Legislature(2015 - 2016)HOUSE FINANCE 519
01/27/2015 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Revenue Forecast: Department of Revenue | |
| Oil and Gas Production Tax Credits: Department of Revenue | |
| Fy 16 Budget Overview: Department of Revenue | |
| 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
January 27, 2015
1:30 p.m.
1:30:47 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 1:30 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE; John
Tichotsky, Chief Economist, Tax Division, Department of
Revenue; Dan Stickel, Assistant Chief Economist, Tax
Division, Department of Revenue. Jerry Burnett, Deputy
Commissioner, Treasury Division, Department of Revenue.
PRESENT VIA TELECONFERENCE
Lennie Dees, Audit Master, Tax Division, Department of
Revenue.
SUMMARY
REVENUE FORECAST and OIL and GAS TAX CREDITS
FY 16 BUDGET OVERVIEW: DEPARTMENT OF REVENUE
Co-Chair Neuman reviewed the agenda for the day.
1:31:23 PM
^REVENUE FORECAST: DEPARTMENT OF REVENUE
1:31:53 PM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced the PowerPoint presentation "Revenue Forecast"
(copy on file). The focus of the presentation would be on
the "How" and the "Why" of the revenue forecast. He would
be addressing how the revenue forecast was done and why
certain assumptions were made. There had been significant
concern about the tumbling oil prices and whether the
forecast remained reasonable. He relayed that Dr. Tichotsky
would be doing much of the presentation since his group put
together the forecast and was responsible for producing the
Revenue Sources Book.
Co-Chair Neuman reminded committee members to be conscious
of time and to keep questions in line with the topic. He
encouraged members to ask questions.
Commissioner Hoffbeck began with slide 3: "Methods: What Do
We Forecast at DOR?" The primary focus of the department's
forecast was petroleum revenue and secondarily non-
petroleum revenue. Since petroleum revenue was Alaska's
largest income component, it would receive the bulk of
attention. Petroleum revenues including production taxes,
severance tax, royalties, corporate income tax, and other
oil-related taxes such as property taxes, and non-petroleum
revenues made up one bucket of money. The second bucket of
money was composed of investment revenues, the forecast of
which was produced by the state's investment advisors,
Callen. The forecast largely reflected long-term trends
with some adjustments for market conditions. The third
bucket of money was comprised of federal revenues to the
state. The department forecasted what was actually
authorized for spending. Typically, the actual revenues
received were 20 to 30 percent less due to the state not
meeting all of the match requirements. The three buckets of
money were what was compiled into the Revenue Sources Book.
Commissioner Hoffbeck moved on to slide 4: "Oil Revenue
Forecasting." The slide reflected the way in which the
forecast was put together. He pointed to the formula about
one-third of the way down the page that read "Net value
equals, price multiplied by production, minus costs". The
three areas he would be looking at that made up the state's
net value were price, production, and cost. The revenue
forecast would then be built by taking the net value
multiplied by the tax rate and then deducting credits taken
against liability. The department would provide a separate
presentation on credits.
Commissioner Hoffbeck advanced to slide 5: "Fall 2014
Highlights." He indicated there had been some concern about
the change between the spring forecast and the fall
forecast and the significant changes in how the forecast
was put together. The assumptions, the methodologies, and
the people that made the forecast were the same. The main
difference was the oil price. There was also some
adjustment for oil production. The department had seen a
slight uptick in production, information that had become
available in between the spring and fall forecasts. There
had been additional investment and production.
1:36:46 PM
JOHN TICHOTSKY, CHIEF ECONOMIST, TAX DIVISION, DEPARTMENT
OF REVENUE, began with slide 7: "Production History and
Forecast." He indicated that he would provide a larger view
of production giving a history of production and
forecasting and how an increased forecast fit into a
broader picture in order to put things into perspective. He
enjoyed the longer-term view.
Co-Chair Neuman asked about slide 7. He wondered if the
forecast included estimates on future production due to
investments in current production tax credits for new
investments.
Mr. Tichotsky specified that Co-Chair Neuman was correct.
He explained that the methodology was such that every
October the department interviewed almost every active
company including the exploration companies, companies that
were planning to produce. The department summarized the
information in addition to modeling currently producing
fields and wells. Department of Revenue came up with an
overall production forecast. The slight uptick on the slide
reflected what people were reading in the press about
additional production. However, because of the criteria the
department used to include the production in its forecast,
production was not booked until there was confirmation that
it was included in the business plans of the companies.
Co-Chair Neuman asked if Mr. Tichotsky had an estimate if a
gas pipeline was in operation by 2023.
Mr. Tichotsky responded that the chart reflected oil
production. He reported that one of the issues that the
department encountered was that most of the information it
received was good for 3 to 5 years. Beyond 5 years
companies had a difficulty seeing far out into the future.
The decline seen on the slide was a function of a physical
decline and of the state's certainty. The state believed
that for 2023 the estimate would be approximately 300
thousand barrels of oil per day. The department believed
that the estimate had a wide range of variance on its
estimate. He furthered that if he was asked about the
forecast in 2023 he would respond 300 thousand barrels per
day plus or minus 300 thousand barrels. Whereas, in the
following year he could say with relative certainty within
tens of thousands of barrels what would likely be produced.
The department had been extremely accurate since adjusting
its methodology. Certainly 1 to 2 years out there would be
great certainty. In the slides provided a point estimate
was provided and showed some of the ranges of possibilities
in the future.
1:40:31 PM
Representative Gara asked about the top color on the chart.
He wondered if the color in 2015 represented offshore oil.
Mr. Tichotsky responded that the top skin came in from
Prudhoe Bay to the right to Endicott then were added from
Kuparuk which satellited to Point Thomson. They layered in
as reflected in the legend.
Representative Gara responded that his chart showed a light
green for the top layer that appeared to be getting wider
in 2015. He wondered if it reflected "Offshore". Mr.
Tichotsky responded in the affirmative.
Representative Gara asked about the slight increase. He
wondered if the state would receive any production tax if
the oil production increased. He also asked about what
offshore fields were represented in the "Offshore"
category. Mr. Tichotsky responded that the offshore
category was not what many would considered part of the
Outer Continental Shelf (OCS). The offshore category
represented the zero to 3 miles offshore which the state
exerted sovereignty. In addition the state had a revenue
sharing provision from 3 mile to 6 mile range. The state
had no sovereign jurisdiction beyond 6 miles. The offshore
category represented only the oil within the state's
jurisdiction.
Representative Gara asked Mr. Tichotsky to clarify what he
considered to be the oil within the state's jurisdiction.
Mr. Tichotsky answered that it reflected the oil between
zero to 3 and 3 to 6 mile ranges.
Co-Chair Neuman commented that the state recently had
entered into an agreement with Callos Energy regarding
Marathon's Liberty Field investing $1.2 billion. Mr.
Tichotsky did not hear all of the details of Co-Chair
Neuman's question. He asked Co-Chair Neuman to repeat his
question.
Co-Chair Neuman stated that it was okay to wait until later
to discuss his question. Mr. Tichotsky responded that it
would include North Star, Oooguruk, and Liberty fields.
1:43:07 PM
Mr. Tichotsky advanced to slide 8: "ANS Production
Comparison." He relayed that the slide showed the revision
from the spring to the fall forecast. It included the
additional information the department received in October.
The time between the months of September and October was a
critical time for the oil companies in terms of planning
and providing information to the state. He pointed out the
production increase from 2015 through 2017 or 2018
[Depicted in blue], during which time production remained
above 500 thousand barrels per day. The decline rate was a
function of the probability of being able to forecast the
future. It was not necessarily DOR's belief that the
production would decline at the rate shown.
Representative Wilson commented that production was close
to what the state had thought it would be. She asked if the
state's budget would have been close to being accurate had
the price been close to what the state had predicted it
would be at the end of the prior year. Mr. Tichotsky
responded that price was absolutely a major driver in
determining revenue.
Representative Wilson wanted to clarify that it was price
rather than production affecting state revenue. Mr.
Tichotsky responded, "That is correct." The other issue was
that investment decisions were made on a different time
scale. The price environment collapsing was not necessarily
connected to investment decisions. The production was
driven largely from what information the state received
regarding investment decisions.
Mr. Tichotsky pointed out that the Revenue Sources Book was
a great summary of the information DOR was presenting. In
addition, with the help of his staff, it was also the
repository of data. He noted a new feature, the Quick
Response (QR) codes, easily read by an application in a
smart phone, which allowed a reader to see the data tables.
Mr. Tichotsky scrolled to slide 9: "ANS Oil Production
Forecast." He asserted that the forecast was sorted into
three major bins; developed or currently producing
reserves, undeveloped reserves, and contingent reserves.
The three categories of reserves added together equaled the
state's unrisked investment case.
Mr. Tichotsky discussed slide 10: "Production Forecast." He
relayed that in the graph the point estimate for 2015 and
2016 were provided. Going forward into 2017 the state would
begin to risk the unrisked investment case. He explained
that the unrisked investment case was everything the
industry informed the state that it was likely to produce.
The low investment case was a circumstance in which all
currently producing wells were to continue producing with
no further investment or additional wells brought on line.
In reviewing the state's methodology two elements needed to
be risked; the first was when a project was announced but
delayed, and the second was when greater production was
anticipated but targets were not reached. When the state
did its risking it was not well specific or project
specific. The state risked across the board. He believed it
was a good strategy because he had found that on average
the risks in criteria were useful. They got larger the
further out in time they were due to uncertainty. They were
also based on industry standards developed out of looking
at some of the classic oil industry expectations chapters.
1:49:18 PM
Mr. Tichotsky pointed to slide 11: "Dept. of Revenue
Investment Cases." He suggested that the slide described
how the state looked at the vocabulary in terms of
investments. There were three investment cases; an unrisked
investment case, and adjusted expected investment case, and
a low investment case.
Mr. Tichotsky continued with slide 12: "North Slope
Production Forecast." He drew the committee's attention to
the green, red, and blue skins. He explained that they
represented the volumes from contingent, undeveloped,
forward-shifted developed, or developed reserves which
helped to define the state's production forecast. He
reported that the other two skins [the purple and teal
colored skins] represented the potential upside volumes.
The economic research group favored seeing that the likely
probability was that the volumes from the development
reserves would fall between the two goal posts without any
new unexpected discovery or a black swan event.
Representative Gattis stated that she thought she had heard
Mr. Tichotsky say that throughput would fall somewhere
between 500 thousand and 600 thousand barrels per day. She
asked for clarification.
Mr. Tichotsky responded that the state's production
forecast baseline was represented by the top of the green
skin. However, production climbing to the top of the teal
skin was not unrealistic based on information the state
received from the industry concerning what was possible to
produce and what was planned for production. Price and
investment were also factors considered in forecasting.
Reaching the top of the upside potential volumes from
contingent resources was within the realm of possibility
based on current technology and the status of
infrastructure on the slope.
Vice-Chair Saddler asked whether Mr. Tichotsky had any
formal or informal estimates of production from the 1002
area of the Arctic National Wildlife Refuge.
Mr. Tichotsky responded in the negative. He explained that
it was not within the 10-year horizon. He added that there
was an indication from United States Geological Survey that
there were undiscovered reserves in the area and there was
an earlier evaluation conducted by DNR in 2009 indicating
the same information. However, the information was limited.
He emphasized that the data pointed to undiscovered
resources rather than reserves.
Mr. Tichotsky advanced to slide 14: "Alaska North Slope
Crude West Coast Price." He explained that when the
department looked at prices its focus was to look at
averages. The average price of the period was about $104.
It was clear that there was an event in which the price
dropped dramatically by more than 50 percent within a short
period of time.
Mr. Tichotsky explained slide 15: "Alaska North Slope Crude
West Coast and West Texas Intermediate Prices." He reported
that in looking at a longer term horizon back to 2007 the
drop was not an unexpected event. Economists were very
familiar with volatility over the long term. Price
stability was something that Alaska enjoyed for several
years but was an anomaly.
1:54:08 PM
Mr. Tichotsky moved on to slide 16: "Key Oil Price
Drivers." There were two key oil price drivers that DOR
monitored. The first was the global spare capacity of Oil
Producing and Exporting Countries (OPEC) which included
Saudi Arabia. The second factor was the cost of developing
new oil supply. Currently, there was adequate supply in the
market driving the price down. Also, at present, the global
demand was weak and Saudi Arabia was willing to sustain
lower prices in order to maintain its market share.
Mr. Tichotsky looked at slide 17: "Price Forecast
Methodology." He relayed that on the first Tuesday of
October DOR held a day-long oil price forecasting session.
In the current year it occurred on the 7th of October. The
State of Alaska was very fortunate to have its investment
funds, particularly the Permanent Fund. The state had
access to top-notch investment advisors. The state often
invited quality presenters to speak to both the U.S.
economy and the global economy. He remarked that people
were very interested in discussing pricing in the price
forecast session. In the past year there were 37
participants from state government, academia, and the
private sector. Department of Revenue, Department of
Natural Resources, Department of Law, the Office of
Management and Budget, and the Legislative Finance Division
participated. There was a wide variety of people interested
in markets or had expertise in the oil and gas industry.
Rather than asking for a high, medium, low estimate
approach the department asked for more statistical
information. The general process that the department used
was a modified Delphi approach. He explained that people
were given information in which they were then able to
incorporate throughout the day in order to present their
opinion of the pricing at the end of the day. The opinions
were then aggregated. In the current year at the price
forecast session people were asked for a probability of 10,
a probability of 90, and the median. The median price was
then used to generate the point estimate used for the
revenue. He advised the committee to keep in mind that DOR
forecasted real prices. However, when DOR generated the
revenue forecast it included inflation. Therefore, when
looking at prices 10 years out the $120 to $130 per barrel
range would equate to about $90 to $100 in current dollars.
1:57:33 PM
Representative Edgmon recalled in the previous year that
the governor's 10-year budget had prices soaring into the
$120 to $130 range. Mr. Tichotsky indicated it was a "no
change" price. When prices sloped up with a 2.5 percent
inflation rate it meant the current price was the same
taking inflation into account.
Representative Edgmon asked about the process in which the
department went through every October. He wondered if the
meeting set the stage for looking 10 years out. Mr.
Tichotsky responded affirmatively. Participants were asked
to do the price forecast for a 10-year period.
Representative Gattis asked about whether the forecasting
done in the prior October accounted for the downturn in oil
pricing. Mr. Tichotsky explained that there were different
views concerning supply and demand. He furthered that when
prices were very high there would always be someone in the
room that would predict that prices would drop. Often times
psychologically it was a difficult thing to say because of
current prices. The opposite was true in a low-price
environment where someone might predict that prices would
go up. Not everyone shared the same opinion.
Representative Gattis followed up with a questions about
whether the financial crisis could have been forecasted.
She suggested it was a guessing game of sorts. Mr.
Tichotsky responded that, generally speaking, it was
extremely difficult to forecast. He added that it was
always a challenge to forecast a great change in direction.
In other words, when something changed from one state to
the next, psychologically human beings were resistant to
understanding change. On the other hand economists were
always ready to anticipate a change. Department of Revenue
put the forecast out as one of the tools for legislators
for budgeting purposes. The department also used the
revenue forecast for other items such as when the state
approached rating agencies.
2:00:45 PM
Mr. Tichotsky continued that when legislators were looking
at the revenue forecast or the price and budgeted lower
than the predicted revenue to be on the safe side, they
looked at it from the standpoint of the glass being half
empty. When approaching the credit rating agencies the
glass was presented as being half full focusing on things
such as capacity. The revenue forecast was strictly a tool.
Co-Chair Neuman reminded committee members and presenters
about time constraints.
Mr. Tichotsky moved onto slide 18: "Fall 2014 ANS Revenue
Forecast Prices." He discussed the methodology used in
forecasting. He reported that DOR adapted when prices were
low. The department had looked at being able to hybrid the
information from the price forecast session. The price
forecast was DOR's price forecast endorsed by the
commissioner and was a recommendation. The department
wanted to make sure it reflected reality in order to have a
credible forecast in which to base decisions.
Mr. Tichotsky turned to slide 19: "What if the oil price
is…" for the last half of FY 2015." He indicated that
because the price of oil in the state was high in the early
part of the current fiscal year, even if oil prices dropped
to $50 per barrel of oil, the price would average about $70
per barrel over the course of the year.
Mr. Tichotsky discussed slide 20: "Historical ANS West
Coast FY Oil Price Bands: Annual Average and Official
FY2014 Forecast." He pointed to the portion on the left
that depicted actual oil prices. The dots indicated the
average price and the black scale represented a range of
prices including the highest and lowest prices for the
corresponding year. The portion on the right of the slide
represented the forecast which also showed a range of
pricing possibilities in black and the specific price
forecast in the Revenue Sources Book in dots. He explained
that a revision would be provided prior to the end of the
legislative session there was a revised view. He suggested
that if the information was changed so might legislators'
minds. One thing he stressed that for two years running in
2013 and 2014 the state had the exact same price to three
decimal places. He commented that it reflected stability
but it was also as if lightning struck 16 times in one
place.
2:04:37 PM
Mr. Tichotsky looked at slide 22: "General Fund
Unrestricted Oil Revenues." He indicated that one of the
mainstays of petroleum revenue during times of low oil
prices was the state's net royalty, the payment the state
received as owners of the resource. The production tax and
corporate income tax were highly dependent upon oil pricing
whereas, property tax was not. Non-petroleum revenue
equaled about $500 million depending on the market. Revenue
for 2015 was forecasted to be about half of the actual
revenue for 2014.
Mr. Tichotsky reported on slide 23: "General Fund
Unrestricted Revenues Non-Petroleum." He relayed that the
slide provided an overview of the unrestricted non-
petroleum revenues. He suggested that the $500 million
revenue detail could be found in the Revenue Sources Book.
Mr. Tichotsky scrolled to slide 24: "Total Revenue Forecast
- FY 2015 and 2016." He mentioned that although the
investment revenue was important it did not get deposited
into the general fund (GF). The state continued to generate
revenue off of its assets. The total state revenue for FY
14 was $17 billion, the second largest state revenue
figure. The state forecasted healthy total state revenues
for FY 15 even in the face of lower total unrestricted
revenue.
Mr. Tichotsky advanced to slide 25: "FY 2016 General Fund
Unrestricted Revenue with Price Sensitivity." He reported
that the department was frequently asked about what would
happen if the price was higher or lower. He suggested that
the graph on the slide was in the Revenue Sources Book and
was a way to get a feel for what the revenue might be. He
pointed out that if the price of oil was between $80 and
lower the revenue slope became flatter due to the minimum
tax.
2:07:23 PM
Mr. Tichotsky reviewed slide 27: "Comparison - Fall 2014
vs. Spring 2014 Forecasts." He indicated that the price of
oil had changed, which was the major driver for the changes
from the spring to the fall forecast. There was a small
increase in production from spring to fall. Overall there
was a significant change to the general fund unrestricted
revenue mainly due to the change in the price of oil.
Mr. Tichotsky continued with slide 28: "Contributors of
Change in FY2015 Revenue Forecast." He reported that the
slide reflected more of the same and suggested that the
slide provided detail which might be useful in the future.
Mr. Tichotsky looked at slide 29: "Contributors of Change
in FY2016 Revenue Forecast." He skipped through the slide
indicating that the same applied for FY 2016.
Mr. Tichotsky moved to slide 30: "North Slope Capital
Expenditure Forecast Change." He explained that DOR
reviewed its capital expenditure forecast. The driver for
increased production was that the state forecasted
additional capital expenditures especially in near years.
Mr. Tichotsky viewed slide 31: "North Slope Operating
Expenditure Forecast change." He relayed that operating
expenditures were increased based on the increase in
production.
Co-Chair Neuman asked how the slide showed increased
investment since 2013.
Mr. Tichotsky referred back to slide 30. In the previous
year there was an increase in investment, and based on the
interviews going forward the department saw a relatively
larger amount in the fall of 2014. The numbers on the
bottom of the slide were significantly larger especially in
FY 16, FY 17, and FY 18. Looking out further to FY 19, FY
20, and FY 21 the years were of interest but less
significant. The oil industry was providing the state with
very forward looking statements about its plan.
Representative Edgmon asked whether the numbers were
adjusted for inflation. Mr. Tichotsky responded that the
numbers were nominal dollars.
Representative Edgmon expressed that it would be helpful to
have non-adjusted numbers to do a comparative analysis. Mr.
Tichotsky indicated that he would be happy to provide
Representative Edgmon with the information and additionally
would provide an inflation series.
Co-Chair Neuman asked that the information be provided to
his office and he would make sure to disperse it to all
committee members.
Representative Edgmon suggested including the information
on the same graph. Mr. Tichotsky responded that he would be
happy to reproduce the graphs in real and nominal terms. He
believed that a real view was very useful.
Mr. Tichotsky revealed slide 32: "Net Tax Credits versus
Production Tax." He mentioned that the information on the
slide would be discussed in the following presentation.
Mr. Tichotsky discussed slide 33: "Fall 2014 Total Revenue
Forecast." He indicated that in looking back at the total
revenue history the state had experienced highly volatile
revenues either because investment revenues and petroleum
dollars were volatile. The state's non-petroleum dollars
remained relatively steady. In looking forward it was
difficult to anticipate volatility due to it being
typically unexpected. On average, over a 10-year period DOR
provided a fairly good picture.
2:13:23 PM
Vice-Chair Saddler noted the increase in federal spending
in the out years compared to the historical data. He
wondered why. Mr. Tichotsky responded that federal spending
remained steady rather than increasing. Vice-Chair Saddler
clarified that he was comparing it to the historical data.
Mr. Tichotsky responded that it was a function of
forecasting. He referred back to the first slide that
Commissioner Hoffbeck spoke about. The department
forecasted a certain number but only received about 20
percent or 30 percent of the revenues that actually came
in. He continued that out of the 3.1 that was allocated the
state anticipated only receiving 2.5. He posed the question
as to why the state did not discount upfront. It had been a
tradition for DOR to use the allocated number.
Co-Chair Neuman asked to return to slide 32. He pointed to
the red bars that fell below zero, production tax net of
refundable credits, and commented that it was somewhat of
an anomaly. He added that the refundable credits would
sunset in 2016. He wondered if the state would see the red
bar beyond 2016. Mr. Tichotsky responded that there were
refundable credits that would extend beyond 2016. Some of
the credits would sunset, but not all of them.
Co-Chair Neuman asked whether the refundable credits were
for the smaller producers. Mr. Tichotsky replied that the
refundable credits were primarily those claimed by
explorers and those producers currently developing
facilities that did not have any resulting revenues.
Co-Chair Neuman asked for clarity that Mr. Tichotsky was
referring to smaller companies making new investments. Mr.
Tichotsky responded in the affirmative. Co-Chair Neuman
commented, "So we are cashing in using our production
credits?" Mr. Tichotsky answered, "That is correct."
Co-Chair Neuman asked about the large producers. He
referred to the darker green bars on slide 32. He wondered
whether the bars indicated that the state was also
competitive at low oil prices.
Commissioner Hoffbeck responded that whether the state was
competitive at low oil prices the state still collected tax
at low oil prices. He furthered that the difference between
the light green and the dark green bars on the chart was
the credits taken against tax liabilities. The state would
collect about $500 million in taxes from the producers in
the current year even at low oil prices with the minimum
tax in place.
Co-Chair Neuman asked whether the commissioner was only
referring to the production taxes used by the larger
companies. Commissioner Hoffbeck replied, "This is
generally the big three, yes."
Co-Chair Neuman was attempting to point out the difference
the state saw for investments in tax credits between newer
companies coming in in the red and the larger production
tax credits that were investments for purchases from others
used against tax liability by the big three. Mr. Tichotsky
offered that Co-Chair Neuman was correct.
Representative Gara commented that the state had less
revenue based on the two types of credits but suggested
that there was a third place the state received less
revenue. He continued that until the minimum floor was
reached producers received a 35 percent tax deduction. He
asked if he was correct. Commissioner Hoffbeck responded
that Representative Gara was correct until the minimum
floor was reached.
Representative Gara suggested that only some fields had the
minimum tax floor. He wondered whether the 4 percent floor
applied to the gross value reduction (GVR) fields, the
post-2002 production units, and whether the 35 percent
deduction applied. Mr. Tichotsky relayed that he would be
addressing Representative Gara's question in the following
presentation.
Representative Wilson asked a question regarding slide 33.
She wondered about holding on to barrels until the price of
oil increased. Mr. Tichotsky responded that energy
companies were typically used to volatility and made
decisions accordingly. He explained that depending on the
direction of prices, if the price increased in a low-price
environment, then there would be a stimulus to invest.
There was also a delayed reaction at times. The state had
seen an increase of investment currently which meant that
there would be an increase in production and tax revenue in
subsequent years. There was sometimes a disconnection
between a price signal and activity.
Representative Wilson commented that she would store the
oil until the price increased. Mr. Tichotsky responded that
what she was proposing was a hedging activity in which a
commodity would be held back. The types of decisions she
was mentioning depended on timing and how long a commodity
would have to be stored. Generally, when producing off of a
large field, producing what was possible was preferred.
Representative Kawasaki asked about a nexus between price
and production. He wondered what production level the state
would have to see to come up with the same amount of money
over future years if the state continued to see low oil
prices.
2:21:11 PM
Mr. Tichotsky responded that the budgeting process and the
revenues and expenditures were disconnected. He recognized
that in recent years the state had spent or at least had
enough revenue to cover its expenditures. Within the
state's forecast period, depending on price, it was not
unreasonable to have yearly revenues between $2 billion and
$5 billion based on current levels of production and
expenditures.
Mr. Tichotsky returned to Representative Wilson's question.
He relayed that oil in the ground was not oil in the bank.
Even if a barrel of oil is produced, sold for $20, and
deposited in the bank for a period of ten years, the state
might be able to get as much oil as the oil price that
appreciated. Once a natural resource was turned into money
there were many things that could be done to get the same
or equal value. It depended upon a risk calculation. In
general, there was a risk of never producing oil that was
left in the ground, a significant risk that petroleum
producers as well as the state recognized.
Representative Wilson was concerned about revenues and
thought the state and producers might be able to rebound
faster by keeping some oil in the ground. She wondered if
DOR took into consideration whether oil companies would
produce as quickly when the price of oil was low as opposed
to when the price was higher. Mr. Tichotsky responded that
in general when a facility was producing oil it tried to
maximize production. A production manager's job was to
maximize production and minimize costs without price
consideration. He suggested Representative Wilson discuss
her question with the oil companies.
Commissioner Hoffbeck commented about moving forward in the
next portion of the presentation.
^OIL and GAS PRODUCTION TAX CREDITS: DEPARTMENT OF REVENUE
2:25:48 PM
Commissioner Hoffbeck introduced the PowerPoint
presentation "Credits (copy on file)." He relayed that he
had the Assistant Chief Economist, Dan Stickel with him to
answer questions if needed during the presentation. He
explained that the presentation was a historical overview
of tax credits and the point at which the state was at in
the credit process. He indicated he would touch briefly on
the expiring credits to better understand what the state
would be dealing with in the future.
Commissioner Hoffbeck detailed slide 3: "History of Oil and
Gas Tax Credits." He explained that the credit situation
that the state was currently in was a product of four
separate tax regimes within the last 10 years, each with
their own particular focus and contributing to the
available credits to be used by the producers, explorers,
and the developers. He mentioned that the first "modern
era" credits came during the Economic Limit Factor (ELF)
regime under SB 185 [Legislation passed in 2003 - Short
Title: Royalty Reduction on Certain Oil/Tax Cred]. He
explained that the credit was a 20 percent to 40 percent
credit for exploration depending on type and location. The
credit could be taken against a tax liability, sold to
someone else with a tax liability, or carried forward.
However, it could not be cashed in with the state. It was
not a reimbursable credit, rather, it was to be used
against someone's tax liability.
Commissioner Hoffbeck turned to slide 4: "History of Oil
and Gas Tax Credits." Several credits were added with the
passage of the Petroleum Profits Tax (PPT) [HB 3001 was
legislation that passed in 2006 - Short Title: Oil/Gas
Prod. Tax] moving from a gross tax to a net tax. There was
a 20 percent loss carry forward credit. The 20 percent
credit had changed over time multiple instances. There was
also a 20 percent qualified capital expenditure that
expired with SB 21 [Legislation which passed in 2013 that
had to do with an oil and gas production tax]. There was
also a small producer and new area tax credit. He furthered
that the credit equaled $6 million for frontier explorers
and $12 million for small producers. The credit expired in
2016 but had a 9 year tail which necessitated the state
paying the credit for up to an additional 9 years. Another
credit that was added with the passage of PPT was the
transitional expenditure credit which expired in 2013.
Also, there was a mechanism for the state to buy back
credits from small producers that produced less than 50
thousand barrels per day with a cap of $25 million per
year.
Co-Chair Neuman asked how many small producers took
advantage of the credit. Commissioner Hoffbeck did not know
but could provide the committee the numbers.
Representative Munoz asked about the liability on the 9-
year tail. Commissioner Hoffbeck deferred to Mr. Stickel.
DAN STICKEL, ASSISTANT CHIEF ECONOMIST, TAX DIVISION,
DEPARTMENT OF REVENUE, responded that the small producer
credit was a credit of up to $12 million per year per
producer for the first 9 years of production. The forecast
for the credits was between $55 million and $73 million per
year for all of the companies involved. His numbers were
based on the forecast for the following 4 years.
Vice-Chair Saddler asked for clarification about the $55
million to $73 million. Mr. Stickel specified that he was
talking about the small producer credits. He continued that
for FY 15 and FY 16 the department was estimating $55
million for North Slope small producer credits and another
$12 million for non-North Slope producer credits. He
reported that it would be a total of $67 million for FY 15
and for FY 16 and $85 total in FY 18. He relayed that the
department had a document that provided additional details
on the credits information included in the Revenue Sources
Book. For the following 2 years the department was looking
at about $67 million in total small producer credits and
increasing to $85 million.
2:31:53 PM
Slide 5: "History of Oil and Gas Tax Credits." Commissioner
Hoffbeck discussed the credits modified with Alaska's Clear
and Equitable Share (ACES) [HB2001 was legislation passed
in 2007 - Short Title: Oil and Gas Tax Amendments].
Alaska's Clear and Equitable Share (ACES) provided minor
changes to the credits themselves. The loss carry forward
was increased to 25 percent, eliminated the $25 million cap
on the small producer credit, and created the Tax Credit
Fund, a sub fund of the GF.
Commissioner Hoffbeck advanced to slide 6: "History of Oil
and Gas Tax Credits." He explained that between ACES and
the SB 21 regime there were several Cook Inlet changes that
were made to the tax credits in an effort to stimulate
exploration and production in Southcentral Alaska. There
was a gas storage facility credit that allowed for a
storage facility to deal with peak demand times during
brown-out conditions in Anchorage and the surrounding
areas. The credit was granted to the first facility which
was claimed in FY 14 in the amount of $15 million. There
was also a $15 million credit available for a Liquefied
Natural Gas (LNG) project that had not been claimed. He
anticipated the credit would be claimed within the
following 2 years.
Co-Chair Neuman asked whether the credits were for drilling
dry wells. Commissioner Hoffbeck asked for Co-Chair Neuman
to clarify whether he was referring to the gas storage
facility credit. Co-Chair Neuman commented that he was not
talking about the gas storage credit but the expenditure
credit. Commissioner Hoffbeck commented that he hoped they
were not for drilling dry wells.
Commissioner Hoffbeck continued to explain additional Cook
Inlet credits. He mentioned a 40 percent well lease
expenditure credit and remarked that it was for "Middle
Earth" as well as Cook Inlet; anything South of the North
Slope. Another credit was a jack-up rig credit put in place
to encourage a jack-up rig in the north. Two rigs actually
came north. The credit was 100 percent for the first well
drilled up to $25 million, 90 percent for the second well
up to $22.5 million, and 80 percent for the third well up
to $20 million. At present no producer had made a claim.
Co-Chair Neuman asked if any gas had been found.
Commissioner Hoffbeck reported that the wells had been
drilled but that there were information requirements
associated with the credit. Therefore, some companies chose
to use other credits with lesser returns.
Co-Chair Neuman commented that the state had offered a
significant amount of credits without getting any gas.
Commissioner Hoffbeck acknowledged that the state had
learned of some information without having to pay any
credits. The last credit on the slide he addressed was the
frontier areas credit was set up in a fashion similar to
the LNG storage and the jack-up rig credits. He anticipated
that the credits would be claimed in the Nenana and Susitna
basins.
2:35:09 PM
Commissioner Hoffbeck pointed to slide 7: "History of Oil
and Gas tax Credits." He conveyed that additional credit
modifications came with the passing of legislation, SB 21
[Legislation passed in 2013 - Short Title: Oil and Gas
Production Tax]. He summarized that SB 21 eliminated the 20
percent qualified capital credit only for the North Slope.
The credit remained in place for Cook Inlet. The
legislation also created a per-barrel credit which was
essentially an offset against the 20 percent capital
credit. They were not exactly the same but were a trade-off
between the two credits. He furthered that the per barrel
credit was an $8 credit at $80 per barrel of oil, a $7
credit at $90 per barrel of oil, and a $6 credit at $100
per barrel of oil. Once the price of oil reached $150 per
barrel of oil the credit no longer existed. In regards to
new oil there was a $5 flat credit for each barrel. He
stated that the final piece within SB 21 was an increase of
the loss carry forward credit to 35 percent. He explained
that it was actually at 45 percent for the first two years
during the transition period then dropped down to 35
percent in 2016. Cook Inlet remained at 25 percent for the
net operating loss carry-forward credit. Cook Inlet was
basically still under ACES. The change within SB 21 applied
to the North Slope.
Co-Chair Neuman commented that it was probably too early to
determine the original effects. He wondered whether the
incentives were resulting in more production. Commissioner
Hoffbeck responded that the state was seeing a substantial
response in Cook Inlet. He indicated there was sufficient
gas to ensure Southcentral would not run out. There was
enough gas for other uses as well. The totality of the
response in Cook Inlet in relationship to the cost of the
credits was still to be determined.
Representative Gara asked whether the per-barrel credit had
anything to do with how much oil was produced. He wondered
if at different prices a different tax rate was paid. He
supposed that it would max out at a 35 percent tax rate
around $160 per barrel, 20 percent at $110 per barrel, and
lower at lower oil prices. He asked if he was correct.
Commissioner Hoffbeck affirmed that Representative Gara was
correct except that it was at $150 rather than $160 per
barrel. It was not a production driven credit. The price
credit was on every barrel produced.
Commissioner Hoffbeck continued with slide 8: "So to sum
all that up…" He reported that over the last 10 years the
size and the applicability of the oil and gas tax credit
had grown dramatically. The slide showed a graphic
representation of two types of credits. The first was the
credits used against tax liability and the second was
refundable credits for which the state actually issued
checks. Both types of credits had grown over time. He
relayed that the credits purchased by the state peeked in
2011. Otherwise they had tracked parallel with oil prices.
He pointed out that the credit liability had grown each
year in relationship to revenues generated by the price of
oil.
2:39:41 PM
Commissioner Hoffbeck revealed slide 9: "So to sum all that
up… (Continued)." He emphasized that not all credits should
be viewed as a cost. The 20 percent capital credit under
ACES and the per barrel credit under SB21 were really part
of the tax rate itself. They worked together to create the
tax rate. He stated that although credits function
independently from rate, a person would not have a total
picture of their function without looking at them together.
He added that particularly with the per barrel credit the
department saw it as a deduction prior to revenue. It did
not show up on the cost line but in reduced revenue.
Co-Chair Neuman added that capital credits were created to
encourage a desired behavior in the industry. He asked the
commissioner to further explain how the industry reacted.
Commissioner Hoffbeck pointed out that it was easy to
explain the reaction in relationship to explorers and new
development. By offering credits the state took on a
substantial portion of the risk that accompanied
exploration and new field development. It was done in order
to make marginal fields more economic to develop. It was an
investment in the future to have additional production. The
per-barrel allowance was an attempt to make Alaska's tax
system competitive with other tax regimes. It was aimed at
the companies that were already producing to encourage
additional investment.
Co-Chair Neuman remarked that there was an upside to
investments in exploration which resulted in creating more
jobs to search for more oil.
Representative Wilson asked who determined whether the
credits were working. Commissioner Hoffbeck asked
Representative Wilson to restate her question.
Representative Wilson asked about who determined whether
the credits were effective in incentivizing exploration.
She wondered what department was in charge of evaluating
the effectiveness of the credits. Commissioner Hoffbeck
responded that it was a combination of many of the
agencies. One of the things that Governor Walker made clear
was that he was taking a comprehensive look at credits to
make a business decision moving forward. He suggested that
it was too early to know the impact of SB 21.
2:44:11 PM
Representative Kawasaki asked about qualified capital
credits. He wondered if the credits were used primarily for
the investment in maintenance for existing infrastructure.
He suggested that the Legislative Finance Division had a
different opinion about what the qualified capital
expenditure credit ended up accomplishing.
Commissioner Hoffbeck replied that the statement was not
inaccurate. Much of the credits went towards infrastructure
and maintenance which had some impact on continuing and
increased production. The totality of the analysis was
incomplete.
Representative Kawasaki asked when the ACES audit would be
made public and available for review. Commissioner Hoffbeck
asked whether Representative Kawasaki was referring to an
independent company audit or a total audit of ACES.
Representative Kawasaki commented that the state had gone
back and forth changing the system. It was changed with SB
21. His problem was that the state never fully examined
whether ACES was working. He wanted to confirm that an
audit was being done or was completed. Commissioner
Hoffbeck reported that individual audits were being done on
companies and that the first of the ACES audits would be
released shortly. There was a 6 year statute limitation. He
furthered that he had been assured by his staff that the
audit reports would be out before the statute limitation.
He confirmed that PPT audits were completed and his staff
was currently working on audits for ACES.
Commissioner Hoffbeck commented that slide 9 also touched
on the fact that there had been increased activity.
Representative Munoz referred back to slide 8. She asked
what portion of the $1.2 billion in credits was
attributable to Cook Inlet. Commissioner Hoffbeck responded
that of the reimbursable credits approximately half were
attributed to Cook Inlet and the other half were attributed
to the North Slope. He detailed that 100 percent of the
credits used against tax liability were assigned to the
North Slope. About a quarter of the total credits were
reimbursable to Cook Inlet.
Representative Gara asked about the bottom blue portion on
the graph on slide 8. He commented that under SB 21 the
blue part included a portion that was not credits, but a
price per barrel credit. He asked if he was accurate.
Commissioner Hoffbeck affirmed that it was essentially the
per barrel allowance that was reflected in blue.
2:48:19 PM
Commissioner Hoffbeck presented slide 10: "Net Tax Credits
versus Production Tax." Commissioner Hoffbeck indicated
that the slide was a history look back to 2007 when the
refundable credits were implemented. The light green bar
reflected total production tax revenue prior to applying
the credits. He continued that the dark green bar
represented the production tax after credits were applied
against liability. The red bar indicated the refundable
credits. He pointed out that over time the red bar had
grown dramatically. He added that the credits against
liability had also grown particularly as a percentage of
total revenue.
Vice-Chair Saddler asked the commissioner to define
"refundable credits." Commissioner Hoffbeck answered that
the refundable credits could be cashed in with the state.
He added that companies that did not have a tax liability
could essentially sell the credits back to the state.
Co-Chair Neuman asked if the credits could be other
refundable credits that companies who had a tax liability
to the state purchased and used them against their
liability. Commissioner Hoffbeck responded that some of the
credits could be sold to other companies.
Commissioner Hoffbeck advanced to slide 11: "Net Tax
Credits versus Production Tax." He explained that the slide
depicted current day taxes. He pointed out that the light
green represented the total tax before any credits. The
dark green bar indicated production tax after credits used
against liability. The red bar showed production tax net of
refundable credits. He added that those companies that were
producing were paying taxes even in the current low price
environment. He acknowledged that the low price of oil, the
resulting cash flow issues, and the overall decrease in tax
revenue all contributed to the state falling below zero for
the total take when the credits were applied. Companies
that were producing and had a tax liability would reach a
floor. However, no bottom limit existed for companies that
used the tax credits for exploration and development. There
was a robust number of companies looking to develop. There
was significant exploration occurring due to high oil
prices that drove the credits. Also, the expiring credits
were generating activity. Companies wanted to do the work
prior to the expiration of credits.
Co-Chair Neuman commented that there were multiple reasons
for the credits being used. He had a problem with the
current graph. He felt that the chart looked at a single
feature of the entire tax system. He added that it was a
distortion of the public's perception of how the credits
worked.
Commissioner Hoffbeck remarked that it had been discussed
in several forms and he was hoping that the slide would not
have to be discussed much in the future.
2:52:17 PM
Representative Munoz asked if the slide reflected the Cook
Inlet tax credits in the total production tax. Commissioner
Hoffbeck detailed that the refundable tax credits were in
Cook Inlet, half of them were in Cook Inlet and half were
on the North Slope. She clarified that the chart reflected
the Cook Inlet versus the total tax. Commissioner Hoffbeck
responded affirmatively.
Commissioner Hoffbeck skipped to slide 13: "Alaska Credit
Burden will Naturally Decline." He relayed that the slide
was a summary of the expiring credits. First, the carry
forward annual loss credit for the North Slope would
decrease from 45 percent to 35 percent in January, 2016.
The credit in Cook Inlet would remain the same at 25
percent. Second, the small producer credit would stop
accepting new producers in May, 2016. However, if they had
production prior they could take the credit for a period of
up to 9 years. The third credits to expire would be the
exploration incentive credits for North Slope and Cook
Inlet which end in July, 2016.
Co-Chair Neuman asked if the first two types of credits
were primarily targeting producers other than the big three
oil companies. Commissioner Hoffbeck responded that the
first credits applied to both types of producers. The first
applied to the North Slope and the second was focused on
both Cook Inlet and the North Slope.
Representative Gara did not like the way Commissioner
Hoffbeck referred to something as a tax credit that just
varied the tax rate based on price. He wanted to know the
effective tax rate for FY 14 before deductions and the non
per barrel credit. He wondered about the effective tax rate
on the producers that paid a tax. Commissioner Hoffbeck
indicated he would provide the committee with the
information. Mr. Stickel responded that he did not have the
information with him but would be happy to provide it.
Co-Chair Neuman reassured the committee that the current
discussion would not be the last on the topic. Further
discussion would ensue. He recommended that members
familiarize themselves with the credits.
Commissioner Hoffbeck wondered whether committee members
had received the supplemental packet the department had
sent over earlier the same day. He elaborated that included
was a 9 page report that described each credit in more
detail.
Co-Chair Neuman asked if Dan would be available for
questions on the credits. Commissioner Hoffbeck responded
that Dan would be available anytime.
^FY 16 BUDGET OVERVIEW: DEPARTMENT OF REVENUE
2:57:16 PM
Co-Chair Neuman asked to visit any of the major issues that
had been previous discussed as the presentation moved
along. Commissioner Hoffbeck turned the presentation over
to Mr. Burnett.
JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, introduced the PowerPoint
presentation "Department of Revenue Budget Overview" (copy
on file). He mentioned he would be going through the slides
at a rapid pace and suggested members stop him with any
question.
Mr. Burnett's reviewed slide 2: "Alaska Department of
Revenue: Major Programs." He discussed each of the
divisions briefly. The Tax Division collected taxes,
forecasted and reported revenues, and regulated charitable
gaming. The Treasury Division managed and invested state
funds other than the Permanent Fund. The Permanent Fund
Dividend (PFD) Division administered the PFD program,
distributed the annual dividend payment to eligible
Alaskans, and administered the Pick, Click, Give donation
system which was doing better in the current year.
Donations were up by about 15 percent from the previous
year. He relayed that the last division within the
department was the Child Support Services Division. The
division collected and distributed child support to
custodial parents and to the state for children who are in
state custody.
Mr. Burnett explained the department's organizational chart
on slide 3: "Alaska Department of Revenue." He highlighted
the commissioner's position as well as his own position and
that of the deputy commissioner's in Anchorage, Donna
Keppers. He elaborated that Ms. Keppers was the lead on the
Alaska Liquefied Natural Gas project. She also provided
administrative oversight for the Tax Division and the
criminal investigation unit. The remaining divisions fell
under Mr. Burnett's administrative watch.
Mr. Burnett turned to slide 4: "Authorities and
Corporations." He detailed that the commissioner oversaw
four of the state's corporations. First was Alaska Housing
Finance Corporation which the commissioner held a seat on
the board. The corporation provided access to safe,
quality, and affordable housing. The commissioner also
oversaw the Alaska Permanent Fund Corporation and held a
board seat. The commissioner oversaw the Alaska Mental
Health Trust. The commissioner did not hold a seat on the
board. However, it was within DOR and provided a large
number of administrative services for Mental Health Trust
Authority. He furthered that the Alaska Municipal Bank
handled financing options for capital projects. There were
two half-time employees at the Alaska Municipal Bond Bank
and a loan portfolio nearing $1 billion.
Co-Chair Neuman added that all of the corporations were
overseen by their own individual boards. Respectively they
did not fall under the budget act. He suspected it made Mr.
Burnett's job of managing them was pretty easy.
Mr. Burnett responded that the employees within the
Municipal Bond Bank were also half-time treasury employees
within his direct purview. He agreed with Co-Chair Neuman
that the administration was done by the board and the
executive director for the most part but showed up in DOR's
budget.
Mr. Burnett advanced to slide 5: "Results in 2014:
Department of Revenue as a Whole and Treasury Division." He
relayed that in 2014 the department consolidated leases and
combined public facing offices to reduce the state's
billable footprint for greater long-term cost savings. The
Department of Revenue also reviewed and updated all of its
regulations, an ongoing process. In the Treasury Division
33 out of 36 funds managed by Treasury met or exceeded the
benchmark returns in FY 14. He also reported that PERS and
TRS funds returned 18.55% and 18.56% respectively as
compared to 12.50% and 12.59% in FY 13. The actuarial
assumption was 8 percent which the division exceeded.
Vice-Chair Saddler asked about the public facing offices.
He assumed that Mr. Burnett was referring to offices open
to the public. Mr. Burnett answered that public facing
offices were offices where people came in with questions
about child support, PFD payments or taxes.
Vice-Chair Saddler asked about the locations of the public
facing offices. Mr. Burnett answered that the main office
in Anchorage was in the Atwood Building and in Juneau in
the State Office Building. The state had satellite offices
in other places, but the department was trying to
consolidate them together.
Co-Chair Neuman noted that the Department of Administration
was consolidating with its office saving space plan.
Mr. Burnett discussed slide 6: "Results in 2014: Tax
Division." He informed the committee that the department
was continuing the implementation of the Tax Revenue
Management System (TRMS). Phase 1 of the system rolled out
in April of 2014 for all corporate income and excise tax
filers. The project included online filing options for all
taxpayers. The first part of the oil and gas property tax
came online in 2014. Phase 2 of the TRMS rolled out in
January of 2014 for oil and gas production tax. He reported
that the prior year's tax payments were uploaded to the new
system which would greatly assist with auditing information
and preparing statistical work. It would also be much
easier to file online. He believed the system would be
improved for all users. He suggested that 98.5% of known
taxpayers filed tax returns and made their payments timely.
3:05:04 PM
Mr. Burnett addressed slide 7: "Results in 2014: Permanent
Fund Dividend Division (PFD)." He relayed that the division
contacted over 90 percent of the state's eligibility cases
by the time the dividend amount was announced. He felt the
division was doing a better job of getting things dealt
with prior to people contacting the division. The division
succeeded in reaching the highest case closure rate since
2008. PFD technicians were increasing their interactions
with the public through phone, email, and in-person than
the prior year. The division had changed processes over the
previous several years which had made it a much better
experience for the public. The division focused on
improving communications with other state agencies that
directly affected the Permanent Fund Dividend processes and
customer service experience. He added the necessity of a
collaborative effort between the division and agencies like
myAlaska (ETS), DMV, and Vital Statistics. In 2014 at the
beginning of the filing season there were a number of
people whose names did not match between what was on file
with DMV and the PFD system preventing applicants from
completing an online signature. He believed it was much
improved although additional improvements still needed to
be made.
Representative Gara relayed his own experience when he had
not received a PFD a couple of years earlier. He discussed
a frustrating experience dealing with the division in the
application process. Mr. Burnett replied that the division
was working on the phone queue. He elaborated that the
system had a feature where a caller could leave the queue
and a person from the division would call back. There were
other features incorporated to avoid such issues.
Co-Chair Neuman noted that committee members had all had
constituents who experienced issues with the PFD system.
Representative Gara just wanted to know if the system was
working. Mr. Burnett relayed that the PFD Division could
often times determine whether someone tried to apply
online. The system would be able to track a person
attempted to apply online. If a person contacted the
division and it was determined that they tried to file
their application would be accepted. However, waiting two
years to contact the division after the fact would be
considered too late.
3:09:04 PM
Co-Chair Neuman thought there had been a change in
regulation that went back to a one time mulligan where
someone thought they mailed their application in, but did
not, and would get another opportunity.
Representative Gara interjected that he would get to the
point in the phone system where he would be able to leave a
message for someone to call him back and the system would
hang up. He wondered if the problem he had experienced had
been resolved. Mr. Burnett believed so.
Co-Chair Neuman recommended Representative Gara contact Mr.
Burnett.
Co-Chair Thompson noted that he had had a problem two years
prior with his PFD. He simply walked across the street,
talked with someone at the counter, and the matter was
resolved.
Representative Gara was not concerned with himself but
cared about the phone hanging up on constituents. Mr.
Burnett responded, "And so do we."
Mr. Burnett referred to slide 8: "Results in 2014: Child
Support Services Division." He conveyed that the division
computed statistics for the federal government each year on
child support. He pointed out the efficiency rate of the
division, meeting minimum standards required to receive
federal incentive payments.
Co-Chair Neuman commented that it was important information
to look at because of the people it affected. He mentioned
a previous audit that determined the department was
efficient. He acknowledged a human factor.
Mr. Burnett advanced to slide 9: "Look Back at Department
Activities." He reported that in FY 15 the department was
collecting more revenues than in FY 05. A number of new
programs had been added since then. There had also been
many changes to the oil and gas production tax. The funds
that were under management of the Treasury Division had
grown from $20 billion ten years previously to currently
over $50 billion. In the prior 2 years the Treasury
Division had had more money than the Permanent Fund most of
the time. It may end in the current year with spending. The
number of dividends paid had increased, the Pick, Click,
and Give Program was implemented, and the department was
dispersing more money in child support.
Representative Wilson asked where audits fit into the
picture. Mr. Burnett responded that there was a statutory
framework in which audit activity within the Tax Division
had to be completed. Some of the audit activities had been
down over the last couple of years due to installation and
start-up of the TRMS. In many cases, 35 percent to 50
percent of staff time had been spent changing systems. Now
that the system was online the staff time could be
designated to regular business. He understood the
seriousness of Representative Wilson's question.
Representative Wilson asked what year the department was
auditing currently. Mr. Burnett responded approximately
2008.
Representative Wilson commented that the state really was
not caught up at all. Commissioner Hoffbeck stated that
there were two contributing components; the new system, and
the fact that the PPT audits were completed.
Representative Wilson relayed that although the audits were
not completed it did not mean that the companies had not
paid their taxes. An audit was a check to see whether the
state agreed with the companies on their tax liability.
Commissioner Hoffbeck responded affirmatively.
Co-Chair Neuman commented that pressure had been applied to
the department to stay as current as possible with the
audits.
Vice-Chair Saddler asked about the complexity of the tax
audits for ACES versus other structures. He also had a
question about PFD payments which he would get to.
Commissioner Hoffbeck deferred to Mr. Dees. He relayed
Vice-Chair Saddler's question.
LENNIE DEES, AUDIT MASTER, TAX DIVISION, DEPARTMENT OF
REVENUE (via teleconference), responded that ACES and PPT
were both net tax systems. He commented that they were very
similar. Some changes were made in ACES that added some
complexity to the audits such as the reasonable cost for
transportation. The department determined what was to be a
tariff for certain pipelines owned by some of the
producers. Another complexity was looking at maintenance
costs completed having to do with the problems that
occurred in 2006 at Prudhoe Bay. He continued that the most
complex portion of the audit was the audit of lease
expenditures. One of the challenges was the amount of
activity the auditors had to look at as well as the
challenge of not having the data presented in a consistent
manner. He suggested that with the new TMRS the department
would be able to collect data on a more consistent basis
having a data warehouse of information for the auditors to
look at. Also, he mentioned the learning curve moving from
a gross to a net tax system for the auditors in terms of
understanding the operations of the industry.
Co-Chair Neuman stopped Mr. Dees from continuing and
thanked him for his input. He mentioned other complexities.
Mr. Burnett continued with slide 10: "Department of
Revenue's Share of Total Agency Operations (GF Only)($
Thousands)." He provided DOR's budget as it related to
total agency operations and gave some historical
information since 2007. He drew attention to the box to the
left of the graph. He pointed out there was an error. He
stated that where it said, "decreased" it should have said
"increased." It was an error on the slide. The department's
operating budget was .61 percent of the state's GF budget.
Mr. Burnett scrolled to slide 11: "Appropriations within
the Department of Revenue (GF Only) ($ Thousands)." He
explained that the slide showed the division detail. He
added that the taxation and treasury category included the
Tax Division, the Treasury Division, and the Permanent Fund
Division which was why the category appeared much larger
than any of the other division categories.
Mr. Burnett continued to 12: ""Appropriations within the
Department of Revenue (All Funds) ($ Thousands)." He
pointed out that the slide depicted "All Funds."
Mr. Burnett discussed slide 13: "Department of Revenue FY
2016 Governor's Budget by Fund Source." He commented that
the largest fund source was the Permanent Fund's corporate
receipts which was in the Permanent Fund Corporation's
operating budget primarily used to pay management fees for
its investments. The pension funds were similar. Federal
funds were primarily in the Child Support Services and the
Alaska Housing components. The GF was only 8 percent of
DOR's total budget.
3:20:15 PM
Mr. Burnett turned to the pie chart in slide 14:
"Department of Revenue FY 2016 Governor's Budget by
Program." The chart reflected that the Permanent Fund was
the largest portion, which funded the external manager of
the state's investments. The pension fund portion of the
department's budget was significant for the same reason; a
large amount of money was being handled.
Mr. Burnett discussed slide 15: "Key FY 2016 Budget
Changes." He reviewed that non-personal services reductions
totaled about $1.7 million undesignated general funds
(UGF), personal services reductions equaled about $1.5
million UGF, and health insurance and working reserve
reductions were taken out of the budget as part of the
payroll administration reductions. He reported that
positions were being added in the Permanent Fund
Corporation and in the Treasury Division. These positions
would be paid for by reducing external management fees
resulting in a net savings.
Vice-Chair Saddler asked if DOR was adding a thousand
positions. Mr. Burnett responded that it was $1 million
dollars-worth of positions. Mr. Burnett continued to
elaborate that the reductions in non-personal services
included a reduction in federal funds because of the
matched funding requirements. Some of the reductions were
pension fund and Permanent Fund Corporate management fee
reductions. He relayed that more detailed information would
be released the following week.
Mr. Burnett reviewed slide 16: "FY 2016 Capital." He
confirmed that 100 percent of the department's capital
budget fell under the Alaska Housing Finance Corporation
budget. The budget was small relative to previous years. He
read from a list of projects:
· $8.1 million Weatherization
· $4.69 million Teacher, Health, Public Safety and VPSO
Housing Loans
· $4.5 million Housing & Urban Development Fed HOME
Grant
· $3 million Home Energy Rebate
· $2.5 million Housing & Urban Development Capital
Fund Program
· $1 million Cold Climate Housing Research Center
(CCHRC)
Mr. Burnett noted that the funding equated to $17 million
in UGF and $11.5 million in federal funds.
3:23:02 PM
Mr. Burnett talked about the final slide 17: "Wrap-up." The
Tax Division was actively engaged in improving its
information system and improving its efficiencies. He
thought there would be efficiencies in future budgets and
more timely audits. The department was the state's largest
investment manager and had made prudent investments over
the previous several years. Department of Revenue also had
achieved and maintained the highest credit rating and the
lowest cost of borrowing. He reported that the department
would be doing some GF refunding bonds and some bond
anticipation notes in the future.
Mr. Burnett continued that the department had worked
diligently to improve the customer service sections in the
PFD and Child Support Services Divisions. He suggested
doing a comparison of customer support from the past to the
present. He thought the improvements made an incredible
success story. He also relayed that DOR's corporations had
received national recognition for exemplary program
management and fiscal solvency. He concluded his
presentation.
Representative Munoz asked about the graph on page 10. She
believed it showed a $13 million reduction. She mentioned
that the figure did not match the amount shown on slide 15.
She asked Mr. Burnett to explain the differences. Mr.
Burnett answered that there was a one-time item included He
would provide additional information to the committee at a
later time.
Representative Munoz wondered about which divisions were
affected by the personal services reductions in UGF. Mr.
Burnett responded that the GF personnel costs were in the
Tax Division, the Treasury Division, the Child Support
Division, administrative services, and the commissioner's
office.
Representative Gara reported that he would be testing out
the customer service of the PFD office.
Co-Chair Thompson asked jokingly for a report back from
Representative Gara.
Co-Chair Neuman thanked the presenters and reviewed the
agenda for the following day.
ADJOURNMENT
3:26:56 PM
The meeting was adjourned at 3:26 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR Budget Overview for HFC 1-27-15.pdf |
HFIN 1/27/2015 1:30:00 PM |
|
| DOR Rev Forecast HFIN v 1432 Jan 26 2015.pdf |
HFIN 1/27/2015 1:30:00 PM |
|
| DOR Pres to House Finance- Credits 1-27-15 Final.pdf |
HFIN 1/27/2015 1:30:00 PM |
|
| Summary of AS 43 55 Tax Credits 2015.pdf |
HFIN 1/27/2015 1:30:00 PM |