Legislature(1999 - 2000)
04/19/1999 06:45 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
GENERAL SUBJECT(S): Long Term Fiscal Gap Discussion
The following overview was taken in log note format. Tapes and
handouts will be on file with the House Finance Committee through the
21st Legislative Session, contact 465-2156. After the 21st Legislative
Session they will be available through the Legislative Library at 465-
3808.
Time Meeting Convened: 6:45 p.m.
Tape(s): HFC 99 - 86, Side 1
HFC 99 - 86, Side 2
HFC 99 - 87, Side 1
PRESENT:
X
Representative G. Davis
X
Co-Chair Therriault
X
Representative Foster
X
Co-Chair Mulder
X
Representative Grussendorf
X
Representative Austerman
X
Representative Kohring
X
Representative Bunde
Representative Moses
X
Representative J. Davies
X
Representative Williams
ALSO PRESENT: REPRESENTATIVE ETHAN BERKOWITZ; REPRESENTATIVE SHARON
CISSNA; REPRESENTATIVE TOM BRICE; KENNETH BOYD, DIVISION OF OIL AND
GAS, DEPARTMENT OF NATURAL RESOURCES; ROBERT STORER, CHIEF
INVESTMENT OFFICIER, DEPARTMENT OF REVENUE; CHRIS PHILLIPS,
INVESTMENT OFFICIER, DEPARTMENT OF REVENUE.
LOG
SPEAKER
DISCUSSION
TAPE HFC 99 - 86,
Side 1
000
CO-CHAIR MULDER
Convened the House Finance Committee
meeting at 6:45 p.m.
050
KENNETH BOYD,
DIVISION OF OIL AND
GAS, DEPT. OF
NATURAL RESOURCES,
OIL AND GAS
PRODUCTION
Rolled out a map on the Committee room
floor showing all the leased maps in the
State. He spoke to the "oil watch". Mr.
Boyd spent time providing background
information regarding the floor map.
Northern part of the area could be new
oil areas. Also in the Arctic National
Wildlife Refuge and the new resource
estimate done last year.
331
MR. BOYD
Spoke to the Reserve Report previously
presented in the Senate Finance
Committee. Reserves are fields that are
pretty closely known. That report 1999
version has been presented to the
Committee members.
440
MR. BOYD
The projection is looking at resources
and reserves. A copy of that report was
sent out April 7tth.
573
MR. BOYD
Adding a resource presented a bump in the
system. The information is not fact at
this time.
672
Mr. Boyd
Spoke of the three places that will be
available for oil. ANWAR, Chuck e SEE
which is a huge basin.
714
Mr. Boyd
Reserves are what is counted in the
report and they are recoverable. The gas
is considered a resource and is not able
to be developed currently. These are
technical recoverable resources.
764
Mr. Boyd
The economically recoverable resources.
Those numbers get smaller.
800
Mr. Boyd
Spoke to the handout.
806
Vice-Chair Bunde
Difference between resources and
reserves.
824
Mr. Boyd
Resources can be defined.
860
Representative
Grussendorf
Questioned the reliability of the
information.
886
Mr. Boyd
This is a zen like exercise and perhaps
unrealistic. There are other
assumptions. This could be a puzzle.
This is from data provided by other govt.
agencies. There is time built in for the
discovery of the resource.
961
Mr. Boyd
Reference Table 1. Discovered on shore
resources.
987
Mr. Boyd
This is new additional oil, Pt. Thompson,
Sourdough and Prudoe Bay.
1013
Mr. Boyd
In response to Co-Chair Mulder, he
explained what the State owns and from 3-
6 miles states get 27%. There are other
benefits to keeping the development.
Senator Murkowski's bill would extent.
1116
Representative
Grussendorf
How likely is that to happen.
1130
Mr. Boyd
Does not know. Enough states will
benefit that could make it happen.
1163
Co-Chair Mulder
Would it go to 20%.
1173
Mr. Boyd
3-6 miles the state would get 28% and the
Murkowski bill would extend that amount.
1208
Mr. Boyd
Explained the NPRA and the State's share.
1228
Co-Chair Mulder
Clarified that within the 50-50%; through
the royalty, corporate tax and the rent
and the bonus.
1262
Mr. Boyd
Royalty, rent and bonus.
1290
Mr. Boyd
Back to the map; the more interesting
geological area is north. The minimum
bid is $25 dollars an acre. The higher
value land is to the north.
1356
Representative
Grussendorf
How competitive will the bids be.
1367
Mr. Boyd
BP and ARCO will be the most aggressive
bidders. He believed that those companies
would be very interested in the property.
There are other companies that are
interested. The area has been looked at
before.
1445
Mr. Boyd
It took 3-D sizing to get a good look at
the sand.
1471
Mr. Boyd
Spoke to Table 3: Undiscovered Onshore
Resources. He pointed out that the
Foothills in the Brooks range. He
provided a little history of that
information.
1558
Mr. Boyd
He spoke to the new GS report of a young
formation and has a lot of good sand in
it. There are a lot of interesting
things going on.
1611
Mr. Boyd
Spoke to Table 4: Undiscovered offshore
resources i.e. Beaufort and Chukchi Sea.
1654
Mr. Boyd
Also included in the handout are graphs
of existing data and decline curves.
Sourdough, Pt. Thompson, Umiat,Kuvium,
Gwydyr Bay, Sandpiper; technically these
are potential oil fields.
1718
Co-Chair Mulder
Asked about Kuvium
1735
Mr. Boyd
ARCO discovered it and dug 3 bad wells.
ARCO sold that field after a series of
sales. When ARCO bought UTV, it was back
in that business. Those are available to
be leased again. They were released,
formed and shuffled around. That acreage
is now available for someone to lease.
There is some deferral areas now there.
1822
Mr. Boyd
Explained a deferral area.
1862
Mr. Boyd
He stated that they had taken some
publicly available information and
provided charts for the Committee's
pursue.
1908
Co-Chair Mulder
Intent of this testimony and the estimate
of testimony from Friday. The intent is
to build in assumptions and reasonable to
expect in the out years. Looking at the
projection in the out years of 2010 and
2020.
1978
Mr. Boyd
Spoke to the recharging oil field in
Mexico. There was a lot of salt in the
base. Oil migration is generally very
slow. He stated that the State should
not count on that.
2020
Representative G.
Davis
Gas line model.
2029
Mr. Boyd
The gas line is interesting. It is a
market. It is being used now. Other gas
on the slope; no one has ever looked for
gas on the slope. He stated that with a
line, that could be a salable resource.
There could be a lot of gas and there is
potential there.
2089
Representative G.
Davis
If gas flows would it reduce oil
production.
2101
Mr. Boyd
Does not know the cross over point.
Important to look at entire big picture.
The timing looks like not much would be
lost. There are many pieces to that
answer.
2138
Representative G.
Davis
Looking for a plan that shows additional
revenue.
2147
Representative
Austerman
Are gas tracked and the demand for oil
and gas in the foreign markets?
2166
Mr. Boyd
Oil - yes; no - gas. The world is full
of gas. There needs to be a market.
2195
Representative
Austerman
Understood that the demand for oil is
slipping and the demand for gas is
rising.
2209
Mr. Boyd
No detailed info available on that.
2219
Co-Chair Therriault
Asked about the Umiat formation on the
map.
2235
Mr. Boyd
There is an outcrop (shallow) 12 miles
long with good sand that was oil stained.
It is Prudhoe Bay oil. Those results are
preliminary. There should be info
available on that info soon.
2270
Mr. Boyd
In response to Co-Chair Therriault
question, Mr. Boyd stated that some of
the seismic data will be taken and ANARCO
will take that info and try to generate
projects.
TAPE CHANGE 86-2
000
ROBERT STORER, CHIEF
INVESTMENT OFFICIER,
DEPARTMENT OF
REVENUE
Introduced and provided a handout of
model presented by the Department. An
interactive model was developed. One
model applies to the Alaska Permanent
Fund.
107
CHRIS PHILLIPS,
INVESTMENT OFFICES,
DEPARTTMENT OF
REVENUE
Spoke to the model regarding the parts of
the whole. The general fund, the
Constitutional Budget Reserve Fund, and
the Alaska Permanent Fund.
207
Vice-Chair Bunde
Asked if the Constitutional Budget
Reserve was invested on a short-term
basis.
271
Mr. Storer
That is managed in two ways both
conservatively 20% and the 80% is managed
a bit more aggressively. Over the past
year it has been managed in the broad
money market.
340
Vice-Chair Bunde
Clarified that Department of Revenue
keeping some portion of it liquid makes
budget decisions. He thought the article
in the Anchorage paper misrepresented
what the Leg. Did.
394
Mr. Storer
That information was misrepresented and
that 10% of that portfolio was liquidated
in 1988.
427
Co-Chair Mulder
Was that done from the additional draws
to balance the budget?
455
Mr. Storer
The projected life of the Constitutional
Budget Reserve at this time is 3-5 years.
480
Representative J.
Davies
If the Legislature had made the decision
last year, it could have been invested at
a higher term and could have earned a lot
of money.
519
Mr. Storer
That is correct.
532
Ms. Phillips
Page 3 - interactive modeling. Keep it
simple; make the model change as
assumptions change; try to answer
everyone's concerns; make reasonable
assumptions and keep relationships
consistent.
663
Ms. Phillips
Spoke to the general fund and the ability
to add additional sources. Revenue -
adjust oil revenue by price and
production; expenditures such as
inflation proof expenditures, some
expenditures grow with population growth
and ability to change the budget.
761
Ms. Phillips
Constitutional budget reserves - evaluate
cash flow needs; time horizon of the fund
defines the asset allocation and rates of
return of the fund; timing of receipts
and draws are important.
815
Ms. Phillips
The Alaska Permanent Fund - original
model operates as the fund does today;
realized rates of return are important
when describing the current dividend
calculation; expected total return for
the fund is based on capital market
assumptions and statutory equity
limitation.
910
Ms. Phillips
Capital Market Assumptions - Should be
consistent across all plans; the same
outside consultant provides the capital
market assumptions to the Department of
Revenue and APFC every year.
954
Ms. Phillips
The terms can be confusing, total return,
real return, and inflation rate.
1000
Ms. Phillips
Additionally, learned is that the small
differences in assumptions in FY 99 or
FY00 make big differences by FY10; the
priority of payments out of the AK PFD
matter; timing of receipts/disbursements
matter.
1094
Representative
Austerman
Asked about the outside consultants.
1108
Ms. Phillips
They are used once a year because of the
cash flow needs.
1128
Mr. Storer
These are medium needs and looked beyond
that.
1143
Vice-Chair Bunde
What if the dividend was capped at $1000
would the pfd Corporation invests
differently.
1180
Mr. Storer
The PFD takes a long-term time horizon
and market allocation is not based on
what the dividend would be. A 4% real
rate of investment. Funds can be
adjusted for other sources.
1226
Vice-Chair Bunde
Do you address asset allocation?
1239
Ms. Phillips
Currently might use the bond fund but the
outlook is for a long period of time and
the cash flow horizon.
1270
Representative
Austerman
Was referring to the realized return.
1287
Mr. Storer
Important issue. The model must have the
flexibility to see the impact on the
fund.
1308
Representative
Grussendorf
The earnings reserve is an important part
of the plan. Concern with inflation
proofing the corpus. Is it by statute a
revenue flow by statute? The State will
need that flow.
1374
Ms. Phillips
Referenced page 9.
1482
Co-Chair Mulder
Differences and assumptions during the
course of the year. Can have a dramatic
effect in the long run.
1507
Ms. Phillips
Now using a short time horizon. Could
have a higher rate of return. That is
built into the current model on the
internet.
1539
Vice-Chair Bunde
Page 9 - priority of payments.
1552
Ms. Phillips
The calculation today, that is paid first
and then the inflation proofing is done.
If inflation proofing were done before
the dividend would provide a lower
dividend.
1589
Vice-Chair Bunde
Inflation proofing lower fund.
1605
Co-Chair Therriault
Did you run scenario regarding inflation
proof? Is everything inflation proofed
or just the earnings reserve.
1632
Ms. Phillips
Today, the fund, at the end of the FY,
the value of the principle is inflation
proofed. Not the earnings reserve.
1660
Ms. Phillips
There are two basic types of plans.
1685
Mr. Storer
Things to look at when evaluating a plan.
Initial lump sum transfer from the PFD to
a separate fund or annual withdrawals.
1715
Mr. Storer
Continued, menu regarding the investment
structure and asset allocation and the
two different types of approaches.
1740
Mr. Storer
Spoke to Page 12, transfer mechanics and
the effect on the dividend. Multiple
approaches intransferring assets.
1765
Mr. Storer
Important to recognize that little
differences represent a lot. Important
to remember about inflation proofing.
Need flexibility in the model.
1812
Mr. Storer
Page 14 - systematic pay out of the
permanent fund. Amount distributed from
the Separate Fund and the amount
distributed from the Permanent Fund.
1848
Mr. Storer
Options Menu Page 15 prioritizes
permanent fund distribution among
dividends inflation proofing and public
services.
1875
Mr. Storer
In response to Co-Chair Mulder, he spoke
to inflation proofing the principle.
1900
Mr. Storer
Page 16, additional revenue. Broad based
general tax; motor fuel tax; per capita
school tax; rental car tax; increase
business license tax; miracle.
1939
Mr. Storer
The model allows interactive decision-
making. It will show inflection points
where additional action must be taken;
linear forecasting tool, the future is
not line linear. The model that the
Department of Revenue has provided have
developed does not address changes in the
law that may be required or address the
economic impact to the state's economy of
different decisions.
2028
Representative
Foster
In 1989, ELF courts settlement. Is there
any court decisions on the horizon?
2051
Mr. Storer
The magnitude of the miracle has become
more important. The model shows that the
significant price increase in oil will
not handle the problem.
2077
Representative
Austerman
Has the Administration come up with
assumptions that everyone is comfortable
with?
2094
Ms. Phillips
The current model operates with just
about every piece that is available
today. As plans come up, Department of
Revenue will model it. Staying with the
status quo.
2136
Representative
Austerman
0 growth rate. Has the growth factor
been included?
2152
Ms. Phillips
Model is set up for a five-year plan with
lower expenditures.
2165
Mr. Storer
That issue has been addressed in the
flexibility of the model. There are
other factors. Try to use known
information and build a model with
flexibility with that info.
2192
Representative
Austerman
There must be some realistic info that
must be included.
2206
Ms. Phillips
The school budget is increased for
anticipated enrollment. If remaining
operating budget is increased that will
show in the model.
2245
Representative
Grussendorf
$1.8 billion dollars into the corpus and
then that was needed to be inflation
proofed.
2270
Ms. Phillips
Once the money moved into inflation
proofed then it is inflation proofed.
TAPE CHANGE 99-87-1
000
Ms. Phillips
K-12 is built into a 1.5% increase.
100
Vice-Chair Bunde
Flat funding or formula change.
149
Ms. Phillips
K-12 is currently funded at 1.5% increase
and would stay constant in the three
additional years in the five-year plan.
200
Representative
Grussendorf
That money is for enrollment; it is flat
funding.
221
Representative
Foster
Page 7, Page 3, are they consistent on
target.
261
Mr. Storer
It is evaluated and were hired since the
mid `80's and have been used since 1992.
300
Mr. Storer
Did not know the cost of that service.
That is bid out every three years and was
last January.
333
Co-Chair Mulder
Supplemental budget $4 million dollars.
358
Representative
Austerman
Concern about taking money out of the
Constitutional Budget Reserve to balance
the budget. He spoke to the endowment
idea.
400
Mr. Storer
Evaluated all the plans; there are ways
that have merit however, the details must
be evaluated.
445
Representative
Austerman
Will reserves be gone in a few years?
465
Mr. Storer
It is his opinion, the more choices and
loosing a resource by spending it.
492
Co-Chair Mulder
How is Department of Revenue rate of
return compared to PFD?
510
Mr. Storer
Retirement system over the four prior
years, more favorably; however, last
year, the PFD had a higher than the
retirement system.
566
Co-Chair Mulder
Spoke of the weekly schedule.
616
Representative
Austerman
Asked who would present the governor's
plan and wanted to draw upon the resource
that Department of Revenue offers.
676
Representative J.
Davies
Will the Committee attempt to agree on
some common numbers before the Governor's
plan proposal? Otherwise it will be
apples and oranges.
717
Co-Chair Mulder
Will try.
725
Representative J.
Davies
Need longer time horizon than has been
supplied to date.
780
Co-Chair Mulder
Adjourned meeting at 8:30 p.m.
HOUSE FINANCE COMMITTEE
LOG NOTES
April 19, 1999
H.F.C. 3 4/19/99
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