Legislature(2009 - 2010)HOUSE FINANCE 519
01/22/2009 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Revenue Forecast - the Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 22, 2009
1:32 p.m.
CALL TO ORDER
Co-Chair Hawker called the House Finance Committee meeting
to order at 1:32:40 PM.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Vice-Chair
Representative Allan Austerman
Representative Harry Crawford
Representative Anna Fairclough
Representative Richard Foster
Representative Les Gara
Representative Reggie Joule
Representative Mike Kelly
Representative Woodie Salmon
MEMBERS ABSENT
None
ALSO PRESENT
Pat Galvin, Commissioner, Department of Revenue; Cherie
Nienhuis, Acting Chief Economist, Department of Revenue;
Jerry Burnett, Director, Division of Administrative
Services, Department of Revenue; Dan Stickel, Economist,
Alaska Department of Revenue; Donna Keppers, Audit Master,
Department of Revenue; Senator Stedman; Senator Menard;
Representative Guttenberg; Representative Seaton;
Representative Kawasaki; Representative Buch
PRESENT VIA TELECONFERENCE
Dudley Platt, Consultant, Department of Revenue
SUMMARY
^REVENUE FORECAST - THE DEPARTMENT OF REVENUE
1:32:45 PM
Co-Chair Hawker acknowledged legislators and staff present
in the room. He explained the role of the finance committee
as an appropriation body spending state funds in a budget
bill with guidelines and information provided by the
revenue department. He added that the present budget will
for the fiscal year beginning July 2009 through June 2010.
1:35:43 PM
Co-Chair Hawker noted the greatest component in determining
much of Alaska's revenue is the projection of the price of
oil, within the two variables of production volume and
market price. He requested Commissioner Galvin present the
big-picture components of Alaska's revenue.
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, introduced
his team including in the audience DAN STICKEL, ECONOMIST,
ALASKA DEPARTMENT OF REVENUE and DONNA KEPPERS, AUDIT
MASTER, DEPARTMENT OF REVENUE.
1:38:21 PM
Commissioner Galvin characterized revenue projection as a
critical tool in building the state budget. The
Commissioner declared his intention to start with the fall
forecast showing the layers of information and the building
blocks contributing to the forecast. He commented that the
budget forecast is a process where the revenue team watched
the markets, collected information from experts, then
incorporated the data into the revenue forecast to assist
the state in the budget making process.
1:39:54 PM
Co-Chair Hawker acknowledged the loss of Brian Andrews,
former Deputy Commissioner of the Department of Revenue and
his outstanding contribution to the department and to the
state of Alaska.
1:41:30 PM
Co-Chair Stoltze also recognized the great contributions
and friendships of Mr. Andrews.
CHERIE NIENHUIS, ACTING CHIEF ECONOMIST, DEPARTMENT OF
REVENUE, provided a PowerPoint presentation, Overview of
the Fall 2008 Revenue Forecast (copy on file). She defined
budget making and revenue forecasts as processes
incorporating the variables of production, price, and
costs/investments (p. 2). She explained that the forecast
variables interplay with each other starting at the top
with supply and demand.
1:44:10 PM
Ms. Nienhuis continued that supply and demand is closely
related to price which in turn affects production and
costs/investments (p. 3). She noted that costs/investments
can not be separated from price since the price drives the
level of investment that the oil industry is willing to
make in producing more oil.
1:45:19 PM
Ms. Nienhuis began with the production variable noting that
production was consistent from the spring forecast. She
referred to the "mountain" slide indicating that maximum
production was reached in the mid to late 80s (p. 5). The
graph refers to the annual North Slope production and the
contribution of various other fields broken into "history"
and "forecasts". She showed the steep decline from the high
of 2 million barrels a day to the low of 700,000 barrels.
Ms. Nienhuis reviewed the forecasted Arctic North Slope
(ANS) production for FY 09 to FY 2030. The graph showed oil
from currently producing projects and those scheduled to go
online in the future. She pointed out that the graph
indicated a flatter, less steep, decline (p. 6).
Co-Chair Hawker interjected that the committee planned to
ask questions during the presentation. He clarified that
the numbers calculated as the state's forecast revenues are
based on both the current producing projects, as well as,
future revenue projections on new or existing fields. Ms.
Nienhuis agreed that the official production forecast was
broken into several categories including currently
producing, under evaluation and under development fields.
Ms. Nienhuis cautioned that the production profile could
change if variables, such as price, remained low but the
figures represented the present best scenario. She
indicated that this information comes from interaction
within the oil industry.
1:48:49 PM
Co-Chair Hawker questioned the process in actualizing these
revenues and what standards were applied.
1:49:17 PM
Ms. Nienhuis referred to the Revenue Sources Book, Fall
2008, (p. 53), showing the Currently Producing, Under
Development, and Under Evaluation categories.
1:49:50 PM
DUDLEY PLATT, CONSULTANT, DEPARTMENT OF REVENUE, testified
via teleconference, and indicated that he took a "bottoms-
up" approach to each field. He first requested field
information from all the North Slope operators, analyzed
the information and then formed his "best guess." Co-Chair
Hawker asked if Mr. Pratt could provide more detail on how
he arrived at his "best guess" scenario. Mr. Platt
explained that the "best guess" could be wrong noting he
had missed the fall forecast by about 2000 barrels a day
but he reminded the committee that in such forecasts, this
guess was considered very close. Co-Chair Hawker asked for
further explanation on the standards used in making the cut
for outlying years. Mr. Platt indicated that 100 percent of
the barrels shown in the graph fall into the operator's
business plan but the timing is uncertain. He gave Pt.
Thompson as an example of a potential high performing field
that will eventually proceed but the exact date is unknown.
He explained this uncertainty often results in wrong
forecasts. Mr. Platt revealed that his standards are the
same used by the oil industry, but he also applies a
sophisticated software program in the analysis of long term
forecasts.
1:52:32 PM
Co-Chair Hawker asked for an explanation how the production
points were arrived at for Pt. Thompson. Mr. Platt
explained that because of the incredible uncertainty and
sensitivity in recovering the 200 to 400 million barrels of
liquid hydrocarbons from Pt. Thompson coupled with the
determination if it is a gas cycling or major gas sale
project, resulted in a lot of uncertainty. He disclosed
that he gives the project ten years to develop.
1:53:46 PM
Representative Gara noted that most of the present oil is
high tech with high royalties on state land but expressed
concerned about some of the future projects that were low
revenue, offshore or without a royalty or production tax
associated with them.
1:54:27 PM
Mr. Platt identified the Liberty field scheduled to come
online in 2011 as 100 percent federal oil with shared
royalties at 27.5 percent, making it an effective royalty
of 4 percent. He mentioned the Endicott field net profit
sharing will provide the state with some revenue and the
National Petroleum Reserve-Alaska (NPR-A) fields, west of
the Alpine field, will receive a production tax, but due to
the fact it is not state land, the royalties will be less.
1:55:35 PM
Commissioner Galvin interjected that the revenue projection
is based upon the amount of revenue expected from each of
these different types of fields. The revenue reflects that
there will be limited revenue from fields such as Liberty
but the graph also shows the production profile throughout
the North Slope.
Representative Gara queried if the revenue projection is
for next year. Commissioner Galvin replied it is a ten year
forecast. Representative Gara asked if there was an easy
way to look at the non-producing fields that are not
Prudhoe Bay. Commissioner Galvin remarked that each field
would be different with a different royalty rate and cost
profile.
1:57:40 PM
Representative Gara questioned if the royalty rate applied
to federal land but not offshore. Commissioner Galvin noted
that the production tax applies to the three mile offshore
limit. He continued that anything from three to six miles
is "shared" federal royalties but no royalties are paid out
for anything beyond the six mile boundary. The Commissioner
cited the plan to talk with Congress about receiving a
similar deal that the Gulf of Mexico enjoys where there is
more robust federal revenue sharing with offshore
production.
1:58:37 PM
Ms. Nienhuis added that these new projects will require
some capital expense increases, an immediate hit to the
production tax revenue, but this will be positive since it
indicates further production.
1:59:35 PM
Ms. Nienhuis pointed out that there was minimal change in
the near term for production from the spring forecast.
Ms. Nienhuis moved to the price variable indicating it is a
very lengthy process taking in account efforts from many
different divisions within the Department of Revenue (DOR),
the Office of Management and Budget (OMB) and the Permanent
Fund Corporation (PFC), The Forecasting Timeline-Part 1,
(p. 8). She reported that the "Delphi" session, held on Oct
7, 2008, provided the best oil price forecast estimate.
Co-Chair Hawker questioned the origin of the word Delphi.
Ms. Nienhuis indicated the term was developed by the Rand
Corporation in the 60s and 70s. She clarified that the
revenue department uses a modified Delphi, a bit different
from the model used by the Rand Corporation. She continued
that after the "Delphi" session, the department compiles
and reviews the current year's revenues, then a production
forecast is finalized by Mr. Platt after consultation with
the oil industry. This year's price forecast was finalized
on November 6, 2008.
2:02:40 PM
Representative Fairclough asked for clarification on how
the reserve calculation was used for Pt. Thompson in the
formula for production. Mr. Dudley indicated that the Pt.
Thompson estimate evolved over twenty five years starting
with Exxon but changed from linking it with major gas sales
containing one production profile to a gas cycling project
with a completely different projection profile and
recovery. He indicated that the proposal submitted in 2008
by Exxon is not the scenario used but one more indicative
of not cycling the gas. Mr. Dudley signified he based his
estimate of 275 million barrels of reserve after
discussions with Alaska Oil and Gas Conservation Commission
(AOGCC) and the Department of Revenue. He revealed that
confidential information has been garnered from the
industry over the past 10 to 20 years. Mr. Dudley remarked
that based on all his information that there were 275
million barrels, starting in FY 2019, with production
starting at 65,000 barrels, declining by 7 to 8.5 percent
per year.
2:05:03 PM
Representative Fairclough questioned if his calculation of
barrels was based on a balance sheet line. Mr. Platt
indicated that it was not. Representative Fairclough
reported that when she attended an Exxon presentation on
the Pt. Thompson field it was indicated that the oil could
not be recovered under the pressure and wondered if this
information had been given to Alaska Oil and Gas
Conservation Commission (AOGCC) to make the determination.
2:05:48 PM
Commissioner Galvin remarked that he did not have that
particular information but the issue in regard to whether
it would be a gas blow-down or a gas cycling project is
part of the current controversy. He was not aware of AOGCC
having a pending decision. Co-Chair Hawker indicated that
AGOCC will be with the committee in a future meeting and
this question could be directed toward them. Commissioner
Galvin asserted that Mr. Platt makes his own assessments
based on confidential data on the nature of the field and
the type of production profiles that he would see coming
out of that type of field. He contended that questions
regarding the likely production scenario would be best
directed elsewhere.
2:07:15 PM
Ms. Nienhuis continued with her presentation. She noted
that after finalizing the oil price forecast the revenue
department finalizes the costs forecasts (p.8). She
disclosed that cost information is received from the North
Slope operators which is incorporated into the forecast,
then the department looks into the longer term production
forecast to determine if more production is brought online
how that will impact the cost structure. She reported that
on November 11, 2008 the unrestricted revenue forecast was
finalized incorporating the three previous variables and
the prior fiscal years actual revenues. This model is then
given to the Treasury department and the OMB for their
input. Ms. Nienhuis indicated that the Permanent Fund
Corporation (PFC) makes their best estimates based on what
the DOR believes will be the royalties. She reported that
on November 14, 2008 the Department of Revenue gave their
summary to Office of Management and Budget.
2:09:53 PM
Ms. Nienhuis continued that on November 18, 2008 the DOR
prepared the narrative and the tables for the Revenue
Sources Book (p. 9), with the final forecast on December 9,
2008. She added that on December 15, 2008 the Governor's
office released their budget.
2:10:33 PM
Co-Chair Hawker referred to the timelines as benchmark
events and questioned if the DOR ever returned to
reevaluate decisions when world situations change. He
provided an example that the price forecast was finalized
on November 6, 2008 and between that date and the forecast
release date, the world experienced a calamitous change.
Co-Chair Hawker wondered if there was a process for going
back and revisiting a benchmark after such an event or was
it on a committed track.
2:11:35 PM
Commissioner Galvin remarked that it becomes a question of
cost benefit. He reiterated that the process is a sequence
of events with information obtained feeding into one part
of the process that will then affect the next part of the
decision making process rather than something set in stone.
The Commissioner emphasized that there are firm dates when
a revenue projection must be made and when the Governor
must roll out the budget. He agreed that this year changes
in the financial world did affect the process but there was
a point when the process could not look back but had to
move on in order to complete the process. Co-Chair Hawker
understood the practical dilemma of a statutory deadline in
the process.
2:13:52 PM
Commissioner Galvin indicated the DOR sought a balance in
the public rollout noting that rolling out multiple
revenues and numbers would confuse the public regarding the
process.
2:15:04 PM
Ms. Nienhuis interjected that this was the most compressed
timeline she had worked with during her tenure.
Commissioner Galvin added that the November 6, 2008 date
was not the original date but a point-of-no-return date to
agree on a price.
2:16:14 PM
Ms. Nienhuis elaborated on the Delphi session (p.10). She
indicated that in this modified Delphi technique, fifty
groups were invited to participate with eventually twenty
nine participants providing twenty eight forecasts. During
the Delphi topics included the fundamentals of supply and
demand, geopolitics, financial markets, and analyst
expectations. Ms. Nienhuis remarked that on Oct 7, 2008,
the price of oil averaged $92.85, still a high range. Ms.
Nienhuis showed on the graph price forecasts available at
Delphi from the Energy Information Association (EIA),
Merrill Lynch, New York Mercantile Exchange (NYMEX),
Goldman Sachs, and the Bloomberg Analysts Average. (p. 11).
2:19:55 PM
Co-Chair Hawker stated that there are thirty three
participants in the Bloomberg report and wondered if it was
possible to get this information directly. Ms. Nienhuis
indicated the information was provided by a subscription
service that is available at the Department of Treasury.
2:20:45 PM
JERRY BURNETT, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
indicated it could be made available to the committee.
2:21:12 PM
Ms. Nienhuis reiterated that in the five months between
July and December there was an 80 percent drop in oil
prices (p. 12). She showed that historically the two most
volatile years in oil prices proved to be 1991 and 2008(p.
13).
2:23:14 PM
Co-Chair Hawker agreed with the difficulty in preparing oil
price forecasts during this volatile time but he was
surprised to read in the introductory letter to the
Governor that "This price forecast assumes that the
financial crisis experienced in the U.S. is relatively
short-lived, and the economy returns to a more stable state
within one or two years." (Revenue Source Book, Fall 2008).
Co-Chair Hawker did not believe this reflects the real
volatile nature of this unprecedented deviation level and
wondered if this was a conscious decision.
2:25:24 PM
Commissioner Galvin acknowledged that there is an
unprecedented volatility existing but he believed the
quoted section provided an insight to the public on what
can be fulfilled and what can not. He explained that when
this letter was being prepared there was an acknowledgment
that the world financial situation was changing but a lag
time in information still existed. The Commissioner
elaborated that it was necessary to gage where the world
and U.S. economies were going and how that would play into
price projections over the next two years. He expressed the
necessity of making assumptions about the state of the
economy, the length of the difficult times, and a time when
demand might increase. The department brought in a low
forecast "if" scenario with the recognition that the
economy may continue to struggle. He reported that when the
cover letter was written the price of oil was $90 to $100
per barrel so the letter was trying to describe why the
department was estimating at $74 per barrel. The
Commissioner stressed that this was not an intention to
downplay the volatility of price but to link the price to
the national economy.
2:29:26 PM
Co-Chair Hawker referred to the chart on page 12 showing
the dramatic 2008 downturn and believed that when the
th
report was released on the 15, it should have been
emphasized that there could be a stronger volatility more
prominently included in the report.
2:30:30 PM
Commissioner Galvin defended his forecast noting that every
time a revenue forecast is published there is a false sense
of precision. It is an exercise in describing an incredible
range of possibilities and a pinpoint on where it may be.
He remarked that in the future the cover letter would
include a more precise description of the false precision.
2:31:19 PM
Co-Chair Hawker believed it was a disservice to the public
not acknowledging the volatility more precisely.
Commissioner Galvin noted that it has been wrong every year
but usually in a higher amount.
2:32:14 PM
Representative Crawford acknowledged the oil price changes
over the years. He referred to the chart on page 12 and
indicated if the figures went back to 1973 it would reflect
tremendous hikes and drops in price followed by about a 10
year recovery. He suggested that a longer timeline chart
could help everyone make better predictions.
2:34:14 PM
Commissioner Galvin agreed that the historic nature is a
factor in looking at the world today to draw conclusions.
He also indicated that the supply and demand functions are
different today than during similar price spikes in the
early 70s, making it difficult to replicate data from an
earlier time period. The Commissioner remarked that there
are experts who predict that oil prices may stay at the $30
a barrel for years but others who think that oil may rise
again soon to $100 a barrel. He added that new projections
for the current year will be provided within a week and an
update for next year will be forthcoming in February with
the Governor's amended budget.
2:36:49 PM
Commissioner Galvin mentioned that the DOR must decide on
an oil price number and make it the official one.
Representative Crawford agreed the oil price process was
difficult but believed if the available information had
been viewed over a longer time frame there would be a
visible historical pattern shown. He noted on the chart
that it should have been more obvious that the high price
of oil could not be sustained.
2:39:16 PM
Ms. Nienhuis maintained that today's oil prices are viewed
differently from the 70s. She contended that oil markets
today are more global, with the example of Asia and China
starting to utilize more petroleum products. She stressed
that although the role of the U.S. is still large, it has
been diminished. Ms. Nienhuis emphasized that "easy" oil is
increasingly getting scarcer and that the world was looking
to more unconventional supplies with increased costs.
Representative Crawford agreed that worldwide production
was accelerating and influences are different today but he
reasoned that if the prices go up, at some point, they must
come down. Commissioner Galvin reminded the committee that
the chart reflected the actual not the projected price and
that was trying to keep within historic expectations.
2:43:50 PM
Representative Salmon questioned if the DOR was predicting
that oil prices would drop off gradually or drop down
drastically. Commissioner Galvin answered that the price of
oil changes with the times. He pointed out that the price
is determined for the year, not daily. The spring forecast
was for $80 a barrel, even though the actual price at the
time was $120 barrel. The Commissioner signified that each
price is set for a six month period, whether it goes up or
down.
Representative Gara offered that projections in oil prices
have often been wrong. He believed the report was not
focused on what the price of oil would be but a budget that
would range from June 2009 until July 2010.
2:46:38 PM
Representative Gara wondered what the relevance of a
projected oil price would be on budget decisions that are
months away.
Co-Chair Hawker noted that a budget has to be moved out of
the House Finance Committee by the first week in March
therefore the process is to receive the best possible
information in order to work with the administration to
make decisions providing an open, transparent and truthful
discussion of the state's fiscal circumstances.
Representative Gara asked the Commissioner, regarding the
presented budget, how close the forecast is to what is
being spent in the budget from the administration's
perspective. Commissioner Galvin asserted that the
department would not provide an inappropriately optimistic
or pessimistic projection but reiterated that the only
relevance of the revenue projection is to provide a tool
for the budget making process. The Commissioner stressed
that when providing the fall number then combining it with
the spring projection, both pieces of information would be
used to make decisions on spending levels. He emphasized
that the goal of the department is to work with the
committee to provide an updated revenue number to work on
spending. He remarked that a new number would be provided
in a week for the budget effective in July.
2:51:14 PM
Co-Chair Hawker remarked that the DOR explains how the
money is collected but OMB determines how that information
is utilized for the budget.
2:52:00 PM
Ms. Nienhuis continued with the presentation moving to the
price forecasts that were available as of November 6, 2008,
when the final forecast was decided (p. 14). She described
how the forecast came to be with a blending of various
inputs (p. 15). She moved to how the DOR formed their price
forecast (p. 16). Ms. Nienhuis remarked that all forecasts
were weighed equally to arrive at the FY 2009 average price
of $77.66.
2:54:15 PM
Co-Chair Hawker reiterated that the price amount came from
the Delphi process and it predated the economic change in
the world. Commissioner Galvin emphasized that the
department went through the normal process but then
adjusted their figures as the world rapidly changed.
2:55:20 PM
Ms. Nienhuis continued the presentation recapping the price
forecasts for the fall showing the Bloomberg Analyst Survey
for January through March of 2009 (p. 18). She pointed out
that the dates at the bottom showed the dates when the
forecasts were made. Ms. Nienhuis illustrated another view
of the same period on the following graph showing outside
company's forecasts in October and early November (p. 19).
2:57:24 PM
Ms. Nienhuis moved to the last revenue forecast variable,
costs. She explained that cost forecasting is a recent
process therefore cost data information is limited. Ms.
Nienhuis remarked that twice a year the department asks
operators on the North Slope to give their best estimate
regarding cost structure. This information coupled with the
trends as far as costs of production combine to make the
DOR best estimates (p. 22). She indicated that capital
expenditures are treated differently in that they are given
a credit that signifies the interest in production on the
North Slope. Ms. Nienhuis continued with Lease Expenditures
per Barrel (p. 23). She explained that the Capital
Expenditures (CAPEX) per barrel is for projects on the
horizon as well as current producing projects. She moved to
the next graph showing the historical and projected North
Slope investment of reported, not audited, expenditures (p.
24).
3:01:59 PM
Ms. Nienhuis continued with FY 2009 Total Revenue chart
which included both restricted and unrestricted revenue (p.
25). The total projection is for $13.5 million, split
evenly between restricted and unrestricted revenue. Co-
Chair Hawker asked for an explanation for the public on
restricted and unrestricted revenues which were presented
in the next slide (p. 26). Ms. Nienhuis pointed out that
the DOR classifies restricted revenue as the use of revenue
restricted by the constitution, state or federal law, trust
or debt restrictions, or customary practice. Unrestricted
revenue is available for general appropriation discussed in
the revenue forecast. Ms. Nienhuis continued to Sources of
Unrestricted Revenue which included oil (property tax,
corporate income tax, production tax, royalties),
investment earnings and other non-oil revenue (taxes,
charges for services, fine and forfeitures, licenses, and
permits, rents and royalties) (p. 27). She noted that until
recently 25 percent of royalties were deposited in the
permanent fund and .5 percent in the school fund but that
changed with the repeal of HB11 and now some of the
royalties are being paid at a higher amount to the
permanent fund.
3:04:14 PM
Commissioner Galvin elaborated that this refers to an
automatic mechanical repeal based on when the bill was
passed. There was a provision in the bill that stated that
once the affect in the reduction in the investment of the
permanent fund affected the calculation of the dividend
having a $20 impact on the amount of the dividend, the bill
would automatically be repealed and the amount returned to
the original distribution, where those leases issued after
1980 would be at 50 percent. These include the more recent
lower producing leases, not the larger ones.
3:05:25 PM
Co-Chair Hawker reiterated that 25 percent to the permanent
fund is in the constitution but the legislature moved it up
to 50 percent for new leases when there was a lot of money
on the table. It reverted to the constitutional formula but
the legislature provided that if it ever affects the
dividend by $20, no matter what the financial circumstances
of the state, the extra money would be put back into the
permanent fund. Co-Chair Hawker requested the benchmark
number for how much this would affect the money taken from
the legislature's ability to appropriate this year. Mr.
Burnett remarked that over the years it has averaged a
little over $100 million a year but with the current oil
prices it may be different. Co-Chair Hawker remarked that a
reasonable benchmark would be $100 million off the table
into unrestricted revenue.
3:07:31 PM
Ms. Nienhuis continued with the next graph indicating the
FY 2009 Revenue Overview (General Fund Unrestricted
Revenue) (p. 28) followed by the FY 2009 Non-Oil Revenue
Detail (p. 29). Ms. Nienhuis then presented the FY 2009
Revenue Forecast Comparison with the spring 2008 and fall
2008 forecasts (p. 30).
Commissioner Galvin directed attention to the oil price at
$77 a barrel which reflected both the summer prices (2008)
at over $120 per barrel and the short term, January to
March (2009), prices in the low $60s. Because the summer
prices were no high, it averaged the price for the FY 09
year back up to $77 per barrel. The Commissioner indicated
that the next projection will be much lower than the fall
forecasts because the DOR will be averaging in the lower
prices of more recent months.
3:12:57 PM
Commissioner Galvin recounted that all forecasters have
reduced expectations in the projection of oil prices.
Ms. Nienhuis interjected that the production taxes are not
that different from the spring forecast, even though the
price came down. She elaborated that the anomaly of having
a production tax with a progressive component shows a
different set of revenues as the price changes, magnifying
the revenue when prices are high. The progressive surcharge
built into the production tax magnifies the revenue in high
priced months which make it impossible to take an average
for the year and arrive at the same amount that you would
if looking at each month separately and adding them
together. Co-Chair Hawker agreed this is an important point
in understanding this year's budget and forecast.
Ms. Nienhuis explained that in the current fiscal year the
department works in months, followed by quarters, then
years. Co-Chair Hawker gave an example that in the
beginning of a fiscal year the price spiked to a huge
number, then lowered in other months, but at the end of the
year it averaged $74 per barrel. He remarked that this
number is different than if it had averaged $74 every
month. Ms. Nienhuis agreed.
3:15:15 PM
Commissioner Galvin repeated that the department was not
expecting the price to at this figure for all four quarters
so the model shows a price for each quarter. Co-Chair
Hawker added that this is no longer a single variable.
Ms. Nienhuis concluded that this year experienced a record
level of oil price volatility but when the price forecast
was made it was within the ballpark of other outside
forecasts (p. 31). She added that there were minimum
production level changes from the previous forecast but
that lower prices now will impact future costs and
investments.
Ms. Nienhuis presented the Historical Production and Price
Changes as of fall 2008 (p. 32). She noted that changes
were made in revenue forecasting from "cash basis" to
"accrual" accounting. She noted that when deposited cash
reflects the amount of existing revenue, as opposed to
accrual accounting that is not recorded until it is earned.
She noted that cash accounting resulted in $1.2 billion,
thought it be for FY 09, being attributed to FY 08. The
decision was made to change the accounting to the accrual
method so that it would be in alignment with state
financial documents.
3:19:28 PM
Co-Chair Hawker asked if there was any disclosure on the
change. Ms. Nienhuis remarked that disclosure was made
after being asked to do so.
Mr. Burnett referred to the error on page 84 of the draft
of the Revenue Sources Book that showed a loan to the
general fund that did not occur. The original reason it was
shown was in FY 08 the legislature appropriated $2.6
billion to the Constitutional Budget Reserve (CBR) but the
Commissioner decided to move that, plus $1.5 billion from
the CBR to the subaccount of the CBR. Mr. Burnett commented
that this was the first time money had been moved from the
main to sub account of the CBR since 1998. Co-Chair Hawker
requested information on the sub account.
Mr. Burnett explained that the constitutional budget
reserve has a main account and, for investment purposes, a
sub account. The sub account is money invested in fixed
income and equities but not to be spent for approximately
five years. The main account can be used in a shorter time
line as it is more liquid and available for spending.
3:22:03 PM
Mr. Burnett recounted that when the Revenue Sources Book
was first put together, there was no column reflecting the
transfer to the sub account but this was corrected before
being sent to the printer. Co-Chair Hawker noted this was
simply an accounting mistake in the web version. Mr.
Burnett agreed. He also noted that a correction was made
regarding the $400 million deposit to the CBR which was not
accounted for in the first version. Commissioner Galvin
interjected that this was not an accounting mistake but
poorly recorded in revenue book.
3:24:16 PM
Commissioner Galvin summed up the presentation.
3:24:55 PM
Representative Crawford wondered how the subaccount has
performed as opposed to main account. Commissioner Galvin
reiterated that the main account is short term and not
risked money but the sub account is at fifty-fifty. Mr.
Burnett did not have exact numbers but revealed that the
two accounts have a total of just under $7 billion with
approximately $1 billion unrealized loss currently in the
sub account.
Representative Kelly asked what was changed in the asset
allocation and by whom. Mr. Burnett replied that this is
the responsibility of the Commissioner of Revenue combined
with input from investment staff.
3:27:24 PM
Commissioner Galvin stressed that the asset allocation for
the main and sub account is set by the commissioner with
staff consultation but the strategy is in conjunction with
the finance co-chairs. He explained that when the asset
allocation meets the investment strategy with no change
then the strategy remained the same. Representative Kelly
questioned if the lever the Commissioner controlled is the
liquidly not market timing. Commissioner Galvin agreed that
the department does not try and guess the market.
Representative Kelly asked if the Commissioner and finance
co-chairs would be a looking at the asset allocation. The
Commissioner indicated that there would be several items
reviewed during the discussions. Commissioner Galvin agreed
to give the public and the committees a better idea of the
purpose and function of the two accounts.
3:29:57 PM
Representative Austerman asked when the money was moved.
Mr. Burnett replied that all of the money was moved April
2008. He added that when the $2.6 billion was deposited to
the CBR by the legislature last spring, the intent language
was in the budget. Representative Kelly asked if that
intent language related to the liquidity future. Mr.
Burnett agreed that it was.
Co-Chair Hawker thanked the Commissioner.
ADJOURNMENT
The meeting was adjourned at 3:32 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HFinPresentFor012209 Final.pdf |
HFIN 1/22/2009 1:30:00 PM |
|
| Revenue Forecast Source Book pages.pdf |
HFIN 1/22/2009 1:30:00 PM |