Legislature(2013 - 2014)HOUSE FINANCE 519
01/24/2013 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Fy 14 Governor's Budget Overview: Department of Education and Early Development | |
| Alaska Revenue Forecast: Department of Revenue and Department of Natural Resources | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 65 | TELECONFERENCED | |
| += | HB 66 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
January 24, 2013
1:31 p.m.
1:31:58 PM
CALL TO ORDER
Co-Chair Austerman called the House Finance Committee
meeting to order at 1:31 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Lindsey Holmes
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
ALSO PRESENT
Michael Hanley, Commissioner, Department of Education and
Early Development; Mark Lewis, Director, Administrative
Services, Department of Education and Early Development;
Bryan Butcher, Commissioner, Department Of Revenue; Dan
Stickel, Assistant Chief Economist, Tax Division,
Department of Revenue; Bruce Tangeman, Deputy Commissioner,
Tax Division, Department of Revenue; William Barron,
Director, Division of Oil and Gas, Department of Natural
Resources; Angela Rodell, Deputy Commissioner, Treasury
Division, Department of Revenue.
SUMMARY
FY 14 GOVERNOR'S BUDGET OVERVIEW:
Department of Education and Early Development
Alaska Revenue and Price Forecast: Department of
Revenue and Department of Natural Resources
HB 65 APPROP: OPERATING BUDGET/LOANS/FUNDS
HB 65 was HEARD and HELD in committee for further
consideration.
HB 66 APPROP: MENTAL HEALTH BUDGET
HB 66 was HEARD and HELD in committee for further
consideration.
HOUSE BILL NO. 65
"An Act making appropriations for the operating and
loan program expenses of state government and for
certain programs, capitalizing funds, amending
appropriations, and making reappropriations; and
providing for an effective date."
HOUSE BILL NO. 66
"An Act making appropriations for the operating and
capital expenses of the state's integrated
comprehensive mental health program; and providing for
an effective date."
^FY 14 GOVERNOR'S BUDGET OVERVIEW: DEPARTMENT OF EDUCATION
AND EARLY DEVELOPMENT
1:32:57 PM
MICHAEL HANLEY, COMMISSIONER, DEPARTMENT OF EDUCATION AND
EARLY DEVELOPMENT (DEED), introduced department staff. He
provided a Power Point presentation titled "State of Alaska
FY 2014 Governor's Operating Budget: Department of
Education and Early Development." He explained that the
parameters of education services in Alaska were defined by
its constitution, which designates that the legislature
shall by general law establish and maintain a system of
public schools for all children in the state (slide 2). The
core system had defined key functions that enabled the
establishment and maintenance of public schools including
providing adequate funding, oversight and support, setting
student standards, and assessing students on their progress
towards proficiency in meeting the standards.
Commissioner Hanley communicated that the education policy
is defined in statute, which stated that the purpose of
education is to help ensure that all students will succeed
in their education and work (AS 14.03.015). He read the
department's four core services on slide 3:
1. Public School Funding - Ensure funding is
appropriately distributed to recipients based on
legislative appropriations and by Statute.
2. Fiscal Accountability, Compliance, and Oversight -
Ensure the department effectively and efficiently
manages state, federal and other funds.
3. School Effectiveness Programs - Assist districts by
providing programs, technical on-site and distance
delivery support, and early intervention services.
4. Active Partnerships - Provide opportunities for, and
collaborate with government entities, and other public
and private organizations.
Commissioner Hanley elaborated that funding could be
provided by grants and formula programs. He added that DEED
worked directly with districts to [effectively and
efficiently] manage funding. He added that the state and
department did not have authority to make decisions at the
local level related to curriculum, personnel, and other;
the items were set at the local level by school boards and
personnel. He moved to a pie chart on slide 4 that
illustrated the DEED budget by core services: 80 percent
went to public school funding; 14 percent went to
accountability, compliance, and oversight, which included
assessments; 2 percent went to school effectiveness
programs including State System of Support programs,
mentors, and WorkKeys; and 4 percent went to active
partnerships.
Commissioner Hanley addressed a graph on slide 5 related to
school effectiveness and the statewide graduation rate
goal. He relayed that graduation had always been one of
DEED's core functions. He stressed that the department
viewed graduation as a destination it needed to help
students reach in order to adequately prepare them for the
next step in their lives. He shared that the governor had
recently set a 90 percent graduation rate goal to be
achieved by 2020; the actual rate had been 68 percent in
2011 and 69.6 percent in 2012.
1:37:35 PM
Representative Wilson wondered how the state and department
could help increase graduation rates to 90 percent if all
of the action was taken at the local level. Commissioner
Hanley replied that local decisions were not the only piece
of the equation. He shared his intent to address the
question further on the following slide.
Commissioner Hanley pointed out that the graduation rate
was a cohort and not an annual rate; the measurement began
when students entered ninth grade and tracked how many of
the students graduated in four years.
Co-Chair Austerman asked committee members to hold their
questions until the end of the presentation.
Commissioner Hanley continued to discuss how graduation
rates were determined (slide 5); all states utilized the
same method. Slide 6 addressed the governor's proposed
increment for the Jobs for Alaska's Graduates program
(JAG). The proposal was based on a national model used by
33 other states; it had a 93 percent graduation rate for
at-risk students. The program would identify and engage at-
risk students, set time for them on a daily basis, work to
help them obtain the credits needed to graduate, work with
them on employability skills, connect them employers, help
them to overcome barriers, stick with them through the
summers, guide them into jobs, and stick with them for 12
months after graduation. The proposal would put eight or
nine specialists in different locations who would work with
35 to 45 students a piece.
Commissioner Hanley turned to a chart on slide 7 related to
DEED's active partnerships with the Alaska Commission on
Postsecondary Education (ACPE). The blue bar represented
the total graduation rate; the 2012 graduate cohort was
smaller than the one in 2011 due to a decrease in
enrollment. The red bar represented the number of students
who qualified for the Alaska Performance Scholarship; 29
percent qualified in 2011 and 28 percent qualified in 2012.
The green bar represented the number of students who took
advantage of the scholarship; 12.8 percent of qualifying
students used the scholarship in 2011 compared to 10.7
percent in 2012. The comparison did not provide a complete
look at the overall picture given that students had two
years to access the scholarship after qualifying. He
elaborated that some students in the 2011 cohort had left
the state for a year and had then returned to access the
program; therefore, DEED anticipated that numbers would
rise for 2011 and 2012.
1:42:30 PM
Commissioner Hanley spoke about the governor's proposed
increment for digitizing education in Alaska on slide 8. He
pointed to several components of the proposal including a
"1:1 initiative." He detailed that the initiative was not
about matching technology to students, but about changing
and providing better access for opportunities to students
and meeting students' needs. The initiative would allow
teachers to become more efficient by using the tools to
measure student growth. The initiative was about putting
devices into the hands of each student in order to ensure
that they had the latest technology skills.
Commissioner Hanley discussed the Alaska Learning Network
as another piece of the governor's goal to digitize
education in Alaska. A portion of the network was currently
in place; it connected high quality teachers and online
courses to students around the state. He provided an
example of an Introduction to Mining course that had
started during the current week; 120 students statewide
were anticipated to participate in the current course. He
detailed that the course was a partnership with the
University of Alaska that provided dual credits with the
mining companies throughout the state. Greens Creek Mine in
Southeast was a primary supporter of the program and was
helping to pay student fees; students were only responsible
for $44. The mines were looking for local hires, given the
lower turnover rate; the goal was to aim students for a
local workforce. Greens Creek had also committed to
offering a summer internship to students in the top one-
third of the class that would pay $12,000; students would
then have the opportunity to have some of their college
tuition paid. He emphasized that every student would have
the opportunity to tour a mine in their region. The program
applied to the entire spectrum of occupations that fell
within the mining sector including environmental engineers
and other.
Commissioner Hanley pointed to broadband support as the
third component of the governor's emphasis on digitizing
education in Alaska (slide 8). The effort was conducted
through the state's libraries and museums partnership
called Online with Libraries (OWL). Infrastructure
capabilities were available in 67 community libraries;
continued support would be provided to maintain broadband
access. He furthered that 30 of the 67 libraries were
school libraries. The capability allowed college-aged
students to access courses, adults to access state
services, and communities to connect with each other for
joint meetings.
1:46:10 PM
Commissioner Hanley relayed that the final component of the
governor's plan to digitize education in Alaska was live
homework help (slide 8). The program offered tutoring help
from 1:00 p.m. to 12:00 a.m. 7 days per week. The number of
students using the service had grown from 5,703 to over
8,000. He shared that the student representative on the
state school board came from a small school in Port Heiden;
the program allowed her to access help with algebra that
her local teacher was not able to provide.
Commissioner Hanley addressed efficiency measures on slide
9. He explained that the agency portion of the $5,680 Base
Student Allocation (BSA) was $129.15 per student; the funds
paid for support services including mentoring and other. He
turned to a DEED organizational chart on slide 10. The
Alaska State Board of Education and Early Development was
the head of DEED; membership was composed of 7 members who
represented the state's 4 judicial districts, 3 at-large
members, and 1 member who represented an REAA [Regional
Educational Attendance Area]. He elaborated that the three
components at the bottom of the chart represented the
department's active partnerships including the Professional
Teaching Practices Commission, Alaska State Council on the
Arts, and the Alaska Commission on Postsecondary Education
(each entity had its own organizational structure and
boards and commissions).
Commissioner Hanley stated that the DEED budget was broken
into two components (slide 11): (1) K-12 formula programs
in the amount of $1.386 billion and (2) agency operations
in the amount of $311 million; the total budget was $1.69
billion. A pie chart showed the operating budget by fund
source: 85 percent general funds, 14 percent federal funds,
and 2 percent other funds (e.g. interagency receipts). He
turned to a chart showing the department's total fund
operating overview (slide 12): 94 percent of funds were
spent on grants to schools (e.g. foundation formula, pupil
transportation, school debt reimbursement, and Title 1
programs); 4 percent of funds were contractual (e.g.
assessment, commodities, and travel); and 2 percent of
funds went to personal services.
1:50:25 PM
Commissioner Hanley relayed that the department had 335
full-time positions, which included staffing for the state
run boarding school Mount Edgecumbe, the Professional
Teaching Practices Commission (PTPC), the Talking Books
Library, ACPE, and other (slide 12). Slide 15 included a
pie chart depicting an overview of the department's
operating budget: 82 percent went to K-12 formula programs
and 18 percent went to agency operations. Slide 14 showed
agency operations by fund source: 24 percent in general
funds; and 68 percent in federal funds. He emphasized that
agency operations were largely funded with federal dollars.
Commissioner Hanley directed attention to budget highlights
on slide 15. He stated that the governor recognized that
state revenues were decreasing and had put forward a
fiscally conservative budget; however, several additional
increments had been added to the department's budget
including funding for school district support outside of
the formula, forward funding for the Foundation Program and
pupil transportation, and funding for the Autism Resource
Center and Rural Transition Services (per the
recommendation of the Alaska Mental Health Trust
Authority).
1:53:59 PM
Commissioner Hanley discussed additional funding proposals
on slide 16. The administration recognized the importance
of children being able to read by the third grade. The
statewide K-3 Literacy Program would focus on early
identification and would provide a universal screening tool
for kindergarten through third grade that would enable
teachers to recognize and address any deficits in students'
reading. The program did not address deficits, but provided
teachers with the information to make the necessary
teaching decisions to help students. He explained that
previously $800,000 for Pre-K grant funding had been moved
to one-time funding; the proposal was to move $480,000 back
into the base. Two other funding increments would go to the
JAG program and the digitizing of Alaska's education
system.
Commissioner Hanley communicated that DEED had incorporated
its budget changes into the 10-year plan. Using data from
the past several years DEED projected flat funding of the
foundation formula, which included $25 million outside the
formula as targeted funding. He noted that 10-year
projections were "crystal ball exercises" given that it was
hard to determine the future. Projected operating costs
included inflation adjustments for contractual obligations.
Commissioner Hanley addressed capital projects on slide 18.
He detailed that construction and major maintenance items
remained at current levels. The proposed budget included
funding for one school construction (based on the Kasayulie
settlement) and continued funding for a previously
supported project. The department had moved down 14
projects on its major maintenance list. The budget also
included maintenance for Mount Edgecumbe based on its 6-
year plan to keep the school in operation and funding for
the Stratton library the state had acquired in Sitka.
Slides 19 and 20 illustrated the 10-year projection in
graph form. The dotted black line represented DEED's
projection and was relatively flat. The green line
represented what would occur if the department's budget
continued to grow at a 10.5 percent annual growth rate. He
believed a realistic growth rate would fall somewhere
between the two lines. He emphasized that the department's
budget was a part of a fiscally conservative total state
budget that did not grow at 10.6 percent. He believed the
governor recognized that a 10.6 percent annual growth rate
would be unsustainable. The graph on slide 20 represented
the 10-year projection for all funds.
1:58:10 PM
Commissioner Hanley continued to discuss slide 20, which
showed a target of 4.8 percent annual growth; the target
was slightly higher than actual growth that had occurred in
the past five to six years. The graph showed a flatter
projection than 4.8 percent, but he anticipated the actual
budget would fall somewhere between the two projections.
Slide 21 showed the DEED budget compared to all other
agency budgets (non-formula and general fund only). The
DEED share had been consistent at approximately 2 percent
beginning in FY 07; it had been at 1.6 percent in FY 05.
Slide 22 provided the DEED formula and non-formula funding
compared to other state agencies. He pointed to the trend
line (shown in blue) that had decreased from 29.7 percent
in FY 05 to 25.5 percent in FY 14. He stressed that
department's portion of the total budget had been steadily
declining over the last several years.
Co-Chair Austerman pointed to slide 19 and asked for
verification that DEED expected "somewhat" of an increase
over the next several years in general fund spending.
Commissioner Hanley responded in the affirmative.
Co-Chair Austerman asked if the growth was due to salary
increases or other.
MARK LEWIS, DIRECTOR, ADMINISTRATIVE SERVICES, DEPARTMENT
OF EDUCATION AND EARLY DEVELOPMENT, responded that salary
increases were not included in the department's 10-year
plan; the Office of Management and Budget (OMB) was
responsible for trending salaries. The graph only showed
increments contained in the DEED 10-year plan.
Co-Chair Austerman asked for detail on increments that were
responsible for the department's projected general fund
spending growth. Mr. Lewis replied that the "modest" growth
was due to items such as contractual increases for the
state assessment system, mentors (growth of 2.7 percent),
and other.
2:01:20 PM
Representative Munoz queried how graduation rates tracked
students who moved from one district to another during high
school or who began high school in Alaska and moved out of
state prior to finishing.
Commissioner Hanley answered that there was a statewide
identification system for K-12 that allowed DEED to track
when a student left one district and enrolled in another.
He explained that it became challenging when students moved
out of state, but the system did recognize when students
enrolled elsewhere and worked to create a realistic
picture.
Representative Thompson asked for verification that the
69.6 percent graduation rate included students who entered
9th grade and graduated in four years. Commissioner Hanley
replied in the affirmative.
Representative Thompson asked how students who graduated in
over four years were accounted for. He wondered how the
data skewed the graduation percentages. Commissioner Hanley
opined that every graduate represented a success story. He
responded that those graduating in more than four years
would add approximately 1 percent to 2 percent. He
furthered that the state used the specific formula because
it allowed DEED to compare Alaska's graduation rate to
those in other states.
2:03:51 PM
Representative Guttenberg asked whether the growth charts
accounted for fluctuating student enrollments, costs of
heating, transportation, or other. He wondered what was
built into the figures.
Mr. Lewis replied that the growth had been trended out. The
department based future projections on current year
forecasts because it was the only basis it could use to
make a decision on; it did not try to calculate any
increase or decline in student population.
Representative Holmes referred to the department's 10-year
plan. She urged the department to work on a way to develop
a more realistic future projection that could be used as a
planning tool. She observed that the 10-year forecast
looked remarkably flat. She pointed out that there would be
increases in inflation and other.
Representative Gara referenced slide 17 and asked if the
$25 million in funding outside of the BSA would be an
annual increment or if it would build on itself by $25
million annually.
Commissioner Hanley replied that the figure was an annual
increment of $25 million; the 10-year projection included
the amount as a reflection of recent years but it was not
reflective of a "wish list" or suggestion.
2:07:33 PM
Representative Gara looked at slide 19 and wondered if DEED
could provide a better estimate on its future budget
growth.
Commissioner Hanley replied that it was difficult for DEED
to provide future projections because working with the
legislature determined what the number would be. He
furthered that the projection would continue to look
similar if the BSA of $5,680 and the annual appropriation
of $25 million remained static going forward.
Representative Gara wondered how DEED planned to increase
student achievement given cuts that had been made. He
pointed to two years of flat education; no BSA increase;
and, the Anchorage school district was laying off teacher
aides, tutors, and student counselors in Anchorage who were
helping students transition to college and jobs; and summer
school in Anchorage had been closed the prior year.
Commissioner Hanley answered that flat funding meant that
no money had been added to the BSA, but it did not mean
that education had received no funding increase in the past
years. He expounded that the $25 million increment had been
provided for the first time the prior year, money had been
added to Career and Technical Education (CTE), and the
state had allocated money to the Teachers' Retirement
System (TRS). He reiterated that the governor's proposed
budget included funding for energy and other; however, he
recognized that whether the budget kept up with what
districts needed was a different issue.
Representative Gara appreciated the effort to increase
reading proficiency in the K-3 Literacy Program; however,
he thought Commissioner Hanley had testified in the past to
the importance of working with children on literacy by the
ages of 3 and 4. He wondered why the Literacy Program was
not starting at the Pre-K level.
2:10:57 PM
Commissioner Hanley did not recall the testimony. He stated
that the Literacy Program would strengthen the current
school system. He elaborated that there was funding for
some Pre-K programs, Parents as Teachers, Head Start, Best
Beginnings, and other. There was not a system wide Pre-K
program in place, but DEED believed that when children
entered the school system it was important for teachers to
understand each child's specific needs to ensure readiness
for reading by the third grade.
Representative Wilson queried whether the state was seeking
a waiver related to No Child Left Behind. She wondered how
the waiver would impact the state's federal funding.
Commissioner Hanley replied that the waiver from No Child
Left Behind should not have an impact on federal funding;
however, it would change the measurement and accountability
tools. The department believed the shift would more
accurately measure what took place with students in Alaska.
Representative Wilson discussed that district's had local
control over how they spent BSA money. She believed
programs continued to be added and surmised that it was
because the department was not seeing the necessary growth.
She wondered why districts were not charged for elective
programs and why the funds were not coming out of the BSA.
Commissioner Hanley asked for verification on the question.
Representative Wilson clarified her question. She pointed
to digital learning as an example; not all districts would
access the same programs based on their individual needs.
She wondered why the various elective programs were not
charged to the BSA. She thought that districts should pay
for their participation in the programs instead of the
state providing a free service.
Commissioner Hanley responded that DEED had some explicit
proposals to move forward with. He stated that the
department was looking at "specific targets for specific
outcomes." He stressed the importance of local control for
districts to address their needs. He addressed graduation
rates and believed that implementing a targeted program
would provide a targeted outcome. He communicated that it
was "a categorical specified funding for something that the
governor wants to see."
Representative Wilson asked if the department could specify
targets for districts that would allow DEED the authority
to redirect or change programs in specific districts if the
targets were not met. She stressed that the budget did not
included enough money for all of the districts.
2:15:24 PM
Commissioner Hanley replied that the JAG program was the
only program that would begin in select districts; other
programs were all statewide. He guessed the state could
implement regulations that put responsibilities on
districts without funding them; however, he pointed out
that a new set of content standards had been implemented
and that the rigor had been tremendously increased related
to expectations for students. The department had not funded
districts to replace their curriculum or do professional
development; it was a burden for districts to move in the
new direction, but it was an expectation the department
had. He expounded that teacher evaluations were now tied
with student learning; funding had not been tied to the new
requirement, but DEED wanted to see high quality teachers
in the classroom. He noted that the department was working
to support teachers and that only so much could be asked of
them without providing additional funding.
Representative Wilson was concerned about the fairness of
some "excellent" districts operating on a set amount of
funding while challenged districts were receiving added
programs. She opined that the challenged districts were
getting the BSA and programs on top of that, whereas other
excellent districts were "trying to survive on a string."
She wanted to ensure that districts with excellent schools
were taken care of as well. She would discuss the issue
further during the DEED Finance Subcommittee meetings.
Representative Guttenberg pointed to digitizing education
(slide 8). He asked about current capability to provide all
schools with bandwidth. He pointed to constant growth in
the demand for increased capacity to account for the
growing number of computers, iPads, and other. He observed
that currently bandwidth capacity was fairly limited. He
mentioned the state's broadband task-force. He wondered
whether the department would be able to keep up with the
ever increasing demand for bandwidth.
2:19:23 PM
Commissioner Hanley believed that broadband would always be
maxed out. The digitization initiative did not require
broadband in every capacity. He relayed that every school
district had broadband, but every district did not have the
ability for all of its students to be online at the same
time or the ability for live-streaming. Under the digital
initiative districts would build a plan around their
existing capacity. He pointed to recent funding for the
Association of Alaska School Boards (AASB) for student use
of iPads; he stated that "tremendous growth" had been
witnessed for K-3 graders who had participated in the
program. He elaborated that most of the iPads used "apps"
(applications) and did not have access to broadband. He
relayed that DEED did not have significant capacity to push
forward broadband. He referenced that DEED was watching and
supporting GCI's TERRA project [a project working to
provide broadband connection to rural communities
throughout Alaska]; broadband access was now available in
Hooper Bay. He shared that DEED was looking at obtaining
the best e-rate in order to keep costs down. He recognized
the challenge and believed the department could move
forward with the current capacity; the capacity could
continue to be increased when available.
Representative Guttenberg was concerned that broadband
learning opportunities were equalizers for rural and urban
communities and students with different ways of learning.
He wanted to ensure that students had equal learning
opportunities that would help them succeed in school and
life.
2:22:25 PM
Representative Munoz believed the mining training program
was a great partnership between multiple entities. She
wondered whether the program could act as a model for other
sectors including healthcare, marine technology, and other.
Commissioner Hanley replied that he hoped so. The mining
program connected industry with the education system to
help provide training and high paying jobs to Alaskans; it
was the first of its kind that the department had
participated in.
Representative Gara had been told by school officials in
Anchorage that the rate for school districts' ability to
make local contribution had been capped too low when the
legislature had worked to make local contributions more
equitable the prior year. He had heard from officials who
wanted to contribute more. He wondered if there was a
solution to the problem.
Commissioner Hanley responded that he did not believe a
mistake had been made, but the local contribution rate had
been changed. He explained that Anchorage's contribution
needed to be $8 million less and the state had picked up $8
million more. He added that criteria existed related to how
much could be contributed. He had been involved in meetings
the prior summer with the Anchorage Chamber of Commerce and
the school district related to the issue. He opined that
there were ways for communities to adequately contribute.
Representative Gara asked if the department supported the
concept of Pre-K programs. Commissioner Hanley recognized
that early intervention programs could benefit students and
prepare them for kindergarten.
Co-Chair Austerman referenced the department's 10-year
budget projection on slide 19. He stressed that legislators
and department administrators had to think beyond the next
several years or the state could end up in a bad situation.
He expressed concern about the 10.5 percent projected
annual growth figure on slide 19 and stated that if it was
accurate there were some "real problems" that needed to be
planned for. He elaborated that there was no way to plan
for the future if departments continued to come forward
with one or two years of anticipated growth. He hoped the
administration would recognize the importance of providing
a realistic 10-year plan.
2:26:56 PM
Commissioner Hanley replied that the department could work
with key legislators to help it come up with a more
realistic plan.
Co-Chair Austerman remarked that population growth alone
would account for higher budget increases than those
included in the department's annual management plan on
slides 19 and 20.
^ALASKA REVENUE FORECAST: DEPARTMENT OF REVENUE and
DEPARTMENT OF NATURAL RESOURCES
2:28:37 PM
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE (DOR),
provided a Power Point presentation titled "Overview of
Fall 2012 Revenue and Price Forecast." He looked at an
outline on slide 2 and shared his plan to discuss the
department's 10-year overview, total revenue (including oil
and non-oil revenue). Slide 4 showed a snapshot of DOR's
10-year revenue forecast. He pointed out that the
department's forecast included an expectation of relatively
high oil prices into the future. The yellow row titled
"Total ANS Production" showed production levels that would
continue to decline (production had been declining in
recent decades); as a result the general fund unrestricted
revenues were projected to decrease as well.
Commissioner Butcher directed attention to slide 5 that
provided a detailed look at the differences between the
department's spring 2012 and fall 2012 forecasts. He
relayed that the price of oil was down by approximately
$1.77 from the spring 2012 forecast; production was also
down by approximately 10,000 barrels per day. He stated
that in conjunction with increased North Slope expenditures
revenue was down by approximately $928 million from the
spring forecast (higher spending was taken out prior to the
calculation of production tax value; corporate income tax
was also off slightly). There was a slight uptick in the
oil price forecast and a more "severe" production decline
(by approximately 29,000 barrels). The production decline
was largely due to delayed production in some wells and
reduced performance in some other wells.
2:32:50 PM
Commissioner Butcher added that the fall forecast was
approximately $1.6 billion less than the spring projection.
He reiterated that the reduction was due to lower
production and oil prices and higher spending. He addressed
slide 6 titled "Total Revenue Forecast" that included
unrestricted and designated general funds, other restricted
revenue, and federal revenue. He pointed out the FY 12
actual investment revenue at $109 million compared to the
forecasts for FY 13 and FY 14 that were over $3 billion
each. He explained that the Permanent Fund had high
earnings in FY 11, but that FY 12 investment revenue was
virtually flat. The projections for FY 13 and FY 14 were
based on what the Permanent Fund expected to make; the fund
was up approximately 7 percent for the first 6 months of FY
13. He stated that the fund was "well on its way" to
achieving the FY 13 forecast.
2:34:24 PM
Commissioner Butcher pointed to a table that broke down
unrestricted general fund revenue particularly related to
petroleum revenue; it detailed what the state receives in
royalties minus royalties designated for the Permanent Fund
and Public School Fund. The production tax represented the
largest portion of incoming revenue; corporate income tax
accounted for $568 million; and property tax was generally
around $100 million. Slide 8 provided a snapshot of non-oil
revenue. He relayed that over 90 percent of the state's
budget was paid for with oil revenue; therefore the non-oil
revenue represented a relatively small portion of the total
picture at approximately $627 million. The slide also
included a detail on the various taxes including corporate
income, mining license, insurance premiums, tobacco, motor
fuel, and other smaller taxes. The department did not
foresee a tremendous change between the last, current, and
upcoming fiscal years.
Commissioner Butcher addressed a chart depicting the
production history and forecast on the North Slope (slide
9); production had peaked in the late 1980s at 2.1 million
barrels per day. Slide 10 included a closer look at oil
producing fields from 2002 to 2022 including Prudhoe Bay,
Prudhoe Bay Satellites, Kuparuk, Endicott, and other. He
noted that legacy oil fields of Prudhoe Bay and Kuparuk
were still expected to produce the most oil over the next
ten years. He looked at oil price forecast methodology on
slide 12. He shared that the past fall marked the fifth or
sixth year that DOR had held an all-day forecasting
session. The most recent session was on October 2, 2012;
there had been 31 participants from DOR, Department of
Natural Resources, Department of Labor and Workforce
Development, OMB, University of Alaska, Institute of Social
and Economic Research, Legislative Finance Division, and
other outside entities. He elaborated that experts were
brought in and the entities considered supply, demand,
geopolitics, financial markets, and other expert forecasts
(e.g. federal Energy Information Agency (EIA), New York
Mercantile Exchange (NYMEX), futures market, and other). He
furthered that experts were brought in to present at the
meeting in order to encourage a more interactive dialogue
on what was occurring worldwide. He shared that DOR had
heard from Barry Pulliam of Econ One, the late Dr. Tony
Finizza (former chief economist of ARCO), Samuel Van
Vector, President of Economic Insights, and the Wells Fargo
senior economist Mark Vitner. The forecasts from
participants were blended with EIA and NYMEX and other
analysts to determine the DOR fall forecast.
2:39:33 PM
Commissioner Butcher moved to slide 13 that showed the
price of oil for the past five years and price forecasts
through FY 17. The slide included price forecasts from
multiple entities; EIA had a "rosier" or bullish outlook
than others and NYMEX was forecasting at the lower end of
the spectrum; however, most analysts tended to see prices
in the middle range. He pointed out that DOR's projection
fell "comfortably" in between the high and low forecasts.
He communicated that rating agencies look at all aspects of
the revenue projections to determine how realistic they
are. For example, a state could use a state income tax that
was higher than rating agencies believed would occur, which
would give a rosier view of forecasted state revenues. He
furthered that ratings agencies worked to determine how
conservative or optimistic projections were; he stated that
conservative projections were better. He shared that
ratings agencies had acknowledged that the department's
price forecast had been lower than the actual forecast in
five of the past six years; however, its production
forecast had been overly optimistic every year for the past
couple of decades.
Commissioner Butcher shared that slide 14 titled "General
Fund Unrestricted Revenue Price Sensitivity FY 2013-2015"
had been included for future reference; it showed the
forecasted revenue, production, and price (price could
fluctuate tremendously). The slide depicted what the state
would generate in revenue at different per barrel costs
beginning at $50 dollars and increasing by $10 increments;
it showed how a price swing up or down would impact
revenue. He observed that there was a fairly extreme
difference between the scenarios due to the progressivity
of the current production tax system.
2:42:47 PM
Co-Chair Austerman pointed to a breakdown of unrestricted
non-oil taxes on slide 8 and asked for a brief description
of other taxes.
DAN STICKEL, ASSISTANT CHIEF ECONOMIST, TAX DIVISION,
DEPARTMENT OF REVENUE, answered that the other taxes were
all unrestricted taxes. He explained that the table on
slide 8 included line items for the top five taxes. He
pointed to the department's fall 2012 Revenue Sources Book
(page 54) that listed other unrestricted taxes for items
including alcohol, fisheries, charitable gaming, vehicle
rental, and other.
Representative Gara referred to a January 21, 2013
presentation specifying that one of Moody's factors for
rating the state highly was that it used a conservative
approach to forecasting oil revenues with respect to both
price and production. He observed that DOR's projection was
below the middle mark on slide 13 and wondered whether it
was what Moody's was referring to and what the department
was aiming for.
Commissioner Butcher replied that slide 13 was related only
to price forecasts; DOR's forecast was a result of equally
blending projections from multiple entities. He furthered
that Moody's based its view on the fact that DOR's
forecasts were consistently lower than actual prices turned
out to be. He explained that if DOR based its forecast on
EIA it would be much more likely to have an overly
optimistic price projection compared to actual.
Representative Gara asked for verification that the price
forecast had been slightly under what actual numbers had
been in five of the past six years. Commissioner Butcher
replied in the affirmative.
Representative Gara understood that the state did not want
to overestimate how much money it would have to spend;
however, he wondered if the price estimates were being used
in the fiscal notes for the current oil tax legislation.
Commissioner Butcher replied in the affirmative. He relayed
that the fiscal notes were based on the department's fall
2012 forecast.
Representative Guttenberg had read that the federal
government was looking at making changes to mining royalty
rates. He wondered if the state may be able to take a
percentage if royalty rates were increased.
2:46:32 PM
Commissioner Butcher asked for clarification on the
question.
Representative Guttenberg restated that the federal
government was reexamining royalty rates and that some
states got a larger cut for offshore oil or gas production.
He did not want to increase rates above what the federal
government would implement, but surmised that the state
could take a portion of the revenue. Commissioner Butcher
answered that the issue was under the purview of the
Department of Natural Resources (DNR).
Representative Guttenberg wondered how a pipeline shutdown
in 2012 had impacted production compared to other years. He
asked why the shutdown had been longer than expected.
Commissioner Butcher confirmed that the main reason for the
10,000 barrel per day decrease was due to the shutdown. He
did not know if issues had prolonged the shutdown. The
department would follow up on the question.
Representative Guttenberg asked for a status on the
auditing of past tax reports. Commissioner Butcher replied
that audits had been completed for the first year of the
Petroleum Production Tax (PPT); it was currently in the
PPT/Alaska's Clear and Equitable Share (ACES) year, which
had come in in 2008. The department expected the audit to
move increasingly faster given that it had finished the
transition from gross to net. He pointed to vacant auditor
positions as a primary problem and relayed that the
positions had been filled; the proposed FY 14 also included
a request for two auditor positions. The department was
statutorily in a fine position related to the audits, but
it would like to get further along.
2:49:18 PM
Representative Guttenberg asked whether a report on the
audits would be available. Commissioner Butcher responded
that there had not been a substantial difference in the
audits. The department would be happy to brief the
committee or provide a confidential briefing at a later
time.
Co-Chair Stoltze remarked that it may be helpful for DOR to
be present at department budget presentations to instill
recognition of the current situation related to revenue and
oil production. He pointed to the challenges of running a
pipeline under lower oil flow conditions. He asked the
department to be mindful of what oil meant to the state's
budget; he observed that mining revenue would not "even
cover" the operational costs of the Department of Education
and Early Development and fish taxes would not fund a
three-year Chinook study in the amount of $30 million.
Commissioner Butcher discussed why DOR had decided to dig
into the way its production forecast was produced. He
recalled that in the past committee members had expressed
dissatisfaction over DOR's long-term production forecast.
As a result the department had looked at the issue to
determine how to increase accuracy in its forecasting; it
discovered that the forecast had been high by 40 percent to
65 percent in its 10-year production forecast. He shared
that historically the decline rate had been 6 percent, but
DOR had projected an annual decline rate of no higher than
2.5 percent (many years the projection had been lower than
2.5 percent). He stated that clearly the process had not
been accurate and needed to be improved. Subsequently DOR
had met with DNR to figure out a way to provide
policymakers with a better production snapshot into the
future; DNR had only played a small role in the forecast in
the past. He stressed that DOR had done a good job with the
forecast for the couple of years, but the longer-term
forecast needed improvement.
2:54:20 PM
BRUCE TANGEMAN, DEPUTY COMMISSIONER, TAX DIVISION,
DEPARTMENT OF REVENUE, provided a Power Point presentation
titled "Oil Production Forecast." He planned to explain the
production methodology that DOR had been working on for the
past 18 months; the goal was a more prudent and reliable
long-term forecast. He stated that oil funded over 90
percent of state government. He referenced committee member
comments about the importance of planning for the future;
the thoughts had been taken into consideration when DOR
looked at its historically overoptimistic production
forecast going back two decades. He emphasized that it was
critical for legislators and the executive branch to have
the best available information for short and long-term
budgeting. He read from AS 37.07.020, which designated that
OMB:
...must set out significant assumptions used in the
projection with sufficient detail to enable the
legislature to rely on the fiscal plan in
understanding, evaluating, and resolving issues of
state budgeting.
Mr. Tangeman moved to a chart on slide 2 that compared
overly optimistic production forecasts from 2002 through
2012. He pointed out that in year-one the forecast was
fairly close to actual production, but none of the out
years "were even close to reality". He reiterated
Commissioner Butcher's earlier statement that projections
were 40 to 60 percent off in the future. He pointed to
bumps in the forecast that represented potential resources
coming online, which had not necessarily come to fruition.
He shared that DOR had a contract petroleum engineer
consultant who had historically met with his counterparts
at oil companies to discuss the next 10-year outlook. He
furthered that a private sector budget person had been
missing from the conversation. He relayed that William
Barron the director of the Division of Oil and Gas for DNR
had volunteered to help DOR work on the project. He was
pleased at the current progress of the ongoing project.
2:59:19 PM
Mr. Tangeman moved to slide 4 and addressed concern that
had been expressed by members of both the House and Senate
Finance Committees. He read quotes from Representatives Mia
Costello and Mike Doogan respectively: "Is it possible for
the department to come forward with a plan for providing
more accountability to the productions forecasts?" and
"What I am asking is that I be given something that will
give me more confidence that the projections that we see
are, not necessarily 100 percent accurate, but that they
have taken into account everything that they can, and we've
got the best shot we can get."
Co-Chair Austerman acknowledged the presence of
Representative Lora Reinbold.
WILLIAM BARRON, DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, relayed that DOR had asked
DNR to help establish a method to produce a reasonable out-
year production forecast for the greater North Slope region
(factoring in several categories of production). He
addressed efforts to understand the magnitude of the
problem on slide 5 titled "Forecast Errors by Years in
Advance Being Forecast." Numbers along the outside edge of
a spider diagram represented years and data showed the
percent error from forecast to actual. He noted that spider
diagrams provided an insight into any patterns that may
exist. He elaborated that the blue and red lines
illustrated the errors from the 2001 and 2002 forecast to
actual; the green line represented the average from 2001 to
2010. He pointed out that the pattern stayed the same; the
error increased consistently as time went on.
Mr. Barron believed it was important for DOR and DNR to
look at the issue independently from each other; if the
departments both identified similar procedures it would
help determine a better approach. He had asked DOR to
establish confidence intervals based on all Alaska North
Slope (ANS) production; DOR had used a standard deviation
variance of all production from 1992 to 2011 and had
projected it forward (slide 7). The bold green and light
green dashes represented the upper and lower bounds of the
production standard deviation forecast respectively. He
added that it was necessary to factor in a multitude of
items that could impact production. He pointed to a
flattening of the curve beginning in 2006 through 2008; the
leveling was predominantly due to the impact of gas cap
water injection at Prudhoe Bay. He had asked DOR to look at
the years prior to the enhanced oil recovery project and to
identify the lower bound. Prior to 2006 the slope of the
line was steeper than the slope across the entire "regime."
The purple lines represented confidence intervals from 1992
to 2006. He elaborated that the lines established the high-
high and low-low given the two different time parameters
[1992 to 2011 and 1992 to 2006].
3:05:11 PM
Mr. Barron shared that the departments had considered three
out of four tranches of the production forecast (slide 8):
currently producing, under development, and under
evaluation. He explained that currently producing or "old
oil" applied to existing wells, facilities, and fields.
"Under development" represented the first tranche of new
oil; projects included in the category would be incremental
to existing fields or new fields (projects that were
currently being funded). He furthered that under
development projects had some risk; the confidence level
fell in between currently producing fields and under
evaluation fields. "Under evaluation" represented the
second tranche of new oil. The category included projects
that were likely to occur in the future; assessments had
been made, but money had not been invested. Under
evaluation fields had a greater risk than the first two
tranches.
Mr. Barron relayed that "exploration" was the fourth
tranche, which had not been included in the forecast. He
elaborated that exploratory projects could be on the cusp
of a company's lease sale or based on seismic information;
the projects represented areas of new potential, but were
not substantial enough to be included in the under
evaluation category. He elaborated that shale oil was an
example of exploration. He explained that shale by
definition was a reasonable project; the current operator
had drilled two wells on the North Slope, but no flow tests
had been done. Core samples were currently being tested for
"fracability" and product yield. He added that exploration
could lead to projects, but there was no data available to
project how it would impact the production profile from a
budgetary perspective.
3:09:14 PM
Mr. Barron addressed the concept of risk on slide 9. He
explained that risk was a natural component of the oil
industry business. He read the last quote on slide 9:
The ability to convey the relative riskiness of
various oil and gas projects in a consistent manner is
an elusive and desirable goal.
[Source: Development and Implementation of an
Integrated Risk Assessment Methodology. Cutten, Evoy,
Grecu. SPE conference pater 1993]
Mr. Barron looked at risk assumptions on slide 10 titled
"Accounting for the Risks Appropriately." Currently
producing oil was not risked in the DOR forecast; some
people had voiced that it should have been factored in
given the lack of restart on some existing facilities the
prior summer. He acknowledged the existence of
uncertainties and unknowns even in the currently producing
category. The DOR consultant had done a ground-up
assessment; every well was factored into the participating
area and field-level review. He furthered that DNR had
reviewed every field decline curve for reasonableness and
credibility; staff had not agreed on everything, but it had
agreed on the reasonableness and consistency.
Mr. Barron continued to discuss risk assumptions on slide
10. Risk related to new oil was factored into the forecast
beginning with FY 15. He stated that the under evaluation
portion of the forecast had a greater risk component than
the under development category. He relayed that technical
and non-technical risks had been included in the review. He
communicated that many items impacted production forecasts
(e.g. reserve assessment and other). The departments had
looked at two categories: (1) budgetary control and (2)
technical or production control; there were many subsets
within the two categories. The main question was whether a
project had come on in time and if it happened at the same
rate as originally forecast; multiple items could have
subtle impacts that were compounding.
Mr. Tangeman emphasized that currently producing fields
were not included in the forecast risk assumptions; the
category represented a very significant portion of the
projected oil for the current and upcoming fiscal years. He
clarified that the specific risk factor began in FY 15.
Mr. Barron moved to "Risk Factor 1: Delays" on slide 11. He
relayed that delays (due to equipment not showing up on
time or facilities were delayed) were likely to be a
budgetary constraint. He pointed out that publications
(e.g. Petroleum News and Oil and Gas Journal) were always
accurate when they predicted a project would go online the
following year; however, predictions became less accurate
when a project was scheduled to come online further into
the future. The only outlier was related to year 7 (shown
in a chart on slide 11) when 7 years earlier when a company
had accurately specified when it would bring the Northstar
field on. He informed the committee that the numbers on
slide 11 were relative, but it was important to account for
delays or projections would be skewed. He reiterated that
the closer a prediction was to the date it was scheduled to
occur the more accurate it would be.
3:14:17 PM
Mr. Barron addressed "Risk Factor 2: Performance Deviates
from Expectations" on slide 12. The slide showed production
performances for oil fields including Badami, Aurora,
Polaris, and Prudhoe Bay Satellites. He shared that the
Badami field had been late coming online and production had
peaked at 18,000 barrels per day (compared to the predicted
production of 30,000 to 35,000 barrels per day). The Aurora
field had been predicted to produce between 15,000 and
20,000 barrels per day, but it had peaked at 10,500. The
Polaris field had peaked 30 to 40 percent lower than
expected. However, Prudhoe Bay satellite fields had been
predicted to bring in 40,000 barrels per day, but
production had peaked at 50,000. He communicated that it
was possible to have upside [deviation from expectations]
as well as downside. He stressed that uncertainty existed
as companies progressed a project from exploration to
inception; a company's understanding of recovery factors
and production increased once a project was producing and
more information was obtained.
Mr. Barron directed attention to historical ANS production
on slide 13 [identical to slide 7]. He explained that the
high-high represented on the chart included all ANS
production from 1992 to 2011; the lower edge represented a
confidence interval based on 1992 to 2006.
3:16:11 PM
Mr. Barron pointed to slide 14 where DNR's refined method
was applied. The red line represented industry production
forecasting for currently producing, under evaluation, and
under development fields without the risk factors; the line
was not dissimilar from other forecasts and was flat
followed by a slight positive increase and a decline. He
believed it was important for the administration and
departments to provide committee members with the high and
low sides and a prediction proposal. The low side fell
along the lower benchmark tranche and excluded the under
evaluation and under development categories. The refined
method including risk for under development and under
evaluation and no risk for currently producing yielded the
green curve on slide 14. He emphasized that the two
programs had been done independently and were combined for
review and assessment. The refined methodology fell
slightly on the higher side of the spectrum's middle. He
opined that the projection was reasonable; the goal had
been to provide policy makers with a benchmark that
provided risk profile boundaries. Slide 15 showed a longer-
term view of the refined model applied over time [1978 to
2022].
3:19:01 PM
Mr. Barron addressed that the real difference [between the
original and refined methods] was how the departments
looked at new oil. He pointed to a graph that illustrated
the new oil share of total production on slide 16 [2012
through 2021]; the blue bar represented the 2011 forecast.
The blue bars increased and then began to flatten out at
approximately 40 percent to 45 percent of the total
production. The red bars represented the 2012 forecast and
were derived by using a risk model relative to under
evaluation and under development tranches; out-year risk
was factored in with projects that were not yet online.
Mr. Barron stressed that any good modeler would look back
in history to determine how accurate the model would have
been. He pointed to a spider diagram on slide 17 titled
"Testing the Refined Method." The red line showed the
original forecast error from 2001 to 2010. The blue line
used the refined method and showed a significant reduction
in overall error. He emphasized that the refined model took
away approximately 50 percent of the error. He communicated
that DNR had been asked to come up with a method that was
more reasonable, more prudent, and more practical in terms
of the out-year forecasting for the under development and
under evaluation process.
Mr. Tangeman stated that the presentation and the DOR
Revenue Sources Book were not meant to be "doom and gloom"
scenarios. The goal had been to set a more realistic
baseline for decision makers while recognizing the
tremendous up-side of the state's resources. He stated that
the forecast had historically dealt with what is possible
compared to what is probable and had always been overly
optimistic. He pointed out that chapter 4 of the Revenue
Sources Book provided additional detail on the issue.
3:22:19 PM
Mr. Tangeman addressed potential concern about what ratings
agencies would think of the state's process. He shared that
Commissioner Butcher and Deputy Commissioner Rodell had met
with the ratings agencies in late 2012 and had received
positive feedback on the department's process. He read a
brief quote from the Standard and Poor's rating agency:
The state's Department of Revenue has a good track
record forecasting year ahead prices and production
levels. A bigger issue for the state is measuring the
long-term rate of oil production decline. Since
peaking in 1988 the average annual rate of decline in
production has been around 5.5 percent; however, the
state's long-term forecast has consistently projected
a long-term rate of annual decline in oil production
of just 2.5 percent or lower. As a result the state's
long-term forecast has tended to overestimate actual
production levels. With its fall 2012 forecast the
Department of Revenue has revised the methodology used
to develop its longer-term production forecasts. The
new approach applies risk factors to discount the
projected oil production from oil fields that are
still under development or in the evaluation stage.
Previously production estimates in the forecast from
such fields were not adjusted downward to account for
their higher level of uncertainty.
Mr. Tangeman elaborated that there were many items a rating
agency took into account. Price and production were both
very critical and DOR had received great feedback that it
was headed in the right direction with its production
forecasting.
Representative Guttenberg wondered whether an independent
entity had been called upon to weigh in on the departments'
approach to the forecasting method. He observed that during
his time working for the legislature, price forecasters had
admitted that they were always wrong. He recalled a
legislative class that had been given in the past on mega
projects; it had shown the ranges of projects that failed,
succeeded, were over budget, and other. He believed the
departments' work to increase forecasting accuracy was
positive.
Mr. Barron replied that outside source had not been used;
therefore, the confidence intervals had been established
independently of the scenario plan. The Oil and Gas
Division had reached out to some of its colleagues in the
industry to ask if the approaches were reasonable; he
relayed that the answer had been yes. He stated that the
way assessment numbers had been generated could be
construed as arbitrary; therefore, DOR numbers were
provided to identify where tranches lay. He furthered that
the technique was not uncommon in the oil and gas industry;
he had used a similar technique for long-term budgeting
when he had worked for the industry. He acknowledged that
forecasting was "a degree of wrongness" and the "best wrong
answer we have today."
3:28:01 PM
Representative Guttenberg sited a disclaimer on slide 8
that stated "These definitions are not equivalent to those
used by the Society of Petroleum Engineers (SPE) or
Securities and Exchange Commission (SEC) and should not be
used as such." He questioned how different the definitions
were. He asked if another analysis had been done using the
SPE and SEC definitions.
Mr. Barron responded that the terms "under development" and
"under evaluation" were common industry terms, but they
were not necessarily the same terms used by SPE or SEC. He
stated that prevalent phrases used were "proven, probable,
and potential." The definitions used in the analysis were
not far off from those of the SEC and SPE. He elaborated
that under the currently producing category there could be
several sub-layers of SPE definitions; for the purpose of
the analysis the basic definition was adequate. He added
that the other two tranches fell within a probable and
possible category, which would be similar to an SPE
definition.
Representative Guttenberg remarked that the forecasting was
now 30 percent wrong instead of 60 percent wrong.
Co-Chair Stoltze understood it was not possible to find
someone to conduct a completely accurate price forecasting.
He discussed risk and reward. He provided an approximate
quote that the "U.S. tax code is the greatest influencer of
behavior." He wondered about the influence of tax codes on
production. He expressed the hope for further conversations
with the departments throughout the legislative session.
3:30:23 PM
Mr. Tangeman replied that the exercise had been purely
technical and had not taken tax, revenue, or other into
account. He deferred the question to Mr. Barron for further
detail.
Mr. Barron agreed. He expounded that the model did not look
at product price or fiscal regimes; the model used
information and historical data related to fields on the
North Slope and industry fields in general. He followed up
on Representative Guttenberg's remark about mega projects
and stated that 30 percent of projects were over budget and
behind schedule 10 percent of the time; the reality needed
to be included to produce a realistic model. The
departments had not attempted to look at anything on a
micro level. He discussed other parameters that had been
factored in including the closer in time a project was due
to come online there was less risk and higher certainty.
Representative Gara asked for verification that shale oil
did not fall into any of the three tranches [currently
producing, under development, and under evaluation]. He had
heard from an industry person that ConocoPhillips had
purchased leases around the Great Bear shale oil play.
Mr. Barron affirmed that shale oil did not fall under the
three tranches (slide 8); it fell under the exploration
category.
Representative Gara asked whether consideration should be
given to shale oil. He acknowledged that shale oil could
turn out to be nothing, but that it could also turn out to
be a significant source of oil production on the North
Slope.
Mr. Barron answered that the problem with shale was that
there were no benchmarks showing its capacity or duration
to date; there was "nothing to hang your hat on." He
stressed that it would be "unbelievably speculative" to
include anything like shale in a state forecast that would
be used to make business decisions. He added that by the
time shale was brought online it would fall under the high-
high and low-low profile.
3:34:30 PM
Representative Gara asked if the revised forecast method
was trying to be conservative or hit the middle line
perfectly. Mr. Barron answered that the departments did not
want to skew the forecast in either direction. The goal had
been to establish a method that would assess the relative
risk related to time by the [under development and under
evaluation] categories. The forecast could have been much
more conservative or more optimistic, but the goal had been
to use a technical and neutral methodology.
Representative Gara wondered whether ConocoPhillips had
purchased leases near the shale area. He referred to Mr.
Barron's statement that he had talked to industry as part
of the analysis; he surmised there were members of industry
who may overestimate production, others who may
underestimate their production until oil reform occurred,
and others who may be accurate; he wondered how the items
were factored into the equation.
Mr. Barron replied that industry project engineers acted as
salespeople when they pitched projects to senior
management. He communicated that when the DOR consultant
had met with industry engineers, a budget component had not
been included in the discussion. The consultant had asked
engineers what the production would be for different
projects; the refined method had absorbed the data. He
looked at the red line that showed a gross un-risked basis
(slide 14); the line represented what had historically been
presented in forecasts. He added that the red line was also
overly optimistic. The refined methodology had looked at
accuracy relative to time. He addressed what under
development meant and used the Badami field as an example.
The field had been a "huge" capital cost to BP when it had
begun; it had under produced and hundreds of millions of
dollars had been spent on the project. The occurrence was
unfortunate, but the risk was inherent to the business.
3:39:30 PM
Mr. Barron addressed Representative Gara's question related
to leases around shale oil plays. He stated that most of
the leases around the south Great Bear play had been
purchased by Royale Energy. He did not recall any major oil
industry companies purchasing leases around shale oil
plays. He would follow up with more detail.
ANGELA RODELL, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, provided a power point presentation
titled "An Update on the State's Savings Accounts." She
began on slide 3 related to general fund and other non-
segregated investments; the fund was responsible for paying
state bills. The general fund had a moderate risk profile
and tended to be invested in short to intermediate-term
investments due to the high demand for liquidity. The fund
had a balance of $11.67 billion on December 31, 2012. The
Statutory Budget Reserve (SBR) made up the largest portion
of the general fund with a balance of $5.487 billion on
December 31, 2012; the amount was comprised of $1.75
billion appropriated in FY 12, $250 million appropriated in
FY 13, and $805 million in FY 12 surpluses. The other large
piece of the fund was the Alaska Housing Finance
Corporation (AHFC) and Alaska Housing Capital Corporation
deposits of approximately $1 billion. She relayed that to
date the markets were much improved over the prior year.
The improvement had been seen in the returns; the Year to
Date (YTD) return was 1 percent compared to the Fiscal Year
to Date (FYTD) return of 0.37 percent.
Ms. Rodell addressed the Constitutional Budget Reserve
(CBR) main and sub funds on slide 4. The main fund had an
intermediate, broad market, short-term asset allocation (a
very conservative, moderate risk mix). The sub fund had a
higher risk asset allocation and contained approximately 60
percent equities. On December 31, 2012 the balance was $5.7
billion in the main fund and $5.5 billion in the sub fund.
She shared that the totals included the amounts paid by a
BP settlement in December 2012; the CBR received a deposit
of approximately $160 million and the remainder went to the
Permanent Fund and Public School Trust Fund. The YTD return
was 1.9 percent for the main fund and 11.2 percent for the
sub fund due to the robust equities market return in 2013.
Ms. Rodell directed attention to the Power Cost
Equalization (PCE) Fund on slide 5. She explained that due
to the fund's 7 percent target rate it had a higher risk
tolerance and asset allocation. She was happy to report a
YTD return of 7.38 percent. The balance was $787.5 million
on December 31, 2012.
Ms. Rodell spoke to the Public School Trust Fund on slide
6. She detailed that the fund's income was used for
education formula funding. The principal fund was invested
in a moderate risk profile made up primarily of broad
market and equities (not to the same extent as the CBR).
The principal fund had a balance of $487 million and a 10.7
percent YTD return. The investment income was moved into
the income fund for eventual appropriation to Department of
Education and Early Development; it had a balance of $10.4
million on December 31, 2012.
3:45:31 PM
Ms. Rodell addressed the Public Employees' Retirement
System (PERS) and Teachers' Retirement System (TRS) trust
funds on slide 7. As of December 31, 2012 PERS had a
balance of $12.016 billion and the TRS balance was $5.018
billion. She relayed that FY 12 had been challenging on the
returns; the 0.52 percent return for PERS and 0.59 percent
return for TRS was well below the 8 percent actuarial
target rate. The FYTD returns were 5.63 percent and 5.68
percent for PERS and TRS respectively.
Ms. Rodell communicated that the Alaska Permanent Fund
Corporation (APFC) had a December 31, 2012 balance of
$43.654 billion (slide 8). She noted that the number was up
significantly from the prior year. The fund saw a low
return of 0.02 percent for FY 12, but with the recovery of
the equity markets the return had increased to 12.58
percent YTD and to 7.34 percent FYTD.
Ms. Rodell concluded with an FY 13 investment revenue
forecast (slide 10); it was also included in the DOR
Revenue Sources Book as part of the total revenue forecast.
She noted that given current market conditions and low
short-term rates a 0.6 percent return had been used in the
forecast rather than a 2.87 percent (the expected interest
earning over a 10-year period); the 0.6 percent return
explained some of the declines in investment income
expectation.
3:47:54 PM
Commissioner Butcher spoke to a question posed by
Representative Gara at a prior meeting. He explained that
the two CBR funds and the SBR fund totaled slightly under
$17 billion.
Co-Chair Austerman looked at slide 4 and surmised that the
CBR main and sub funds could be subtracted from the total
reserve fund to reach the SBR amount. Commissioner Butcher
replied in the affirmative. He added that although the
PERS, TRS, and APFC funds were flat for FY 12, they had
been up approximately 20 percent for FY 11. He stated that
the returns had been "pretty healthy" in the past two years
and were approximately 7 percent FYTD. The markets had been
up and down, but targets had been exceeded over the past
2.5-plus years. He stated that although markets had
recovered from the drop in 2008 and 2009, the numbers were
still relatively low.
Co-Chair Austerman asked about the value of the SBR. Ms.
Rodell replied that the SBR totaled $5.487 billion on
December 31, 2012.
Representative Munoz asked if the switch from a Defined
Benefit to a Defined Contribution system had changed the
department's projected rate of return for the retirement
funds.
Ms. Rodell replied that Defined Contribution numbers were
not included because individuals managed the asset
allocation of their accounts. There were approximately 25
different investment options to select from.
3:50:44 PM
Representative Munoz understood, but wondered how the shift
had impacted the projected rate of return. Ms. Rodell
replied that the change did not have fiscal impact on the
retirement fund accounts shown in the presentation.
Representative Gara asked for the current amount in the
AHFC Capital Investment fund. Ms. Rodell replied that the
account had contained approximately $600 million at one
point. She could provide an exact number at a later time.
Commissioner Butcher agreed. He added that the fund was
available for appropriation for items like forward funding
for education.
Representative Edgmon asked for a definition of the term
Year to Date. Ms. Rodell replied that the current YTD was
January 1, 2013 to the current day (calendar year to date).
Representative Edgmon surmised the state's fiscal year had
to be factored into a fund's earning performance.
3:52:30 PM
Ms. Rodell replied in the affirmative and explained that
Fiscal Year to Date was July 1, 2012 to the current day.
Representative Edgmon asked what 7 percent earnings on the
$17 billion in reserves would equal.
Commissioner Butcher replied that the 7 percent applied
specifically to the PCE fund; returns were significantly
lower on other state funds because approximately half of
the general fund was invested very short-term and
intermediate term due to liquidity issues for payments to
the operating and capital budgets. The projected general
fund return was approximately 3 percent. The PERS and TRS
funds had an 8 percent target and APFC had a target of 5
percent plus inflation. The PCE fund was invested at a
higher risk given its statutory target return of 7 percent.
Co-Chair Austerman thanked the departments for their
presentations and discussed the schedule for the following
day.
HB 65 was HEARD and HELD in committee for further
consideration.
HB 66 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
3:54:38 PM
The meeting was adjourned at 3:54 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| FY14 EED HFIN Overview 1_24_2013_MEL_1_23 No Notes.pdf |
HFIN 1/24/2013 1:30:00 PM |
DEED Overview HFIN |
| HFIN DOR Oil Production Forecasting - FINAL (2).pdf |
HFIN 1/24/2013 1:30:00 PM |
DOR Oil Forecast HFIN |
| HFIN Revenue Forecast OVERVIEW vFINAL2 01242013 (2).pdf |
HFIN 1/24/2013 1:30:00 PM |
HFIN DOR Revenue Forecast |
| State Savings Accounts Update 1 22 13.pdf |
HFIN 1/24/2013 1:30:00 PM |
DOR HFIN State Savings Update |