Legislature(2017 - 2018)ADAMS ROOM 519
03/19/2018 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Spring 2018 Revenue Forecast by the Department of Revenue | |
| Presentation: Alaska's Economy by Dept. of Commerce, Community, and Economic Development | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
March 19, 2018
2:01 p.m.
2:01:18 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 2:01 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-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 Les Gara, Vice-Chair
ALSO PRESENT
Sheldon Fisher, Commissioner, Department of Revenue; Dan
Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue; Ken Alper, Director, Tax
Division, Department of Revenue; Mike Navarre,
Commissioner, Department of Commerce, Community, and
Economic Development; Representative Gary Knopp.
PRESENT VIA TELECONFERENCE
None
SUMMARY
PRESENTATION: SPRING 2018 REVENUE FORECAST BY THE
DEPARTMENT OF REVENUE
PRESENTATION: ALASKA'S ECONOMY BY DEPT. OF COMMERCE,
COMMUNITY, AND ECONOMIC DEVELOPMENT
Co-Chair Foster reviewed the agenda for the day. The
committee would be hearing two presentations: one from
Department of Revenue (DOR) on the spring revenue forecast
and one from the Department of Commerce, Community and
Economic Development (DCCED) on Alaska's economy. He asked
members to hold their questions until the end.
^PRESENTATION: SPRING 2018 REVENUE FORECAST BY THE
DEPARTMENT OF REVENUE
2:02:22 PM
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced the PowerPoint presentation: "Spring 2018
Revenue Forecast." He indicated that in the interest of
time he would jump over a few slides. He began by reviewing
the forecasting methods and timeline on slide 2. He
reported accelerating the spring forecast which was usually
done in April because of the importance of the discussion
that was currently happening in the legislature.
Commissioner Fisher turned to the chart on slide 4 which
showed the historical production of the Alaska North Slope
(ANS). He highlighted that production was starting to level
off.
Commissioner Fisher looked at the chart on slide 5
comparing the ANS FY 17 and FY 18 production forecast. In
the fall the department predicted about 533,000 barrels per
day of production. The state fell below that number.
Alaska's current production was about 518,000 barrels per
day. At the bottom of the chart the black figures
represented actual numbers, and the red figures were the
forecasted numbers for the remainder of the year.
Historically, the fourth quarter had accounted for about
24.5 percent of production for the year. The number of
521,800 barrels per day was just over 25 percent, slightly
above average but consistent. The department was predicting
FY 18 production to be slightly below FY 17 production -
essentially flat with FY 17.
Commissioner Fisher turned to the ANS comparison on slide 6
that showed the long-term production forecast. He
highlighted that in FY 18 the production was down. However,
for the rest of the 10-year period, he was predicting a
flat forecast with modest gains in a few years. Generally,
he expected the production to be comparable to what the
department predicted in the fall forecast.
Commissioner Fisher discussed the short-term impact of
spare capacity as it related to the price forecast on slide
8. He reported that the lines on the chart showed where
there was either more supply or more demand. He continued
that when the green bars fell below, it meant there was
greater demand than supply leading to upward price
pressure. Conversely, when the green bars went above the
line, it meant supply was greater than demand leading to
downward price pressure. He emphasized that the Energy
Information Agency (EIA) was predicting in the coming
quarters the state would see periods where supply was
greater than demand, potentially resulting in a price
softening. He would spend a little time reviewing some of
the existing forecasts to give legislators a sense of why
different forecasters predicted different scenarios for
future price.
Commissioner Fisher detailed the forecast comparison
between the Brent forecast and DOR ANS forecast for 2018 on
slide 9. He indicated that the solid black line represented
actual prices. He noted that when the state began FY 18 in
July the price was just over $50 per barrel. The price
reached close to $70 per barrel prior to leveling off where
it was currently under $65 per barrel. The black dotted
line was what was predicted for the remainder of the year.
The department was predicting just over $64 per barrel for
the remaining months of the year that would lead to a
forecasted price for 2018 of $61 per barrel average. The
state's average price year-to-date for the fiscal year was
$59.65 per barrel. The red line represented the futures
market. If a person wanted to go into the market to
purchase oil, they could buy it over the period of time
indicated at the price represented by the red line. The
state was essentially consistent with the red line being
modestly higher.
2:08:28 PM
Commissioner Fisher moved to slide 10 that showed the
short-term comparison of the Brent forecast and the DOR ANS
forecast. He was talking about the near-term versus the
long-term because of the different data points available to
the department as it considered short-term and long-term
pricing. In the short-term, in addition to the NYMEX [New
York Mercantile Exchange] futures market, there was also
the EIA Short-Term Energy Outlook (STEO). There were
financial analysts who made predictions about pricing. The
state's forecast was in line with the analysts' forecast
and was higher than the EIA's STEO forecast. He would
discuss the EIA's STEO forecast further.
Commissioner Fisher reviewed the short-term price forecast
on slide 11. He relayed that the slide represented the
information on the previous graph in dollar amounts. He
noted that the state's forecast started at $61 per barrel
in FY 18, would increase to $63 per barrel by FY 19, and
would reach $75 per barrel by the end of the forecast
period. He had mentioned a moment ago that the EIA STEO
outlook predicted the price of oil would be $60 per barrel
by FY 19. By 2020, the price would move substantially to
$67 per barrel and continue to increase. He would provide
the rational for the climb. He noted that the average
analysts' predictions were more in line with the state's.
Their price was $1 more in FY 19, slightly higher in FY 20
and FY 21, and would begin to decline by FY 22. The
analysists did not go beyond a 4-year period.
Commissioner Fisher moved to slide 12 reflecting the
analyst's short-term comparison of the Brent forecast and
the DOR ANS forecast. The slide showed a disparity in the
analyst community. He noted that the solid blue line
represented the analysts' average, the dotted black line
represented the state's forecast, and the two blue dotted
lines above and below represented the 25 percent highest
analysts and the 25 percent lowest analysts. He pointed out
there was a significant range. Some people predicted the
price of oil would be well over $70 per barrel, while
others predicted the price would be closer to $50 per
barrel.
Commissioner Fisher indicated that slide 13 showed the
differences in analyst forecasts. To a large extent the
difference of opinion on demand was narrower. All of the
analysts the department reviewed saw demand growing. Those
that saw a lower price saw global demand growing more
slowly. Those who saw a higher price saw global demand
growing more rapidly, particularly in India and China. All
of the analysts were within a narrow range with a stable
consensus. The larger differences that explained the
varying opinions around pricing had to do with supply.
There was a material difference of view in how the world
would react regarding supply. Analysts who were on the low
end of the forecast saw lower costs of producing oil. He
expounded that they thought technology would drive the cost
of oil per barrel down resulting in stronger production and
very aggressive oil supply in the marketplace. The high
analysts saw flat U.S. shale production driven by a
discipline in the capital markets and available funding.
Some of them saw a disruption in supply from external
factors, especially in Venezuela and Iran. They saw that
there might be opportunities for a material and rapid
decline in terms of supply resulting in higher prices. He
noted that EIA had two forecasts, the short-term energy
outlook (published on a monthly basis) and a long-term
forecast (published on an annual basis). While they were
not the same and the short-term forecast accounted for
events as they occurred, they shared a long-term thesis
that the world was underinvesting in oil production, that
there would not be enough supply to meet demand, and that
prices would be driven higher.
2:14:41 PM
Commissioner Fisher discussed the Bullish Analyst example:
Guggenheim, Short-Term on slide 14. He noted the analyst
company's high price forecast. The company believed that
2018 would see oil prices in the low $70 range. In 2019,
prices would be as high as $80 per barrel. The company saw
a material increase in demand driven primarily by China and
India. The company saw supply being more constrained with
potential disruptions.
Commissioner Fisher reviewed the Bearish Analyst example:
Citi Short-Term on slide 15. Analysts with Citi Group
believed that prices would be in the high $50 range in 2018
and in the high $40 range per barrel in 2019. They saw flat
demand and a large supply from the U.S. resulting from
shale oil. They also believed that a number of segments in
the industry, particularly Oil Producing and Exporting
Countries (OPEC), were enjoying some material cost
reductions making it more profitable and easier to deliver
oil at lower prices. He skipped slide 16. The slide
reflected a middle-of-the-road forecast.
Commissioner Fisher presented the long-term comparison of
the Brent forecasts to the DOR ANS forecast on slide 17. He
conveyed that in real terms the long-term forecast was
basically flat, a thesis consistent with the fall forecast.
At low $60 per barrel pricing there were enough sources of
oil to meet the demand. The graph showed the analyst
forecast and the EIA reference case predicting higher oil
prices.
Commissioner Fisher discussed the long-term price forecast
for EIA Brent cases from 2018 Annual Energy Outlook on
slide 18. He reported that EIA had three forecasts. The
first forecast was the reference case, which Alaska had
historically shared with the legislature shown in black.
The two other cases consisted of a high case and a low
case.
Commissioner Fisher reviewed the differences in EIA
projection cases on slide 19. He explained that, in terms
of demand, the low case had slowing global demand growth.
Although there was a growing demand for oil, it was growing
at a lower rate. The reference case was more moderate,
which was led by the non-Organization for Economic
Cooperation and Development (OECD) countries in the world.
The high cases reflected strong demand. He thought it was
fair to say that the larger issue had to do with supply. He
continued that consistent with EIA's view, the world was
underinvesting. The Energy Information Agency believed that
in the low-price case non-OPEC countries would enjoy some
cost savings and would be able to deliver oil at a lower
price. Therefore, it was believed that a lower price would
be adequate to meet the demand for oil. The moderate case
showed OPEC flat in production, but the U.S. producers
needed a somewhat higher price to meet the world
requirement. Finally, in the high case, OPEC production was
seen declining along with higher exploration and
development costs in non-OPEC countries. It would
potentially lead to significantly high prices, over $140
per barrel, by the end of the period.
2:19:10 PM
Commissioner Fisher spoke about the nominal ANS price
distribution on slide 20. The nominal price was layered in
the new forecast and the different scenarios the department
had shared with the legislature in its fall discussion. He
reported that the department's underlying thesis was
consistent. The department saw that by the end of the
forecast period, the new forecast and old forecast would
meet based on the largely flat oil price in the low $60 per
barrel range. In the near-term, the department anticipated
higher prices. In the long-term he anticipated a more
consistent outlook.
Commissioner Fisher presented the graph of the comparison
between the Spring 2018 forecast and the Fall 2017 forecast
on slide 21. The Fall 2017 forecast was represented by the
dotted line on the bottom versus the state's Spring 2018
forecast represented by the dashed line in the middle of
the slide. The state would reach a higher price sooner but
would be fundamentally consistent on a long-term basis. He
anticipated that $60 per barrel would be sustainable on a
long-term basis.
Commissioner Fisher detailed slide 22: "Price Forecast: UGF
Revenue Under Selected Price Paths." The chart showed
different prices from different sources. The shaded box at
the top was the department's current official forecast. The
NYMEX was the futures market. Both of EIA's long-term and
short-term scenarios were shown. The analysts' case was
also shown. He highlighted the unrestricted general fund
revenue (UGF) revenue under each of the scenarios. He
thought it provided a chance to see how revenue would
change based on different scenarios.
2:21:47 PM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, moved to slide 24 that
showed the comparison of the cost forecast for North Slope
capital lease expenditures to the previous forecast. The
department reduced the forecast in FY 18 because of a
combination of continued cost efficiencies being realized
by the producing companies on the North Slope and deferrals
in wells being drilled for some of the new projects. The
state expected capital expenditures to rebound in 2019,
2020, and beyond as major spending occurred for some of the
new developments included in the forecast.
Mr. Stickel advanced to slide 25 that was a similar slide
showing operating expenditures. There was a modest
reduction in 2018 and 2019 operating costs due to
efficiencies seen by the major producers. Once some of the
new developments such as Pikka, Mustang, and Placer came
into the forecast in 2026, the department saw a shift up in
operating costs for operating the new units.
Mr. Stickel relayed that slide 26 showed the most
significant change to the cost forecast. He thought most
members were aware of the announcement related to the
Trans-Alaska Pipeline. He furthered that the settlement
instituted a new methodology for calculating the Trans-
Alaska Pipeline System (TAPS) tariff going forward. It
resulted in about $1 per barrel in transportation costs
across the time horizon of the forecast. He reported the
reference that the $1 change for FY 19 added $46 million to
the revenue forecast.
Mr. Stickel indicated that the department's discussion on
tax credits began on slide 28. The slide provided
information about the statutory appropriation and the
methodology DOR was using and supported for calculating the
statutory appropriation. He noted that the statutory
appropriation could be found in Title AS 43.55. There were
several subsections having to do with levying the tax
dealing with credits and the appropriation. The
appropriation guidance could be found in AS 43.55.028 and
referenced either 10 percent or 15 percent of revenue from
taxes levied under AS 43.55.011. He explained that AS
43.55.011 was the statute that specifically applied the 35
percent tax rate with credits being calculated in other
sections (023, 024, and 025). He furthered that when the
department first went to calculate the appropriation, it
calculated the appropriation based on the 35 percent net
tax under AS 43.55.011 without regards to the tax credits.
The department had been using the methodology since 2015.
He reported that the following two slides were based on
that methodology. He conveyed that the final bullet point
on the slide spoke to a legislative legal opinion the
department was aware of that stated the statutory guidance
on calculating the appropriation was ambiguous. Typically,
in such a situation, the state would interpret in favor of
the tax payer, which the department thought it had done.
2:26:00 PM
Mr. Stickel reviewed the illustration of tax credit
calculations on slide 29. The state was estimating an
appropriation of $184 million for FY 19, a combination of a
few different pieces. The largest piece was North Slope oil
illustrated on the slide. Another smaller piece was from
Cook Inlet. There were also private land owner royalties.
He highlighted that the slide showed a 35 percent tax rate
applied to an estimated production tax value of about $4.7
billion for FY 19. The statutory appropriation would be 10
percent of the estimated tax value or about $165 million
for the North Slope portion.
Mr. Stickel reported that slide 30 discussed the changes in
the statutory appropriation from the fall to the spring. In
the fall, the department estimated $206 million for the
FY 19 statutory appropriation. Although oil prices were up,
and profits were up, the state was forecasting a slightly
lower statutory appropriation in the spring forecast due to
statutory language having a trigger price around $60 per
barrel. He elaborated that when the department's price
forecast was below $60 per barrel 15 percent of the tax was
taken before credits. He continued that when the
department's forecast was above $60 per barrel 10 percent
of the tax was taken before credits. The department was
currently forecasting $63 per barrel for FY 19, therefore,
10 percent was being used. He explained that a smaller
multiplier was being used on a larger base which was how
the department derived the $184 million estimate.
Mr. Stickel presented slide 31 that showed the view of the
statutory appropriation compared to estimated outstanding
tax credit obligations. The department estimated there
would be $946 million of tax credits available for
repurchase for FY 19 and beyond. He continued that of those
tax credits, the department estimated that $125 million
would be transferred to the major producers offsetting some
back taxes related to TAPS, leaving a balance of $821
million that would be potentially purchased by the state.
Assuming that the statutory appropriation per the
department's calculation was made in each year, it would
exhaust the balance of outstanding credits in FY 23. He
mentioned that the estimates were before the introduction
of any repurchase bill.
Commissioner Fisher relayed that slide 33 was intended to
highlight the changes between the Fall 2017 forecast and
the Spring 2018 forecast in terms of oil prices,
production, deductible lease expenditures, transportation
costs, and the resulting undesignated general funds (UGF)
associated with petroleum revenue. The changes resulted in
about $240 million in additional UGF petroleum revenues in
FY 18 and $202 million in FY 19. He would discuss total UGF
revenue shortly.
Commissioner Fisher thought slide 34 was a useful tool to
help people understand what happened as the price of oil
changed. It was interesting that the state's price point
was at the inflection point. Up until the present,
companies had been paying at the minimum level. For any
price below $63 per barrel, a $1 change would result in a
$30 million impact to UGF revenue. Based on the current
forecast for FY 19 of $63 per barrel, for every dollar
decline in the price of oil there would be $30 million less
in revenue. On the other hand, the curve was steeper to the
right of the graph. If the price of oil increased by a
dollar, the state could anticipate an additional $75
million in revenue. The department's estimates were fairly
sensitive to the price of oil, particularly as the dollar
price increased. There would be material opportunity to
increase revenue expectations.
2:31:16 PM
Commissioner Fisher turned to slide 36 that showed the
revenue forecast for FY 18 and FY 19 compared to FY 17. He
highlighted that between FY 17 and FY 18 the department
forecasted an almost $1 billion difference between FY 17
and the current year. He noted that FY 19 was flat. The
other notably large change was in other restricted revenue
and the investment revenue line (about a third up from the
bottom of the slide). The investment revenue was primarily
associated with the Permanent Fund. He relayed that FY 17
was a very strong year with 12 percent returns. The
department took the actual returns for the first 8 months
of FY 18 and forecasted a 6.5 percent return for each month
going forward. He reported that the return expectation for
the fund for FY 19 was also 6.5 percent. He remarked that
volatility was associated with the change.
Commissioner Fisher provided a wrap-up of the changes to
the 10-year unrestricted revenue outlook on slide 37. The
slide showed the changes between DOR's spring forecast
compared to the previous fall forecast. He highlighted
production, price, and UGF revenue. He noted that for FY 18
the department was forecasting an increase of about $250
million. In FY 19, the department anticipated just over
$200 million in additional revenues and was consistent in
FY 20. He thought the information was positive news for the
State of Alaska, but he did not believe it was sufficient
to close the fiscal gap. The governor's budget was
predicting a fiscal gap of approximately $477 million for
FY 19 and included some additional revenue from a gas tax.
Even with the changes there was a material difference
between what the state needed and what the state was
predicting would be available from sources. He was
completed with his prepared remarks and was happy to take
questions.
Co-Chair Foster recognized Representative Knopp in the
audience.
Representative Wilson referred to slide 31 and the state's
outstanding tax credit obligations. In regard to
repurchasing credits, she wondered what formula was being
used.
Commissioner Fisher responded that the formula used was the
same formula that had been used up through the present. The
reason the numbers were slightly less was because at $60
per barrel the statutory formula changed from a 15 percent
calculation to a 10 percent calculation. In other words, it
was a 10 percent calculation of a larger amount. The result
was reflected on the schedule presented on slide 31. The
schedule assumed that the formula was applied consistently
as it had been by the department for the prior number of
years.
Representative Wilson wondered if the number would decrease
substantially in FY 19 if the state used what was currently
in the budget. She thought tax credit repurchasing would
extend out further in time. Commissioner Fisher responded
in the affirmative. He suggested that if the formula
currently in the House budget was used, the timeline would
extend out for many years. The administration had put
forward a proposal to bond and pay for the tax credits
which could result in a lower amount in FY 19. However, it
was a different scenario.
2:36:03 PM
Representative Wilson clarified that she was concerned, on
behalf of the companies, about the difference between the
formula being used presently and the formula used in the
budget. She suggested that those companies that did not
receive payment would be required to get their tax credits
at a discount with the passage of certain legislation
rather than receiving the full amount reflected in the
budget.
Commissioner Fisher replied that under the proposal by the
governor, the tax repurchase plan, a company had the option
of waiting and receiving their share of each of the
distributions reflected on the chart on slide 31.
Alternatively, companies could choose to take a discount
presently. Under the administration's scenario companies
would have the choice. Under the alternative it came down
to the question of how much the legislature would
appropriate. Even under the larger appropriation of $184
million all of the companies would not receive 100 cents on
the dollar. They would receive a partial payment and would
have to wait for partial payments in the future. Under the
lessor appropriation, $49 million or less, companies would
receive an even smaller pro rata share and would wait
longer. He did not believe that anyone would receive 100
cents on the dollar under any scenario.
Representative Wilson asked for clarification about 100
percent of the dollar. Commissioner Fisher meant that in
FY 19 no one would receive 100 cents on the dollar in any
of the scenarios being discussed.
Representative Wilson asked how many companies would be
affected by the drop from $196 million to approximately $50
million.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
responded that the number of companies with pending tax
credits with either dates from 2016 or 2017 was 37. Some of
credits were small amounts. The department had just
completed reports the previous Friday listing all of the
companies that received cash in calendar year 2017. It was
a required annual report by DOR. The number reflected in
the report was about 20, because some of the numbers were
in the 2017 pool rather than the 2016 pool. All of the
money paid the prior year was a pro rata share to everyone
in the department's 2016 pool.
Representative Thompson asked for the total number of
companies.
Mr. Alper responded that there were 37 companies.
Representative Thompson inquired if the list of companies
included companies like Petro Star, which was owed $15
million for the addition to their plant.
Mr. Alper responded that the money the state spent in the
previous year was associated with oil, predominately on the
North Slope. There was also a number of Cook Inlet
recipients who were in the gas business. Petro Star had a
credit in the 2016 pool and received a partial payment. He
thought the amount was about $900,000 in the prior year.
Co-Chair Foster relayed the names of testifiers available
online.
2:40:40 PM
Co-Chair Seaton referred to slide 11. He asked if the
numbers were inflated by 2.5 percent like DOR was on
slide 10. He pointed out that at the bottom of the slide
there was a note about the DOR forecast being inflated by
2.25 percent. He wondered if all of the different indexes
on page 11 were all inflated with 2.25 percent.
Commissioner Fisher thought it would be slightly different.
He elaborated that the number on slide 11 reflected the
forecast as produced by the various organizations. The
slide showed what they were predicting in nominal dollars.
The amount was the number they published in their
forecasts. He explained that in slide 10, the department
took the forecast and translated it into a real dollar
forecast. It discounted the amounts by a 2.25 percent
expectation for inflation. It was not that the department
inflated. Rather, the department took a nominal forecast
and turned it into a real forecast to get the state's real
forecast numbers.
Co-Chair Seaton asked if all of the numbers were treated in
the same way to include an inflation rate. He provided an
example. Commissioner Fisher replied that some of the
charts were nominal and some were real. The department
tried to label them appropriately. He pointed to NYMEX as
an example. He explained that the state took the actual
NYMEX numbers that were available in the market place,
which were reflected on slide 11. The department had not
manually taken the numbers and reported them. The
department just reported the NYMEX numbers. On slide 10 the
department took the reported numbers and discounted them
with an inflation rate to result in real numbers. They were
consistent. In other words, the nominal numbers on slide 11
were produced the same way. The real numbers on slide 10
were internally consistent.
Representative Guttenberg pointed to slide 13 and asked
about the impact of U.S. shale production. He thought it
would have a dampening effect.
Commissioner Fisher thought Representative Guttenberg made
a good point. He conveyed that how the effect was perceived
depended on each one of the different sources. For example,
the analysts predicting a low price thought shale oil would
respond very quickly to price changes. There would be a
strong supply, and shale oil could ramp to meet the demand
as it grew. The analysts that predicted a high price saw
shale production being flat. They also believed the U.S.
was currently in a period of discipline in terms of access
to capital for shale producers making it difficult for them
to respond quickly to changes. He also noted that the
analysts predicting high prices saw that the dynamic was
also influenced by disruptions in other markets. He
concluded that how a person saw shale playing a role
depended on their view of the world. He wanted to share
these perspectives with the committee. The impression of
the department was that legislators were students of the
industry and had a sense of how the industry did or did not
respond. He thought providing the information helped
members to make their own conclusion. The department's view
was that, in real terms, pricing at about $63 per barrel
was sufficient to support many sources of oil and that the
supply could largely meet the demand in the market place.
2:46:40 PM
Representative Guttenberg asked Commissioner Fisher to walk
through the mechanics of the TAPS tariff settlement.
Commissioner Fisher deferred to Mr. Stickel.
Mr. Stickel referred to slide 26. He qualified that he was
not an expert in all of the nuances of the tariff
methodology, but he understood that there was a lawsuit
related to the calculation of the tariff. It was settled in
a way that prescribed a new method of calculating the
tariff going forward as well as going backward. He
continued that companies were revising their production tax
and royalty statements for the previous several years to
reflect a lower tariff and a higher tax and royalty
liability. They were also using a new calculation method
going forward that resulted in a tariff equal to about $1
per barrel lower. He would be happy to provide more
detailed specifics on the settlement. Representative
Guttenberg understood that when the tariffs went down, the
wellhead went up.
Representative Grenn asked about the tax credits on slide
30. He inquired whether the estimated statutory
appropriation was $184 million. He wondered if the figure
was UGF. Mr. Alper replied that it was a statutory
appropriation guideline. Historically, tax credits had been
paid for with UGF. However, there was no requirement that
it was UGF. He thought in the prior year's budget, the
House passed $57 million to the tax credit fund and $20
million was added to the capital budget. The amount of $20
million came out of the statutory budget reserve (SBR).
There was no specific fund source requirement.
Historically, it had been mostly UGF.
Representative Grenn asked about the administration's bond
legislation. He queried the approximate interest cost in
FY 19. Commissioner Fisher explained that $27 million was
placed in the governor's budget. As the department refined
its expectations around interest, the number declined to
about $24 million. At $184 million the interest would be
slightly less than $24 million. He would have to get back
to the committee with the amount.
Representative Grenn asked about the difference of $150
million. He wondered if there could be a potential decrease
to the state's UGF if the administration's proposal passed.
Commissioner Fisher replied that there would be an impact
of $150 million. The governor's budget did not include $184
million to fund the statutory appropriation. If the credit
repurchase program did not pass, the administration and
legislature would have to collectively find an additional
$150 million.
2:50:51 PM
Representative Kawasaki asked the general question of why
the production forecast numbers were down from Fall 2017.
Commissioner Fisher asked if the representative was
referring to slide 5. Representative Kawasaki confirmed
that he was looking at slide 5. Commissioner Fisher
explained that the state had not had as much production as
expected. It was driven, in part, by warmer weather and
field-specific issues that had arisen.
Mr. Stickel explained that Department of Natural Resources
(DNR) incorporated the most recent actual production for
the previous several months in projecting what would happen
for the remainder of the fiscal year. There had been below-
prior-year production in several fields including Prudhoe
Bay where temperature had a large impact. At Point Thompson
there were compressor issues that would keep production
down for the following few months. At the Alpine field
there had been some technical issues that had arisen. Such
issues had been factored in as well as typical decline
rates at fields.
Representative Kawasaki commented that at about the time
the legislature received the fall forecast, which looked to
be higher than the numbers prior. Mr. Stickel responded
that Representative Kawasaki was correct. He elaborated
that the numbers on the slide were compiled in October. He
highlighted that at that point in time the last several
months were tracking higher than the prior year. The
department also did not know about some of the technical
issues that came up. He noted that the state did not know
that the time period would be one of the warmest winters on
record. The Department of Natural Resources had adjusted to
pull in the latest information.
Representative Kawasaki asked about the capital lease
expenditures. He referred to slide 24 at the bottom of the
page in the numbers section. He wondered if the numbers had
been revised down. He noted $400 million in FY 18 and $400
million in FY 19. He asked why the numbers had been revised
down so sharply. Mr. Stickel replied that there were two
aspects to the reduction in the capital expenditures.
First, there were deferrals of work being done by some of
the explorers and developers - work that the state thought
would happen in the current winter and the following
winter. The work might get deferred into future years.
Another reason was continued cost containment by existing
producers. It was not that the producers were forecasting
less work at existing fields, but they were finding ways to
cut costs.
2:54:56 PM
Representative Kawasaki wondered if the decreases in
capital lease expenditures were inclined to have a flip
side on decreased production in the future. Mr. Stickel
replied that the reductions at the existing fields were not
flowing through to production currently. It was not to say
that if there were further reductions, it could not flow
through. The reductions in costs the state was seeing at
the legacy fields was an example of finding more ways to
become efficient.
Representative Kawasaki asked if they had revised
employment numbers on the North Slope. Commissioner Fisher
would check and get back to the committee. The last time he
checked, oil industry employment was down a little more
than 30 percent in the peak. He did not know what the new
numbers showed.
2:56:43 PM
Representative Pruitt noted there was an increase in
capital expenditures from FY 18 and FY 19. He wondered if
there was a rough estimate of anticipated job growth on the
North Slope.
Commissioner Fisher did not know whether DLWD or the
Institute of Social and Economic Research (ISER) had done
any studies on the correlation of spending to employment.
He would get back to the committee.
Mr. Alper added that a large component of the increase the
state would be seeing in the following two years had to do
with the Pikka field - the Armstrong discovery. There were
other new discoveries, but Pikka was the largest. The field
had a new partner and a new operator. The field had
deferred the current year's and the following year's work.
The state was still seeing the field moving forward with a
significant amount of work ramping up in the later part of
2019 or 2020. The work was not happening as quickly as
anticipated. He did not know the number of jobs associated
with the field, but it was a large number.
Representative Pruitt returned to the tax credit
discussion. He wondered if some work was not being done
because some of the companies were expecting certain
payments. He asked if there were companies that could not
be capitalized to be able to continue. He wondered if the
state was up against the challenge of people wanting to
invest based on the state not knowing what to do, including
the way the state was calculating the tax credits.
Commissioner Fisher responded that there had been a
material reduction in spending, particularly with the
smaller companies. He reminded the committee that the major
oil companies were not eligible for the credits, did not
benefit, and were not impacted by the state's decisions on
the issue. However, small producers were impacted, as the
state strategically wanted to attract more competition in
the oil segment. The state had seen a meaningful decline in
oil company spending which impacted direct hiring and oil
service companies. In conversations with lenders, they
confirmed they were not lending presently largely due to
the uncertainty and disruption that had occurred. The
producer companies relied on the expectation that the state
would pay them cash for their credits. However, they were
unable to meet their payment obligations to lenders.
Commissioner Fisher continued that the banks were in
forbearance and were not willing to lend future money. He
explained that the small producer section of the industry
was frozen and thought uncertainty was a large contributor.
He suggested that if the legislature changed the tax
structure again, it would have a further chilling effect on
the industry's perception about certainty. He relayed that
the purpose of the oil tax credits was to stimulate
economic growth and employment in Alaska. He reported that
the administration continued to believe it was a viable
strategy with credits.
Commissioner Fisher returned to a previous question from
Representative Pruitt about how many jobs to expect. He
relayed that there had been some work done by ISER around
capital spending by the state. It was not a perfect
analogy, but it looked at different scenarios for balancing
the budget between cuts in different areas. There was a
range in which $100,000 of spend translated to between 500
to 1000 jobs.
3:03:11 PM
Representative Pruitt thought, based on what the
commissioner had highlighted, there would be an increase of
about 4000 high-paying jobs anticipating an increase in
spending of around $800,000 between FY 18 and FY 19. He
noted that the state had seen an increase in Medicaid
partly because of the job losses in the state. He believed
an increase of 4,000 jobs would help reduce the state's
budget. He thought discussions about revenue sources went
hand-in-hand with policy discussions. He supposed there
were companies looking to capitalize. However, lenders did
not trust capital investment in Alaska based on the history
of other transactions. He suggested that it would be
prudent not to change the mechanisms that would help
investors to get needed capital.
Commissioner Fisher thought what Representative Pruitt had
stated was the foundation behind the governor's bond
legislation. He mentioned that at least one representative
from the banks would be in Juneau in the coming week. He
indicated he would be happy to bring the lenders around to
legislative offices or to have them testify.
Representative Pruitt suggested hearing from some of the
lenders to know what it would take to free up capital. He
wanted to ensure that additional capital was available in
the future. It would translate to more jobs and helping the
state's budget in the long-term.
3:06:32 PM
Representative Guttenberg observed that on DLWD's webpage
it reported that non-resident workers in the Alaska oil and
gas industry, including the Kenai area, made up 36.5
percent of the workforce in 2015. He calculated that about
$500 million in payroll was remaining in the state. In 2016
the percentage of non-resident oil industry workers went up
by 1 percent totaling 37.5 percent. He commented that the
loss of jobs in Alaska's oil and gas fields was higher for
residents than non-residents.
Co-Chair Foster thanked the presenters.
Representative Wilson announced she would not be staying
for the next part of the presentation. She was concerned
with Fairbanks being used as an example in the following
presentation. She commented that if the word factory was
replaced with military the example would imply that the
state could not afford the military because of a $30
million loss. She referred to slide 29 of the following
presentation. She did not want to send such a message to
the military, therefore, she would not be staying for the
presentation.
Co-Chair Seaton commented on DOR's presentation. He wanted
to return to numbers that had been quoted. He noted $143
million. He clarified that if the state were to appropriate
the first statutory amount, it would be different than the
calculation the House had used. He conveyed that $143
million did not equate to 4,000 jobs. He disagreed with the
idea that the lenders would reestablish lending. The
lenders were lending because of cashable credits which had
been eliminated from any future programs. If lending was
based on cashable credits, it was unlikely lenders would
come back and start lending. He noted that there were loss
carry-forwards as well. He wanted to make sure the
committee considered all factors going forward.
Representative Pruitt suggested bringing a lender before
the committee to testify. He thought if a company had been
capitalized by a bank and the basis for which the company
was able to borrow was no longer available, a company would
not be able to access capital if it could not meet its
obligations. He wanted to understand the impact of lenders'
decision making by hearing from them.
Co-Chair Foster directed Commissioner Navarre to begin his
presentation.
^PRESENTATION: ALASKA'S ECONOMY BY DEPT. OF COMMERCE,
COMMUNITY, AND ECONOMIC DEVELOPMENT
3:10:47 PM
MIKE NAVARRE, COMMISSIONER, DEPARTMENT OF COMMERCE,
COMMUNITY, AND ECONOMIC DEVELOPMENT, indicated his
presentation was similar to a presentation he gave in the
prior year. However, there were several differences. He had
several slides and asked for questions to be held to the
end. He appreciated watching DOR's presentation and
discussion and thought it was completely relevant to his
presentation and Alaska's overall economy.
Commissioner Navarre introduced the PowerPoint
presentation: "Alaska's Economy - A bright future, but are
we prepared?" He thought his presentation was a perspective
that would provide opportunities for everyone on the
committee to agree with and disagree with. He looked
forward to questions and a discussion.
Commissioner Navarre began with slide 2: "Our future is
bright". He thought Alaska had incredible economic
opportunities because of the state's vast natural resources
including world class mining, fishing, tourism,
agriculture, timber, and oil and gas. However, there were
common misconceptions.
Commissioner Navarre continued to slide 3:
"Misconceptions":
"We don't need a fiscal plan because?."
1. "The status quo is ok; oil and gas will save us"
2. "Economic development will save us"
3. "Cutting government will save us"
Let's review these statements
Commissioner Navarre posed the question on slide 4: "can't
we just wait on oil and gas development or oil price
increases?" He had heard discussions from people who were
fairly well educated and versed in state and local
governments issues. He reported hearing comments from them
suggesting that oil prices would increase again, and the
state would be fine.
Commissioner Navarre advanced to slide 5 "Good news in oil
and gas":
1. Modest increases in production
North Slope oil production forecast in 2018 at
533,000 barrels/day up for the third year in a row
2. NPR-A beating expectations
Conoco beat its flow projections at CD5 within NPR-A
3. New prospects on the horizon
Conoco's Greater Moose's Tooth start-up late 2018.
ConocoPhillips at Willow, Caelus Energy at Smith
Bay, Armstrong, Repsol, Oil Search at Pikka and
Nanushu
Commissioner Navarre read slide 6: "Maybe even better good
news":
1. ANWR Potential
First ANWR lease sale could occur by 2021-2022
2. North Slope future looks bright
With more leasing in NPR-A, plus ANWR, plus new
discoveries west of Prudhoe Bay, the North Slope has
decades of production potential
3. LNG Project
The long-awaited North Slope gas line project could
add to Alaska's success stories
in the 2020s
Commissioner Navarre turned to slide 7 "Maybe even better
than good":
All of this will require billions in private
investment. When making a decision, investors look
closely at profit potential and fiscal stability.
Commissioner Navarre elaborated that they had a fiduciary
responsibility to their owners and shareholders to do their
due diligence.
Commissioner Navarre read the quote on slide 8:
"Uncertainty is the enemy of investment":
"Private Construction spending in 2017 is supposed to
be around 4 billion dollars. Using the 5 to 15 percent
estimated by Jens (2013), we would conclude that the
direct effects of policy uncertainty is costing the
state somewhere between 200 and 600 million in private
capital spending. The decline in spending due to
policy uncertainty would indicate that waiting is not
a costless option."
Mouchine Guettabi, ISER (February 2018) What do we
know to date about the Alaska recession and the fiscal
crunch?
Commissioner Navarre indicated that the quote came from a
presentation by ISER talking about the impact of policy
uncertainty, which was likely creating a cost of between
$200 million and $600 million in private capital spending.
The conclusion by ISER was that the losses due to
uncertainty were important and similar in magnitude to the
losses the economy would experience due to a tax or further
government reductions.
Commissioner Navarre discussed slide 9: "How does Alaska
compete? From an investor's perspective." He asserted that
the state had prominent investment opportunities and a
growing and diversifying economy. However, the state had an
overreliance on oil and gas revenues, an annual deficit of
$2.7 billion, multiple years of drawing down savings, and
annual political battles over the deficit and taxes. All of
the items he listed were somewhat of a disincentive to
investment.
3:15:04 PM
Commissioner Navarre moved to slide 10: "Alaska's
competition." The slide showed where Alaska's competition
existed. The slide was from a presentation by
ConocoPhillips from the previous year. It had been updated
slightly. The slide showed the fields Alaska was competing
with in the Lower 48 for investment dollars. He highlighted
the size of fields. He noted the Bakken field and the
Permian Basin field in particular. He mentioned the
Marcellus gas play on the East Coast. He highlighted the
400 trillion cubic feet of gas (TCFG) compared with
Alaska's estimate of 100 TCFG on the North Slope.
Commissioner Navarre explained slide 11 "Alaska's
competition." The slide showed the fields in the Lower 48.
He highlighted the production trends. In the Permian field
production had increased significantly to where it was
almost at 33 million barrels per day. The other fields were
mostly shale placed. It was not the same as conventional
oil. He explained that shale oil production required more
wells and a quicker decline period. However, the return on
investment remained significant. The fields indicated who
Alaska was competing with for investment dollars and why
Alaska could not count on oil price increases bailing it
out. He opined that there was too much production potential
that was growing because of investment. It was estimated
that more than $40 billion would be invested in the Permian
Basin by 2022.
Commissioner Navarre reviewed the chart on slide 12:
"Alaska's competition: U.S. Crude Oil Production: Thousand
barrels of oil per day, 2017-2013." The slide showed the
investment in the Lower 48 compared to Alaska. Alaska was
represented by the yellow line at the bottom of the chart.
He relayed that Alaska used to be the largest producer in
the US. Currently, Alaska saw flat or declining production
and had for a significant period. The U.S. was expected to
be importing oil for the foreseeable future just a few
short years prior. However, it was looking like the U.S.
would become a net oil exporter.
Commissioner Navarre discussed the bar graph on slide 13:
"Are were competitive? Production costs per barrel." He
relayed that the cost comparison differential was another
hurdle to investment in Alaska.
Commissioner Navarre continued to slide 14: ""can we rely
solely on oil and gas? Production Forecast: ANS History and
Forecast by Pool.". He conveyed that the slide showed an
investment decline in Alaska. Significant investment was
needed to slow the decline or to create an incline. The
chart also showed why Alaska was able to get by without
taxes for a long time. He pointed to the orange section
representing the Prudhoe Bay field, the largest in Alaska.
At one time, the field was the largest in the U.S. It had
significantly declined and had experienced a flattening. It
remained Alaska's largest field and was still declining. It
was also the reason why oil price increases had less
impact.
Commissioner Navarre spoke of his time in the legislature
when the price of oil went up $1 per barrel. The rule of
thumb was that for every $1 increase per barrel of oil, the
state generated additional revenues between $150 million to
$170 million. He suggested that currently the figure would
be significantly less because production was down.
Commissioner Navarre reviewed slide 15: "We don't need a
fiscal plan because":
1. "The status quo is ok; oil and gas will save us"
We have to compete with larger more accessible plays
throughout the country and world. Our fiscal
situation is a real and significant disincentive to
investment.
Commissioner Navarre advanced to slide 16: "We don't need a
fiscal plan because":
2. "Economic development will save us"
Commissioner Navarre posed the question whether economic
development, alone, was the solution. He indicated he
included slide 18 to reinforce that the next slide showed a
hypothetical scenario.
Commissioner Navarre reviewed the hypothetical scenario on
slide 20: "Economic development scenario":
1. Hypothesis: A company proposes a major investment in
the Fairbanks North Star Borough
2. Evaluation: It must be economically viable for both
the state and Fairbanks North Star Borough
3. Criteria: The project must pay its own way no
subsidies
Commissioner Navarre read slide 20: "Hypothetical new
factory in Fairbanks":
• 5,000 new jobs (1,000 jobs filled by local residents)
• 4,000 new residents, some with families
• 2,500 new students for the school district
• $1 billion capital investment
• 4,000 new housing units at an average taxable value of
$200,000 per home
3:20:18 PM
Commissioner Navarre continued to slide 21: "Fairbanks
decision: New Revenues":
• $10 million a year in borough areawide property
taxes on the new homes
• $12 million a year in borough areawide property
taxes on capital investment
TOTAL: $22 million / year
Commissioner Navarre used the current Fairbanks/NorthStar
Borough tax structure.
Commissioner Navarre turned to slide 22: " Fairbanks
decision: More expenses":
• 2,500 students would be more than an 18 percent
increase over current school district enrollment.
The state pays almost 2/3 of the school district
budget. An 18 percent-plus increase in the local
share of K-12 funding would cost the borough
about $10 million a year.
TOTAL: $10 million / year
Commissioner Navarre detailed slide 23: "Fairbanks - the
math." He concluded that, for Fairbanks, it would cost $10
million in new school funding. The borough would receive
$22 million in new revenues. The result would be that the
borough would receive a net of $12 million available for
other expenses in the community.
Commissioner Navarre drew the conclusion in slide 24 that
the borough would have new revenues to cover the costs of
new development.
Commissioner Navarre asked about the potential for new
revenues in the state on slide 25: "State - new revenues."
The state currently did not have any new revenue.
Commissioner Navarre moved to slide 26: "State - new
expenses":
• $5 million a year in higher expenses for
troopers, highways, courts, prisons, agency
operations, etc.
• $25 million a year in increased school funding
costs (18 percent gain in enrollment)
Commissioner Navarre elaborated that the increased school
funding costs were based on an increase to the formula
program required in order to pay the cost of new students.
Commissioner Navarre talked about the expenses versus new
revenues for the state on slides 27 and 28. He reported
that in the scenario, the state would incur $30 million in
additional budget expenses without any new revenues.
Commissioner Navarre presented his conclusions on slide 29:
"The math." He offered that for the Fairbanks North Star
Borough it was a positive $12 million and made good sense.
On the other hand, for the State of Alaska it was a
negative -$30 million to its budget, and it was
questionable whether this type of economic development was
beneficial.
Commissioner Navarre discussed the effects across several
Alaskan communities on slide 30: "Across communities, it's
the same." He noted that it did not matter where the
development took place. In local governments there was a
tax base that allowed them to generate more revenues than
the cost associated with economic development. It was a
positive in the communities. The state impact was negative
because there was no drawback on the economic activity that
took place.
Commissioner Navarre indicated that, although the scenario
he had presented was hypothetical, diversifying Alaska's
economy was not.
Commissioner Navarre discussed state revenues on slide 32:
"FY 18 state revenues":
$1.801 billion
Unrestricted petroleum revenue
$536 million
Non-petroleum unrestricted revenue (e.g. fishing,
mining, motor fuel, alcohol, tobacco and
marijuana taxes, corporate income taxes)
Commissioner Navarre reported that the chart on slide 33
showed the oil and gas gross domestic product (GDP), which
had grown over time but was volatile. He highlighted that
the numbers had trended downward over the prior couple of
years because it was price sensitive.
Commissioner Navarre continued to slide 34: "Other private
industries growing steadily: Nominal GDP of All Other (non-
petroleum) Private Industries, 1997-2015." He pointed out
that the gross domestic product (GDP) had grown from $15.1
billion in 1997 to $34.1 billion in 2015, which was a 125
percent increase in growth in other industries in 18 years.
Commissioner Navarre reviewed the graph on slide 35 which
showed a disconnect. He pointed to the GDP for oil and gas
in Alaska [shown in red] and the UGF petroleum revenue
associated with the GDP in the development of oil and gas
[shown in grey]. The blue line showed other UGF revenue
added to the line, which barely moved the line upward. He
pointed to the GDP of all other private industries from
1975 to 2015 [shown in black]. He emphasized that the blue
line and the greenish [grey] line were almost equivalent
which meant that the economy was diversified, the state did
not have much oil and gas development. As the state saw oil
and gas development increase, the state eliminated most
taxes in the state. The disconnect was due to the state's
economy which had diversified, but revenues had not.
Commissioner Navarre advanced to slide 36: "We don't need a
fiscal plan because":
"Economic development will save us"
The state needs to recognize the costs associated
with economic development and determine how we're
going to pay for them. Our economy is developing
and diversifying, our revenues are not.
Commissioner Navarre added that economic development
without a source to pay for the associated costs would
create additional funding challenges.
Commissioner Navarre moved to slide 37: "We don't need a
fiscal plan because":
"Cutting government will save us."
Commissioner Navarre posed the question whether the state
could simply cut expenses more. He thought it was possible.
He knew that for every year he was in the legislature and
every year he had observed the legislature, there had
always been discussion about cutting the budget further. He
thought cuts were much easier said than done.
3:25:10 PM
Commissioner Navarre discussed the impact of cuts on
services referring to the bar graph on slide 39. He noted
of the state's $4.5 billion budget, about $2.4 billion was
spent in 2 areas: K-12 formula education and Medicaid and
other formula programs in health and social services. He
reinforced that the money was not spent on bureaucrats. In
the area of K-12 education, the formula paid for teachers
in the local schools - people who volunteered in the
communities and coached little league. In the area of
health and social services, the Medicaid formula program
paid for providers, hospitals, and created significant jobs
in Alaska's communities. He opined that the areas he
discussed could be cut, but there would be significant
impacts.
Commissioner Navarre advanced to slide 40: "State funds
matter locally: Municipalities and schools depend on state
help":
Fairbanks North Star Borough and School District FY 17
• Municipal community assistance
$3 million
• State reimbursement of school bond debt
$9.6 million
• State assistance for retirement liability
$13.6 million
• Foundation formula funding K-12 schools
$116.7 million
• Pupil transportation reimbursement
$12.3 million
$155 million state funds for Fairbanks Borough
Commissioner Navarre explained that slide 41 showed state
funds were provided to communities in the amount of $983
million. The slide only reflected 5 communities. The impact
was much greater when funds were allocated to all
communities.
Commissioner Navarre read slide 42: "We don't need a fiscal
plan because":
3. "Cutting government will save us"
Cuts have real impacts that must be weighed. Cutting
government means cutting services, cutting local
funding, and real economic impacts.
Commissioner Navarre commented that it was not that cuts
could not be applied, but it was important to recognize the
impact of those cuts.
Commissioner Navarre wondered if there was a perfect
solution on slide 43. He had spent a significant time
talking to economists, legislators, local government
officials, and business men and women. He had researched
data and brain-stormed with a multitude of diverse
interests to develop the perfect solution. He turned to
slide 44, a blank page. He suggested there was not a
solution. He thought the legislature would be debating
these issues for several years. He recalled talking about
them when he was in the legislature. He believed the
legislature would be talking about taxes, in terms of which
ones and at what level. He mentioned oil taxes, income
taxes, property taxes, and sales taxes. The legislature
would also be discussing spending decisions; how much to
spend on education, health and social services, public
safety, capital. and infrastructure. The discussion would
continue about where and how to promote economic
development and how to pay for the associated costs.
Commissioner Navarre reviewed the options on slide 45: The
options":
Budget Cuts?
• Easier said than done
• Priorities
• Philosophical differences
• Rhetoric
• Negative economic impacts
Taxes?
• Easier said than done
• Takes time
• Philosophical differences
• Rhetoric
• Negative economic impacts
Permanent Fund Earnings?
• Public Perceptions
• Political consequences
• Impacts to Permanent Fund growth
• Impacts to PFD
• Negative economic impacts
Commissioner Navarre wanted to end on a high note. He
thought Alaska had tremendous opportunities. The state had
vast natural resources and was still very young. If the
people of Alaska wanted to take advantage of the
opportunities in mining, timber, fishing, and oil and gas,
the state had to fix its economic foundation to be
positioned to attract investment to Alaska.
3:29:24 PM
Commissioner Navarre turned back to the earlier disconnect
slide. He thought members should be particularly concerned
with the contents of the slide. He suggested that if the
state was going to expect that oil and gas or other
resources were going to pay the entire cost of all aspects
of economic activity in the state, it would be a
significant and ongoing disincentive to investment in
Alaska. He opined that decisions that were being made
currently about where to invest in Alaska, especially in
oil and gas, would lead to whether the state would see an
incline in production. He reiterated that everyone should
be concerned. He suggested that if Alaska did not fix its
economic foundation, it would struggle along in a recession
and perhaps go into a depression. The state had been
spending down its reserves, which he thought would be
limited in a time of depression where drawing from them
might be necessary. He advocated for balance, spreading the
tax burden so the state could create incentives for
investment in Alaska.
Representative Grenn thanked the commissioner for his
presentation. He noted Commissioner Navarre had not
mentioned tourism. He referred to slides 25 and 26 and the
commissioner's comments about economic development. He
thought the point the commissioner made was about the lack
of revenues to the state. On slide 26 there was a list of
all of the expenses the state would incur. He thought the
expenses had to do mostly with the state's statutory and
constitutional obligations. He asked if he was correct.
Commissioner Navarre explained that the information was
extrapolated from the amount of money being spent in the
categories listed based on a population increase associated
with the development scenario.
Representative Grenn suggested that the State of Alaska was
unique in some ways in terms of what the state paid for as
opposed to other states that might have a county expense or
other obligations. Commissioner Navarre responded
affirmatively. He remarked that there were many areas of
the state that were not incorporated, other areas that were
incorporated based on a mandatory borough act in 1964, and
others that had incorporated as a tax base was developed or
identified in communities.
Representative Thompson had attended many meetings in
Fairbanks. He did not agree with the information on
Commissioner Navarre's slide. Fairbanks did not have a new
factory coming online, it had the military coming. He
disagreed with the commissioner's numbers. They were very
different from the numbers economists had worked on to
determine how many new students to account for and how many
new housing units would have to be built (approximately 800
was estimated). He did not like the commissioner's
implications about not wanting the military in Fairbanks
because it would cost the state money. He provided some
other possible examples. He disagreed with Commissioner
Navarre's report and thought he had attempted to skew it
one direction or another. He did not appreciate it.
Commissioner Navarre had wanted to stimulate a discussion.
The fact was that Representative Thompson was correct that
the military and the F-35s in Fairbanks would be an
excellent opportunity for investment in Alaska. However, in
looking at the Tiger Team report regarding the cost of
education and the increase in new students (1,800-2,000),
the source identified for funding was the state foundation
formula.
Commissioner Navarre continued that while local government
would be able to pay their share and local government would
receive payments in lieu of taxes (PILT) and other monies
that were shared from the federal government, the state
would not because there was the recognition that the state
had a taxing ability in order to collect the cost
associated with economic development to pay for associated
services required.
Commissioner Navarre concluded that because the funding
source was identified as the state foundation formula,
there would likely be a cost of $20 million to the state
budget with no source of revenues associated with the cost.
It was not to say that Alaska did not support the military.
He supported the military along with the governor and
Representative Thompson. He believed everyone in Alaska
supported the military. The fact of the matter was that
what the people of Alaska expected that oil and gas in a
declining production scenario would pay for the cost
associated with the diversification of the rest of the
economy. It was a premise that was not sustainable and
would be a disincentive to investment. He reiterated that
he used the slide to show that Alaska's economy had been
diversifying, but the state's revenue sources had not.
3:35:44 PM
Representative Pruitt agreed that there was a fiscal gap
and the legislature needed to come up with a solution. He
commented that the debate had been about how to handle the
deficit. He believed there was no way to get around using
some of the state's earnings reserve to fill the budget
gap. He remembered in Commissioner Navarre's presentation
from the prior year there had been more focus on taxes. He
wondered whether the fact that there were several people
inside Alaska without jobs was contemplated when the
commissioner put his presentation together. He spoke of the
unemployed requiring additional state services and driving
up state costs. He suggested that one of the best ways to
decrease the cost of government was to allow private sector
investment, as it would lead to fewer people needing
Medicaid, unemployment, or other state services. He thought
that working towards more jobs for Alaskans and using a
portion of the earnings reserve account would get the state
within striking distance of a manageable budget gap. He
commented on the knee-jerk response of having to implement
taxes. He reasoned that using a portion of the earnings
reserve needed to be discussed first. He appreciated the
commissioner's points but did not think the focus should be
on new investment and the drag it could have on the state.
He emphasized that the state had a resource to draw on to
address the state's fiscal gap.
3:39:22 PM
Commissioner Navarre agreed with Representative Pruitt. The
largest state asset was the Permanent Fund. He embraced the
idea that there was no economic plan that currently worked
without using earnings from the Permanent Fund. He had
written and talked about the use of the earnings reserve 3
years prior and wrote about it 20 years previously when he
served in the legislature. He believed that the legislature
needed to recognize that the Permanent Fund was a growing
asset and was currently the state's largest income source.
His point was that economic development in Alaska could not
continue with oil production decline and diversification of
the economy, even with using the earnings from the
Permanent Fund. He opined that there would still be a gap.
He offered that without spreading the burden, the
investment the state was seeking would be put at risk. He
explained that there would be a disincentive for investment
because there would be a growing gap.
Commissioner Navarre also agreed with Representative Pruitt
about the Medicaid program. He surmised that a contracting
economy and an increase in unemployment had driven up
certain areas of the budget. If the economy improved, the
state could begin to see an improvement in those costs.
However, he thought the state was a long way off from
recovering.
Representative Pruitt did not believe oil could save the
state from its current gap. He thought the decline in
production within 7 or 8 years would be a difference of
about 20,000 barrels per day, a dramatic change from the
production forecasts from previous years of 300,000 barrels
per day. He opined, that the sources book before the
committee confirmed that good tax policy and a good
business climate could help to maintain the oil production
level. Previously in conversation, oil production was
nearing its end. Even though the state could never return
to the days of 2,000,000 barrels per day, he suggested that
maintaining or increasing oil production was possible. It
had the potential to fill the fiscal gap along with
managing government spending. He noted a presentation from
a special session in the prior year that suggested that
controlling government growth coupled with increased
revenues did not require additional taxes. He did not want
to write off oil and gas. Instead, he wanted good tax
policy in place, which did not change every couple of
years. He also wanted to continue to invest in commerce,
put people back to work, and reduce people's reliance on
state government. He did not think the state needed to
resort to dire consequences regarding the fundamental
foundation of the state's economy.
3:44:12 PM
Commissioner Navarre thought oil and gas had a bright
future in Alaska. However, based on the slides from the
Lower 48 fields, additional investments were needed. He
agreed that the state needed a stable tax policy. The state
could not have a legitimate debate about other taxes,
increased oil taxes, or budget cuts without talking about
production decline. He thought the state peaked in
production in 1988. He did not feel Alaska would ever reach
that peak number again. If the state peaked to previous
levels, it would generate significant expansion in Alaska
requiring additional services. He emphasized that the other
areas where there had been expansion in the state's economy
were being subsidized. It was okay if the state wanted to
utilize the earnings of the Permanent Fund or by resource
industries. It was also okay to look at the way the state
did things when he was a kid (he recalled paying income tax
in Alaska), to spread out the burden. He thought people
needed to change their outlook.
Representative Guttenberg noted that term "The Alaska
Disconnect" was not new. He remembered paying income tax.
He made clear he would love to diversify Alaska's economy
without an income tax. He had heard the dialogue about the
damage the state did to the economy and to oil and gas
development because of the payback period for tax credits.
However, Commissioner Navarre's presentation talked more
about a stable economy and not going through swings. He
argued that the conversation should not only be around oil
and gas tax credits, but on the economy as a whole. He
believed without a sensible fiscal plan, people would
continue to accuse the legislature of not having its game
together. He mentioned a recent article he had read about
the expected trillion-dollar investment in a new arctic
development. It was his understanding that the state was
not in a position to take advantage of it. He asked the
commissioner about the stability of Alaska's economy and
future investment.
Commissioner Navarre responded that there were several
different perspectives on the state's economic outlook. He
commented that Alaska was poised to see a significant
amount of investment. He speculated that when Alaska saw
construction activity and there was economic investment
unrelated to oil and gas, there were also resulting costs
to the state. He mentioned seeing various budget plans,
most of which underestimated the costs of capital
investment (infrastructure) in Alaska. He provided a couple
of examples including building year-round roads. The state
owned incredible assets requiring further investment. He
opined that the state did not have nearly enough to invest
where it should in infrastructure. Deferred costs would not
go away but would manifest into significant increases in
the future.
Co-Chair Foster reviewed the agenda for the following day.
He reported that there would be 3 bills before the
committee and public testimony would be heard.
Co-Chair Seaton commented that the committee schedule was
uncertain due to the floor session taking up the operating
budget on the following day. He advised members and the
public to check for updates on the committee schedule.
ADJOURNMENT
3:50:57 PM
The meeting was adjourned at 3:50 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AK Economy Presentation M Navarre H Fin 3.19.18.pdf |
HFIN 3/19/2018 1:30:00 PM |
HFIN AK Economy Presentation |
| Spring 2018 Revenue Forecast Presentation_03162018 House.pdf |
HFIN 3/19/2018 1:30:00 PM |
HFIN HFIN DOR Spring Revenue Forecast Presentation |
| Analyst Brent Price Forecast Backup_V2.pdf |
HFIN 3/19/2018 1:30:00 PM |
DOR Spring Revenue Forecast Response to HFIN |
| DOR Response to House Finance_20180330.pdf |
HFIN 3/19/2018 1:30:00 PM |
|
| Employment Forecast for 2018.pdf |
HFIN 3/19/2018 1:30:00 PM |
DOR Spring Revenue Forecast Response to HFIN |
| The North Slope Oil Patch.pdf |
HFIN 3/19/2018 1:30:00 PM |
DOR Spring Revenue Forecast Response to HFIN |