Legislature(1999 - 2000)
04/16/1999 01:45 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
GENERAL SUBJECT(S): LONG TERM FISCAL GAP DISCUSSION
The following overview was taken in log note format. Tapes and
handouts will be on file with the House Finance Committee through the
21st Legislative Session, contact 465-2156. After the 21st Legislative
Session they will be available through the Legislative Library at 465-
3808.
Time Meeting Convened: 1:45 P.M.
Tape HFC 99 - 83, Side 1.
Tape HFC 99 - 83, Side 2.
Tape HFC 99 - 84, Side 1.
PRESENT:
X
Representative G. Davis
Co-Chair Therriault
Representative Foster
X
Co-Chair Mulder
X
Representative Grussendorf
X
Representative Austerman
X
Representative Kohring
X
Representative Bunde
Representative Moses
Representative J. Davies
Representative Williams
ALSO PRESENT: DAVID TEAL, DIRECTOR, DIVISION OF LEGISLATIVE FINANCE;
REPRESENTATIVE ETHAN BERKOWITZ; REPRESENTATIVE SHARON CISSNA; PHIL
OKESON, LEGISLATIVE ANALYST, DIVISION OF LEGISLATIVE FINANCE; WILSON
CONDON, (TESTIFIED VIA TELECONFERENCE), COMMISSIONER, DEPARTMENT OF
REVENUE; CHARLES LOGSDON, (TESTIFIED VIA TELECONFERENCE), CHIEF
PETROLEUM ECONOMIST, OIL AND GAS DIVISION, DEPARTMENT OF REVENUE;
GREG WILLIAMS, DEPARTMENT OF LABOR.
LOG
SPEAKER
DISCUSSION
TAPE CHANGE 83-1
000
Co-Chair Mulder
Convened the HFC meeting at 1:45 p.m.
079
PHIL OKESON,
LEGISLATIVE
ANALYST, DIVISION
OF LEGISLATIVE
FINANCE
Spoke to the measurable goals of a long-
term plan. The intent would be to
identify the goals. He distributed a
handout for the Committee. [copy on file]
149
Phil Okeson
Highlighted long term issues and the
current situation and how that would
affect long term budgeting in the State.
201
Phil Okeson
The second situation illuminates high oil
prices. He spoke to the graph
illustrating historical state revenues.
He pointed out the volatility of oil
prices and problems with production.
283
Phil Okeson
Future projections do not change. These
lines are slopping downward. The
difference between the lines continue to
grow closer together.
348
Phil Okeson
Stressed that assumptions would be the key
to the problem. The first assumption is a
3% inflation. That is about the same as
the CPI. He questioned the growth rate in
government. The second item is population
growth which is projected to be 1.5%. A
2% projected population growth would be
used for the dividend only.
479
Phil Okeson
Continued, another scenario would indicate
a permanent fund total return of 7.75%.
539
Phil Okeson
Constitutional Budget Reserve total return
of 5%. 5% if less than $3B and 8.1% if
greater than $3B.
594
REPRESENTATIVE
BERKOWITZ
He asked the difference between the PFD
and revenue stream. Are restrictions
placed on the PFD 3/10%.
653
Phil Okeson
Referenced the current situation revenues
and expenditures (graph) . The deficit
will grow significantly in the years to
come.
716
Representative
Grussendorf
Asked if there was a slide that indicates
the earnings off the permanent dividend?
742
Phil Okeson
Stated that he looks for spikes which
indicates that things are going bad for
the unrealized gains. Under this
assumption, there will continue to be
revenues being placed into that fund.
804
Phil Okeson
Spoke to the graph, which indicates
various savings accounts which the State
owns. The Permanent Fund corpus continues
to grow. The first thing that will go
will be the Constitutional Budget Reserve.
How to fund the deficit will begin with
spending the Constitutional Budget
Reserve. The State can not touch the
Permanent fund corpus by constitutional
law. He projected that by 2005, the
earnings reserve will be gone. Then the
State will hit a wall
907
Phil Okeson
Referenced that the graph showing the
purchasing power of the current assets.
To stay even with the rate of inflation,
the purchasing power must stay the same.
Deficit is growing each year. He asked
how much could be funded through the
savings account. At some point all that
will be left is Permanent fund dividend
corpus.
1012
Phil Okeson
In out years, the State will continue to
be paying out from the dividend.
1035
Phil Okeson
Stated that the technical graph warns of
coming problems. This graph indicates the
unrealized gains realized. The dividend
structure exasperates the problems. The
realization of gains causes the dividend
to rise.
1121
Co-Chair Mulder
Asked about the 21% of realized gains of
the unrealized structure.
1140
Phil Okeson
Stated that it would vary according to
what the market was doing. He recommended
a prudent investor rule.
1163
Phil Okeson
Spoke to high oil prices. What oil price
would it take to bail us out of the
situation? If oil went to $34/bbl and in
fact rose to $61/bbl, although that would
not be too possible. He believed that if
oil revenue did jump, the deficit would
start to come back. It is difficult to
reach the production curve.
1259
Phil Okeson
He outlined a graph at $34/bbl. A savings
fund would be reasonable, however the
Constitutional Budget Reserve would also
start to go away. There is a production
problem.
1321
Phil Okeson
In order to maintain constant purchasing
power, the actual projected savings begins
to sloop downward.
1390
Phil Okeson
This shows that the model is a structural
problem. It will haunt the state year in
and year out. There needs to be a long-
term plan. There no longer will be a big
savings and the State must tackle how the
deficit can be attacked.
1456
Phil Okeson
Cut costs; raise revenues; systematically
use the State's savings accounts.
1481
Phil Okeson
Goals of long term plan would be
sustainability. State must solve the
problem for a long time. Must decide what
is fair today and would continue to work
tomorrow. There needs to be stability.
We need a plan that provides more
stability.
1550
Phil Okeson
Predictability of assumptions that can be
used. Will the plan be able to fund the
pfd's and the deficit? These are the
goals to be addressed.
1580
Phil Okeson
Sustainability has been addressed in the
past has been inflation proofed. A
calculation has caused over inflation
proofing. What the State is trying to do
is to protect the purchasing power of the
assets. He asked what the time would be
for sustainability. No other state in the
union has assets like Alaska. There are
other models that Alaska might consider.
1690
Phil Okeson
The key is establishing a system that will
allow the ride during the down time.
Intergenerational equity is closely
related to sustainability. All
generations are held equal. Many ways to
provide intergenerational equity. i.e.
infrastructure will leave the next
generation a sense of economy. Alaska has
the ability to wipe out the salmon runs.
Unique about AK is taking a non-renewal
resource and turn it into renewal
resources.
1865
Phil Okeson
Decision tree. Does the State wish to
maintain the purchasing power of the State
financial assets. How much can be spent
each year? What will the state do when the
assets run out? To invest in
infrastructure. There is the potential of
messing it up. It is difficult to pick an
infrastructure to do. That would be a
policy call. The amount that can be spent
each year is about $1.4 billion dollars in
today $$.
2000
Phil Okeson
It is important to remember that Alaska
has lived in a great bull market. Now it
is time to create a responsible portfolio
realizing that it is important to save
during the good years. Consider the
inflation rate. It is important to
inflation proof the assets.
2078
Phil Okeson
The question is what are we going to do in
the future. A reasonable amount to pull
out of the fund would be 5% each year.
Can the state live within that constraint.
At this time, the state is short. How to
make it work if it is sustainable.
2128
Phil Okeson
Market volatility: There are mechanisms
that will help smooth that out and bring
stability. Important to make worse case
scenarios. How does the plan stack up in
the worse case scenario? Some plans will
do better in a revenue flow.
2180
Phil Okeson
Volatility of the market. A plan would
provide the ability to reduce the State's
revenue.
2207
Phil Okeson
Spoke to the predictability of the market.
Standard revenue assumptions.
2268
Phil Okeson
What is the realistic rate of growth in
the expenditure assumption?
TAPE CHANGE 83-2
056
Co-Chair Mulder
Intent is have the Committee consider the
assumptions in order to develop a common
set of assumptions. Voiced appreciation
on the work done regarding the modeling
and key assumption development.
213
WILSON CONDON,
(TESTIFIED VIA
TELECONFERENCE),
COMMISSIONER,
DEPARTMENT OF
REVENUE
Provided handouts to the Committee. He
provided an overview of that handout.
[copy on file]
349
Co-Chair Mulder
Assumptions in any model are production
and price. Can the Legislature consider
reasonable expectation of these two
assumptions? He stressed the importance
of these points.
417
Commissioner
Condon
Spoke to pages 2 and 3 of the handout. He
addressed the big picture and the State's
revenue and the unrestricted revenues.
The State can assume that it will have
available $3.4 billion a year. That will
come from oil and money in pfd and taxes
and fees. Roughly $3.4 billion dollars
will be paid for operating budget and for
inflation proofing the pfd.
579
Commissioner
Condon
Page 3 annualizes the $1 per barrel impact
on the general fund unrestricted revenue.
He pointed out that $1 dollar change means
$140 million dollars. In the next decade,
it will mean a different amount given the
situation that the State faces.
698
DR. CHUCK LOGSDON,
(TESTIFIED VIA
TELECONFERENCE),
CHIEF PETROLEUM
ECONOMIST,
DEPARTMENT OF
REVENUE
Provided information accessable on the web
site forecast. Page 4 indicates the ANS
oil prices will average their lowest since
FY79. ANS production is lowest since FY79
and the State revenues are the lowest
since FY79. He acknowledged that this is a
bad year.
847
Dr. Logsdon
Oil prices remain low but will recover to
$16/bbl in FY2003. New fields on-line in
FY2001 and 2003 keep production above 1.03
million barrels per day through FY 2005.
916
Dr. Logsdon
Projects needing to go into the
Constitutional Budget Reserve with the
current situation. He provided a
historical perspective speaking to a chart
which shows prices since 1985. The chart
dramatically illustrates how far the
prices have fell.
996
Dr. Logsdon
Thinks that OPEC will stay the course
making modest cuts; however, OPEC
production creeps up; he provided the low-
price scenario. He did not address that
scenario.
1058
Dr. Logsdon
Spoke to what is happening in OPEC at this
time. Recent news has stressed that Iran
will be prorating. Total OPEC has agreed
to cut barrels per day. These
announcements show prices are moving up.
Alaska forecast is adjusted to the risk
that they are not cut. He spoke in more
detail between the arrangement between
Saudi Arabia and Iran. The cuts left all
countries with a 7.3%. The key non-OPEC
countries have agreed to also take a cut.
1234
Dr. Logsdon
Reference case and production forecast
providing the low oil prices in FY99 delay
company development plans; Alpine
production starts in FY 2001; Northstar
and Liberty come on line in FY2003-2004.
1344
Dr. Logsdon
FY 2000-2005 summary general fund
unrestricted revenues. Oil revenues are
projected to average about $900 million
dollars per year. Oil prices will average
$15.40/bbl. Non oil revenues will average
about $475 million per year. Investment
earnings will be about $2000 million
dollars per year. Total unrestricted
revenue will average about $375 million
dollars per year.
1440
Co-Chair Mulder
Asked if the Department had focused on the
production side. Any other than Northstar
and Alpine?
1466
Dr. Logsdon
There is hope that by FY2004 - 05 the
State will be producing out of West Sack
and satellite fields will begin producing
now 3,000 barrel per day and will increase
to 50 thousand barrels per day by 2005.
There are other sources of new oil.
1523
Co-Chair Mulder
Cook inlet?
1529
Dr. Logsdon
Absolutely. 16000 barrels per day by
2005.
1549
Co-Chair Mulder
2006 - 2010 drops in production?
1564
Dr. Logsdon
2010 - 70,000 barrels per day. Less than
what is produced in 2005. No speculative
discoveries at this time figured into the
price.
1620
Vice-Chair Bunde
NPRA speculation?
1642
Dr. Logsdon
Not until discovered.
1657
Co-Chair Mulder
Why?
1662
Dr. Logsdon
Habitat situation.
1674
Vice-Chair Bunde
Federal regulations.
1682
Representative G.
Davis
Assessment of infrastructure for NPRA?
1694
Dr. Logsdon
Have not however, field opening in 2001
1731
Co-Chair Mulder
NPRA hold opportunity for the State.
Would the State receive 50-50 share?
1752
Dr. Logsdon
50% federal revenue and the State could
severance tax the revenue. Those numbers
are not available at this time. Could
generate 20 - 30 million barrels a year.
Not a giant revenue source for the State.
1804
Co-Chair Mulder
Asked for more info on the NPRA fund.
1819
Dr. Logdson
That fund was created as a compromised
with the fed govt. to assure that local
communities receive some of the monies.
That is a federal statute. It would be
subject to Legislative appropriation.
1858
Representative
Austerman
Assume when price drops down, is there
increased production. Is that calculated?
1878
Dr. Logsdon
Replied about heavy oil development. Also
made strategic decisions and that are
taken into consideration.
1927
Representative
Austerman
Is there a slow down in the amount of oil
being pumped?
1941
Dr. Logsdon
The oil companies need cash flow and they
pump as much as they can. There has not
been a close correlation between today's
caps.
1985
Co-Chair Mulder
Forecast is conservative based on no
reserves and probability of no new
reserves soon.
2008
Commissioner
Condon
Unlikely that the State will see more than
what is proposed in the forecast.
2058
GREG WILLIAMS,
DEPARTMENT OF
LABOR
Provided a handout that indicates the
population projections. Distinguish
between economic migrations. Series
reflects base line terms for mortality and
fluctuations that occur over time.
Indicates the mid series projection.
2161
Mr. Williams
Spoke to the handout and the Alaska middle
series population projection by age and
male/female, 2005. The baby boom in their
most productive years of employment. The
echo boom in high school; fewer elementary
age children.
2236
Mr. Williams
The two key trends are that the population
over 65 will be a large increase over the
next 20 years. The second trend will look
at flat school age growth in the next 10
years.
2314
Mr. Williams
Will continue to see the spill over effect
in Anchorage which will not stop. That
trend is more volatile depending on the up
and downs in the year.
2372
Vice-Chair Bunde
Referenced the chart and Mat valley trend.
TAPE CHANGE 84-1
043
Mr. Williams
Continued addressing the impacts of the
trends. Projections could be a little
optimistic.
096
Representative
Austerman
1% growth for the next 10 years. What
were the last 10 years?
136
Mr. Williams
Approximately the same as what is
projected to come.
168
Co-Chair Mulder
Referenced the graph regarding the 65
years and older will be increased by 182%.
5-7 year olds 12.9% growth. There is a
decrease in the 30-45-age bracket.
274
Mr. Williams
In population overview often indicates the
ages and the number of those that will
need to be supported.
329
Vice-Chair Bunde
Alaska has the highest percentage of
growth of those over 85. He referenced
the last chart in the handout.
381
Mr. Williams
Those people are not a significant part of
that trot.
415
Representative
Austerman
Is the age 65 and older population
growing?
Mr. Williams
He noted that Alaska has been a young
state. The state's population is aging.
535
Co-Chair Mulder
Discussed growth in the 65 and older
category. He observed that there would be
a continued trend of increasing Medicare
expenditures.
603
Vice-Chair Bunde
Noted that the legislature has encouraged
the elderly population to stay in the
state.
737
Co-Chair Mulder
ADJOURNMENT
The meeting adjourned at 3:42 p.m.
HOUSE FINANCE COMMITTEE
LOG NOTES
H.F.C. 8 4/16/99 p.m.
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