Legislature(2007 - 2008)HOUSE FINANCE 519

01/23/2007 01:30 PM House FINANCE


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01:35:07 PM Start
01:35:16 PM Overview: Department of Revenue Budget
03:17:14 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview: Department of Revenue TELECONFERENCED
-- Teleconference <Invitation Only> --
                       HOUSE FINANCE COMMITTEE                                                                                  
                            January 23, 2007                                                                                    
                                1:35 p.m.                                                                                       
                                                                                                                                
 CALL TO ORDER                                                                                                                
                                                                                                                                
 Co-Chair   Meyer  called   the  House  Finance   Committee   meeting   to                                                      
 order at 1:35:07 PM.                                                                                                         
                                                                                                                                
 MEMBERS PRESENT                                                                                                              
                                                                                                                                
 Representative Mike Chenault, Co-Chair                                                                                         
 Representative Kevin Meyer, Co-Chair                                                                                           
 Representative Bill Stoltze, Vice-Chair                                                                                        
 Representative Harry Crawford                                                                                                  
 Representative Richard Foster                                                                                                  
 Representative Les Gara                                                                                                        
 Representative Mike Hawker                                                                                                     
 Representative Reggie Joule                                                                                                    
 Representative Mike Kelly                                                                                                      
 Representative Mary Nelson                                                                                                     
 Representative Bill Thomas, Jr.                                                                                                
                                                                                                                                
 MEMBERS ABSENT                                                                                                               
                                                                                                                                
 None                                                                                                                           
                                                                                                                                
 ALSO PRESENT                                                                                                                 
                                                                                                                                
 Patrick   Galvin,   Acting   Commissioner,    Department    of  Revenue;                                                       
 Dr.  Michael   Williams,   Chief   Petroleum   Economist,    Department                                                        
 of    Revenue;     Jerry    Burnett,      Director,     Administrative                                                         
 Services,     Department      of   Revenue;     Gary     Bader,    Chief                                                       
 Investment    Officer,   Department    of  Revenue;    Cheri  Nienhuis,                                                        
 Petroleum    Economist,    Department    of  Revenue;   Representative                                                         
 Anna Fairclough                                                                                                                
                                                                                                                                
 PRESENT VIA TELECONFERENCE                                                                                                   
                                                                                                                                
 None                                                                                                                           
                                                                                                                                
 GENERAL SUBJECT(S):                                                                                                          
                                                                                                                                
              ^OVERVIEW: DEPARTMENT OF REVENUE BUDGET                                                                         
                                                                                                                                
The   following     overview    was   taken    in   log   note    format.                                                       
Handouts    will  be  on   file  with   the  House   Finance   Committee                                                        
through    the   25th   Legislative     Session,    contact    465-6814.                                                        
After   the  25th   Legislative    Session    they  will   be  available                                                        
through the Legislative Library at 465-3808.                                                                                    
                                                                                                                              
                                                                                                                                
                                                                                                                                
TIME           SPEAKER             DISCUSSION                                                                               
1:35:16 PM Co-Chair Meyer  Introduced members of the House Finance                                                            
                               Committee.                                                                                     
1:37:22 PM PATRICK                 Summarized the responsibilities of the                                                     
               GALVIN,    ACTING   Department       of     Revenue:      the     Tax                                            
               COMMISSIONER,       Division,       Child     Support      Services                                              
               DEPARTMENT      OF  Division,     the  Permanent    Fund   Dividend                                              
            REVENUE             Division, and the Treasury.                                                                   
1:39:24 PM Commissioner            Introduced members of his management                                                       
               Galvin              team:        Brian        Andrews,        Deputy                                             
                                   Commissioner        working      on    Treasury                                              
                                   issues;        Marcia       Davis,        Deputy                                             
                                   Commissioner,     responsible    for   gas  line                                             
                                   and     tax     issues;      Jerry     Burnett,                                              
                                   Legislative    Liaison   for   the  Department;                                              
                                   Gary   Bader,    Chief   Investment    Officer;                                              
                                   John   Iverson,    Director,    Tax   Division;                                              
                                   Dr. Michael Williams, Chief Economist                                                      
1:42:44 PM Commissioner            Noted that the discussion would focus                                                      
               Galvin              on projected crude oil prices and                                                            
                                   future    projections,     Petroleum     Profits                                             
                                   Tax   (PPT)   status,    revenue    milestones,                                              
                                   and the investment situation.                                                              
1:44:35 PM DR.           MICHAEL Introduced the topic of Crude Oil                                                            
               WILLIAMS,           Prices:                                                                                      
               CHIEF                                                                                                            
                                       · The Department's official crude                                                        
               ECONOMIST,                                                                                                       
                                          oil price forecast for FY 2007 as                                                     
               DEPARTMENT OF                                                                                                    
                                          contained in the Revenue Sources                                                      
               REVENUE                                                                                                          
                                          Book or RSB [page 97].                                                                
                                       · The actual prices for FY 2007 for                                                      
                                          the months for which we have data.                                                    
                                       · The volatility of crude oil as                                                         
                                          reflected in daily prices.                                                            
                                       · The topics or drivers that are                                                         
                                          causing volatility                                                                    
                                                                                                                                
                                   Dr.    Williams    referred     to   a   handout                                             
                                   entitled      "Crude    Oil    Prices,     State                                             
                                   Revenue & the PPT" (copy on file).                                                         
1:46:46 PM Dr. Williams            Read from a prepared statement: "Let's                                                     
                                   begin    with   the   Department's     official                                              
                                   price   forecast    for   Alaska   North   Slope                                             
                                   crude   oil   or  ANS.    The   chart  presents                                              
                                   prices    in  dollars    per   barrel   and   the                                            
                                   vertical    axis    goes   from   $40   to  $75.                                             
                                   The   horizontal     axis   contains     monthly                                             
                                   average    prices   beginning    in  June   2006                                             
                                   and    running    through    May   2007.      The                                            
                                   reason     the   data    begin    in   June    is                                            
                                   because    oil   prices    and  production     in                                            
                                   June    are   the   basis   for    royalty    and                                          
                                    production    tax   payments   in   July  -  the                                            
                                    first   month   of   Alaska's   fiscal    year."                                            
                                    "The   green   bars  represent    our  forecast                                             
                                    prices     and     the     dark    blue     line                                            
                                    represents     actual    prices.       When    we                                           
                                    prepared    the   forecast     we   had   actual                                            
                                    prices   for  June,  July   and  August  -  that                                            
                                    is   the  reason   they   match.     Our   crude                                            
                                    oil    price   forecast     for   FY   2007    is                                           
                                    $59.15    per    barrel    -   which    is   the                                            
                                    average   of  the  12  months  you   see  in the                                            
                                    chart.      You   will    note   we   correctly                                             
                                    predicted    prices   declining;   however,    we                                           
                                    missed the exact trajectory.                                                                
                                                                                                                                
                                    Moving    on   to   volatility,     this   chart                                            
                                    contains     the    daily     price    of    ANS                                            
                                    beginning    with  June  1,  2006  and  running                                             
                                    through    January    18,   2007.     You   will                                            
                                    note   there   are   some  dramatic    changes.                                             
                                    Prices   increase   almost   13%  between   June                                            
                                    13  and   July  14,   and  then   decline   more                                            
                                    than  29%   or $22  per  barrel   between   July                                            
                                    14  and   October   30.    Thereafter,    prices                                            
                                    increase     12%   by   December     15   before                                            
                                    declining    another    20%   by   January   18.                                            
                                    What   is  causing   these   dramatic   swings?                                             
                                    Will they continue?                                                                         
                                                                                                                                
                                    To   help   you  understand     the  causes    of                                           
                                    these    price   changes,     I  am   going    to                                           
                                    discuss   some  key  topics   or  drivers   as  I                                           
                                    call   them.    One  must  keep   in  mind  that                                            
                                    the   price   of  an  item   - any   item   -  is                                           
                                    determined    by   the  relative    supply   and                                            
                                    demand    for   the    item   in   the    market                                            
                                    place.     Crude   oil  is  a  commodity    that                                            
                                    is    traded     on   electronic      exchanges                                             
                              worldwide."                                                                                     
 1:47:48 PM Dr. Williams                                                                                                      
                                    "So   what   are   the   drivers?      We   will                                            
                                    begin    with    the    demand    for   refined                                             
                                    petroleum      products     -    things     like                                            
                                    gasoline,    jet  fuel,   diesel   and  heating                                             
                                    oil.    Demand   is one  of  the  pillars   that                                            
                                    determines    price.     In  general,   greater                                             
                                    demand   for  a  good   provides   support   for                                            
                                    higher   prices.      In  the  United   States,                                             
                                    according     to   the   American     Petroleum                                             
                                    Institute,     "…  petroleum    deliveries,     a                                           
                                    measure    of  demand,   fell   by  roughly    1%                                           
                                    to  20.6   million   barrels   per  day   [mbd],                                          
                                   down   from   20.8  mbd   in  2005,   which   was                                            
                                                                      1                                                         
                                   below      the     2004     level".           The                                            
                                   International      Energy   Agency    estimated                                              
                                   that   world  oil  demand   in  the  industrial                                            
                                   countries     -   countries     like   the    US,                                          
                                   Japan   and  Germany   - declined    by 0.6%   in                                            
                                   2006.    However,    global  demand   increased                                            
                                   due   to  the   increases    in  Asia   and   the                                            
                                   Middle   East.     According   to  a  Citigroup                                              
                                   analyst    "We've   entered    that   era   on  a                                            
                                   worldwide    basis  where   demand   is  growing                                             
                                                   2                                                                            
                                   more   slowly."     The  recent  declines   come                                             
                                   at   a  time   where   there    has  been   warm                                             
                                   weather,    so the   demand  for  heating   fuel                                             
                                   has been reduced by weather.                                                                 
                                                                                                                                
                                   Next,    we  look   at  another    pillar   that                                             
                                   helps    determine     price    -   the   supply                                             
                                   side.     In  general,   greater   supplies    of                                            
                                   a   good   [relative     to   demand]    have   a                                            
                                   depressing     effect   on   price.     Here   we                                            
                                   see     events     that     have     offsetting                                              
                                   effects.     The  Organization    of  Petroleum                                              
                                   Exporting      Countries      or     OPEC     has                                            
                                   attempted    to  stem   the  price   decline   by                                            
                                   reducing      their     production.         They                                             
                                   consciously    reduced   output   in  December,                                              
                                   October     and   September.         They   have                                             
                                   publicly    stated  that   they  might   convene                                             
                                   a   special    meeting   to   discuss    further                                             
                                   production    cuts.     You  should   also  note                                             
                                   that   Angola   became   a member   of  OPEC   on                                            
                                   January 1, 2007.                                                                             
                                                                                                                                
                                   Crude     oil    production      in    non-OPEC                                              
                                   nations    has  been  increasing    as  has   the                                            
                                   inventories    of  crude   oil.   With   slowing                                             
                                   demand,      the    increase     in    non-OPEC                                              
                                   production     has  offset   the   declines    by                                            
                                   OPEC.     The  result   has  been  an  increase                                              
                                   in  inventories.      According    to  the  IEA,                                             
                                   crude    oil   stocks    for   the   industrial                                              
                                   countries     reached   their   highest    level                                             
                                   in   20  years   in  May  2006   and  continued                                              
                                   to   increase   for   four   of  the   next   six                                            
                                   months."                                                                                     
                                                                                                                              
                                                                                                                                
                                                                                                                                
1                                                                                                                               
  Anchorage Daily News, "Demand for Petroleum Drops Second Year", January                                                       
20, 2007.                                                                                                                       
2                                                                                                                               
  Ibid.                                                                                                                         
                                    "Taken    together    we  see   a   picture    of                                         
                                    decreasing    demand,    increasing    supplies                                           
                                    and   increasing    inventories.       What    is                                         
                                    causing    demand    to   slow   and   non-OPEC                                             
                                    supplies    to  increase?      A  major   factor                                            
                                    is  high   crude   oil  prices.     High   crude                                            
                                    oil  prices   translate   to  high   prices  for                                            
                                    refined   petroleum    products.     These  high                                            
                                    prices   have   an   impact   on  consumption.                                              
                                    It  has  taken   time  for   the  impact   to  be                                           
                                    seen,     but    the     recent    consumption                                              
                                    statistics     reflect    the   price   effect.                                             
                                    On   the   supply   side,    the   high   prices                                            
                                    have   led  to  large   oil  company   profits,                                             
                                    which   have   in  turn   led   to  a  drilling                                             
                                    and    exploration     bonanza    world    wide.                                            
                                    Companies    are  exploring    and   developing                                             
                                    resources around the world.                                                                 
                                                                                                                                
                                    Geopolitical     events   also  contribute     to                                           
                                    price   volatility.       When  Venezuela    and                                            
                                    Bolivia    talk  nationalization,      there   is                                           
                                    an  impact   on   the  crude   markets   with   a                                           
                                    perception    of  reduced   supply   and  higher                                            
                                    prices.     The  fighting    in  Iraq,  Russian                                             
                                    policy    changes   with    regard   to   energy                                            
                                    development      and     other    events     all                                            
                                    influence crude oil prices."                                                              
 1:52:48 PM Dr. Williams                                                                                                      
                                    "Please    bear  with   me   as  I  attempt    to                                           
                                    tie   much  of  this   together    to  help  you                                            
                                    understand      the    functioning      of   the                                            
                                    market.      A  key   ingredient    in   all   of                                           
                                    this   is   what  people    think   the   future                                            
                                    holds    -   their    perceptions.         If   a                                         
                                    refinery    operator     believes    demand    is                                           
                                    strong   and  supplies   are  not  forthcoming                                              
                                    [here   you   should   think   of  2004   global                                            
                                    oil   demand   growth   of  3.4%   followed    by                                           
                                    supply   disruptions     caused   by  Hurricane                                             
                                    Katrina    in    2005],    that   operator     is                                           
                                    likely   to   purchase   additional    supplies                                             
                                    [remember,    after   2004  there   is  limited                                             
                                    world   wide   spare   crude   oil   production                                             
                                    capacity].      Now,   multiply   this   by  all                                            
                                    the     refinery      operators,      airlines,                                             
                                    petrochemical      plants     and    one    sees                                            
                                    strong   demand    for  crude   oil,   with  the                                            
                                    different     market   segments     bidding    up                                           
                                    the  price.     Now  throw   in  the  financial                                             
                                    sector.     Institutional    investors   see   an                                           
                                    opportunity     -  they   too  believe    demand                                            
                                    is   increasing    with   limited   supplies    -                                         
                                   and   they  purchase   derivatives    -  further                                             
                                   bidding     up    the    price.        This    is                                            
                                   basically     what   happened    in   2004    and                                            
                                   2005.                                                                                        
                                                                                                                                
                                   The    year    2006    opened     with    people                                             
                                   believing    [1]  there  was   no price   effect                                             
                                   that   would   dampen    oil   demand   and   [2]                                            
                                   there   would  be  a  nasty  hurricane    season                                             
                                   in  2006   that  would  reduce   oil  supplies.                                              
                                   With    continued     unrest    in    Iraq    and                                            
                                   problems     in  the    Russian    oil   sector,                                             
                                   this    led   to   the   steady    increase    of                                            
                                   prices   that  peaked   in  July.    Thereafter                                              
                                   it   became   clear   that  the   price   effect                                             
                                   was    working    as   demand    for   oil    was                                            
                                   declining,     and   there    were   no   supply                                             
                                   disruptions      due   to   hurricanes.        In                                            
                                   addition,     warm   weather   reduced    winter                                             
                                   heating    oil   demand.     The   IEA   lowered                                             
                                   its    demand     estimate     in    September,                                              
                                   October,    November    and  January    [it   was                                            
                                   unchanged in December].                                                                      
                                                                                                                                
                                   On  a  very   different   but   related   topic,                                             
                                   the   demand   for   corn   has  risen   as   the                                            
                                   demand    for   ethanol    has  increased     and                                            
                                   corn    prices    are   at   10   year    highs.                                             
                                   While   crude    oil  prices   are   declining,                                              
                                   financial    investors    still   want  to  earn                                             
                                   a   profit   in  commodities,     so   they   may                                            
                                   move   money    to  commodities     other   than                                             
                                   oil   - such   as  corn.    The  recent   freeze                                             
                                   in   California    has   damaged    the   citrus                                             
                                   crop,   so  orange   juice  prices   are  likely                                             
                                   to   increase.     Perceptions:      it  may   be                                            
                                   easier    to   make   more   money   in   orange                                             
                                   juice    and   corn   than   oil.     Thus,    we                                            
                                   could   see  additional    money  exit  oil   and                                            
                                   enter    these   other   commodities.       This                                             
                                   could   amplify   the  downward   trend   in  oil                                            
                                   prices.                                                                                      
                                                                                                                                
                                   In   summary,    when   people's    perceptions                                            
                                   change,     they   change    their    behavior.                                            
                                   The    advent     of    computers     and     the                                            
                                   internet     speed    information     worldwide                                              
                                   and   a   change   in   perception    can   very                                             
                                   rapidly   translate    to  a change   in  action                                             
                                   and   prices.    It   is  people's   perception                                              
                                   of   future   prices    that   causes   them   to                                        
                                    take     action      -    they     get     their                                            
                                    information      from    television     or   the                                            
                                    internet    and   make    their   decisions     -                                           
                                    whether   hedging    jet  fuel   purchases   for                                            
                                    an  airline,    purchasing    commodities    for                                            
                                    an   institutional     investor,    or  betting                                             
                                    on price declines at a hedge fund.                                                          
                                                                                                                                
                                    With   regard   to  prices,   we  did  forecast                                             
                                    the  price   decline.     Further,    I believe                                             
                                    prices   will   remain   volatile.     Again,   I                                           
                                    do    not   think    the    financial     sector                                            
                                    causes    the    trends;    I    believe    they                                            
                                    amplify   the  trends.    In  the  short   term,                                            
                                    there   is   possible    price   support    from                                            
                                    the    recent    cold   weather    that    could                                            
                                    stimulate    the   demand   for   heating   oil.                                            
                                    Also,   if   OPEC   does   decide   to  further                                             
                                    reduce     output,    it    can    impact    the                                            
                                    markets.     The  two  key  ingredients:     the                                          
                                    supply-demand       balance     and    people's                                           
                                    perceptions of the markets."                                                           
 1:55:46 PM Dr. Williams                                                                                                      
                                    "Next,    I   want   to   turn   to   our   fall                                            
                                    forecast    revenue    projections.        These                                            
                                    can   be   found   in   the   Revenue   Sources                                             
                                    Book.     I  will   review   our  projections,                                              
                                    highlight      the     importance      of    oil                                            
                                    revenues    to  Alaska,    and  describe    some                                            
                                    basic   analysis    to  give  you   an  idea   of                                           
                                    where we are today.                                                                         
                                                                                                                                
                                    Our   official    forecast   of   General   Fund                                            
                                    Unrestricted     Revenue    for   FY   2007    is                                           
                                    $4.9    billion.       Of   the   total,    $4.3                                            
                                    billion   or  88%  comes  from   oil.   I  would                                            
                                    like   to   review    the  categories.       The                                            
                                    first   is   Royalty   revenue    -  this   does                                            
                                    not   include   the   25%  that   goes   to  the                                            
                                    Permanent     Fund   or   PF.     You   see    we                                           
                                    project   about   $1.5   billion   and  this   is                                           
                                    based   on  price,   volume   and  the  royalty                                             
                                    rate    [about    12.5%].       Next    is   the                                            
                                    production     tax   -   which    is   the   new                                            
                                    Petroleum     Profits     Tax   or    PPT   that                                            
                                    Commissioner       Galvin      will     discuss                                             
                                    shortly.     Our  estimate    is  that  it  will                                            
                                    generate    about    $2  billion.      The   key                                            
                                    aspects    here   are    production    volumes,                                             
                                    price,   costs   and  credits.     Next  on  the                                            
                                    list   is  Income   Tax  which  we  project    at                                           
                                    about   $657   million.      The   drivers   for                                            
                                    income    tax  include    prices,    production                                           
                                   and   some  factors    our  accountants    refer                                             
                                   to   as   apportionment     factors.      It   is                                            
                                   pretty    complicated    and  I  will   not   get                                            
                                   into   the  details   now.   We  project   about                                             
                                   $52    million   from    property    taxes    and                                            
                                   this    is    based    on    assessed     value.                                             
                                   Monies    from    bonus,    rents,    etc.    are                                            
                                   projected    at  about   $51  million   and   the                                            
                                   recent    lease   sale  in  the   Beaufort    Sea                                            
                                   in  October    is  the  main  reason   for  this                                             
                                   high   number.     Our   projection    for  non-                                             
                                   oil    revenue    is   about    $580   million.                                              
                                   This    includes     many   other    categories                                              
                                   such    as   alcohol    and    tobacco    taxes,                                             
                                   fines    and    forfeitures,     licenses     and                                            
                                   permits, investment income and other."                                                     
1:57:00 PM Dr. Williams                                                                                                       
                                   "As   you  can  tell,  oil  revenue   dominates                                              
                                   the   Alaska    revenue    picture   and   crude                                             
                                   oil    prices   and   crude    oil   production                                              
                                   volumes      are    the    key     factors     in                                            
                                   estimating     oil   revenue.      To   see   our                                            
                                   status   on  these   two  factors,    I  compare                                             
                                   our    forecast    with   actual    prices    and                                            
                                   volumes for the fiscal year-to-date.                                                         
                                                                                                                                
                                   In   this    chart   the   vertical    axis    is                                            
                                   percent    change.       Our   ANS   crude    oil                                            
                                   price    forecast    for   FY   2007   that    is                                            
                                   published     in   the   RSB   is   $59.15    per                                            
                                   barrel.      ANS  crude   oil  prices    through                                             
                                   January     18   average    $61.81    which    is                                            
                                   $2.66    or    4.3%    above    the   forecast.                                              
                                   Regarding    ANS  crude   oil  production,    our                                            
                                   volume   forecast    for  FY  2007  in  the   RSB                                            
                                   is    739,618    barrels     per   day    [b/d].                                             
                                   Through     January     17   ANS    crude     oil                                            
                                   production     averaged    722,845   b/d   which                                             
                                   is    16,773    b/d    or   2.3%    below     our                                            
                                   forecast.        Since    oil   production     in                                            
                                   Alaska    is    higher    during    the   cooler                                             
                                   months,    I  expect   our  production    volume                                             
                                   estimate      will    get    closer     to    the                                            
                                   forecast as time goes on.                                                                    
                                                                                                                                
                                   These   conclude    my  remarks   on  crude   oil                                            
                                   prices      and    the     revenue     forecast                                              
                                   published    in  the   Revenue   Sources   Book.                                             
                                   I  would  now   like  to  turn  the  floor  over                                             
                                   to  Commissioner    Galvin   who  will   discuss                                             
                                   the PPT."                                                                                  
1:59:16 PM Co-Chair                Asked if $580 million in the non-oil                                                       
               Chenault            revenue stream is an increase or                                                           
                                    decrease    in   revenue    sources    for   the                                            
                                    state from the previous year.                                                             
 1:59:52   PM   Dr.  Williams       Responded    that    it  is   an   increase    of                                         
                                    less   than   1  percent.     He   referred    to                                           
                                    page   9  of   the  "Revenue    Sources    Book"                                            
                                    (Copy on File).                                                                           
 2:00:59   PM   Dr.  Williams       Clarified    that   it  is  an  increase    of  2                                         
                                    percent    because    investment    income   has                                            
                                    doubled.                                                                                  
 2:01:29   PM   Commissioner        Pointed   to  page   9  and  stated   that  with                                          
                Galvin              regard to the actual revenue sources,                                                       
                                    the   amount   is  relatively     flat  between                                             
                                    FY  06  and   what  is  projected    for  FY   07                                           
                                    and  FY  08.    What   changes   is  investment                                             
                                    income,    thus    resulting     in   a   higher                                            
                                    number.                                                                                   
 2:02:22   PM   Co-Chair   Meyer    Noted   that   the   price   of  oil   can't   be                                         
                                    controlled,     but   production     can.      He                                           
                                    questioned    what   is  being   done   to  curb                                            
                                    production    decline.     He  inquired    about                                            
                                    a  production   spike   in  2012,  as  shown   on                                           
                                    the   graph  on  page   13  of  the   Fall  2006                                            
                                    Revenue    Sources     Book.      He   wondered                                             
                                    about       current       exploration        and                                            
                              incentives.                                                                                     
 2:03:33   PM   Commissioner        Replied     that    exploration      has    been                                          
                Galvin              heavier this year compared to recent                                                        
                                    years.        He   referred     to    incentive                                             
                                    credits    given   for   exploration     and   an                                           
                                    increase    in   exploration,     both   on  the                                            
                                    North   Slope  and  in  Cook  Inlet.    He  said                                            
                                    he  expects   several   new  off-shore    fields                                            
                                    to be added to the projection forecast.                                                   
 2:05:11   PM   Co-Chair   Meyer    Concluded    that  in   2012  some   additional                                           
                                    fields would come on line.                                                                
 2:05:24   PM   Commissioner        Explained    that  development    now  in  those                                          
                Galvin              fields would lead to production in five                                                     
                                    years.                                                                                    
 2:05:42   PM   Dr.  Williams       Referred    to  page   103  of  the  Fall   2006                                          
                                    Revenue    Sources     Book,    where   Liberty                                             
                                    field     comes      on    line     in     2012.                                            
                                    Commissioner Galvin described the make-                                                     
                                    up  of   Liberty   and   the  projection    that                                            
                                    it could be on line in 2012.                                                                
                                    Co-Chair     Meyer    asked    about    Shell's                                             
                                    holdings     in   the    Chukchi    Sea    area.                                            
                                    Commissioner      Galvin    said   there    were                                            
                                    currently    no  leases   in   that  area,   but                                            
                                    there   were  a  number   of  Shell   leases   in                                           
                                    the  Beaufort    Sea  area.    Co-Chair    Meyer                                            
                                    noted   that   the  gas   pipeline   will   also                                            
                                    help production.                                                                          
 2:07:54   PM   Representative      Asked   for  an  estimate   of  how   much  more                                          
               Gara                revenue there would be absent the                                                            
                                   pipeline shut down.                                                                        
2:08:07 PM Dr. Williams            Replied that estimates are not up to                                                       
                                   date   because   some   of  the  production    is                                            
                                   still    being    shut    in.     Commissioner                                               
                                   Galvin   added   that  the  estimates   are   on-                                            
                                   going.                                                                                     
2:09:11 PM Representative Asked how Point Thompson might affect                                                               
               Gara                the      production        volume      picture.                                              
                                   Commissioner     Galvin  replied   that   it  may                                            
                                   take    10    to   13   years     to   go   from                                             
                                   exploration       to    production.           Dr.                                            
                                   Williams     said    Point    Thompson     could                                             
                                   occur    without   a  gas   pipeline    and,   in                                            
                                   this   forecast,    is  scheduled   to  come   on                                            
                                   line    in  2017.    The  prediction     is   far                                            
                                   enough    in  the  future   as  to  not   impact                                             
                                   near-term    supplies.      As  a  gas   cycling                                             
                                   project it is feasible.                                                                    
2:10:59 PM Commissioner            Referred to page 6 of the handout                                                          
               Galvin              entitled "Crude Oil Prices, State                                                            
                                   Revenue    &  the  PPT".     He  addressed    the                                            
                                   PPT   True-Up    Payment.      Companies    were                                             
                                   allowed    to   continue    to  make   payments                                              
                                   under    the   previous    tax  program    until                                             
                                   April   1,  2007,   when   they   will  have   to                                            
                                   make   the  payment   they   should   have  made                                             
                                   during     that    time,    less    what    they                                             
                                   actually    did   make   under    the  previous                                              
                                   tax     program.     Based     on    forecasts,                                              
                                   payments    should    be  a  little    under   $1                                            
                                   billion   and  will   be an  indication    as  to                                            
                                   how well PPT is working.                                                                   
2:13:16 PM Commissioner            Noted that there would have to be some                                                     
               Galvin              adjustments made to PPT regulations,                                                         
                                   which      have     not     been     finalized.                                              
                                   Companies    are   basing   payments    on  what                                             
                                   those    regulations    may   be.    There    are                                            
                                   two   regulation    adjustment    packages    set                                            
                                   up.       The   first    one    created    draft                                             
                                   regulations     and   raised   the   issues    of                                            
                                   the   transfer     of   exploration    credits,                                              
                                   clarification      of   lease    expenditures,                                               
                                   overhead     rates,   ring    fencing    losses,                                             
                                   information    reporting    requirements,     and                                            
                                   penalty provisions.                                                                        
2:17:41 PM Commissioner            Explained that the second process                                                          
               Galvin              requires       final     reviews       by     the                                            
                                   Department     of   Revenue's    Director     and                                            
                                   Commissioner,       as    well    as    by    the                                            
                                   Department     of  Law   and   the   Lieutenant                                              
                                   Governor's Office.                                                                         
2:18:34 PM Co-Chair Meyer  Asked about the status of PPT and what                                                             
                                    the   estimate    of  the   surplus   for   2007                                            
                                    might    be   given    that   production     has                                            
                                    stabilized    and   prices   are  fluctuating.                                              
                                    Commissioner     Galvin    replied    that   the                                            
                                    process     that    generates     the   Revenue                                             
                                    Sources       Book      bi-annually        would                                            
                                    determine    that   answer.     He  noted   that                                            
                                    it   would    be    premature     to   make    an                                           
                                    estimate    now.    A  better    estimate   will                                            
                                    be  available    in  a  couple   months.     Dr.                                            
                                    Williams    said    he   expected    it   to   be                                           
                                    available in April.                                                                       
 2:20:11 PM Co-Chair Meyer  Noted that there is a lot of heavy oil                                                            
                                    up  on  the  North   Slope.    He  wondered    if                                           
                                    PPT   and   the   20   percent   credit    would                                            
                                    provide   incentive    to go  after   that  oil.                                            
                                    Commissioner     Galvin   thought   it  was  too                                            
                                    early   to   tell.     That   was  one   of  the                                            
                                    primary   objectives    of  the   credit.    Co-                                            
                                    Chair   Meyer  said   the  companies   wanted   a                                           
                                    40  percent   credit.    Commissioner     Galvin                                            
                                    explained    how  it  would  be  determined    if                                           
                                    the credit is effective.                                                                  
 2:21:35 PM Dr. Williams            Referred to page 85 where alternatives                                                    
                                    are   presented     in   the   form   of   three                                            
                                    tables    of   potential    revenues    to   the                                            
                                    state under different scenarios.                                                          
 2:22:08 PM Vice-Chair              Asked if the regulations revert to the                                                    
                Stoltz              effective date of April 1, 2006.                                                            
                                    Commissioner     Galvin   replied    that   they                                            
                                    do.                                                                                       
 2:22:35 PM Representative Noted the intent to put together the                                                               
                Hawker              best possible information to get to a                                                       
                                    projection.     He  asked   if April   1  is the                                            
                                    date   for  that.    Dr.  Williams    said  that                                            
                                    is   when   the  new   Revenue    Sources   Book                                            
                                    will   be published.     Commissioner     Galvin                                            
                                    related     the     steps    that     go    into                                            
                                    determining      the    forecasts     and    the                                            
                                    timeline     for    determining     the    final                                            
                                    number.                                                                                   
 2:24:06 PM Representative Asked if that process will fit into a                                                              
                Hawker              90-day session scenario. He predicted                                                       
                                    that   it  would   provide    the  information                                              
                                    to  the   legislature    at  the   end  of  that                                            
                                    timeframe.       Commissioner     Galvin    said                                            
                                    the  information    would   be  distributed    as                                           
                                    it  comes   in,  but  the   estimate   would   be                                           
                                    determined     at   the   end    of   the   time                                            
                                    period    and    still    would    be   only    a                                           
                              projection.                                                                                     
 2:26:07 PM Representative Pointed out that the true-up payment,                                                              
                Hawker              from April 1, 2006, to the end of                                                         
                                   September      2006,     -    three    calendar                                              
                                   quarters    -  is  estimated   to  be  close   to                                            
                                   $1    billion     more     than    under    ELF.                                             
                                   Commission     Galvin    agreed.       Co-Chair                                              
                                   Meyer    said   that   with   more   production                                              
                                   that    number    would    be    even    larger.                                             
                                   Commissioner     Galvin   added   that   if   the                                            
                                   price    or    production     goes    up,   that                                             
                                   number goes up.                                                                            
2:27:53 PM Representative Wondered about the percent of increase                                                              
               Hawker              over ELF.  Dr. Williams, referring to                                                        
                                   the   slide  on  Oil  Dependency,    thought   it                                            
                                   would   be   doubled.     He  requested    Cheri                                             
                                   Nienhuis to address that question.                                                         
2:29:27 PM CHERI                   Stated that the increase in FY 07 over                                                     
               NIENHUIS,           the ELF for a full fiscal year would be                                                      
               PETROLEUM           $1.2 billion.  That includes the April                                                       
               ECONOMIST,          and May payments, as well.  It would                                                         
               DEPARTMENT      OF  double    in  about   5  quarters.     Co-Chair                                              
               REVENUE             Meyer asked when the fiscal year                                                             
                                   started.      Ms.  Nienhuis    said   it  starts                                             
                                   with   production    on  June  1,  which   would                                             
                                   mean a payment on July 1.                                                                  
2:30:46 PM Representative Asked what part of the 100 percent                                                                  
               Kelly               increase relates to the progressivity                                                        
                                   piece.     Ms.   Nienhuis   thought    about   10                                            
                                   percent.                                                                                   
2:31:20 PM Representative Thought               that     the    oil     companies'                                            
               Gara                deductions would be seen at the end of                                                       
                                   March.    He   wondered    if  the   deductions                                              
                                   would     be   taken    at    the   first     tax                                            
                                   reporting    period.     Commissioner     Galvin                                             
                                   said   he  would  find   out  and  get  back   to                                            
                                   Representative      Gara.       Representative                                               
                                   Gara   wondered   what  the  take  would   be  if                                            
                                   the   tax  was   based  on   a  world  average.                                              
                                   Commissioner      offered   to   provide    that                                             
                              information.                                                                                    
2:33:04 PM Co-Chair Meyer  Questioned the definition of world                                                                 
                                   average.     Representative     Gara  responded                                              
                                   with   a  definition    based  on  last   year's                                             
                                   presentations.       He  pointed   out  that   it                                            
                                   is   up  to  the  Department    of  Revenue    to                                            
                                   determine that figure.                                                                     
2:33:50 PM JERRY BURNETT, In response to a question from Co-Chair                                                             
               DIRECTOR,           Meyer, said that the Department of                                                           
               ADMINISTRATIVE      Revenue     has   been    working     with    the                                            
               SERVICES,           cruise ship industry regarding head tax                                                      
               DEPARTMENT      OF  regulations.          The     expected     gross                                             
               REVENUE             revenue from the tax is $50 million.                                                         
                                   He  explained    how  the  tax  would  be  split                                             
                                   between   the   Department   of  Environmental                                               
                                   Conservation      for    the    Ocean     Ranger                                           
                                    Program,    and   local   communities.       Co-                                            
                                    Chair   Meyer  asked   if the   money  could   be                                           
                                    used    for   municipal     revenue    sharing.                                             
                                    Mr.   Burnett   said   he   could   not   answer                                            
                                    that   question.     Mr.   Burnett    explained                                             
                                    that   the  other   two  parts  of  the   cruise                                            
                                    ship   initiative    that  are   important   are                                            
                                    the   tax  on  gambling    and   the  corporate                                             
                                    income   tax.    The  first   returns   will   be                                           
                               from 2007.                                                                                     
 2:36:42 PM Co-Chair Meyer Noted that several people were added to                                                            
                                    the  department    to  deal   with  the   cruise                                            
                                    ship    initiative,    so   the   $50   million                                             
                                    figure   would   be   a  gross   number.     Mr.                                            
                                    Burnett    agreed.     He  clarified    that   $4                                           
                                    million     goes   to    the   Department      of                                           
                                    Environmental       Conservation      for    the                                            
                                    Ocean Ranger program.                                                                     
 2:37:00 PM Representative Pointed out that the initiative may                                                                
                Hawker              have conflicts with federal statutes                                                        
                                    such   as  taxation    of  gaming,   which   may                                            
                                    pose    the   risk   of   authorizing     Indian                                            
                                    gaming.       Commissioner      Galvin    agreed                                            
                                    that   it  is  a legitimate    concern   and   it                                           
                                    is being looked into.                                                                     
 2:38:26 PM Representative Referred to corporate income taxes and                                                             
                Hawker              an     international       treaty      argument                                             
                                    regarding     taxing     foreign     registered                                             
                                    vessels    at   sea.     Commissioner     Galvin                                            
                                    responded      that    the     department      is                                           
                                    working    with  the   Department    of  Law   on                                           
                                    that    issue.       Representative       Hawker                                            
                                    referred    to   Section    3,   the   conflict                                             
                                    with   Marine  Transportation     Security   Act                                            
                                    of    2002,     which     argues     that    the                                            
                                    designation       of     funds     under     the                                            
                                    initiative    is  in  conflict    with  federal                                             
                                    law.    He  maintained   that   the  initiative                                             
                                    is  setting   the   industry   up  for  a  class                                            
                                    action    lawsuit.       Commissioner     Galvin                                            
                                    emphasized     the   intent    to   avoid   such                                            
                                    conflict    of  interest    and  lawsuit.      He                                           
                                    reiterated    that   he  is  requesting    legal                                            
                                    advice on the matter.                                                                     
 2:40:42 PM Representative Asked what criteria will be used to                                                                
                Hawker              evaluate this issue.  Commissioner                                                          
                                    Galvin    said   the   individual    merits    of                                           
                                    the   case   should    be   looked   at.     The                                            
                                    likelihood     of   success     and   available                                             
                                    alternatives      that    would     avoid    the                                            
                                    exposure,    yet  fulfill   the  intent  of  the                                            
                                    initiative,     will   be   evaluated.       The                                            
                                    analysis     of    the    issue     should     be                                         
                                   advanced     so  that    the   department     can                                            
                                   present      the     information       to     the                                            
                                   legislature      and    assessments     can    be                                            
                                   made.                                                                                      
2:42:15   PM   Representative      Asked    if  the   legal   analysis    would   be                                          
               Hawker              available for use within a 90-day                                                            
                                   session     limit.      Commissioner      Galvin                                             
                                   affirmed     that   the   material    would    be                                            
                               available.                                                                                     
2:43:08   PM   GARY       BADER,   Provided    members   with   backup   material:                                            
               CHIEF               "Department       of    Revenue,      Treasury,                                              
               INVESTMENT          Investment Function" (copy on file.)                                                         
               OFFICER,            He reviewed page 2 and noted that the                                                        
               DEPARTMENT      OF  treasury:      oversees      $24.9     billion,                                              
               REVENUE             manages the cash need of the state and                                                       
                                   Alaska     Retirement      Management      Board                                             
                                   (ARMB),   manages   the   ARMB  domestic   fixed                                             
                                   income    assets,    manages   the   ARMB   real                                             
                                   estate    investment     trust    assets,     and                                            
                                   manages    three   fixed    income   investment                                              
                                   options    for   the    Alaska   Student    Loan                                             
                              Corporation.                                                                                    
2:45:38 PM Mr. Bader               Reviewed page 3, "Internally Managed                                                       
                                   Portfolio    Returns".     He  noted   that   the                                            
                                   Treasury      manages      several     accounts                                              
                                   including:      short-term     fixed     income,                                             
                                   intermediate     term   fixed   income,    broad                                             
                                   market    fixed    income,    and   ARMB   fixed                                             
                                   income.     He  observed    that  the  Treasury                                              
                                   has exceeded its target rates.                                                             
2:48:50 PM Mr. Bader               Explained      page     4,     "Non-Retirement                                             
                                   Investment     Returns   -  Annualized    As   of                                            
                                   September     30,   2006".      He   emphasized                                              
                                   that    the    Treasury    does    not    manage                                             
                                   accounts    for   the  PFD  except    to  invest                                             
                                   the   dividend   amount   for  a  short   period                                             
                                   before    distribution.      There   is  a  sub-                                             
                                   account    in   the   Constitutional      Budget                                             
                                   Reserve     Fund   (CBRF),     which   provides                                              
                                   authorization     for   a  5-year    investment                                              
                                   horizon.        This    allows    for   a   more                                             
                                   aggressive     investment     than    with    the                                            
                                   main account.                                                                              
2:51:01   PM   Representative      Referred    to   the   CBRF   sub-account     and                                          
               Hawker              noted that discussions had occurred for                                                      
                                   allowing    investments    of  the   entire   CBR                                            
                                   in the same manner (managed for a 5-                                                         
                                   year   payout   period.)      He  requested    an                                            
                                   opinion     from    Mr.    Bader    on    giving                                             
                                   greater investment authority.                                                              
2:52:02 PM Mr. Bader               Could not answer the question at this                                                      
                                   time.                                                                                      
2:52:47 PM Mr. Bader               Reviewed page 6, "One Year Cumulative                                                      
                                    Attribution              Effects",              a                                           
                                    characterization       of    the     investment                                             
                                    pension    funds   and   asset   classes    that                                            
                                    the  pension    funds  invest   in.    He  noted                                            
                                    that   the   retirement    fund   returns   were                                            
                                    11.46      percent     and     benefited       by                                           
                                    diversity.        The   manager    effect    and                                            
                                    asset allocation were positive.                                                           
 2:54:57 PM Mr. Bader               Reviewed page 7, "CAI Public Fund                                                         
                                    Sponsor   Database"    which  shows   the  range                                            
                                    of  returns   of  public   pension    funds.   He                                           
                                    noted   that   Alaska   was   near   the  top   8                                           
                                    percent   of   public   pension   funds   ending                                            
                                    September    30,   2006.   The   state   was   in                                           
                                            th                                                                                  
                                    the 67 percentile in the last 7 years.                                                    
 2:56:28 PM Mr. Bader               Spoke to page 8, "Pension Funds -                                                         
                                    Cumulative    Returns    Actual   vs.  Target".                                             
                                    He  observed    that  the  TRS  fund   tends   to                                           
                                    do   a  little   better    than   PERS.     Over                                            
                                    time,   the   gross   returns   have   exceeded                                             
                                    actuarial returns.  Returns over a 15-                                                      
                                    year   period    were   9.01   percent;    after                                            
                                    expenses they were 8.7 percent.                                                           
 2:58:40   PM   Co-Chair   Meyer    Provided   an  overview    of the  anticipated                                            
                                    House     Finance      Committee      schedule,                                             
                                    points     of    order    for    running     the                                            
                                    Committee              smoothly              and                                            
                                    teleconferencing.                                                                         
 3:04:42   PM   Representative      Mentioned      the     cell     phone     rules.                                          
                Hawker              Discussion followed regarding conflict                                                      
                                    of interest disclosure.                                                                   
 3:07:53 PM Co-Chair                Spoke to the possibility of a 90-day                                                      
                Chenault            session      and     how     it     could      be                                           
                                    accomplished.                                                                             
 3:08:33 PM LOUANNE                 Introduced staff members and informed                                                     
                CHRISTIAN,          the members of protocols of the                                                             
                FINANCE             Committee.                                                                                
                COMMITTEE AID                                                                                                   
 3:14:45   PM   Representative      Asked    how   to   communicate     with   staff                                          
                Thomas              members.  Ms. Christian explained that                                                      
                                    notes   could   be  distributed    through   the                                            
                                    Finance Committee staff.                                                                  
 3:15:40   PM   Co-Chair   Meyer    Added   that  meetings   are  also   televised.                                           
                                    Ms.  Christian    stated  that   the  boxes  are                                            
                                    removed     from     the    table     for    the                                            
                                    subcommittee meetings.                                                                    
 3:17:14 PM Co-Chair Meyer  ADJOURNMENT                                                                                     
                                                                                                                                
                                    The meeting was adjourned at 3:16 PM.                                                     
                                                                                                                                
                                                                                                                                

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