Legislature(2011 - 2012)HOUSE FINANCE 519
02/18/2011 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Revenue Forecast and Savings Accounts | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 18, 2011
1:36 p.m.
1:36:25 PM
CALL TO ORDER
Co-Chair Thomas called the House Finance Committee meeting
to order at 1:36 p.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Co-Chair
Representative Anna Fairclough, Vice-Chair
Representative Mia Costello
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Reggie Joule
Representative Mark Neuman
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Bryan Butcher, Commissioner, Department of Revenue; Jerry
Burnett, Deputy Commissioner, Treasury Division, Department
of Revenue; Bruce Tangeman, Deputy Commissioner, Tax
Division, Department of Revenue; Representative John
Coghill.
PRESENT VIA TELECONFERENCE
Cheryl Nienhuis, Petroleum Economist, Tax Division,
Department of Revenue; Frank Molli, Petroleum Engineer and
President, Molli Computer Services, Inc.
SUMMARY
Revenue Forecast and Savings Accounts
^REVENUE FORECAST AND SAVINGS ACCOUNTS
1:37:08 PM
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE (DOR),
introduced department staff and provided an outline of the
presentation topics. He began on slide 4 ("Revenue
Classification Changes") of a PowerPoint presentation
titled "Overview of Fall 2010 Revenue Forecast." He
discussed that previously there had been two categories of
revenue: unrestricted and restricted. Changes had been made
to increase the number of revenue categories to four, which
included unrestricted general fund, designated general
fund, other restricted, and federal revenue (the latter
three categories previously fell within the restricted
group). He explained that the change was reflected in the
department's Revenue Source Book. He delineated that in
addition to historical data and forecast information, each
year the source book had a special focus; the 2010 focus
was on tax credits.
Commissioner Butcher pointed to estimates of total revenue
on slide 5: "FY 11 and FY 12 Total Revenue." He discussed
the "unrestricted general fund" category: the oil revenue
estimate was $4.6 billion for FY 11 and slightly over $5
billion for FY 12; other sources were slightly under $500
million for FY 11 and FY 12; investment revenue was
estimated at approximately $200 million and above for FY 11
and FY 12. "Designated general funds" were estimated at
$281 million for FY 11 and $282 million for FY 12. Under
the category of "other restricted revenue," oil revenue was
slightly under $700 million for FY 11 and $755 million for
FY 12. He noted that federal receipts were slightly over $3
billion for FY 11 and approximately $100 million less in FY
12; these funds were the most restricted because the state
was required to use them for specific purposes.
Representative Wilson had heard multiple times that oil
revenue would drop; she wondered why projections showed
that it would continue to increase.
Commissioner Butcher responded that oil production had been
on the decline; however, the price of oil had been
increasing. The department expected a slight growth in
revenue due to the increase in oil price.
Representative Wilson asked whether DOR anticipated that
the price of oil would increase by at least 6 percent in
the upcoming year. Commissioner Butcher responded in the
affirmative. He added that there was additional price and
production forecast detail later in the presentation.
Representative Gara asked for a definition of restricted
oil revenue. He pointed to the restricted revenue in the
amount of $669 million for FY 11 and $755 million for FY 12
and wondered whether funds were classified as restricted
because they were related to capital credits that the state
owed.
Commissioner Butcher responded that restricted category
included revenue that went into the Alaska Permanent Fund
and the Constitutional Budget Reserve (CBR).
Representative Gara wondered whether capital credits fell
into the restricted category because they related to money
the state owed to others. Commissioner Butcher answered
that capital credits were classified as money going out;
whereas, the current slide pertained to revenue that was
coming in (slide 5).
Representative Guttenberg asked whether the FY 11
restricted oil revenue in the amount of $19.5 million
represented 10 percent of the 90 percent/10 percent split.
He referred to the commissioner's comment that the funds
were the most restricted because the federal government
required the state to use them for specific items.
Commissioner Butcher replied that the funding was coming in
from National Petroleum Reserve-Alaska (NPRA).
Representative Guttenberg wondered why the funds were
restricted. Commissioner Butcher clarified that his comment
about the most restrictive revenue had been related
specifically to federal receipts.
Commissioner Butcher discussed a breakdown of unrestricted
revenue on slide 6: "FY 11 and FY 12 General Fund
Unrestricted Revenue." The department expected that
approximately 50 percent of the unrestricted revenue would
come from the oil production tax or ACES [Alaska's Clear
and Equitable Share]. He explained that slightly over 25
percent came from royalty revenue, slightly under 10
percent came from corporate income tax, and less than 2
percent was generated from property tax. Non-oil revenue
totaled slightly under $700 million.
1:44:29 PM
Representative Doogan asked for details regarding the $3.3
billion FY 11 investment revenue listed on slide 5.
Commissioner Butcher answered that the majority of the
investment revenue was from the Alaska Permanent Fund
Corporation (APFC).
Representative Doogan wondered whether the term "majority"
meant 80 percent or other in the specific case.
JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, answered that the APFC portion was
approximately $2.5 billion; the remaining $842 million came
from the CBR. He noted that to-date both areas had earned
significantly more than the figures listed in the
presentation.
Commissioner Butcher directed attention to slide 7: "FY 11
and FY 12 Unrestricted Non-Oil Revenue Detail." The slide
included the top five largest taxes including: (1)
corporate income tax of approximately $80 million; (2)
mining tax of slightly under $50 million; (3) insurance
premiums at slightly over $50 million; (4) tobacco tax of
$44 million; and, (5) motor fuel tax of slightly under $40
million. He explained that "investments" and "other"
(charges for services, fines, forfeitures, licenses,
permit, rents, ect.) totaled approximately $159 million.
Representative Gara asked for verification that a
corporation was only required to pay non-oil corporate
income tax if it was registered as a C corporation.
Commissioner Butcher responded in the affirmative.
Representative Gara queried the logic behind the
requirement. Mr. Burnett answered that the individual
owners of an S corporation were taxed on their individual
income and were not taxed on corporate income at the
federal level. The State of Alaska did not have an
individual income tax or a business tax; therefore, the
statute would have to be modified in order to include S
Corporations.
Representative Gara believed the issue reflected a loophole
in state law. He surmised that a savvy company could
register as an S Corporation to avoid corporate tax and
unlike other states, Alaska did not have an income tax;
therefore, the companies would avoid income tax as well.
Mr. Burnett responded that currently LLCs, partnerships,
and S Corporations did not pay corporate income tax in
Alaska.
Representative Gara asked whether the corporations would be
exempt from the corporate income tax regardless of the
level of profits they brought in.
Mr. Burnett responded in the affirmative and likened it to
the state's absence of individual income tax.
Commissioner Butcher addressed slide 9 titled "10-Year
Revenue and Spending," that combined general fund expenses
with oil income and other for the next 10 years. He
detailed that a 3 percent budget escalation had been
factored into the data. He noted that the slide had been
submitted to DOR by the Office of Management and Budget
(OMB); therefore, departmental input on future spending was
not included. The chart forecasted that the total amount of
reserves could potentially increase up to $27 billion
through FY 20, given an annual 3 percent budget escalation.
1:49:52 PM
Co-Chair Thomas asked whether the chart on slide 9
reflected the current ACES tax system. Commissioner Butcher
responded in the affirmative.
Representative Gara wondered how confident he should feel
about the projections of budget surpluses in future years.
He believed there were a couple of problems with the chart
on slide 9. He detailed that the governor's FY 12 budget
showed a deficit of approximately $150 million (not
including the possibility of a change to Medicaid that
would result in higher cost to the state); however, the
chart indicated it was in a surplus.
Commissioner Butcher responded that he would need to follow
up on the question. He opined that OMB had intended the
chart to provide a snapshot for the future based on
relatively constant spending (including an annual 3 percent
inflation) combined with the production and oil price
estimates.
Representative Gara remarked that the legislature had been
told there was a FY 12 budget deficit of $150 million. He
believed there would be an additional $1.2 billion cost to
the state if the governor's oil tax bill [HB 110] passed.
He was concerned that the combination of the two would mean
a potential $1.4 billion deficit for the state in FY 12.
Commissioner Butcher responded that the governor's oil tax
legislation would not take effect until 2013 if it passed
and would not impact FY 12.
Representative Doogan believed that beginning in 2013 the
total givebacks from the governor's oil tax bill would be
closer to $1.5 billion or $1.6 billion. He wondered why the
chart on slide 9 did not include capital expenses.
Commissioner Butcher thought that OMB had grouped capital
expenses in with the revenue and spending figures; however,
OMB could provide more detail.
Representative Doogan replied that he would follow up with
OMB, given that the chart did not appear to have capital
expenses included.
Representative Wilson wondered whether the commissioner
could recall a time when the budget had only grown by 3
percent from one year to the next. Commissioner Butcher
believed there were some years in the late 1990s and early
2000s when the budget grew by 3 percent. He remembered that
the 3 percent growth had occurred, but he did not remember
an exact time period.
Representative Wilson requested that OMB update slide 9
with a revised budget growth figure. She added that the
chart reflected a ten-year period and believed the
committee should not have to go back more than ten years to
find an occurrence of the 3 percent growth that OMB had
used.
Representative Edgmon believed that slide 9 conveyed the
wrong picture if the purpose was to provide a projected
snapshot of state revenue and spending.
Commissioner Butcher understood but could not speak
specifically to the intent behind the slide. He added that
the use of a 6 percent to 7 percent annual budget increase
would look different; however, the chart would still show a
substantial projected surplus in later years based on the
price of oil.
Representative Edgmon emphasized that the 3 percent annual
increase did not mirror current growth, which was closer to
10 percent per year.
1:55:48 PM
Representative Gara wondered what would make the budget
surplus grow in future years. He remarked that he would
love to see the surplus grow; however, he did not
understand how a potential deficit in FY 12 of $150 million
combined with a decrease in oil production and a slight
increase in oil price would make that possible.
Additionally, he asked whether there was an assumption that
Congress would modify the Medicaid law, which it had not
done.
Commissioner Butcher replied that the question should be
directed to John Boucher at OMB.
Representative Doogan communicated that the slide had been
presented to the committee by DOR and was misleading. He
only wanted to see the slide again in the future if there
was support for the information that it contained.
Co-Chair Thomas noted that he was interested in the
projections that had been used for the price of oil in
slide 9. He thought that OMB could potentially have more
current numbers that reflected an increase in oil prices
and would modify the FY 12 budget.
Commissioner Butcher replied that there would be a
discussion about FY 11, FY 12, and FY 13 later in the
presentation. He added that the DOR Revenue Sources Book
provided more detail as well.
Commissioner Butcher moved on to slide 11: "FY 10
Production Tax Calculation." He explained that the average
cost per barrel of oil in FY 10 was $74.90, which was
multiplied by 643,515 barrels to equal the value per day.
The number of total taxable barrels was calculated by
subtracting the 31,067,340 royalty and federal barrels from
the annual North Slope production of 234,883,705, which
equaled the total taxable barrels of 203.8 million. The
downstream transportation costs of approximately $6.00 per
barrel, the deductible operating lease expenditures of
approximately $10.64 per barrel, and the deductible capital
lease expenditures of $8.55 per barrel were then subtracted
from the total value per barrel and equaled $49.69. The
total transportation costs and total lease expenditures
were each multiplied by the 203.8 million barrels per year
and subtracted from the total value, which equaled a
production tax value (PTV) of just under $4 billion. The
PTV of $49.69 was multiplied by the 203.8 million barrels
and equaled $10,128,100 billion, which represented the
total taxed by the state. It was necessary to multiply the
tax base of 25 percent by the PTV and to add it to the
progressive tax rate (which began at $30 per barrel and had
a 0.4 percent increase for every dollar up to $49.69) of
7.9 percent to reach the total tax due before credits of
$3.329 billion. The total tax due and the credits of $350
million were then subtracted and equaled the total FY 10
production tax of $2,979,800. He added that the calculation
had been simplified somewhat for the presentation and would
not match the Revenue Source Book precisely.
Commissioner Butcher pointed to slide 12: "FY 11 Production
Tax Projected." He highlighted that the price per barrel
was projected to be approximately $3.00 higher per barrel
than in FY 10. The production was approximately 30,000
barrels less than in FY 10. The total production revenue
was projected to be down almost $400 million from FY 10. He
added that the calculations were based on the department's
fall 2010 forecast in the Revenue Sources Book; there would
be an updated spring forecast issued in late March 2011
that would provide a more accurate view to date, an
estimate of the end of FY 11, and updated FY 12 numbers.
Representative Wilson wondered whether the total would be
$79.39 per barrel in FY 11 if there was a gain of 6 percent
that had been discussed on slide 9. Commissioner Butcher
replied that the department could provide a very specific
breakdown.
Representative Wilson thought that there had been earlier
testimony that a 6 percent gain was needed to counter the 6
percent drop in production. She noted that slides 11 and 12
did not reflect a gain of 6 percent.
Commissioner Butcher answered that the total taxes that
would come in during FY 11 were not limited to the
production tax, which represented slightly below 50 percent
of what the state brought in.
2:03:50 PM
Commissioner Butcher directed attention to slide 13: "FY 12
Production Tax Projected." He reiterated that the figures
on the slide came from the DOR fall 2010 forecast. The
price per barrel of $82.67 was almost $5 more than the
price in FY 11. The number of barrels was projected at a
slight increase of 7,000 barrels over FY 11; however, the
fall forecast had assumed that the Liberty oil field would
begin operation in FY 12, which was not the case;
therefore, the numbers would be revised in the spring
forecast.
Representative Gara pointed to $450 million in credits
applied against taxes that were listed at the bottom of
slide 13. He wondered whether an additional $400 million in
credits that the state reimbursed to companies who did not
pay taxes was included in the calculation.
CHERYL NIENHUIS, PETROLEUM ECONOMIST, TAX DIVISION,
DEPARTMENT OF REVENUE (via teleconference), responded that
the tax credits, which would be refunded for FY 12, were
not reflected in slide 13. She explained that the credits
paid through refunds were appropriated by the legislature;
therefore, they were not included in the incoming revenue
tax calculation.
Representative Gara asked whether the total tax after
credits on the bottom line of slide 13 should be closer to
$2.3 billion instead of $2.754 billion.
Ms. Nienhuis answered that the state would take in the
total production tax revenue listed on slide 13, but the
appropriation for the credits would be a different amount.
She believed the number was close to $400 million for FY
12.
Representative Gara asked whether the total FY 12 tax after
credits would be less than $2.7 billion, given that slide
13 reflected $450 million in credits funded to companies
that paid tax, but did not reflect $400 million in credits
paid to companies that did not pay tax.
Ms. Nienhuis replied that the state would see revenues of
approximately $2.7 billion, but there would be an
appropriation made by the legislature for the refundable
credits.
BRUCE TANGEMAN, DEPUTY COMMISSIONER, TAX DIVISION,
DEPARTMENT OF REVENUE, added that the actual credit
calculation applied against the tax liability would appear
under the deductible operating and capital expenditures. He
explained that the appropriation would be to cover the $450
million in credits. He detailed that there were two
different types of credits: (1) credits that were applied
against the tax liability, which would appear under the
operating and capital expenditure reduction; and, (2)
capital credits that were paid out to those without a tax
liability, which were the $450 shown on slide 13.
Representative Gara asked for clarification that the
additional credits were included under the lease
expenditures category; therefore, the $2.7 billion figure
was accurate on slide 13.
Mr. Tangeman responded in the affirmative.
Commissioner Butcher discussed that the components of the
production tax calculation included production, price,
lease expenditures, and tax credits (slide 14).
Representative Edgmon wondered why the marine
transportation costs had decreased in FY 10 through FY 12,
but the TAPS Tariff had steadily increased during the same
period (slide 13).
Commissioner Butcher replied that as oil production
declined the tariff increased because there were fewer
barrels traveling through the pipeline.
2:10:08 PM
Commissioner Butcher addressed slides 16 through 17 titled
"Three Categories of Forecasted Production:" (1) Currently
Producing fields included base production and enhanced
recovery production from investment that was currently
occurring. He noted that numbers in the category provided
more certainty in a forecast, given that they reflected
currently producing wells; (2) Currently Under Development
fields included new projects that were currently funded or
were awaiting project sanction in the near future (e.g.
Nakiachuk, which had been under development and had begun
producing a couple of weeks earlier). He relayed that there
was less certainty with the numbers, but the department
felt comfortable with them; and, (3) the Currently Under
Evaluation category was the most speculative of the three
and included technically viable projects under active
evaluation for engineering, cost, and risk and reward. The
projects were currently unfunded but were under serious
consideration by producers. The numbers were provided to
give the state an idea of what the out-years would look
like.
Commissioner Butcher highlighted the "Factors that Affect
Production Forecasting" on slide 18:
1. Geology
· Rock type and formation characteristics
· Depth, thickness, pressure
· Oil and gas characteristics (oil gravity,
viscosity, water content, etc.)
2. Development Plan
· Well density and development rate
· Well bore size and completion technique
· Artificial lift and enhanced oil recovery
· Facilities and surface operations
3. Commercial
· Project economics
· Oil price and market conditions
· Government Policy: access, regulation, taxation
4. Production Profile
· History, stage of depletion
· Use production profile to extrapolate trends
5. Timing
Commissioner Butcher elaborated that the Liberty oil field
provided a good example of timing (factor 5). The process
involved discussions with producers to determine when the
field would come online and the understanding that items
may arise that could alter how the department looked at its
next forecast.
Commissioner Butcher pointed to slide 19: "North Slope
Production Decline." The production peak had occurred in FY
88 with slightly over 2 million barrels per day. Production
had dropped approximately 68 percent since its peak and was
at 644,000 barrels per day in FY 10. The decline had been
an average of 5 percent per year since FY 88. He relayed
that over the prior 10 years the production decline rate
had been approximately 4.2 percent per year. The department
expected the decline to flatten out at about 3.2 percent
per year through FY 30.
Vice-chair Fairclough asked for detail regarding the 7
percent decline between FY 09 and FY 10 that was shown in
the DOR forecast book.
Commissioner Butcher replied that the numbers in the
presentation represented an average decline by year. He
thought that production forecaster Frank Molli would be
able to provide information regarding the difference
between the forecast versus the actual decline from FY 09
to FY 10.
FRANK MOLLI, PETROLEUM ENGINEER AND PRESIDENT, MOLLI
COMPUTER SERVICES, INC. (via teleconference), answered that
new development such as Oooguruk, was the largest
contributor to the decreasing of the decline. Continued
development on the Alpine, Kuparuk, and Prudhoe oil fields
had also contributed to the reduction in the decline.
Vice-chair Fairclough noted that the revenue forecast also
included a 1 percent production increase; however, it had
been determined that the number was not accurate. She
believed the revenue production forecast was more
optimistic than it should have been. She wondered whether
the forecasted decline would be 4.3 percent or closer to 6
percent, given that Liberty had not come online.
Mr. Molli replied that he did not know what the exact
decline rate would be. The startup of Liberty would need to
be pushed further out into the future, which would reduce
the forecast for FY 11 and FY 12. He noted that the spring
forecast would be calculated soon.
2:16:33 PM
Representative Costello referenced a DOR graph that showed
the forecast from 2001 to 2010. She wondered whether DOR
had reassessed how it determined the production forecast,
given that the numbers seemed to be overly optimistic over
the ten-year period.
Commissioner Butcher agreed. He had communicated to the
department his goal towards objectivity and accuracy. He
believed the forecast had become more aligned when Mr.
Molli became the forecaster two years earlier. He explained
that actual production tended to be lower than projections
for a couple of reasons: (1) unscheduled pipeline shutdowns
could not be factored into the projection. He referenced
two unexpected pipeline shutdowns that had occurred the
prior month; and, (2) projects were never completed earlier
than expected; they either began on time or later than
anticipated.
Representative Costello asked whether the committee should
assume a less optimistic outcome based on the ten-year
track record.
Commissioner Butcher replied that the department developed
its estimates based on information that came from
producers. He believed that she was right to be slightly
pessimistic about the forecast; however, the department
tried to develop a good estimate without being overly
optimistic about the operation start dates of future
projects.
Vice-chair Fairclough conveyed that she would like to see
the same conservative approach in the department's ten-year
operating budget growth projections. She believed the 3
percent budget growth used on slide 9 was not helpful in
relaying to Alaskans how important it was to keep budget
growth down, given that actual growth was between 7 percent
and 10 percent or more.
2:21:12 PM
Representative Joule recalled that the production decline
had been predominately at 6 percent for a number of years.
He asked for verification that the department looked at
historical data to determine what the actual decline had
been. Commissioner Butcher responded in the affirmative.
Representative Joule wondered whether the decline had been
close to 6 percent. He assumed the meters were correct,
given that they were used to tax people to generate
revenue. He felt that the average decline over the past ten
years of 4.2 percent (shown on slide 19) was 2 percent
lower than what Alaskans had been led to believe.
Commissioner Butcher answered that he was limited to the
current information. He explained that the information was
based on historical data and on the fall 2010 revenue book.
He hoped to be as specific as possible going forward and
referenced upcoming slides that would show the historical
decline and the three categories of production (from least
to most speculative).
Representative Doogan observed that over the past 30 or so
years the revenue projections had always matched the budget
plan of the governor at the time. He hoped the trend could
be broken, but understood that there were political
considerations. He had learned approximately 30 years
earlier to not give much credence to the projections as
they never seemed to turn out they way they were portrayed.
He hoped that the commissioner would try to cure his
skepticism.
Commissioner Butcher responded that he shared some of the
same concerns. He would provide more detail on things that
had been done in the past several years to effect change,
such as involving the legislature and others. The process
in the past had not been open for participation, which had
changed in recent years.
Vice-chair Fairclough wondered whether there were storage
tanks available on the North Slope. She asked whether oil
could have been diverted into storage tanks during a
shutdown and routed through the pipeline once it was fixed.
She thought that with storage tanks there would be less
production lost when a line was shut down, given that the
use of tanks would enable production to continue to flow.
Commissioner Butcher replied that there was a limited
storage capacity. He would determine the amount that had
been stored during the January shutdown and would get back
to the committee.
Vice-chair Fairclough referred to recent headlines
indicating that revenue had been lost during the shutdown.
She found it hard to believe that a producer would stop
production if they had storage capacity to pump the oil
into, which could prevent the state from losing revenue.
Commissioner Butcher replied that it had been unknown how
long the shutdown would last and that production was curbed
or stopped completely. He thought that the shutdown would
have lasted longer, but because it had occurred during the
cold winter, the pipeline needed to be restarted as quickly
as possible.
Representative Wilson wondered whether the department could
provide an average decline for each year over the past 20
years.
Commissioner Butcher answered in the affirmative. He
relayed that the department would provide the graph if the
information did not appear in the source book.
2:28:42 PM
Representative Wilson remarked that there were years within
the past ten-year period where production had increased,
which may have caused the average decline to appear lower
than it had been in more recent years.
Commissioner Butcher replied that he would get the
information to the committee. He did not recall whether the
decline had shifted from 6 percent to 5 percent and what
the cause had been.
Mr. Tangeman communicated that page 98 of the Revenue
Source Book showed a history by field for the past ten
years and page 99 showed the forecast for the next ten
years.
Representative Edgmon asked whether the factors affecting
production forecasting on slide 18 were listed statutorily.
Commissioner Butcher responded that the factors had been
compiled by Mr. Molli and represented a general view of
items that were weighed during the development of the
production forecast.
Representative Joule wondered how long it took DOR to
decipher the geology information (slide 18) once it had
been received from the oil industry. He remembered that the
information had required translation in the past.
Commissioner Butcher confirmed that the geology information
did come from producers. He asked Mr. Molli to elaborate.
Mr. Molli replied that the geology information was
accessible to the public and was generally used to
determine the original oil that was in place prior to
production. He did not know how far in advance the
information was made public. He added that the department
did rely on the information from operators and the Alaska
Oil and Gas Conservation Commission (AOGCC).
Representative Guttenberg discussed how important it was
for the legislature, DOR, and the Department of Natural
Resources (DNR) to understand the factors that affected
production forecasting (slide 18). He referenced the
various decline rates on slide 19. He wondered whether the
department had reevaluated prior forecasts with known
factors that affected production forecasting to determine
whether the original timeline was accurate.
Commissioner Butcher would find out whether there was time
and the ability to uncover the details that had gone into
prior forecasts to determine whether there was a flaw in
previous work. He explained that because Mr. Molli had only
done the forecasts for the past couple of years, he did not
have complete transparency regarding factors used in
earlier calculations.
Co-Chair Thomas referred back to slide 9 that OMB had added
to the DOR presentation. He was concerned that the public
would look at the 3 percent projected budget growth on the
slide and would then blame the legislature if the growth
ended up much higher. He hoped people would realize that
the number was not firm and would shift as supplemental
increases or budget amendments from the governor were
added. He believed the current budget increase had started
at 4.8 percent before any other additions were made.
2:35:54 PM
Commissioner Butcher surmised that OMB had used an
inflation factor to estimate a percentage it could use over
a 10 to 20 year period instead of trying to estimate where
the budget would be growing in 5 to 10 years.
Commissioner Butcher relayed that slide 20 titled "ANS
Production History and Forecast," showed the historical
view of the Alaska North Slope (ANS) production curve from
its peak in 1988 through two significant declines and out
at a more gradual rate of decline through 2019. The chart
also included a breakdown by oil field to show how each
field had factored into the overall decline. He highlighted
that Prudhoe had been the largest contributor and that
Kuparuk's impact had been much smaller, but was more
substantial than the other fields. He detailed that the
forecast did not include the Outer Continental Shelf (OCS),
NPRA outside of Moose's Tooth, or heavy oil that was
currently under development at Ugnu.
Commissioner Butcher detailed that slide 21 titled
"Forecasted ANS Production FY 2010 - 2020," provided
historical data and a forecast of fields that were
currently producing, under development, and under
evaluation. The chart illustrated the three types of
fields: (1) currently producing fields and their forecast
curve for over the next 10 years; (2) fields under
development, which reduced the decline curve in the near-
term; and, (3) fields under evaluation, which were more
speculative and shown in the later years.
Representative Gara asked for an example of major fields
that were currently under development and the level of
production expected.
Mr. Molli responded that projects anticipated in the under
development category were Liberty with peak production of
38,000 barrels, Nakiachuk with a peak production of
approximately 26,000 barrels, and continued development
within the Alpine, Prudhoe, and Kuparuk fields.
Vice-chair Fairclough queried whether the inclusion of
Prudhoe Bay was based on investment in viscous or heavy
crude production. Mr. Molli answered that the items had not
been included for Prudhoe Bay; however, there was some
viscous oil production in areas such as Schrader Bluff that
had been included; heavy oil had not been included.
2:40:02 PM
Representative Gara had heard about substantial stores of
heavy oil at Kaparuk and Prudhoe Bay and believed there had
been heavy oil production at Schrader Bluff. He wondered
what made the production of heavy oil possible at some
smaller fields, but not at larger fields.
Mr. Molli replied that oil production at Schrader Bluff was
considered viscous and was slightly lighter than heavy oil.
There was currently no significant production of heavy oil,
which was primarily the Ugnu formation, but there were
tests underway to determine the best way to produce it.
Representative Gara had heard from a BP representative that
the company planned to move forward with the production of
heavy oil. He wondered when that would take place and about
the quantity that would be produced.
Mr. Molli had spoken with BP representatives, but did not
know the answer to the specific question. He added that he
would consider the information if it was brought to DOR.
Representative Doogan believed that his former assumption
that there was a statutory basis for how revenue forecasts
were developed was incorrect. He wondered whether it would
be possible to direct how the forecasts were made in
statute. He thought that an increasingly thorough
projection, which detailed what and when production would
occur, would be necessary in the future when fields under
development and under evaluation would be more and more
necessary to keep production numbers up. He wondered how
the information could be perfected to provide a more
accurate projection.
Commissioner Butcher responded that DOR would be happy to
discuss the idea, but he thought it would be difficult to
put into statute, given that the process involved bringing
in a large amount of information from operators. He
explained that the forecasting process was subjective by
nature. Information that sometimes seemed optimistic was
derived from the producers; for example, when producers
provided estimates on production per day, the department
was not able to make changes to the data. He noted that Mr.
Molli could provide more detail.
Representative Doogan remarked that he didn't need to know
build the car; he just wanted to know that it was running
okay. He discussed that based on the history of the
projections there was no reason to believe that they were
accurate. He acknowledged the importance of the projections
and explained that he wanted to be proactive if there was
something that could be done to advance the process. He
stressed the need for improvement, which would inspire more
confidence in the accuracy of the projections, given that
the data impacted decisions he would make on different
areas of the budget.
Commissioner Butcher answered that they could bring Mr.
Molli in to discuss the issue and that at the beginning of
each legislative session DOR could present the details
behind the forecast calculations. He added that the purpose
of the spring forecast was to provide an update on factors
that had changed the production forecast presented at the
beginning of each fiscal year. He relayed that price
forecasting had improved considerably in recent years.
Representative Costello queried whether all of the factors
that affected production forecasting (slide 18) were
weighted equally in the forecast development. Mr. Molli
responded in the negative. He elaborated that the heaviest
weight was given to the past performance of the wells and
fields.
Representative Costello wondered about the role of project
economics in the forecast development. She thought that the
geology, development plan, and production profile could all
look good, but that project economics could be a deal
breaker.
Mr. Molli agreed. The department anticipated that the
operators ran extensive economics and would not sanction a
project until they were happy with the numbers they had
run.
Representative Costello asked whether the department
examined the success of efforts that were made to increase
production or whether it relied solely on the industry and
historical data.
Mr. Molli replied that he would assign the method to the
production forecast if it had been successful in the past;
the method would not be utilized if it had not produced any
significant change in production.
2:49:24 PM
Representative Gara asked whether it was plausible that BP
had currently stalled investment due to the impact the oil
spill in the Gulf of Mexico had had on the company's
worldwide financial situation.
Commissioner Butcher did not believe there was enough
information to speculate on the answer.
Commissioner Butcher directed attention to slide 22
"Conclusion on Production," that discussed what was used in
the production forecasting. The department used extensive
well and field specific data that was received from
producers, AOGCC, and DNR. He relayed the importance of new
field development in mitigating decline rates.
Representative Guttenberg wondered whether Pt. Thompson had
been included in new prospects. Commissioner Butcher
believed that the fall 2010 forecast had estimated that Pt.
Thompson would come online in FY 15.
Mr. Molli clarified that limited production was scheduled
to occur at Pt. Thompson in FY 15. The gasline was
scheduled for completion in 2021 and major production would
not happen until that time.
Representative Edgmon wondered whether the committee would
receive detail that would show how the tax rate adjustment
proposed in the governor's oil tax legislation [HB 110]
would impact factors in the production profile if the bill
came to the committee.
Commissioner Butcher answered that DOR would present
estimates on the amount reinvestment would create and
scenarios about the future. The governor had vocalized his
preference for the industry to provide the committee with
its idea on how the tax rate would impact production.
2:53:20 PM
Vice-chair Fairclough recalled that in a past production
tax discussion a spreadsheet had been utilized to provide
multiple scenarios for committee members. She thought that
it would be helpful to develop a similar spreadsheet that
showed one barrel of oil as a fixed point on one axis and
price on another axis, with the ability to generate
multiple scenarios using different credits.
Mr. Burnett believed that the referenced chart was
accessible.
Vice-chair Fairclough thought the tool would help
communicate data and scenarios from the governor to the
legislature and on to the public. The spreadsheet would
also provide a tool to examine how amendments would impact
the numbers.
Co-Chair Thomas asked whether oil price projections were
all calculated in-house or if some were contracted out or
compared to others. Commissioner Butcher replied that the
next several slides provided detail on oil price
calculations.
Commissioner Butcher moved to slide 24: "Price Forecast
Methodology," which described how the price forecast
methodology had been compiled over the past several years.
There was a price forecasting session that had included 27
participants from the Departments of Revenue, Natural
Resources, Labor, and OMB, the University of Alaska,
Legislative Finance Division, and other. Presentations had
been generated that looked at supply, demand, politics,
financial markets, and outside expert forecasts. He
expounded that the forecasting session used the New York
Mercantile Exchange (NYMEX), Energy Information Agency
(EIA) (the official federal forecasting agency), and other
sources to develop the most accurate price forecast. For
projections beyond FY 15 an inflation of 2.75 percent was
added to a constant price.
Commissioner Butcher explained that the chart on slide 25:
"Price Forecasts as of October 2010," showed price session,
analyst data, DOR forecast, and the forecast curve for the
EIA and NYMEX. The items were closely aligned through FY
12, but began to skew in later years, given that
forecasters tended to vary as they moved further away from
the current date and historical data. The trend fell in
line with most federal and other expert projections.
Co-Chair Thomas asked whether DOR predictions were ever
compared to those of oil analysts outside of Alaska.
Commissioner Butcher responded that professional analysts
outside the state were depicted by the purple line shown on
the chart (slide 25). He reiterated that the chart included
data from the NYMEX, EIA, and other. He added that the
department would follow up with a chart that included the
different predictions and more detail on what had occurred.
Co-Chair Thomas remarked that the department's numbers
appeared relatively aligned with the analyst data (slide
25).
Commissioner Butcher highlighted that the price forecasting
was currently much more public than it had been in the
past; therefore, it would be possible to identify and look
into DOR numbers if they appeared to be misaligned with
other data.
Representative Edgmon felt that price calculations were a
product of a thorough and rigorous methodology, but that
production projections appeared to be much more speculative
and included discretion that varied dependent on the
administration.
Vice-chair Fairclough asked for a historical look at how
close past price and production projections had been to
what had actually occurred. She wondered whether DOR had
looked at the risk management model that was utilized by
APFC. She thought the corporation's risk model had offered
an interesting look at the risk involved in price and
production forecasting and could be useful in providing a
different way to display projection data.
Commissioner Butcher responded that he would participate in
his first APFC Board meeting the following week and would
determine whether the board thought the model would be
helpful for DOR projections at that time.
Mr. Burnett communicated that the DOR Treasury Division had
a similar risk model that the department would look at as
well.
Vice-chair Fairclough appreciated the security and risk
management models that were utilized at APFC and understood
that DOR had a similar approach.
3:03:41 PM
Representative Costello asked whether DOR could develop a
plan that would provide increased production forecasting
accountability. She agreed that there was quality assurance
in the price forecasting; however, the production forecast
seemed to lack the same level of accountability.
Commissioner Butcher replied that he would be happy to look
into ways to improve production forecasting. He explained
that price forecasting was easier given that there were
analysts and experts worldwide who worked to determine oil
price projections; however, production forecasting involved
a tremendous amount of work that involved discussions with
operators regarding field locations, when fields would come
online, etc.
Representative Doogan wondered whether it was true that
there were not any price forecasting outliers as shown on
the "Price Forecasts as of October 2010" chart (slide 25).
Commissioner Butcher would get back to the committee with
an answer.
Commissioner Butcher concluded with slide 26 titled "Fall
2010 DOR Oil Price Forecast." The slide showed the FY 10
actual versus nominal prices for West Texas International
(WTI) compared to ANS as well as annual 2.75 percent
inflation factored projected prices for FY 11 through FY
15. The FY 10 ANS nominal price of $74.90 was projected to
increase to $77.96 in FY 11, $82.67 in FY 12, and $87.86 in
FY 13. He discussed the expectation for a slow and steady
oil price increase over the next five years.
Representative Doogan referenced his earlier question about
forecasting outliers and did not believe the information on
slide 26 was likely. He did not disagree with the analysis
as shown over time; however he wanted a more realistic
price forecast on a year-to-year basis. He thought that the
identification of outliers would help to determine downside
risk, which would work to inform decisions about how to
utilize a budget surplus.
Commissioner Butcher agreed and would get the information
to the committee. He recognized the possibility that FY 13
could have been $105 or could just as easily have been $60
and that the prediction could have made.
3:08:29 PM
Mr. Burnett provided a PowerPoint presentation titled
"State of Alaska: An Update on the State's Savings
Accounts." He discussed slide 3: "General Fund and Other
Non-Segregated Investments." He explained that year-end
market values for 2008 through 2010 were shown for each of
the funds. Returns shown on the slide were year to date
(2010 calendar year), fiscal year to date (July 1, 2010 to
December 31, 2010), three year actuals, and five year
actuals. The General Fund and other non-segregated
investments held approximately $6.5 billion at the end of
2010, which were comprised of 98 funds and accounts,
including the general fund, forward funding for education,
the Alaska Housing Finance Corporation capital and capital
income accounts, and the Statutory Budget Reserve Fund
(SBR). He noted that a couple of additional accounts would
be added to the group. Major funds included the General
Fund and the SBR, which had a balance of $1,197,500. There
had been a $190 million surplus at the end of FY 10, which
had been transferred into the SBR in February 2011. Forward
funding for education was currently close to $1.6 billion;
each fiscal year slightly over $2 billion was designated
for education and approximately $1 billion of the funds was
spent each year. He relayed that a substantial amount of
cash flowed through the account, including the capital and
operating budgets; therefore, a large portion was fixed
income and short-term.
Mr. Burnett explained that the returns on fixed income
investments for the current fiscal year were much lower
than they were historically because the Federal Reserve had
set short-term interest rates artificially very low; the
practice was good for businesses and bad for fixed income
investments. He elaborated that there would be a period in
which fixed income investments would not have favorable
returns, given that short-term interest rates could not go
down. He furthered that the fund would lose a little money
when the short-term interest rate began to increase, but it
would subsequently begin to earn money again.
Mr. Burnett moved to slide 4 titled "Constitutional Budget
Reserve Fund (Main $ Sub)." The CBR was divided into two
funds: the main fund and the sub fund. Both funds contained
approximately $5 billion at the end of 2010. As of the
close of business on February 17, 2011 the funds totaled
$10.133 billion and had increased slightly given that
equity markets were currently up. The main fund had
increased significantly over the past five years largely
due to legislative deposits and settlement money. Sub fund
returns over the past five years had averaged 4.21 percent
and were directly related to investment. He communicated
that the main account had performed better during the past
five years; however, he expected that it would not be doing
as well over the next year. The sub fund had a chance of
doing much better if the upswing in the equity markets
continued.
Mr. Burnett pointed to retirement accounts on slide 5
titled "PERS & TRS." The Public Employees' Retirement
System (PERS) and the Teachers' Retirement System (TRS)
accounts had the fiduciary oversight of the Alaska
Retirement Management Board. The accounts were made up of
pooled investments and had the same asset allocations;
however, the funds' returns were slightly different due to
different cash flows. Together the funds contained slightly
over $15 billion. There were a couple of other retirement
funds, including the Judicial Retirement Fund and the
National Guard and Naval Militia Retirement System, which
had similar characteristics to PERS and TRS. The slide did
not include the PCE [Power Cost Equalization] endowment or
the Public School Trust Fund, which were invested similarly
and had similar return characteristics to the CBR sub
account. He noted that he would provide the committee with
the account totals at a later time.
3:15:21 PM
Representative Gara asked what what percent of the expected
liability was represented by the $15 billion in the
PERS/TRS funds.
Mr. Burnett answered that the total liability was estimated
to be in the $25 billion range; therefore, the funds would
equal approximately 60 percent of the total liability. He
detailed that the total was different for PERS and TRS and
pensions and health care. Pensions and health care were
typically separated, but had been factored together on
slide 5 for the sake of simplicity. The numbers on the
slide did not include numbers for the newer defined
contribution system.
Vice-chair Fairclough had read an article that classified
pension funds into four different zones (safe, etc.). She
wondered whether the state pension fund was rated by the
zones.
Mr. Burnett replied that he had not seen the ratings. He
thought that Alaska's ratings were very good compared to
other states. Some other states showed much higher funding
levels; however, the majority did not include funding for
health care and other non-pension liabilities in their
funds. Many states funded retiree health care items as they
arose; whereas, Alaska had always pre-funded the items.
Vice-chair Fairclough wondered whether the state would back
out the specific liability to achieve a better standing for
rating purposes.
Mr. Burnett replied that the state disclosed all
information to ratings agencies. He noted that the state
had been upgraded to a AAA rating during the current year.
Commissioner Butcher added that the rating agencies had
just begun to take into consideration what the State of
Alaska had been doing for quite some time. He communicated
that other states were not happy with the shift as it made
their retirement systems look far worse than they had
previously. Alaska was one of four states that had included
the information; therefore, it was in much better shape
than other states. The information would be extracted from
the data if the goal was an apples-to-apples comparison
between states. He noted that the state was in the upper
portion of states in terms of liability.
Vice-chair Fairclough had reviewed pension liability
information provided by a labor organization to its
members. The organization was much higher funded and she
believed the number looked out of whack. She wondered
whether the inclusion of health care considerations was
potentially a new method going forward.
Mr. Burnett responded that a non-governmental pension would
be evaluated differently.
Representative Edgmon queried the number of active and
retired participants. He thought the number may have been
around 80,000. Mr. Burnett noted that 80,000 was not an
unreasonable estimate. He would follow up with the exact
number at a later time. He noted that the number was also
available on the Division of Retirement and Benefits
website.
Representative Doogan surmised that the 60 percent figure
represented the amount that would be paid towards the total
liability if the funds were cashed out immediately.
Mr. Burnett explained that there were currently 60 percent
of the necessary funds to pay retirement benefits if no
more payments were made to the funds, state employees
stopped working immediately, employees eligible for
retirement retired, and assuming that the projected
actuarial rate of return was achieved on average during the
entire period of time. He elaborated that because the
system was continuous it would not work exactly as
presented in the hypothetical scenario.
Representative Edgmon thought that health insurance rates,
mortality rates, and other factors would need to be
accounted for as well.
Mr. Burnett communicated that the additional factors
including an insurance rate increase, longevity, and other
were built into the actuarial projections.
3:22:12 PM
Representative Wilson deduced that the 60 percent figure
did not necessarily mean that all Alaskan communities were
60 percent invested.
Mr. Burnett answered that local governments throughout
Alaska participated in the state's retirement funds and
paid 22 percent into PERS and approximately 12 percent into
TRS. Under the current system the local governments had no
other liability for their employees. He explained that the
state paid the additional amount above the local government
portion up to the actuarial required rate that would
amortize the unfunded liability for the next 21 years.
Mr. Burnett moved on to slide 6 titled "APFC." He relayed
that at the end of 2010 the fund balance had been $38
billion, which had grown from $28 billion at the end of
2008. The increase had been a combination of cash flows
into and out of the fund (e.g. annual permanent fund
dividend distribution) and investment returns. The fund had
earned 4.14 percent over the past five years. The portion
of the fund invested with equity exposure had done very
well in the past year and the overall fund had earned 14.45
percent in the first half of the last year (fiscal year to
date).
Representative Edgmon queried whether the APFC portfolio
was less liquid and more focused on long-term growth than
the prior two funds that had been discussed.
Mr. Burnett replied in the affirmative. He expounded that
the APFC fund was very similar to the PERS and TRS funds,
but it did not have the same cash flow. He noted that there
was minimal difference between the five year actuals for
PERS, TRS, and the APFC fund, which were 4.04 percent, 4.01
percent, and 4.14 percent respectively. The sub-account of
the CBR fund was slightly higher and did not require
rebalancing for cash flows. He noted that it was not
possible to make an apples-to-apples comparison between the
different funds.
Mr. Burnett concluded with slide 8: "FY 2011 Investment
Revenue Forecast." The slide showed how each fund had
performed in the first part of the fiscal year and
projections for the remainder of the fiscal year. He was
not surprised that unrestricted income was down from the
prior year, given the low interest rates. He was not
confident that the slightly higher projections would come
to fruition in the second half of the fiscal year. He
relayed that the unrestricted income did not represent a
large portion of the revenue forecast; however, it was a
significant amount of money invested that was currently not
earning very much. He explained that the trend would
continue until short-term interest rates improved.
Mr. Burnett discussed restricted investments on slide 8. He
informed the committee that the CBR had earned $700 million
in the first half of the fiscal year and the forecast
through June 30, 2011 was $271 million. To date the fund
had earned approximately $200 million in the second half,
but it was possible that the market could flatten out or
change before the end of the period. The Alaska Permanent
Fund had already earned more in the first half of the
fiscal year than was projected for the entire FY 11. He
furthered that the fund was invested for the long-term and
there had been good absolute performance to date. He noted
that it was unclear how long the equity market upturn would
last.
Commissioner Butcher added that the permanent fund was
almost as high as it had been prior to 2008.
Representative Doogan observed that he should have been
more concerned about investment income than oil revenue.
Mr. Burnett remarked that things were leaning that
direction. He communicated that since 2004, excluding the
money in the retirement funds, the money invested by DOR
had increased from approximately $5 billion to
approximately $18 billion.
Co-Chair Thomas thanked Commissioner Butcher and DOR staff
for their presentations.
ADJOURNMENT
The meeting was adjourned at 3:29 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DNR Revenue Forecast Overview to HFC 2 18 11.pdf |
HFIN 2/18/2011 1:30:00 PM |
|
| DNR State Savings Accounts to HFC 2 18 11.pdf |
HFIN 2/18/2011 1:30:00 PM |