Legislature(2017 - 2018)HOUSE FINANCE 519
01/19/2018 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Overview: Revenue Sources Book, Fall 2017 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 19, 2018
1:34 p.m.
1:34:06 PM
CALL TO ORDER
Co-Chair Seaton called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative Neal Foster, Co-Chair
ALSO PRESENT
Sheldon Fisher, Commissioner, Department of Revenue; Dan
Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue.
SUMMARY
OVERVIEW: REVENUE SOURCES BOOK, FALL 2017
Co-Chair Seaton reviewed the agenda for the day.
^OVERVIEW: REVENUE SOURCES BOOK, FALL 2017
1:34:46 PM
Co-Chair Seaton invited presenters to the table. He
directed testifiers to proceed.
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself.
Commissioner Fisher introduced the PowerPoint Presentation:
"Fall 2017 Revenue Forecast Presentation." He indicated
that the presentation was shorter than the department's
previous presentation. He had heard from both chambers that
the department had gone too far into the weeds and asked
that the presentation be shortened. He signaled that if
committee members wanted to see a slide reinserted, they
should let him know.
Commissioner Fisher tuned to slide 2: "FORECASTING METHODS:
Timeline." He indicated that traditionally the department
had a fall forecast and a spring forecast. The fall
forecast was issued in December and the spring forecast was
typically issued in April. In the current year, because of
the importance of the revenue forecast in all of the
discussions by the legislature, the department had two
additional forecasts. First, the department had an early
spring forecast and a revised forecast which increased some
assumptions around production. Also, because of the special
session in the previous fall, the department issued a
preliminary fall forecast in October to help inform the
discussions in the special session. At the time, the
department signaled that it was a preliminary forecast and
it expected some changes between the preliminary and final
forecasts. He would be reviewing the fall forecast issued
in December. The department hoped to come out with a spring
forecast in March rather than April to help facilitate the
consideration of the budget. He would be highlighting some
items important to legislators while considering the
budget.
Commissioner Fisher explained that the first section would
provide a high-level view of the production forecast. The
production forecast was a product from the Department of
Natural Resources (DNR) and had not changed from what the
Department of Revenue (DOR) issued in the fall - the
preliminary fall forecast issued for special session. He
thought it was useful for people to see where the state was
at.
1:38:37 PM
Commissioner Fisher moved to slide 4: "PRODUCTION FORECAST:
ANS History and Forecast by Pool." The slide showed a macro
level point of view. He reported that from the beginning
the state was currently at about a quarter of the overall
production. He noted the dotted line on the right side of
the chart. The left side of the dotted line showed actual
production and the right side of the dotted line showed the
forecast. There had been a couple of years where production
increased which was different than the department had
expected. Looking forward, he pointed out the pink slice to
the far right which represented new fields that were coming
online, flattening the production curve, and allowing for a
flatter production expectation into the future.
Commissioner Fisher advanced to slide 5: "PRODUCTION
FORECAST: ANS High and Low Case." He reported that the
slide was a product from DNR. The official forecast was
represented by the solid blue line in the middle. It
reflected the expectation of a 50 percent likelihood of
what would be achieved. There was a low case and a high
case at the extremes. The low case meant a 90 percent
confidence that production would be at or above the level.
The high case represented a 10 percent confidence level. He
noted the variability between them.
Representative Guttenberg wondered, since DNR had taken
over producing the forecast, if the department was tracking
accuracy in the short-term and the long-term. He asked how
the department was performing in terms of accuracy.
Commissioner Fisher responded that he could not speak for
DNR in terms of how they were tracking their accuracy. He
noted he would be showing a slide that reflected the
revision from the spring forecast. It would demonstrate
that the department's current forecast had moved
materially. He thought if DNR was present they would
acknowledge that they had refined their process and made
improvements in their accuracy. He could not speak for DNR.
Representative Guttenberg asked which part of the forecast
DOR was responsible for. Commissioner Fisher replied that
DNR was responsible for the production forecast, and DOR
was responsible for the rest of the forecast.
Co-Chair Seaton recognized the committee had been joined by
Representative Pruitt.
Representative Ortiz referred to slide 4. He wondered about
the new fields represented in pink. He clarified that the
new fields were known fields with their potential
production. Commissioner Fisher responded that in the fall,
DNR explained that it had different levels of confidence in
production for different new fields. The fields in which
the department had a higher level of confidence about
production were included in the forecast. The fields that
the department was not as confident in were not included.
He noted that DNR applied a discount to some fields in the
forecast in which the department expected less production
than the developer. The resulting DNR forecast was the 50
percent estimate of what was going to happen.
1:43:42 PM
Commissioner Fisher continued to slide 6: "PRODUCTION
FORECAST: ANS Comparison to Prior Forecast." He pointed to
the burnt orange line that represented the original Spring
2017 forecast from DNR. The grey line represented the
revised Spring 2017 forecast. He noted the difference
between the two forecasts and production declining at a
reduced rate. The blue line represented the current
forecast. It showed that the production rate was largely
flat. He also pointed out that the delta growing between
the lines farther out in time. In examining the budget from
the Office of Management and Budget (OMB), the state's
fiscal challenges get less over time, in part, because of
the assumption that the state would have increased
production. He added that the delta would be less impactful
in the following year or two. However, they were still
meaningful.
Representative Wilson asked how the spring forecast
compared to what actually happened.
Commissioner Fisher responded that the spring forecast was
too low. The state had predicted a decline and the state
actually enjoyed an incline. He pointed out that the state
was anticipating another increase in FY 18, whereas the
spring forecast would have predicted a decline.
Representative Wilson asked if the department could add a
line to include the actuals for FY 17. She wanted to see a
comparison.
Co-Chair Seaton suggested that the blue line represented
current history.
Representative Wilson was asking for the actuals for 2017.
She thought it would be nice to be able to see the level of
accuracy in the forecast. Commissioner Fisher would provide
the information to Representative Wilson. He commented that
with each revision of the forecast DOR addressed any deltas
between actuals and forecasts so that the budgets the
department was releasing were catching up to the changes.
Vice-Chair Gara figured the commissioner would rather
legislators ask questions about which fields were doing
better than expected to DNR rather than to DOR.
Commissioner Fisher responded affirmatively.
Commissioner Fisher turned to slide 7: "Fall 2017
Price Forecast." He remarked that he would move to the
price forecast. Regarding questions about learning from
mistakes, he felt he had undershot the price forecast. He
would discuss why and what the department was looking at
when the department was doing the forecast. He noted that
the market moved in a way the department had not
anticipated. He would discuss the issue in greater detail.
1:48:21 PM
Commissioner Fisher advanced to slide 8: "PRICE FORECAST:
Historical Real ANS Price, 2006+." He explained that the
chart showed what had been happening regarding price in the
previous couple of years. The average price of the period
was $52 per barrel. He pointed out that for FY 15, DOR's
forecast was $56. In other words, the department's forecast
assumed oil would be at $56 per barrel on average in FY 18.
At the current time the average oil price of the present
was just over $58 per barrel. There was a delta of about
$2. He reported that a $1 change in price equated to $30
million to $40 million in revenues to the state. Therefore,
if the price held, the state would receive an additional
$75 million to $80 million if the price were to hold
through FY 18.
Commissioner Fisher reviewed slide 9: "PRICE FORECAST:
Impact of Spare Capacity." He relayed that the chart came
from the Energy Information Agency (EIA), an agency within
the federal government. He indicated that to the left of
the yellow line represented actuals. To the right of the
yellow line represented forecasts. He pointed to the green
bars above and below the line. If the bars were above the
line, it meant inventories were growing. If the green bars
went below the zero line, it meant inventories were
shrinking. In looking back over the previous 4 quarters,
the state had shrinking inventories which was partially
driving the price increase. He reported that EIA
anticipated the growth of inventories looking forward in
time. It would also be a primary driver around pricing.
Commissioner Fisher discussed slide 10: "PRICE FORECAST:
Nominal ANS Price Distribution." He noted members might
have seen the chart previously. It represented the exercise
DOR went through in the fall. It was similar to DNR having
a P50 which was the forecast and a range of scenarios with
different probabilities associated with it. The department
went through a similar exercise around pricing. In the fall
the department examined pricing and developed the P50 row
[highlighted in red on the chart]. The department made some
changes between the fall preliminary forecast and the final
forecast which were highlighted in the red boxes on the
slide. The Department of Revenue increased its FY 18 budget
by a couple of dollars. Fiscal Year 19, which had sat
between the P50 and P60 line, was taken to 57 percent. He
returned to the P50 for FY 20 and beyond. He reiterated
that the market had gone higher. The following two slides
showed different time frames with the same information.
1:52:15 PM
Commissioner Fisher spoke to slide 11: "PRICE FORECAST:
Brent Forecasts Comparison to DOR ANS Forecast: November
2017." The chart showed Brent crude oil reflecting the
international market on the seas. The other bench mark
people used was the West Texas intermediary. The Department
of Revenue thought Brent was a better proxy for North Slope
oil. Presently, both proxies were within a few cents of
each other in pricing. The blue line represented Wall
Street Analysts expectations. The department took an
average of all of the analysts' presentations. The red line
represented the futures market [NYMEX]. He conveyed his
interest in the amount of difference between the analysts'
predictions and the futures market. The green line
represented the EIA's estimate of oil prices. He noted the
large jump in their forecast. He explained that they had a
dated long-term forecast and issued short-term forecasts
underneath. In order for DOR to get a long-term EIA
forecast and present it to the legislature, the department
had to marry the two. The steep curve was the jump between
their more current short-term forecast and their longer-
term forecast. The department expected EIA to update their
long-term forecast in February. By the time DOR returned in
the spring, it would have the benefit of EIA's long-term
forecast. He pointed to the dotted black line. The state's
forecast was in the range between the EIA forecast and the
analysts' forecast - slightly below the futures market.
Commissioner Fisher continued to slide 12: "PRICE FORECAST:
Brent Forecasts Comparison to DOR ANS Forecast: January
2018 (current)." The slide depicted the current market. He
noted that the analysts, EIA, and the futures market had
moved higher. The state had not because it had not updated
its forecast. He mentioned the interesting fact that on a
long-term basis the forecast and the market tended to
forecast pricing around $60. The futures market was
materially below that. The department's forecast long-term
in real dollars assumed that the pricing would stabilize
around $60 per barrel. The department thought it was fairly
consistent with other analysist in the prediction. He noted
that the good news was the department had been conservative
in its pricing. It would be revised when the department
produced its spring forecast.
1:56:00 PM
Representative Grenn asked Commissioner Fisher to comment
on the benefits of the state doing its own forecasts rather
than contracting the task out to someone else.
Commissioner Fisher thought Representative Grenn had a
great question. The department was having a debate
internally on the same issue. The department was asking if
there was a better way of forecasting. He conveyed that
when the department did the forecast, it did not do it in a
vacuum. The department tried to bring in other parties. He
explained that the department had an all-day forecasting
session in the fall. State agency people and other third-
party experts were brought in to gather information and
develop a forecast. Historically, the department felt that
its approach had been appropriate and served the state
well. The department was looking at the best way to
complete the forecasting process.
Co-Chair Seaton asked the commissioner to return to slide
10. He indicated that in previous presentations P10 had
been the high price. On the slide the P10 appeared to be
the low price and a 90 percent probability of having the
higher price. He asked if there was a mistake on the graph.
Commissioner Fisher thought there was a difference between
how DNR and DOR conveyed the information. The Department of
Revenue's belief was that it had a 90 percent confidence
that the price would be a certain amount or less. He asked
Mr. Stickel to comment.
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, responded that in typical
statistical analysis the P10 was the low end of the range
and the P 90 was the high end of the range. The oil
industry tended to do things differently. He continued that
when looking at a production estimate from an oil company,
they looked at the low end of the range as being the P90,
which was a 90 percent chance of occurring. The department
had used the traditional statistical P10 and P90 versus the
oil industry P10 and P90.
Co-Chair Seaton asked the department to identify the P10
and P90 items accordingly on future slides. Mr. Stickel
responded affirmatively and apologized for any confusion.
1:59:47 PM
Vice-Chair Gara commented that predictions were nice,
however, he wondered if the department would advise the
legislature to be cautious about price predictions in
devising a fiscal plan. He suggested that they were almost
always wrong. No one was at fault.
Commissioner Fisher thought the department shared Vice-
Chair Gara's sense that it was more important to be
cautious and conservative. He indicated the department had
received feedback from Wall Street analysts that they
appreciated the state had historically had a conservative
view on pricing. He thought the department had tried to be
fair and in the range without chasing a high price. He
added that he cautioned people to assume the current
pricing regime would remain over the long-term. For
example, on slide 12, it suggested that most analysts
believed pricing would be in the range of $60 per barrel -
a little higher that the state, but not by much. He read
earlier in the day EIA had issued their expectation that
for FY 19 oil would be $60 per barrel and for FY 20 it
would be $61 per barrel. He agreed with the legislator that
the forecasts would never be completely accurate. However,
he hoped it would be close enough that the forecast would
help in drafting a meaningful budget the legislature could
rely upon.
Mr. Stickel turned to the chart on slide 14: "COST
FORECAST: North Slope Capital Lease Expenditures." He
explained that when the State of Alaska did its revenue
forecasting the department looked at three different types
of costs. It looked at transportation costs which were
deducted in determining the gross value of oil for
production tax and royalty. The department looked at lease
expenditures, the direct operating and capital expenditures
incurred in exploring and producing oil. The first chart
looked at what was happening with capital expenditures on
the North Slope. As a response to lower prices over the
past few years, the state had seen a substantial decrease
in company spending. Capital expenditures on the North
Slope were currently below $2 billion in FY 17 and FY 18.
Mr. Stickel continued to explain that the chart compared
the current fall forecast, represented in blue, and the
current spring forecast, represented in orange. He noted
seeing that capital expenditures had been cut for the
following couple of years compared to the previous
forecast. However, he pointed to the bump in FY 20 and FY
21 and beyond. It represented the new fields that had been
added to the forecast beginning with the fall forecast. He
listed a number of the new developments including Pikka and
Smith Bay.
2:04:54 PM
Co-Chair Seaton asked if Point Thompson and the Alaska
Liquified Natural Gas (AKLNG) Project were included in the
forecast. Mr. Stickel responded that Point Thompson for the
current development was in the forecast. He relayed that
DNR had a risked partial inclusion of an expansion to Point
Thompson. No expenditures for AKLNG were included in the
forecast. He elaborated that presently the entire revenue
forecast was based on oil only.
Representative Wilson asked if 2017 numbers were forecasted
or actual numbers. Mr. Stickel responded that the Fall 2017
numbers in the chart reflected the actuals compared to what
the Spring 2017 forecast was.
Representative Wilson asked why more activity was reflected
in the fall and then switched to the spring. Mr. Stickel
responded that the spring 2017 line represented the spring
forecast for each fiscal year. For example, when the
department issued the spring 2017 the previous April, it
anticipated $2.5 billion of North Slope capital
expenditures in FY 18. It was based on information the
department received from the operators as well as public
information. When the department issued the fall revenue
forecast for FY 18, it projected $1.8 billion for capital
spending for the entire FY 18.
Representative Wilson did not understand Mr. Stickel's
response. She asked for further clarification. Commissioner
Fisher clarified that the numbers represented annual
periods. The blue line going above the orange line
reflected the department's prediction of additional
investment in the new fields. The investment was partly
driven by the a rebound in oil pricing. In the out years of
2021 the department was expecting that oil companies were
going to invest more than the department had predicted in
the Spring of FY 17. The department was updating its
forecast of oil company spending because of changes in
market conditions.
Representative Wilson wanted to make sure she was not
adding the two figures together. Commissioner Fisher
responded, "No."
Co-Chair Seaton recommended having bars representing the
years, so it would not appear that spending was changing
from the start of the year to the end of the year. He
recommended a series of bars. He did not believe the
department was representing a change of expenditures during
the year. He asked if he was correct. Commissioner Fisher
responded affirmatively.
Representative Guttenberg asked about the derivation of the
expenditure projections. He wondered if they originated
from DNR's production plan or other sources. Mr. Stickel
responded that the answers were all of the above. The
primary source of the department's expenditure estimates
was based on a return submitted by each operator. They
submitted a 5-year outlook for operating and capital costs
for each of their units that became the main basis of the
department's expenditure forecast. The department also
looked at company presentations and news articles. The
department applied a risk factor to associated costs for
some of the new units. The main source of information came
directly from the operators.
Representative Guttenberg asked how accurate the department
was in its predictions, as the legislature used it to build
the state budget. He remarked that $2 billion was a
significant expenditure to the state.
Mr. Stickel admitted that cost forecasting was challenging
for two main reasons. First, similar to production
forecasting, there was the question of what the companies
would actually do. The state experienced a few years where
companies did a little bit less than they thought they
would. The state had experienced other years where
companies had figure out how to do a little bit more. The
other piece was the overall cost of doing business. There
had been several years of fairly extreme cost inflation. In
the past couple of years, there had been cost deflation
where the companies had been very aggressive in reducing
their costs to make operations in Alaska work at lower
price levels. Representative Guttenberg made a comment
about inaccuracy.
Co-Chair Seaton asked if gross costs were reflected in the
cost forecasts. It did not account for tax credits or
writing off expenditures against a 35 percent production
tax.
Mr. Stickel responded, "Yes."
Co-Chair Seaton asked how much of the increase reflected in
the blue line would be associated with the Point Thompson
expansion. Mr. Stickel replied that the Point Thompson
expansion would be a relatively small contribution to the
increase in the chart. He thought some of the newer
developments were more significant.
2:14:02 PM
Mr. Stickel moved to slide 15: "COST FORECAST: North Slope
Operating Lease Expenditures." He remarked that the chart
was similar to the last chart. It looked at operating
expenditures as opposed to capital expenditures. He pointed
out that relative to the spring forecast, there had been an
across-the-board downward shift in expected operating
expenditures, even with the higher levels of production. He
continued that the chart represented the efforts of
companies to reduce the cost structure in Alaska. It was
the case through 2021. In 2022 and 2023, the department had
increased the overall operating cost estimate versus the
previous forecast. It represented the new fields coming
online. Two dynamics existed, a reduction in the cost of
existing fields and additional costs anticipated for some
of the new fields that were added to the forecast.
Co-Chair Seaton asked Mr. Stickel to elaborate about the
note at the bottom of the slide. Mr. Stickel indicated that
the note said that the estimates included lease
expenditures by companies that were not expected to have a
tax liability. The department included the note for
clarity. Sometimes the department published numbers for
spending that represented only costs that actually got
deducted from a tax calculation, which would be lower than
what was shown on the slide. He continued that what was
shown on the chart was all companies regardless of whether
they were making enough money to owe tax or whether they
were an explorer without a tax liability.
Mr. Stickel advanced to slide 16: "COST FORECAST: North
Slope Transportation Costs." He relayed that the slide
reflected the third type of cost, transportation costs. The
largest piece for transportations costs to get North Slope
oil to market was the cost of the Trans Alaska Pipeline
including feeder pipeline costs and marine costs. In the
spring forecast DOR was forecasting a dramatic increase in
transportation costs from a little over $9 per barrel up to
over $14 per barrel over the 10-year time horizon.
Currently, in the fall forecast the department was
expecting a much more gradual increase in transportation
costs. The slide reflected the impact of higher production
in the Trans Alaska Pipeline. There was a roughly similar
cost in maintaining the pipeline infrastructure which was
divided by a larger number of barrels. Therefore, the per
barrel cost of transportation came down, which was a
benefit to royalty and production tax.
Representative Guttenberg asked how much of the amount was
calculated using the settlement agreement the state had
with producers over tariffs. Mr. Stickel responded that if
the representative referring to the recently announced
settlement in the past month, the transportation costs were
calculated prior to announcing that settlement.
Representative Guttenberg asked what the chart would look
like post the settlements. Mr. Stickel would have to get
back to the committee with an estimate.
Mr. Stickel moved to the next piece, tax credits. The
legislature acted over the past couple of sessions to phase
out the programs for tax credits that could be funded by
the state in cash. However, DOR anticipated that by the end
of FY 18 there would still be approximately $2 billion in
tax credits outstanding. The revenue forecast assumed that
$100 million of the credits would be transferred to the
major producers to offset tax liability, which still left
$900 million of outstanding tax credits eligible for state
purchase going into FY 19.
2:18:45 PM
Mr. Stickel reviewed slide 18: "Illustration of Tax and
Credit Calculations: FY 2019 production tax illustration
Spring 2017." He relayed that in AS 43.55.028 regarding
production tax there was a statutory formula that provided
guidance about what the appropriation might be to help fund
some of the credits. The department included two slides.
The current slide, slide 18, was the Spring 2017 forecast
estimate of the statutory appropriation. Slide 13 reflected
the current calculation. He continued that when the
department issued the spring forecast, the state had about
$8.4 billion in market value for North Slope oil minus
transportation costs and lease expenditures. The resulting
production tax value would be $1.4 billion, of which the
tax would be about $490 million. The statutory guidance,
when Alaska North Slope prices were $60 or higher provided
that the appropriation was 10 percent of the revenue
collected under the production tax statutes. Under the
spring forecast, the statutory appropriation would be about
$49 million.
Mr. Stickel discussed slide 19: " Illustration of Tax and
Credit Calculations: FY 2019 production tax illustration
Final Fall 2017." The slide reflected the current
calculation. Relative to the previous forecast, the price
forecast came down slightly but was offset by the increased
production forecast. Also, the lease expenditures were
lower in the revised forecast versus the spring forecast.
The net result was that the production tax value on the
slope was expected to be about $3.5 billion for FY 19
giving a 35 percent net tax of between $1.2 and $1.3
billion. The statutory appropriation language stated that
when the Alaska North Slope (ANS) price forecast was less
than $60, the state took 15 percent of the tax levied
resulting in an appropriation of about $190 million. There
was some Cook Inlet production that was added to the
calculation that brought the official forecast up to $206
million. He mentioned that when the department did the 35
percent tax calculation, it looked at the tax before the
application of credits. In other words, when adjusting for
the per barrel and the minimum tax, a resulting lower
number was paid. The two slides helped explain where the
statutory appropriation number came from and why it was
higher than in the previous forecast.
Co-Chair Seaton noted there were 2 different
interpretations of the statute. The only legislative
history that he had found was introduced by Governor
Parnell. The governor specified that the amount received by
the state would be available. Since the state did not
receive the amount, the calculation would be after tax
credits, not before. He asked Mr. Stickel if he was aware
of any statutory or legislative history that lead DOR to
select a pre-tax liability instead of the actual amount
received by the state in production tax.
Commissioner Fisher thought the department heard a question
about the appropriate interpretation of the statute. The
department believed that the structure of the statute, the
way it was written and the way the department applied it,
was correct. The department also believed that there was a
history to refer to. There had been legislative debates on
the topic that assumed that it would be applied to the
gross number. The governor's budget assumed the gross
number, and the department used the gross for the past
couple of years publishing the numbers in the Revenue
Sources Book. He did not think the wrong thing should be
continued just because of doing the wrong thing in the
past. However, he felt that if the state was going to take
a position, it was important to maintain consistency,
especially when the state articulated its position. He
added that the department determined that its statutory
interpretation was appropriate after walking through the
structure of the statute, the way the sections referred to
each other, and the 15 percent gross tax.
Co-Chair Seaton thought there would be debate on the issue.
2:24:42 PM
Vice-Chair Gara asked if the department was expecting $320
million in production taxes for FY 19. Mr. Stickel
responded that the slide was an illustration of the tax
calculation and was not precisely the forecast, but a rough
estimate.
Vice-Chair Gara remarked that there was no 35 percent tax.
He argued that at $160 per barrel it was 35 percent of
profits, but below $160 per barrel it was a smaller
percentage of profits. He was frustrated with the 35
percent listed because it did not exist.
Mr. Stickel moved to slide 20: "FY 2019 Statutory Credit
Appropriation." He indicated that in applying the
interpretation of the statute that the department had been
using and published, the slide looked at the key changes
from spring to fall. The production forecast increased
significantly, with 29 million more taxable barrels in the
FY 19 forecast which added about $1 billion to the gross
value. The cost forecast decrease, companies cutting back
in response to lower prices, added about $1.1 billion to
the production tax value. There was about $2.1 billion more
profit on the North Slope. If the profit was multiplied by
the statutory tax rate of 35 percent, it would provide an
additional $750 million in taxes and would be before the
application of the per barrel tax credit Representative
Gara mentioned.
Mr. Stickel continued to elaborate that the department also
had a different statutory appropriation multiplier. The
guidance language in statute allowed for 15 percent of the
tax before credits when the price forecast was less than
$60 per barrel for the credit appropriation and 10 percent
when the price forecast was $60 or higher. In the spring
forecast the department forecasted $60 per barrel for FY
19, and the current forecast was $57 per barrel. The
multiplier went from 10 percent to 15 percent. The
combination of higher production, lower costs, and the
different multiplier resulted in a significantly higher
calculation for the statutory credit appropriation.
Mr. Stickel advanced to slide 21: "CREDITS FORECAST:
Outstanding Tax Credit Obligations." He commented that the
chart was interesting because it showed the credits that
had been repurchased by the state each year represented by
the grey bars. He reported that the 2017 and 2018 credits
had been purchased and reflected actual numbers. The grey
bars from 2019 on reflected projections based on the
statutory appropriation just discussed. The blue bars
represented the ending balance of outstanding tax credits
available for purchase at the end of the fiscal year. He
relayed that for FY 18 the state repurchased $78 million
tax credits. At the end of FY 18 the state would have a
little over $700 million outstanding. He estimated that for
FY 19 the statutory appropriation would be over $206
million. There were some credits that would become payable
in FY 19. Assuming the statutory appropriation, there would
be a little over $600 million outstanding at the end of
FY 19. As the department proceeded in the following years,
if the statutory appropriation was made according to the
calculation, the state would exhaust all of the outstanding
tax credits by the end of FY 24.
Representative Ortiz thought a previous slide had shown an
outstanding tax credit amount of $1 billion, yet the slide
indicated $700 million. He asked Mr. Stickel for
clarification. Mr. Stickel responded that the $1 billion
represented the department's estimate of the entire future
liability of the outstanding tax credits. The forecast
assumed that $100 million of the credits would be
transferred to the major producers and applied against
liabilities which would leave about $900 million of credits
eligible for state purchase. He continued that $700 million
of the $900 million would be available at the end of FY 18.
In FY 19 and FY 20 the remaining $200 million would trickle
in.
2:30:15 PM
Co-Chair Seaton asked to return to the example on slide 19
looking at the "Total" column. He wondered whether the
state would still owe $190 million to companies, even if
the state did not have a 4 percent minimum gross tax and
did not receive any tax payments. Mr. Stickel replied that
Co-Chair Seaton was correct for production tax. If there
was no minimum tax per barrel credits at $57 per barrel,
the production tax liability would be wiped out. The state
would still receive corporate tax, property tax, and
royalties.
Co-Chair Seaton asked for verification that there would be
zero production tax the state would receive without a
minimum gross tax. The state would owe $190 million to oil
companies under the scenario on slide 19. Mr. Stickel
replied in the affirmative.
Vice-Chair Gara asked, based on the forecast of production
tax revenue for the state in FY 19 and the forecast of the
statutory payments due for prior tax credits, what the net
would be to the state. Mr. Stickel responded that for FY 18
the department was forecasting a $206 million statutory
appropriation. The department's official forecast for
production tax for FY 19 was $339 million. There was a
difference of about $130 million. Commissioner Fisher
indicated he would be reviewing the last section of the
presentation which covered the changes from prior revenue
forecasts. The last slide gave an overall comparison. He
would talk about some of the components and conclude with
the comparison.
2:33:41 PM
Commissioner Fisher turned to slide 23: "FORECAST CHANGE:
Production Tax Revenue." The slide listed some of the
changes that occurred from prior forecasts. The
department's oil price forecast declined slightly compared
to the spring forecast. In the spring, for FY 19, the
department thought the price of oil would be $60 per barrel
and in the most current forecast the department estimated
the price would be $57 per barrel. The production would
stabilize rather than declining as the department had
previously anticipated. In addition, the production tax
revenue forecast in the current presentation compared to
the preliminary fall forecast was greater by about $173
million. He explained that between the preliminary fall
forecast and presently, the department increased its
expectation of the price per barrel and received a
larger-than-expected number of tax payments. The department
had talked about lease expenditures and how they were
expected to fluctuate as a result of new production coming
in as well as company costs.
Commissioner Fisher relayed that finally, underlying all of
the information, the department had proposed a structure to
repurchase the oil tax credits in a way thought to be fair
to everyone. It was cost neutral, meaning that the cost of
the financing would be borne by the companies because of a
discount to the credits. He thought the last bullet point
on the slide about the instability and uncertainty was the
most important issue to address. Oil companies and
financial investors had frequently voiced their concerns to
the department about the need to address the issue.
Representative Ortiz referred to the bullet point that
stated that the FY 18 production tax revenue forecast
increased from the preliminary fall forecast by $173
million. He wondered if it was safe to say that in order
for the state to meet its obligations for the FY 18 budget,
the state would have $173 million more dollars to put
towards its obligations. Therefore, there would be $173
million less of a draw on other sources of money.
Commissioner Fisher jumped forward to the final slide,
slide 31: "WRAP-UP: Changes to 10-Year Unrestricted Revenue
Outlook." He drew attention to the middle set of columns
which reflected the final fall forecast. For FY 18 the
unrestricted revenue was $2.082 billion, which represented
all sources for FY 18. The prior slide Representative Ortiz
was reviewing showed only production taxes. The department
was predicting that the state would have $248 million more
in undesignated general fund (UGF) revenue which would be
$248 million less than the state would have to draw from
other sources.
Representative Ortiz suggested the constitutional budget
reserve (CBR) or another account. Commissioner Fisher
responded affirmatively.
2:37:56 PM
Representative Guttenberg thought the last bullet on
slide 23 was something to be concerned about. He recalled a
presentation he had heard in a December House Resources
Committee meeting on the AKLNG project. He noted a comment
made by Mr. Myers about the Chinese outlook on investing in
Alaska. He had a completely different focus than the
Chinese on the perspective in the bullet point. He had
asked Mr. Myers to elaborate. Representative Guttenberg had
a written statement from Mr. Myer which indicated that the
Chinese appreciated the stability of Alaska's tax regime
and its certainty. It was a factor why the Chinese were
looking to Alaska in a positive way. He thought the overall
picture of Alaska's investment climate was attractive. He
provided some examples of instability around the globe.
Commissioner Fisher thought Representative Guttenberg made
a fair point. However, he wanted to provide a slightly
different perspective. He spoke of a conversation with a
bank earlier in the day. The bank had lent to Alaska under
a set of assumptions about the way the oil tax credits
would be treated. The banker had approached his credit
committee making certain representations about Alaska. He
stated that he would presently be uncomfortable going back
to the same credit committee in the current environment to
try to get a future loan approved for a business, whether
in the oil and gas industry or another because of questions
he anticipated he would receive about the topic. He also
offered that he had received a call recently about
investing in Venezuela, which he absolutely had no interest
in doing. He did not disagree with Representative
Guttenberg that it depended on the filter a person applied.
There was no question that Alaska, as part of the United
States, had tremendous benefits to its regime. However, he
thought the state should be cognizant and careful about the
way the state made changes because other people were
relying on the statements by the state. Entities were
impacted by the changes which would impact their behavior
in the future.
Commissioner Fisher continued to slide 24: "FORECAST
CHANGE: Comparison of Spring and Fall 2017 Forecasts for FY
2018." He would not spend a lot of time on the slide but
highlighted the left slide showing changes between the
final forecast and the preliminary fall forecast. On the
righthand side it showed the changes between the final fall
forecast and the spring forecast. He noted the different
categories: prices, production, lease expenditures,
transportation costs, and revenue. He indicated the slide
reflected petroleum revenue and numbers for FY 18.
2:43:20 PM
Commissioner Fisher discussed slide 25: "FORECAST CHANGE:
Comparison of Spring and Fall 2017 Forecasts for FY 2019."
The slide reflected numbers for FY 19. There were similar
changes between oil prices, production, and other various
aspects.
Commissioner Fisher scrolled to slide 26: "GFUR Relative to
Price per Barrel, FY 2019." The slide helped viewers to
better understand that changes in oil price impacted
predictions around general fund revenue. He pointed out
that the curve was not flat. As companies hit a break point
in which they began to pay above the minimum tax, the value
of each additional dollar that the state received changed.
In the $50 to $60 range it would be somewhere between $30
million to 40 million. When above $65, it became closer to
$70 million of additional revenue for the state for each
dollar per barrel. The chart was available for people to
refer to with questions.
Representative Wilson returned to slide 25. She asked about
the $1.4 billion number listed under the final fall
forecast. She wondered if the money was comprised of all
monies that came in because of oil. Commissioner Fisher
responded that it was UGF petroleum revenue.
Representative Wilson asked if the only portion that would
not be included would be what the committee put away to pay
for oil tax credits. She asked if there were other pots of
money to be deposited. Commissioner Fisher answered that
the slide did not include the royalties deposited into the
Permanent Fund. He asked Mr. Stickel to comment on items
that would not be included.
Mr. Stickel responded that the restricted petroleum
revenues not included would be the portion of royalties
that went to the Permanent Fund, the .5 percent of
royalties that went to the school fund (both were mandated
by the constitution), any deposits to the CBR fund that
were made for settlements or termination of litigation, and
any payments to the federal government for the national
sharing of royalties in the National Petroleum Reserve
Alaska (NPRA).
Vice-Chair Gara remarked that the state did not keep most
of the property, the state gave most of it to
municipalities. He wondered if property tax that the state
did not end up keeping was reflected in the $1.4 billion
figure. Mr. Stickel answered that the $1.4 billion included
the state's share of property tax which was a little over
$100 million. The department allowed a credit for municipal
taxes paid but did not actually share the money directly
with them. The total property tax amount was about $500
million. The state kept a little over $100 million.
2:47:09 PM
Vice-Chair Gara asked if approximately $1.2 billion of
$1.4 billion reflected the amount of royalties in the
figures. Mr. Stickel encouraged members to refer to page 26
of the Revenue Sources Book for Fall 2017 [slide 25 was on
the screen]. It contained the detail for the $1.4 billion
figure.
Co-Chair Seaton asked about the property tax figure. He
wondered what was included in the figure. Mr. Stickel
responded that the fall forecast, looking at FY 19, showed
$110.8 million in state property tax. The department's
estimate of the gross tax statewide for oil and gas
property was $567 million in FY 17. He furthered that of
the $567 million, $443 million went to municipalities. The
department allowed the municipal payment as a credit
against the state tax. The state's net state tax was a
little over $120 million.
Co-Chair Seaton suggested that only the net amount was
shown in the unrestricted petroleum revenue on the bottom
line of the slide. Mr. Stickel replied, "Correct."
Representative Guttenberg asked what the figure would look
like post settlement. He asked Mr. Stickel to get back with
him with the figures. Mr. Stickel confirmed he would
provide the information. Commissioner Fisher relayed he
would try to flag the total revenue forecast that included
other revenue beyond that of oil in the last few slides.
Commissioner Fisher continued to slide 28: "REVENUE
FORECAST: 2017 to 2019 Totals." The slide indicated the
department was forecasting that the total unrestricted
revenue would increase from $1.35 billion in FY 17 to just
over $2 billion. The amount would stay relatively constant
in FY 19. The total state revenue appeared to be declining.
Most of the decline was associated with investment revenue.
The state had a great year in FY 18, and the forecast
presumed a more traditional assumption on investment
income.
Co-Chair Seaton asked about the 6.95 percentage. He thought
in meant that the department had not adopted the same
actuarial return of 6.5 percent that the Permanent Fund
had. Commissioner Fisher responded in the negative. The
forecast was based on 6.95 percent.
Commissioner Fisher moved to slide 29: "REVENUE FORECAST:
2017 to 2019 Unrestricted Petroleum Revenue." The slide
provided additional information relating to petroleum
corporate income tax as well as royalties, rents, and other
categories in historical detail.
2:51:35 PM
Commissioner Fisher scrolled to slide 30: "REVENUE
FORECAST: 2017 to 2019 Unrestricted Non-Petroleum Revenue."
The slide showed the non-petroleum revenue and provided
additional detail.
Co-Chair Seaton returned to slide 29. He referred to the
petroleum corporate income tax for FY 17 in the history
column. He wondered about the -$59.4 million figure. Mr.
Stickel responded that as a result of the decrease in oil
price a few years prior, the state had some significantly
large refunds. There was a provision in the tax code that
allowed companies to carry back a loss to prior years. The
combination of those two things resulted in net refunds
paid out for petroleum corporate tax for FY 16 and FY 17.
So far, payments were positive for FY 18. He noted that
with the recovery in price the department expected a return
to positive payments in FY 18 and beyond.
Co-Chair Seaton asked for clarification around the terms
refund and positive payment. Mr. Stickel replied that every
year the department received payments from companies and
paid out some amount of refunds. The amount was for refunds
for overpayments in a prior year similar to how an
individual would receive a refund on their federal income
tax. It just so happened that in FY 16 and FY 17 the
refunds exceeded the current year payments. Companies that
saw a loss in the current year with low oil prices were
able to carry back a portion of the loss to claim a refund
for prior years. In the long version of the presentation or
a follow-up the department had a chart that broke out the
information which he could provide to the committee.
Commissioner Fisher again looked at slide 31 which provided
a long-term view. He highlighted that the total UGF for
FY 18 was predicted to be just under $2.1 billion,
remaining relatively flat for a few years, and growing in
the out years. In particular, compared to the spring
forecast, FY 18 was about $250 million more, and FY 19 was
about $127 million more. There was meaningfully more
expectation of revenue in the coming years. He concluded
his presentation and was available for questions.
2:55:06 PM
Vice-Chair Gara thought the state was expected to receive
about $173 million more in production tax revenue than was
forecasted earlier. The state had also been sticking to the
statutory formula for paying out tax credits. He asked
whether the amount going out was adjusted with the change
in prices or production. In other words, when it turned out
the state expected to get $173 million more in production
tax revenue, he wondered if there was a higher payout for
the statutory credits payment. Commissioner Fisher
responded in the affirmative. He suggested it was worth
returning to slide 19.
Vice-Chair Gara asked if the net was $173 million if the
state stuck with the statutory tax credit. Commissioner
Fisher thought Representative Gara was correct. He would
get back to the committee to provide a precise answer.
Co-Chair Seaton asked about the total tax per barrel on
slide 19. He suggested that at $57 per barrel under the
current profit tax regime there would be zero tax paid. The
gross minimum tax of 4 percent was less than $2 per barrel,
$1.89 per barrel, which would be the amount the state would
receive per barrel. He wondered if he was accurate.
Commissioner Fisher replied, "That's correct."
Representative Wilson asked about the royalty amount per
barrel. Commissioner Fisher answered that it varied by
field. He encouraged Mr. Stickel to respond further. Mr.
Stickel replied that the average royalty on the North Slope
was about 12 percent. Most of the legacy leases were at the
12.5 percent rate. There were some that were higher and
some that were lower.
Co-Chair Seaton asked if it was based on the production tax
value. Mr. Stickel responded that the royalty was based on
the gross value. The royalty would be roughly based on the
$47.14 number. At current price levels, royalty was the
largest component of the state's oil revenue.
Representative Grenn referred to Representative Gara's
question regarding a production tax increase. He referred
to slide 23 and the increase of $173 million in the
forecast. He asked if the number represented the difference
between the spring forecast and the fall forecast. Mr.
Stickel answered that the $173 million was the difference
between the preliminary fall forecast and the final fall
forecast for FY 18.
Representative Grenn asked for the difference in the
increase of production tax credits now due from the
preliminary forecast to the final forecast. Commissioner
Fisher stated that it was only a few million, a small
increase.
Co-Chair Seaton reviewed the agenda for the following week.
Representative Wilson noted the committee would be starting
to review departments. She asked if there was a deadline
for information to be posted on Basis. She wondered if it
was 24 hours prior to a hearing or an hour before a
hearing. She thought it would be nice to know when to start
looking for presentations for the following day in order to
be better prepared. Co-Chair Seaton responded that they
were published currently.
Representative Wilson asked if there was a standard set for
agencies to provide presentation information. Co-Chair
Seaton would discuss the issue with the agencies.
3:00:37 PM
AT EASE
3:01:02 PM
RECONVENED
Co-Chair Seaton detailed that his office had requested that
the agencies provide his office with the information at
noon the day prior to their presentations. An email would
be sent out when the items were available online.
3:01:34 PM
ADJOURNMENT
The meeting was adjourned at 3:01 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Fall 2017 Revenue Forecast Presentation 20180118 ds.pdf |
HFIN 1/19/2018 1:30:00 PM |
HFIN - DOR Revenue Forecast |
| Response HFIN Overview DOR Deputy Commissioner 2-1-18.pdf |
HFIN 1/19/2018 1:30:00 PM |