative Edgmon commented that if a group of
worldwide experts got together to make predictions and were
all wrong or considerably off the mark then it would seem
that the whole topic of volatility was an abstract
conversation. Mr. Tichotsky thought it was useful to know
the environment was unpredictable.
2:29:36 PM
Representative Kawasaki commented that the forecast that
came out in March prior to finishing the budget in the
previous year painted a rosier picture than anticipated. In
looking at the forecasted number, the price per barrel was
off significantly. He wondered if the administration was
trying to paint a rosier picture of the budget than what it
actually was. From a budgeting standpoint it made him very
uncomfortable that the forecasts could be extremely
inaccurate especially when doing budgets from year-to-year.
He speculated that the legislature would have to have a
large supplemental budget. Commissioner Hoffbeck asked
Representative Kawasaki to turn back to slide 16 which
showed some of the dynamic that contributed to a rosier
picture than what occurred. He pointed to January 2015 when
the oil price recovered for a period of time and the DOR
was preparing the spring 2015 forecast update. The forecast
was a product of the data that was available at the time
the forecast was being made. Mr. Tichotsky added that the
department followed a methodology for calculating the price
and production of oil during forecasting sessions.
Vice-Chair Saddler asked if the department had the
necessary resources in personnel to do the forecasting more
accurately. He wondered if there were any structural
impediments in being able to provide more accurate
forecasts. Commissioner Hoffbeck responded that the
economic research group within the department had been
stretched fairly thin in the current year and in previous
years. The demands on the economic team extended from
revenue forecasting to analyzing legislation, to
contributing data to year-end reports. He would absolutely
love to have a few more people doing economic research. He
complimented the many talented people already contributing
within the department.
Vice-Chair Saddler remarked that he would appreciate it if
the department would forecast more with less. Commissioner
Hoffbeck responded, "Yes."
Co-Chair Neuman commented that the commissioner would not
be getting more people.
Representative Kawasaki reported other states being in the
same predicament of being fairly dependent on oil including
Wyoming and North Dakota. He wondered if their forecasts
were similar to Alaska's. Mr. Tichotsky answered that there
was probably no other state that was so dependent on oil
for revenue and where the industry played the role that it
did in Alaska's economy. Alaska was not very diversified.
The economies of Wyoming and North Dakota were not as
dependent on oil. Their economies developed prior to any
oil booms. Alaska was the most oil dependent state in the
nation. He was unaware of any other state that relied on a
forecast for revenue based on oil prices and oil
production.
2:34:53 PM
Representative Pruitt asked about the performance of
Alaska's economists compared to other economists
historically. Mr. Tichotsky responded that three years
prior, when he became the chief economist, the department
revisited the way production forecasting was done and
revised the system. It was clear that the department was
over-forecasting production. He did not believe the state
had an apples-to-apples comparison over the time period to
look at times when the forecast was fairly accurate. In a
stable oil price environment it was very easy from year-to-
year to make a good prediction. In terms of production, it
was very easy to make a good prediction one year out. It
was a very difficult task to make a prediction for multiple
years out when mixing production and price. It was also
difficult, even daunting, to compare how well the state did
in an analysis.
Representative Pruitt asked if there had been things in the
past that the legislature required of the economists within
the department to do that should be taken off their plates.
Commissioner Hoffbeck suggested changing some of the
release dates for certain reports because, currently, most
of them were released around the same time. He understood
the importance of providing current information. However,
it would be helpful if release dates could be staggered.
Representative Pruitt wondered if the legislature had
imposed unreasonable demands that limited the best
utilization of the state's economists. If so, he wanted to
help make adjustments. Commissioner Hoffbeck thanked
Representative Pruitt for his consideration. He referred to
slide 22. The forecast was prepared by another entity. The
ranges were not that much different than the ranges
prepared by staff.
2:38:28 PM
Representative Wilson mentioned the tax division being
behind with audits for the tax years under Alaska's Clear
and Equitable Share (ACES). She wondered about the impact
of the audit workload on forecasting and vice versa. She
wondered if they worked together. Commissioner Hoffbeck
answered that there were two different teams within the Tax
Division of the DOR that ran independently.
Representative Wilson noted that the legislature looked to
the revenue forecast when budgeting. She wondered how the
audits fit in with the forecasts and money for the budget.
Commissioner Hoffbeck replied that the department
forecasted credits which were embedded within the forecast.
The long-term impact of development was forecasted within
the productions. The state worked directly with the
industry concerning investment plans.
Representative Wilson mentioned legislation having to do
with additional taxes. She expressed her concerns about
people leaving which would affect the economy further. She
wondered if different taxes would be less volatile. She
thought additional slides would be helpful. Commissioner
Hoffbeck replied that they were dramatically less volatile.
Mining might be an exception because of being driven by
commodity prices. He spoke to the impacts of changing
rates. He asked folks from the Resource Development Council
(RDC) to include factual data in their testimonies when
they testified on bills.
2:42:38 PM
Representative Gara followed up on a question asked by
Representative Pruitt. He discussed when he had first
started in the legislature. He wondered if there were
missions and measures that had been established in past
years for the DOR that were not the best use of the
department's time. Commissioner Hoffbeck answered that Co-
Chair Neuman and Co-Chair Thompson had asked the department
to look at the issue the prior summer. He noted that there
were some missions and measures that potentially fell into
the category mentioned by Representative Gara, but the DOR
had fewer than in other departments.
Representative Pruitt wondered if a savings could be found
by consolidating or sharing economists amongst departments.
He asked if the state was utilizing its economists
efficiently. Commissioner Hoffbeck answered that he could
not speak for other departments, but the DOR economists
were all working hard. He could look into the issue, but he
did not believe there would be significant efficiencies
because of how much the team had already been tasked with.
2:46:12 PM
Mr. Tichotsky continued with slide 29: "Contributors of
Change in FY2016 Revenue Forecast." He shared that the
major contributors of change in the two forecasts included
price, a small difference in ANS production, a large
difference in price, and a smaller amount of deductible
lease expenditures. Transportation costs were close to the
same with a slight increase in the fall forecast.
Mr. Tichotsky moved to slide 30: "Contributors of Change in
FY2017 Revenue Forecast." There was a larger change in
price in 2017. He thought the production profile was pushed
out but maintained the plateau of over 500 thousand barrels
per day. He noted the $1 billion decrease in lease
expenditures and reported an increase in transportation
costs.
Mr. Tichotsky turned to slide 31: "North Slope Capital
Expenditure Forecast Change." He reported the capital
expenditure forecast change was strongly price driven. The
change equated to a decrease of investment between $500
million to $1 billion.
Mr. Tichotsky turned to slide 32: "North Slope Operating
Expenditure Forecast Change." He relayed that the decrease
in operating expenditures were also price driven. He spoke
to the curve changing a little because of costs escalating
in the future.
Commissioner Hoffbeck advanced to slide 34: "Net Tax
Credits vs. Production Tax." He mentioned a similar slide
being presented in the previous year's presentation - the
impact of credits against production tax.
Commissioner Hoffbeck reviewed slide 35: "Unrestricted Oil
Revenue* and Tax Credits" He explained that the slide had
been requested the prior year. The slide reflected the
impact of credits against total revenues being generated by
the oil and gas industry. The two slides were included for
information purposes.
Mr. Tichotsky proceeded to slide 37: "Fall 2015 Total
Revenue Forecast." He explained that the division
forecasted stable revenues - the average likely revenues -
rather than incorporating volatility. However, he
emphasized that when looking at the total revenue forecast,
both petroleum and investment revenues were extremely
volatile. Federal revenue had been relatively consistent
from FY 11 when the state had between $2.4 and $2.5 billion
coming in. He furthered that when the forecast reached $3.3
billion, the expected revenue, the state only received cash
of about $2.5 billion. He spoke of non-petroleum revenue
totaling about $1 billion for the unrestricted fund. The
state had a consistent non-petroleum revenue of about $500
million.
2:51:12 PM
Co-Chair Neuman asked if the dotted line represented the
present. Mr. Tichotsky responded affirmatively. He relayed
that the history column already occurred including half of
2016. The forecasting portion represented 2015 through
2025.
Co-Chair Neuman asked about the differences between the
current chart on slide 37 and the charts on slide 31 and
32. He wanted to know if those charts only addressed the
North Slope. He noticed on the current chart that the level
of the various revenues were staying flat or increasing.
Mr. Tichotsky answered that Co-Chair Neuman was correct. He
pointed out that the chart on slide 37 showed the total
revenue forecast rather than just the unrestricted portion.
Co-Chair Neuman wondered if the projection included all of
the governor's proposals on new revenue streams. Mr.
Tichotsky answered that it was under the state's existing
taxes. Co-Chair Neuman was confused. He wondered if the
state was going up or down. Mr. Tichotsky explained that
the forecast showed a steady revenue stream from royalties
through 2025.
Co-Chair Neuman noted that it was not matching up with Mr.
Tichotsky's prior charts. Mr. Tichotsky agreed. He thanked
the chairman for catching his mistake. He would come back
to the question at a later time.
Representative Gara wanted to better understand the
confusion. He pointed to the green bar representing oil
revenue which indicated a rebound in oil prices. He
wondered if that was the reason the green band got slightly
bigger and stayed stable. Mr. Tichotsky remembered that the
combination of having the price rebound even with
production falling they cancelled each other out over time.
The chart looked at the total revenue and not just the
general fund revenue which tended to dive more.
2:54:39 PM
Co-Chair Neuman stated that he was still confused and
wanted accuracy. He noted the dramatic drop on the chart
depicting the North Slope capital expenditure forecast
change on slide 31. He surmised from the chart that long-
term low oil prices were expected well into the future if
the industry was not reinvesting in operations or capital.
Mr. Tichotsky would recheck the information on the charts.
The picture was supposed to be schematic to show how
volatile the revenues were. However, when the division
forecasted them they did not forecast volatility. There
were certain interacting issues including the volatility
and depending on pricing which would create dependencies
between costs.
Co-Chair Neuman interrupted to say that the bottom line was
that no one was going to forecast that accurately. Mr.
Tichotsky supposed that the other issue was that when
forecasting if a low number was chosen and increased, then
more capital expenditures would be reflected in the
forecast. The opposite was true in an environment where the
price was decreasing which might result in less capital
expenditures. It would hit production in the future
depending on more or less investment.
Commissioner Hoffbeck stated that the department would
recheck the numbers.
Co-Chair Neuman thought it was safe to say that the state
should budget to the low end, or the conservative end of
the forecast to avoid additional debt.
2:56:54 PM
Mr. Tichotsky scrolled to slide 38: "FY 2017 General Fund
Unrestricted Revenue, with Price Sensitivity." He talked
about the change in price and price sensitivity. Because of
the way the taxation system worked there were certain areas
where the change in oil prices changed revenues less. In an
oil environment where prices ranged between $25 and $50 per
barrel (Alaska's current environment) it was likely that
the state's petroleum unrestricted revenue would be between
$1 billion and less than $2 billion. In an oil environment
where prices were above $80 per barrel the price difference
yielded a more dramatic revenue effect. He relayed that in
the back of the DOR Revenue Sources Book there were pages
that indexed the price of oil to UGF revenue.
Representative Guttenberg suggested that the chart showed
UGF revenue with price sensitivity. He wondered whether the
chart reflected revenues after deductions for
transportation and production. Mr. Tichotsky stated that
the chart showed that revenue equaled price multiplied by
production minus costs.
Representative Guttenberg wondered if production and
transportation costs would appear as a straight line if
they were added in the chart or whether price sensitivity
would have to be added. Mr. Tichotsky explained that some
elements were price sensitive such as items that were
volume oriented. For example if production decreased
producing less barrels running through the pipeline the
tariff would increase. However, the more barrels that were
produced, the greater the economy of scale would be in
terms of transportation costs.
Vice-Chair Saddler referred to slide 39. He asked about the
line for investment revenue. He asked what the figure
included. Commissioner Hoffbeck responded that it would
include the Constitutional Budget Reserve (CBR) and the
Permanent Fund. He did not believe it included the Alaska
Retirement Management (ARM) Board earnings.
Vice-Chair Saddler voiced that it looked like the figures
matched.
3:00:37 PM
Representative Gara returned to the chart on slide 38. He
offered that constitution stated that 25 percent of all
royalties went into the Permanent Fund. He provided some
historical information about the royalty changes for
certain fields over time. He asked the commissioner what
the financial impact would be to the budget if the royalty
percentage for all fields was returned to the
constitutional 25 percent. Commissioner Hoffbeck had looked
at the information and would provide it to the committee.
Co-Chair Neuman added that it be done on the proposed
budget as well. Commissioner Hoffbeck stated that the quick
rule of thumb was that the average royalty percentage was
about 30 percent. He would provide members with the actual
numbers.
Representative Gara asked if it was equal to about $50
million at current prices. Commissioner Hoffbeck responded
that Representative Gara was close.
Mr. Tichotsky advanced to the table on slide 39: "Total
Revenue Forecast - FY 2015 & 2016." He pointed to the major
heading. There were 4 totals for FY 15. The total
unrestricted general fund (UGF) revenue was $2.3 billion in
FY 15 and $1.6 billion was forecasted for FY 16. The total
designated general fund (DGF) in FY 15 was $331 million and
over $300 million in FY 16. The totals for other restricted
revenues reflected a slight or significant increase in
investment revenues in FY 16 up from FY 15. He noted that
the federal revenue total, although reflected in the amount
of $3.2 billion in FY 16 would likely shake out to $2.5
billion. He pointed to the total state revenue from FY 15.
It appeared to be a relatively stable situation but was
clearly different within the structure of the state.
Mr. Tichotsky discussed slide 40: "A New View of Revenue."
He mentioned credit ratings and whether the glass was half
empty or half full. In terms of talking to credit rating
agencies, when a person reviewed revenue subject to
appropriation and given the categories the numbers were
higher than in the past for UGF. The actual number FY 15
was about $6 billion and in FY 16 it was estimated at about
$5.4 billion.
3:05:18 PM
Vice-Chair Saddler asked Mr. Tichotsky to clarify the
difference between slides 39 and 40 and define "A New View
of Revenue." Commissioner Hoffbeck explained that slide 39
reflected total revenue. In the past in looking at revenue
available for use some of the earnings was not included.
The new view of revenue was breaking out the investment
revenues available for appropriation.
Vice-Chair Saddler asked what slide 40 excluded.
Commissioner Hoffbeck responded that in the past there
would not have been a line for Permanent Fund Earnings. It
would not have appeared as available as a UGF revenue. What
was not included in the slide were the substantial
investments for trust funds and other restricted investment
revenues. The take-away was that the realized earnings of
the permanent fund was available for appropriation in the
current year.
Mr. Tichotsky advanced to slide 41: "General Fund
unrestricted Revenues Non-petroleum." He reported
generating around $500 million per year in UGF non-
petroleum revenues. A breakdown of the type of taxes could
be seen on the slide including: Non-petroleum corporate
income tax, mining license tax, insurance premium tax,
tobacco tax, motor fuel tax, and other taxes.
Commissioner Hoffbeck reemphasized that the numbers did not
represent any tax changes but were status quo numbers.
Representative Gattis asked for clarity regarding the "New
View" of revenue. Commissioner Hoffbeck responded that the
"new" was driven by the administration's discussions with
the rating agencies. The administration's position was that
the state was not truly running at a deficit because of its
investment earnings. However, the rating agencies disagreed
because the investment earnings were not included in the
Revenue Sources Book. In their discussions the
administration had to argue why the investment earnings
were not in the book. In the current year the DOR included
all of the available investment revenues, hence the "New
View." It provided a fuller view of how much the state had
available to spend.
Co-Chair Thompson pointed to the motor fuel tax on the
chart on slide 41. In the previous year the legislature
looked at how to increase state revenues. It was his
understanding that the previous year's motor fuel tax was
$80 million but the DOR's chart was showing only $42
million for 2015. He wondered about the discrepancy. He
also pointed out that the mining license tax showed a
substantial reduction from years 2015 to 2016 to 2017, yet
some large mines were scheduled to come online. He wondered
why reductions were shown for the mining license tax. Mr.
Tichotsky explained that for the mining license tax that
the numbers were based on the department's view of
commodity prices. The Department of Revenue anticipated
that the commodity price would be lower and would result in
lower mining license taxes. Commissioner Hoffbeck added
that it was unrestricted revenues and a share of what fell
under motor fuel - aviation fuel taxes that were
restricted.
3:10:33 PM
Representative Wilson wondered why the motor fuel tax
increased from $42 million to $51 million. She also noted
the decrease in the non-petroleum taxes from $136 million
to $105 million and stabilizing in 2017 at $105. Mr.
Tichotsky responded in answer to her motor fuel tax
question. He explained that although the department had a
naive forecast, it tried to get the best available
information possible to put together a forecast. Typically,
an adjustment was done every year to the forecast to
reflect what was actually happening. However, it was a
moving target. Some of the analysis the department
conducted included looking at the price of motor fuel. If
fuel prices dropped, utilization increased. For every tax a
department economist went through and completed an
individual forecast. The difference of $51 million and $42
million had to do with margins of error when running the
models.
Commissioner Hoffbeck stated that the difference in the
motor fuel tax was actually a result of the increase - just
short of a penny - adopted in the prior year.
Representative Wilson asked for an explanation for the
decrease in the non-petroleum corporate income from $136
million to $105 million. Mr. Tichotsky reported it had to
do with the estimations of the global economy. He did not
know the particulars about the higher take in 2015. He
recalled the estimate to be between $100 million and $120
million. The actual number was $136 million for 2015.
Representative Wilson wondered about the original estimate
even though he was reporting actual numbers for 2015. Mr.
Tichotsky stated that as the chief economist when he looked
at the non-petroleum revenues he looked at them as a
portfolio. Even though the individual items within the
portfolio bounced around occasionally, they averaged out at
around half of $1 million. Although there were changes from
year-to-year the total number was a fairly stable revenue
supply.
3:14:43 PM
Co-Chair Neuman asked Mr. Tichotsky, the chief economist
for several years, if it was possible to look at the
forecasts from a few years prior. His point was that, as
uncomfortable as it was to bring up, he thought politics
were becoming part of the discussions around the forecast.
He suggested that perhaps if someone who had an interest in
trying to show that the deficits to the state were going to
be greater, the forecast would need to look lower. He was
not saying that it had occurred, but he thought it was a
possibility. He wanted a comparison since the same person
had been doing the revenue forecasting for many years.
Commissioner Hoffbeck would provide the data and assured
Co-Chair Neuman that politics were not a factor. Co-Chair
Neuman replied, "Let's make sure."
Mr. Tichotsky responded that over all non-petroleum revenue
was a relatively stable source of revenue from an economic
point of view.
Representative Munoz referred to slide 29. In looking at
the deductible lease expenditures for Spring 2015 forecast
for $6.7 billion and Fall 2015 forecast for $5.7 billion it
appeared that there was a correlation between the price of
oil and the amount companies spent. Conversely, when prices
were higher a few years prior, she wondered if the capital
expenditures were significantly higher or similar to the
forecast numbers on the slide. Mr. Tichotsky responded that
they were significantly higher in a higher price
environment.
Representative Munoz asked him to walk the committee
through what qualified lease expenditures included and how
the credits were calculated. Mr. Tichotsky conveyed that
the numbers for the overall forecast equaled the aggregate
across the entire industry. Using the DOR's model, the
department worked with the companies to complete a detailed
questionnaire. The companies were also asked to provide a
forecast of their lease expenditures. The department
referenced the history of what was actually done. An
aggregate number was derived by taking the information the
companies provided as well as the historical information
and applying the department's knowledge of the
responsiveness of lease expenditures to prices. The numbers
were added together by company and an aggregate number was
defined. The department then ran the tax calculation and
based on the lease expenditures, production, and price, the
overall revenue forecast was derived.
3:19:07 PM
Representative Munoz stated that the information helped
with the forecasting. However, she wanted the commissioner
to walk through how they were calculated and applied.
Commissioner Hoffbeck would provide the information.
Representative Guttenberg reiterated that he had asked
about the general fund price sensitivity and deductible
lease expenditures. He wondered if the department tracked
what projects were being worked on to help with forecasting
into the future. He understood that in the short turn there
might not be significant changes in project schedules based
on price. However, he wondered if the production forecasts
factored in potential project development changes due to
future oil prices. Mr. Tichotsky explained that the
department did the interview process with the companies in
September of each year. The department looked at both the
spring actuals and the data from the companies to create
the following spring forecast. Depending on what the
department thought was happening, there was a follow-up
opportunity to have discussions with the industry. He
reiterated that the near-term forecast was typically spot
on. However, uncertainty crept in beyond a year due to
price uncertainty and other uncertainties. The farther out
the forecast, the more uncertain the numbers were.
Co-Chair Neuman asked the commissioner to move on to the
next presentation on the budget overview.
Co-Chair Thompson asked members to submit any questions on
the revenue forecasts to Co-Chair Neuman and he would
obtain and distribute written responses.
3:23:24 PM
^FY17 BUDGET OVERVIEW: DEPT. OF REVENUE
Commissioner Hoffbeck turned the meeting over to Mr.
DeBartolo.
DAN DEBARTOLO, DIRECTOR, DIVISION OF ADMINISTRATIVE
SERVICES, DEPARTMENT OF REVENUE, introduced the PowerPoint
presentation: "State of Alaska: Department of Revenue
Budget Overview."
Mr. DeBartolo began with slide 2: "Alaska Department of
Revenue":
· Core Programs
· Treasury Division - Invest
· Tax Division - Collect
· Permanent Fund Dividend Division - Distribute
· Child Support Services Division - Collect and
Distribute
· Authorities, Corporations, and Boards
· Alaska Housing Finance Corporation (AHFC) - Invest and
Distribute
· Alaska Permanent Fund Corporation (APFC) - Invest
· Alaska Retirement Management Board (ARMB) - Invest
· Alaska Mental Health Trust Authority (AMHTA) -
Distribute
· Alaska Municipal Bond Bank Authority (AMBBA) -
Distribute
Mr. DeBartolo relayed the mission of the DOR was to
collect, distribute, and invest funds for public purposes.
He indicated the department had had questions as to why the
Child Support Services Division fell within the DOR. He
explained that a money stream had to be collected and
distributed. He continued to read the slide.
Mr. DeBartolo explained the structure of DOR on slide 3:
"Alaska Department of Revenue." He read from the
organizational chart. (Copy on File). He noted that the
Alaska Liquefied Natural Gas (AKLNG) fell under the DOR as
well. He clarified that the component within the DOR was
called Natural Gas Commercialization, a very small portion
of the overall AKLNG project.
3:25:43 PM
Mr. DeBartolo read from slide 4: Alaska Department of
Revenue: FY 17 Department Snapshot of Programs":
· Treasury Division
· Mission - To Manage and Invest State Funds
· Positions - 42 Full Time
· Programs under the Treasury umbrella - $83,851.8
(20.83% of DOR Budget)
· Treasury Operations - $10,225.6 (2.54% of
DOR Budget)
· Alaska Retirement Management Board -
$72,039.8 (17.89% of DOR Budget)
· Alaska Municipal Bond Bank - $1004.7 (.25%
of DOR Budget)
· Unclaimed Property - $581.7 (.14% of DOR
Budget)
· Tax Division
· Mission - Collect Taxes, Forecast & Report
Revenues, and Regulate Gaming
· Positions - 110 Full Time, 1 Part Time
· Tax Operations - $15,142.8 (3.76% of DOR Budget)
· PFD Division
· Mission - Distribute Timely Annual Dividend
Payments to Eligible Alaskans
· Positions - 72 Full Time, 9 Part Time
· PFD - Operations - $8,754.2 (2.17% of DOR Budget)
Mr. DeBartolo read directly from slide 5: "Alaska
Department of Revenue: FY 17 Department Snapshot of
Programs":
· Child Support Services Division
· Mission - To Collect and Distribute Child Support
Payments to Custodial Parents
· Positions - 224 Full Time
· Child Support Operations- $27,531.2 (6.84% of DOR
Budget)
· Administration and Support
· Positions - 24 Full Time
· Programs under the Administration umbrella -
$4,049.9 (1.0% of DOR Budget)
· Commissioner's Office
· Administrative Services Division
· Criminal Investigation Unit
· Natural Gas Commercialization - AKLNG
· Permanent Fund Corporation
· Mission - To Maximize the Value of The Permanent
Fund Within Return Objectives
· Positions - 48 Full Time, 2 Part Time
· APFC Operations and Management Fees - $160,300.8
(39.82% of DOR Budget)
3:29:09 PM
Vice-Chair Saddler asked if operational expenses for the
ARM Board equaled $72 million. He wondered if it counted
money under management. He also asked about the $160
million figure for management and operations for the
Permanent Fund Corporation. Mr. DeBartolo explained that it
was a combination of their operational budgets and
management fees. The actual operational budget for the
Alaska Permanent Fund Corporation (APFC) was between $10
million to $12 million. The ARM Board was managed by the
investment officers within the treasury umbrella. The ARM
Board's budget was comprised of mostly fees and some
budgeting components for investment officer positions that
were exclusively allocated to a particular job. Vice-Chair
Saddler asserted the information was helpful.
Mr. DeBartolo turned to slide 6: "Alaska Department of
Revenue: FY 17 Department Snapshot of Programs." He read
from the slide:
· Alaska Housing Finance Corporation
· Mission - To Provide Alaskans Access to Safe,
Quality and Affordable Housing
· Positions - 313 Full Time, 37 Part Time and Non-
Perm
· AHFC Operations- $96,075.7 (23.87% of DOR Budget)
· Alaska Mental Health Trust Authority
· Mission - To Administer the AMHTA as a Perpetual
Trust and to Ensure a Comprehensive and
Integrated Program to Improve the Lives of
Beneficiaries
· Positions - 16 Full Time
· AMHTA and LTCO Operations - $4,998.6 (1.24% of
DOR Budget)
Mr. DeBartolo moved to slide 7: "Alaska Department of
Revenue: Summary of UGF and Position Reductions - FY 15
Management Plan to FY 17 Governor." He provided a bit of
context on the slide. He explained that it was not just a
change slide from last year's management plan to the
current year's governor's budget. He wanted to provide
information about what the DOR was doing to reduce the size
of its operations, in terms of the budget as a whole. He
read directly from the slide:
· Since the start of FY15, the Department has cut $5.9
million (-19.1%) in UGF spending. The Tax Division has
felt the greatest impact as $2.65 million (15.5%) of
its total budget has been reduced during that period.
· The Treasury Division reduced $1.75 million (35.8%) in
UGF spending primarily due to management fee
reductions and cost allocation changes.
· The Child Support Services Division reduced $1.1
million (10.1%) in UGF spending via staff reductions
and programmatic changes.
· During this period the Department will have eliminated
48 positions:
· Tax - 29
· Child Support - 6
· AHFC - 3
· Treasury - 3
· PFD - 2
· Admin Services - 2
· Commissioner - 2
· Criminal Investigations - 1
Mr. DeBartolo highlighted that the reduction in positions
was not a net of new positions requested. They were
positions that had been eliminated. Largely the reductions
had come from general administrative duties such as
accounting and other administrative positions. Information
Technology positions had been reduced as well as some
analysts positions. He offered to provide the detail to
members.
Co-Chair Neuman asked for the information.
Representative Gattis queried about the term "positions"
and whether that word meant human beings. She asked if 48
human beings no longer worked within the departments
listed. Mr. DeBartolo responded that it did not mean that
48 people had lost their jobs. The department had made a
concerted effort to hold positions open rather than
bringing in new people. The department was aware of the
likelihood of potential cuts and made sure to hold off on
filling vacant positions. It had the same budgetary impact.
The Department of Revenue's goal was not to try to put as
many people out of work as possible, but rather to reduce
the overall personal services operating budget. He thought
the department could show that it had done that. In a few
instances the department had added investment officer
positions trying to bring more investments in-house. The
department had found that there was definitely a cost
savings in doing the investments in-house rather than
paying out management fees to outside entities.
3:35:06 PM
Representative Gattis asked how many Alaskans had lost
their jobs and asked how many had been put to work. Mr.
DeBartolo reported that he did not know what the actual
layoff number would be for FY 17 if the budget remained
intact. He was aware that some of the positions were
filled. It was unclear about what would happen to the
positions if the employees moved on. He relayed that 9
Alaskans were laid off or put out of positions as a result
of last year's budget. There were new investment officer
positions that had not all been filled. The Department of
Revenue had filled 3 investment officer positions recently,
2 of which were within the treasury division. He did not
know how many of the 4 positions within the APFC were
filled but would get the answer.
Representative Gattis wanted to be clear that eliminating
positions sometimes meant that the state was just
eliminating the opportunity for the state to hire a person
into a position rather than letting go of an actual person.
Co-Chair Neuman thought the department needed to provide
the number of positions eliminated and how many personnel
were let go.
Commissioner Hoffbeck noted the only caveat he would add
was that the DOR had made a concerted effort to refrain
from hiring personnel. The department had had an informal
hiring freeze for some time. His instructions to his
directors was not to hire a position unless they thought
they were more valuable than someone already on staff.
People were going to have to be laid off. Typically the
vacant positions would have had bodies in them but the
department knew people would have to be laid off.
3:38:22 PM
Mr. DeBartolo reviewed the pie chart on slide 8: "Alaska
Department of Revenue: FY 17 Governor's Budget by Program
Including Unallocated Reduction (See Handout)." The chart
showed the department's entire budget. He pointed out the
largest slices, representing 80 percent of the overall
budget, were investment areas: The Alaska Permanent Fund
Corporation, The Alaska Housing Finance Corporation, and
the Alaska Retirement Management Board. There had not been
any substantial cuts in any of the three entities because
they were investment areas. It was imperative the state was
making as much money as possible. The remaining small pie
pieces made up about 20 percent of the budget and was the
area of focus in terms of cuts to the budget. The
department was making sure its IT staff could work across
division boundaries because of position reductions. Silos
of work were being eliminated. The department's next course
of action would be to look at centralizing some
administrative positions, such as accounting and accounting
support positions, that were currently doing duplicative
work within different divisions. The department continued
to examine how to trim excesses throughout divisions.
Co-Chair Neuman commented that, to his knowledge, the
Alaska Permanent Fund Corporation had never encountered
cuts to its budget. He opined that APFC's budget mattered,
especially in the governor's new proposed budget where the
Permanent Fund Dividend (PFD) would be funding government.
He suggested for the DOR to consult with the APFC. He
thought if there were reductions to APFC there would be
more money available for the PFD. He concluded that the
investment areas should be reduced as well. Commissioner
Hoffbeck relayed that one of the easiest ways to increase
returns was to bring more management in-house rather than
paying higher outside management fees. Although it would
increase the employee budget, it would also substantially
increase the state's net revenue.
Co-Chair Neuman made a comment about hiring 10 more people
and making significantly more money. He did not want to
discuss the issue further.
Representative Wilson suggesting contracting management
rather than hiring full time employees. She asked if the
slide reflected unrestricted revenue funds or all funds.
Mr. DeBartolo responded that he would supply the
information.
Representative Wilson wanted to see a pie chart reflecting
only UGF. Mr. DeBartolo responded in the affirmative.
Representative Pruitt's asked if the management people were
paid from the permanent fund. Commissioner Hoffbeck
responded, "That is correct."
Representative Pruitt thought investing in people within
the APFC was a wise idea and noted that it would ultimately
pay for itself. He requested that the DOR highlight the
individuals paid for by UGF versus individuals paid for by
the Permanent Fund (PF). He would oppose cutting
individuals within the APFC that were paying for themselves
with the work they did. Mr. DeBartolo relayed that when he
was reviewing the slide and pointed out the differentiation
he was not looking for additional cuts but rather was
highlighting where the concentration of cuts had been.
3:43:17 PM
Mr. DeBartolo moved to slide 9: "Alaska Department of
Revenue: FY 17 Governor's Budget Key Changes (Including
Unallocated Reduction)":
Key Reductions
Tax Division - ($757.9) UGF and 8 full time positions
Treasury Division - ($324.1) UGF/Other and 3 full time
positions
Child Support Services Division - ($789.9) UGF/Fed and
6 full time positions
Key Increment Requests
Treasury Division - $711.5 - Add two investment
officers and one support position
Treasury Division - $857.8 - Move investment officer
salaries to market level
Natural Gas Commercialization (AKLNG) - $1,876.7
Consulting and Legal Services - $1,700.0
Non-Permanent Project Coordination Position -
$111.7
Travel and Support Costs - $65.0
Mr. DeBartolo mentioned the reduction of 2 positions from
the unallocated reduction within the Treasury Division. The
state had given $190 thousand to the Tax Division. He also
noted that the APFC had reduced $3 million in management
fees with certain changes.
Co-Chair Thompson asked if the requests were in UGF. Mr.
DeBartolo indicated that the request for the Treasury
Division would not be in UGF because they would be
allocated to the ARM Board.
Vice-Chair Saddler thought he heard Mr. DeBartolo mention
the figures included unallocated reductions. It sounded
like Mr. DeBartolo had allocated them to certain positions.
He noted that it was unusual to have unallocated reduction
as early in the process. Mr. DeBartolo explained that he
had allocated $190 thousand to the Tax Division, $190 to
the Treasury Division, and $134 in UGF to the Child Support
Division of the state's $518 thousand that was a part of
the state's unallocated reduction. He hoped to have the
unallocated reductions in the governor's amended scenario.
Mr. DeBartolo continued reading from the slide. He
mentioned that the request for $857.8 thousand for the
Treasury Division would allow the state to offer more
competitive salaries to investment officers. A study had
been done confirming that the state needed to be more
competitive in the market.
Representative Gattis asked about salaries having to be
bumped up in order to attract people to Juneau from the
Lower 48. She opined that some of the work could be done
from the Lower 48. She wondered whether salaries would have
to be bumped up if they were working somewhere else where
the work was typically done, such as on Wall Street.
Commissioner Hoffbeck answered that in order to attract
people from other places salaries had to be substantially
higher that what the department had asked for particularly
for the ARM Board. The department had attempted to bring
people in and train them. Some of the funding request was
to provide salary increases for people that had been with
the state for several years and were now full-fledged
investment officers. He admitted that the DOR offered
substantially less than the APFC for some positions. The
funding request was, at least in part, to avoid losing some
existing state employees. He added that the department
hired locally whenever possible.
Representative Gattis wondered whether the state's salaries
compared to those elsewhere in the established industry, or
would the department have to bump them up to attract people
to Juneau. Commissioner Hoffbeck indicated that the
industry standard was higher than what the state was
currently offering.
Mr. DeBartolo continued reading the natural gas
commercialization section on slide 9.
3:48:07 PM
Representative Wilson asked if the legislature had already
paid the costs Mr. DeBartolo had just mentioned. She
thought the expenses had been addressed in the most recent
special session. Commissioner Hoffbeck explained that the
request was for a specific DOR position and for support in
order to get through FY 17 focusing on the pre-feed.
Unlike, the Department of Natural Resources (DNR), the DOR
had one deputy commissioner basically dedicated to the
AKLNG project, 2 audit masters working on the project
rather than doing audits, and two analysts already working
on the project that needed to be focusing on their normal
work. He admitted that the DOR could not properly do its
job without additional people hired.
Representative Wilson asked if he had known about the staff
shortfall during special session. She was questioning the
timing. Commissioner Hoffbeck did not know the answer to
her question.
Representative Wilson wanted to point out that there was
already additional costs on certain projects. The
legislature should have been made aware of additional costs
prior to approval of moving to the next steps.
Co-Chair Neuman did not understand why the funds were not
coming out of the AKLNG fund.
Representative Wilson agreed.
Commissioner Hoffbeck explained that in the past the
department had had difficulty getting the money returned to
the department for the work it had done for AKLNG via a
reimbursable services agreement (RSA).
Co-Chair Neuman would ask the committee to look into the
issue further.
Representative Pruitt added that the discussion applied to
the end of the current fiscal year in special session. He
felt the current discussion was for the following fiscal
year. He thought he answered the current question. The
state's money that was appropriated in the previous
November was only for the current fiscal year.
Representative Wilson responded that she wanted the
department to respond.
Mr. DeBartolo advanced to slide 10: "Alaska Department of
Revenue: FY 17 Governor's Budget Key Changes - Alaska
Permanent Fund Corporation Requests":
Rules based stock portfolio
Staff: 3 investment, 1 risk, 1 IT
Annual salary cost: $882,000
Annual fee savings: $3.2 million
Special opportunities
Staff: Investment analyst
Annual salary cost: $145,000
Savings: $44 M over the life of one investment
$216,000 for staff retention adjustments
It is important that the APFC be able to retain
experienced, skilled professionals that are critical
to managing and growing the Permanent Fund.
Mr. DeBartolo noted the anticipated savings with both
clusters of additions.
3:52:08 PM
Mr. DeBartolo scrolled to slide 11: "Alaska Department of
Revenue: FY 17 Capital Budget Requests - Governor":
· Child Support Services Database Replatforming
(NSTAR)
· Capital Funding - 1,700.0 UGF Match/3,000
Fed
These funds will be used to move the case
management system off the aging and expensive
mainframe, and keep them compliant with the Feds
for at least the next fifteen years.
· Alaska Housing Finance Corporation Multiple
Projects
· Capital Funding - 15,950.0 UGF/
3,900.0 Other/1,500.0 DGF/16,500.0 Fed
· General Fund Detail (UGF/DGF)
· $6.85 million Homeless Assistance Program
· $3.0 million Supplemental Housing
Development Program
· $1.85 million Federal and Other Competitive
Grants
· $1.5 million Beneficiary and Special
Needs Housing
· $1.5 million Rental Assistance for
Victims (ECHP)
· $1.0 million Teacher, Health, &
Public Safety Professionals Housing
· $1.0 million Cold Climate Housing
Research Center (CCHRC)
· $750,000 HUD Federal HOME Grant
Co-Chair Neuman mentioned that AFHC would be coming before
the committee at which time questions could be addresses.
Co-Chair Thompson reviewed the agenda for the following
day.
ADJOURNMENT
3:54:01 PM
The meeting was adjourned at 3:54 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR Budget Overview for HFC 1-26-16.pdf |
HFIN 1/26/2016 1:30:00 PM |
|
| 012516 Standard and Poor's AK Rating.pdf |
HFIN 1/26/2016 1:30:00 PM |
|
| 012516 Fall 2015 Revenue Sources Book - PRINTABLE.pdf |
HFIN 1/26/2016 1:30:00 PM |
|
| FINAL Fall 2015 Revenue Forecast Presentation.pdf |
HFIN 1/26/2016 1:30:00 PM |
|
| Leg Finance Supp for Revenue HFC Overview 1-26-16.pdf |
HFIN 1/26/2016 1:30:00 PM |
|
| HFC Response DOR- Wilson - DOR 10 Year GF 1-28-16.pdf |
HFIN 1/26/2016 1:30:00 PM |
|
| DOR Response HFIN 1-26-16 Position Reductions & Layoffs 1-28-16.pdf |
HFIN 1/26/2016 1:30:00 PM |