Legislature(2019 - 2020)Anch LIO Lg Conf Rm
10/02/2020 10:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Supreme Court Decision on Oil & Gas Tax Credit Bonding: Department of Law | |
| Presentation: Revenue Projections: Department of Revenue | |
| Presentation: Fy 21 and Fy 22 Fiscal Outlook: Legislative Finance Division | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
INTERIM
October 2, 2020
10:06 a.m.
[Note: meeting took place in the Anchorage LIO and was
recorded from Juneau.]
10:06:17 AM
CALL TO ORDER
Co-Chair Johnston called the House Finance Committee
meeting to order at 10:06 a.m.
MEMBERS PRESENT
Representative Jennifer Johnston, Co-Chair
Representative Dan Ortiz, Vice-Chair (Via Teleconference)
Representative Ben Carpenter (Via Teleconference)
VACANT
Representative Andy Josephson
Representative Bart LeBon (Via Teleconference)
Representative Kelly Merrick
Representative Cathy Tilton (Via Teleconference)
Representative Adam Wool (Via Teleconference)
MEMBERS ABSENT
Representative Neal Foster, Co-Chair
Representative Colleen Sullivan-Leonard
PRESENT VIA TELECONFERENCE
Bill Milks, Assistant Attorney General, Department of Law;
Lucinda Mahoney, Commissioner, Department of Revenue; Dan
Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue; Deven Mitchell, Executive
Director, Alaska Municipal Bond Bank Authority, Department
of Revenue; Alexei Painter, Director, Legislative Finance
Division; Representative Bryce Edgmon; Representative
Harriet Drummond; Senator Elvi Gray-Jackson; Representative
Sharon Jackson; Representative Delena Johnson;
Representative Geran Tarr.
SUMMARY
PRESENTATION: SUPREME COURT DECISION ON OIL & GAS TAX
CREDIT BONDING: DEPARTMENT OF LAW
PRESENTATION: REVENUE PROJECTIONS: DEPARTMENT OF REVENUE
PRESENTATION: FY 21 AND FY 22 FISCAL OUTLOOK: LEGISLATIVE
FINANCE DIVISION
Co-Chair Johnston recognized House Speaker Bryce Edgmon and
Representative Harriet Drummond online. She reviewed the
meeting agenda.
^PRESENTATION: SUPREME COURT DECISION ON OIL & GAS TAX
CREDIT BONDING: DEPARTMENT OF LAW
10:08:05 AM
Co-Chair Johnston recognized the presence of Senator Elvi
Gray-Jackson, Representative Sharon Jackson, and
Representative Geran Tarr on the line.
10:08:31 AM
BILL MILKS, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW
(via teleconference), introduced himself. He indicated he
would provide a short update on the Alaska Supreme Court
decision Forrer v. State of Alaska, issued on September 4,
2020. He explained that the case was in response to HB 331,
legislation introduced by former Governor Bill Walker and
passed by the legislature in 2018. He detailed that the
legislation sought to address outstanding oil and gas tax
credits that had accumulated. The legislation proposed a
financing structure where a state corporation would be
created, the corporation would issue bonds, and the
proceeds would be used to pay off outstanding oil and gas
tax credits. He added that the debt service for the bonds
would be subject to legislative appropriation. He
elaborated that the debt service would be paid by
legislative appropriation, but there was no binding
requirement for the legislature to appropriate the funds.
Mr. Milks provided more general background information on
the issue. He detailed that the legislation concerned the
oil and gas tax credit program that began in the first part
of the 2000s. He elaborated that in 2003 and 2006 a program
had been established that allowed tax credits to be used to
reduce production tax. Alternatively, a producer could sell
the credits to another producer to allow the purchaser to
reduce its tax liability or the credits could be submitted
to the Department of Revenue (DOR) for purchase of the tax
credits, subject to legislative appropriation. He explained
that it had all been part of a concept to try to encourage
production and spur job growth.
Mr. Milks relayed that when oil prices had plunged in 2014,
the appropriations to pay for the tax credits had been
reduced for the first time in a veto by former Governor
Walker. The legislature had eventually phased out the
program in 2017, but there had still been outstanding oil
and gas tax credits. When the governor had proposed HB 331
in 2018 and the legislature had passed the legislation,
there had been outstanding tax credits of approximately
$800 million with around $200 million more that could be
requested. The bill included a process to try to refinance
the tax credits through the issuance of bonds with the debt
service to be paid out over a decade.
Mr. Milks reported that there had quickly been a legal
challenge to the legislation by Mr. Forrer alleging that
the specific type of debt was not permitted under Alaska's
constitution. The superior court had found the bonds were
constitutional and had dismissed the lawsuit. The court's
decision was based on the fact that the full faith and
credit of the state were not being pledged. He explained
that an appeal had been filed and the Alaska Supreme Court
reversed the superior court decision on September 4. The
supreme court reached the conclusion that the specific
bonds violated the Alaska Constitution's provision on
contracting state debt.
10:13:08 AM
Mr. Milks provided a couple of take-a-ways on the court's
decision. He explained that the court had been faced with a
kind of bond where a corporation would issue the bonds, but
the corporation had no independent revenues to pay the debt
service. The debt service would be subject to legislative
appropriation. He informed the committee that the court's
decision marked a guiding line on the ability to issue
bonds. The decision did not affect the state's ability,
which was clear under the Alaska Constitution, to issue
general obligation bonds. He explained that general
obligation bonds were first approved by the legislature,
followed by voters for purposes of things like capital
improvements and veterans' loans. Additionally, the court's
decision did not impact the ability of the state or state
entities to issue revenue bonds with a dedicated revenue
stream. He summarized that the court had ruled that bonds
could not be issued for the payment of the oil and gas tax
credits under the HB 331 structure.
Mr. Milks reported that the Department of Law (DOL) had
filed a limited petition to the court for a rehearing
because it was seeking the court to clarify that the case
was about a specific type of bond that had no revenue
stream and required legislative appropriation. The state
sought clarification that the court ruling did not apply to
revenue bonds with dedicated revenue streams. He detailed
that the petition had been filed on September 28 and the
department was waiting for the court clarification.
10:16:00 AM
Representative LeBon broached the topic of moving forward.
He asked whether DOL had looked into a repayment method
that may be tied to an escrow approach. For example, he
asked whether the legislature should authorize a draw from
the Permanent Fund Earnings Reserve Account (ERA) and set
aside for future bond debt repayments an amount that
allowed for a ten-year repayment. He explained that the
method would mean the legislature would be guaranteeing
bond debt repayment from a funding source outside the
General Fund. He elaborated that it would mean setting
aside one-tenth of 1 percent of the value of the $65
billion Permanent Fund for future commitments. He detailed
that about $750 million would then be available and would
reassure bond holders there was a commitment to repay the
bonds.
Representative LeBon explained it would not create a
problem as far as a general obligation - it would be a
revenue stream connected to the ERA for example. He asked
if it would be a violation of SB 26 [Permanent Fund
legislation passed in 2018] and the 5 percent draw [from
the ERA]. He argued that the bond repayment would not
necessarily be funded from the ERA. He expounded that it
would be a commitment that if the legislature chose not to
use general funding in the future, it could fall back on a
draw from the ERA. He asked if Mr. Milks had an opinion on
the approach.
Mr. Milks responded that he could not offer an opinion at
present. He explained that due to the complex financing
structure, he would have to confer with DOR and pencil it
out.
Representative LeBon thanked Mr. Milks for his reply and
noted he had not expected there to be an answer. He
remarked that the state was currently in technical default.
He asked how the state's credit rating would be impacted if
it failed to pay its tax credit obligations.
Co-Chair Johnston suggested that the question might be more
appropriate for the upcoming presenters.
Representative LeBon responded that he respected the
notion. He wondered whether DOL had an opinion.
Mr. Milks indicated DOL did not have an opinion. He
believed the question would be better addressed to DOR.
Co-Chair Johnston thanked Mr. Milks for his testimony.
^PRESENTATION: REVENUE PROJECTIONS: DEPARTMENT OF REVENUE
10:20:19 AM
LUCINDA MAHONEY, COMMISSIONER, DEPARTMENT OF REVENUE (via
teleconference), introduced the combined PowerPoint
presentation: "Update on Tax Credits and Revenue
Projections" (copy on file). She outlined the department's
intent to provide a fiscal update and a follow up to Mr.
Milks' discussion of the tax credit certificates. The
presentation included historical purchase amounts and an
update on the remaining tax credit certificate amounts and
the statutory payoff rate. She referenced questions asked
by the committee earlier in the meeting about how the state
would move forward with the debt. She spoke to the
importance of understanding the information because it
would drive policy discussions and conversations about
resolutions for the future. Additionally, the department
would discuss its current revenue outlook that would
include some of the changes DOR had made to its 2020 spring
forecast.
Commissioner Mahoney relayed that the presentation included
a few economic indicators regarding the overall fiscal
health of the state's economy and would use it to launch
into a discussion on the 2021 and 2022 revenue outlook.
Lastly, the presenters would provide comments on the
uncertainties of the state's revenue stream. She relayed
that DOR thought about the aforementioned topics on a daily
basis and the areas that would drive policy decisions in
all three levels of government in the near future.
Specifically, the uncertainty around the path of the virus
and how it impacted the global and local economies would be
critical to the discussion.
Commissioner Mahoney highlighted the global economy's
impact on the price of oil and Alaska's revenues and
investment portfolios. She shared that due to supply
shortages on the West Coast, inventories in Valdez had been
filling up and DOR had been notified the previous day that
Alyeska would begin a proration of 25 percent of production
beginning Saturday at noon through October 6. She stated
the situation illustrated how things taking place at a
global level were significantly impacting Alaska.
Additionally, the department would speak about mitigating
investment volatility risk. She stated that the percent of
market value (POMV) was the state's largest revenue source.
The department would share how it managed through the
largest investment portfolio, the Permanent Fund.
10:23:47 AM
Commissioner Mahoney continued to review an outline of the
presentation. The department would also discuss the
preliminary analytics it performed to assess the potential
revenue impacts if Ballot Measure 1 were to pass [in the
upcoming November general election]. She emphasized that
the data represented estimates. The ultimate interpretation
of the ballot measure would only be determined post-
enactment. The goal was to provide the public and
legislature with estimates and information in order to make
informed decisions. The discussion during the current
meeting would be based on the frequently asked questions
from the public hearing process held the previous week.
10:25:01 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE (via teleconference),
shared that he would begin with a couple of slides on tax
credits followed by the revenue outlook and areas of
uncertainty in the forecast. He began with slide 2 titled
"Tax Credit Certificates Historical Purchases." The slide
showed a graph with a history of the tax credit certificate
purchases made each year since the purchases began in
FY 07. Since FY 07, $3.65 billion had been spent by the
state on credit certificate purchases. Prior to FY 16, the
full amount of eligible tax credits had been purchased each
year. In FY 16 and FY 17, changes to the credit laws set in
place sunset provisions for new credits. He reported that
the ability to earn new credits had been phased out. He
elaborated that as state budget issues intensified, FY 16
was the first year that less than the full outstanding
amount was purchased; it had been the case every year since
FY 16. He relayed that FY 20 was the first year there was
no appropriation for the purchase of tax credit
certificates.
10:26:31 AM
Mr. Stickel moved to slide 3 titled "Tax Credit
Certificates for Purchase Status." The slide contained a
chart projecting how the outstanding tax credits would be
paid off over time if the statutory appropriation were made
each year beginning in FY 22. He noted the information was
based on the 2020 spring forecast. He explained that DOR
calculated the statutory appropriation based on either 10
or 15 percent of estimated production tax levied before
subtracting any tax credits. He expounded that when the oil
price was less than $60 per barrel, which was the case for
the next several years, the multiplier was 15 percent of
the production tax before credit amount. The department
estimated there was $738 million in outstanding credit
certificates at the end of FY 21 and $5 million more
becoming available for purchase in FY 22, for a total
balance of $743 million. The chart assumed that no
statutory appropriation would be made for FY 21, which
would have been $36 million per the spring forecast. The
chart assumed a $40 million statutory appropriation in
FY 22. The appropriation was projected to increase over
time based on improving oil prices. Under the scenario
presented on the slide, most of the credits would be paid
off by FY 32, with the last $4 million purchased in FY 33.
10:28:08 AM
Representative Josephson referred to Mr. Stickel's
statement that the state would have paid $36 million in
FY 21. He asked for the bond amortization rate had the
court had ruled in a different direction. He was trying to
determine the difference between a successful and an
unsuccessful HB 331.
Mr. Stickel replied that he would have to follow up with
the information.
10:29:16 AM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE (via teleconference),
answered that he did not have the figures on hand.
Representative Josephson considered the situation solely
through the lens of the state's treasury. He asked if it
was possibly a good thing that HB 331 had been rejected by
the Alaska Supreme Court.
Commissioner Mahoney answered that she could not speculate.
The department was focused on trying to evaluate the impact
of the ruling and manage its way through.
Co-Chair Johnston indicated Representative Delena Johnson
had joined the meeting.
10:30:26 AM
Representative Wool looked at the chart on slide 2 showing
the state purchase of tax credit certificates by fiscal
year. He observed that the laws had been changed to
eliminate cashable credits in FY 17, but there were still
purchases in FY 17 through FY 19. He asked for clarity on
the word "purchase." He knew there had been cashable
credits the state had paid out to oil companies. He thought
the law had been changed so that going forward the credits
were simply a reduction in taxes received and not
necessarily purchases. He remarked that it appeared the
state purchased zero tax credits purchased in FY 20. He
asked if the state was continuing to incur tax liability
going forward. Alternatively, he wondered if new liability
stopped when the legislature passed a bill eliminating
cashable credits.
Mr. Stickel responded that DOR was using the term "credits
for state purchase," while "cashable credits" was a more
colloquial term. The terms both referred to the tax credits
available for the state to write a check to a company to
purchase. He detailed there had been legislation in 2016
and 2017 that made changes to the tax credit program; the
bills implemented a gradual sunset on the ability to earn
new credits for state purchase. He elaborated that the
provisions had taken effect over several years, meaning the
state had been incurring some additional credit obligations
over the past several years. The ability to earn new
credits had been entirely phased out. The department's
spring forecast assumed there would be $5 million in
additional credits that would become available for purchase
in FY 22. At that point, there would be no additional
credits available for purchase. The $743 million balance
the department was forecasting to be available in FY 22
should be the final balance.
10:33:35 AM
Representative Wool referred to the repayment schedule
beginning in 2022 and ramping up to 2032 based on oil
prices and a 15 percent statutory minimum (slide 3). He
asked how the projection compared to a scenario where
HB 331 had not been overturned. He knew a deal had been
struck with oil companies where they would take a reduced
payment. He wondered if the state's total liability would
be about the same due to the fees on the bond. He wondered
if the overall cost in both scenarios was about the same
for the state.
Mr. Stickel answered that the net cost to the state would
be the same or less. He deferred to a colleague for more
detail.
Mr. Mitchell confirmed that there was an impact on the deal
that may have been struck in the past as the price of oil
fluctuated in the future. He explained that if the price of
oil went up, the expected payments under the formula went
up in a similar fashion and the deal the state struck would
be more beneficial to the state than expected. Conversely,
if the price of oil went down, the deal would be worse for
the state than expected. The expectation under the
legislation [HB 331] was that bonds would be sold at a
discount to the expected payments under the projections of
the day and it would be necessary to wait to see what the
future held in terms of the actual results.
Representative LeBon was trying to determine a path
forward. He highlighted the existing situation where the
state could not sell bonds to immediately pay back the
total obligation to the tax credit holders and the
potential for payments to be stretched out over a ten-year
basis (as shown on slide 3). He asked how to reassure tax
credit holders and banks that repayment would happen, that
the state had committed to repay, and that it had set
aside, through an escrow method on the ERA, the money to
pay the installments should there not be the will of the
legislature to fund the repayment from the General Fund at
some time in the future. He asked if doing so would be a
sign of good faith toward the credit holders and banks to
indicate that they could count on being paid. He did not
know if the concept made complete sense. He explained that
he was trying to find a path forward.
Commissioner Mahoney responded that the department was
evaluating all of the possible options to determine a step
forward. She assured the committee that the issue was a top
priority. She invited Mr. Mitchell to comment on the
potential view of the investors, banks, and credit ratings.
Mr. Mitchell informed the committee that the nonpayment of
the tax credits in the current fiscal year did not have an
immediate reaction from the credit rating agencies. The
commitment that the state had made was salient to fill.
There were other examples of similar experience in recent
history that were cumulatively a death by a thousand cuts
that reflected negatively on a state's ability to stand
behind its commitments. He shared that the lobby wall of
the ratings agency Moody's displayed the saying "man's
faith in fellow man." He relayed that the saying captured
the basis of debt - the belief that people would stand
behind their word. He explained that when that belief was
lost, it was reflected in the credit rating.
10:39:54 AM
Representative LeBon asked whether the bond could be sold
to pay tax credits immediately if the legislature was able
to attach repayment to the ERA in the manner he had
previously described. He explained that the revenue stream
would be committed through the ERA and should the
legislature fail to meet the annual debt service through
the General Fund it could fall back on state savings. He
asked if the approach would be valid.
Mr. Mitchell replied that he believed there would be a
number of structuring issues that would be difficult to
overcome for purposes of issuing a bond under the scenario
presented by Representative LeBon. He explained there were
prohibitions on the dedication of state revenue. He
contemplated the scenario where the legislature was looking
at appropriating the entire amount due under the tax credit
program to an escrow that would be irrevocably pledged to
the repayment of the obligations over time. He relayed that
it was a complex question that would require thought about
the limitations resulting from the recent supreme court
decision and how something might be structured. He would
not characterize the idea as impossible but believed there
would be some challenges.
10:41:39 AM
Representative LeBon believed the situation may have
reached the point where it was necessary to think outside
the box if the state was in a position where paying the tax
credits was in question. He stressed that default by the
state would send a very bad message to the capital markets
and future bond issues by the state and municipalities. He
underscored that the state did not want to have to damage
control that message.
Representative Josephson referred to slide 3. He believed
Mr. Stickel had stated that paying the credits at the
statutory level would have required a payment of $36
million [in FY 21]. He knew that HB 331 had backloaded the
main obligation to paydown the bonds. He recognized that
the conversations were vital and important, yet when
considering the $2.3 billion deficit with a full dividend,
the amount appeared much smaller.
Mr. Stickel responded that the $36 million was the
statutory appropriation for FY 21 under the spring revenue
forecast. He referenced the current payoff schedule on
slide 3 and highlighted that the spring forecast had a
lower price point and production tax revenue calculation
than the previous forecast. He clarified that the payoff
schedule under the spring forecast included a smaller
payment and a longer time horizon.
10:44:34 AM
Mr. Stickel addressed the revenue outlook on slide 4. The
slide included world changes that had occurred since the
spring forecast. He detailed that the spring forecast had
been released in early April during a time of tremendous
and unprecedented uncertainty in the world. He reported
that despite all of the change, the outlook for
unrestricted revenue had not changed significantly. He
shared that investment revenue was currently the most
important revenue source - markets had recovered faster
than expected from the March lows. On the federal revenue
side, the CARES Act had been passed right before the spring
forecast had been released and was not included in the
forecast. He elaborated that between the state,
municipalities, and other entities, there had been about
$5.6 billion in federal aid to Alaska. A significant
portion of the federal funding would be state revenue to be
reflected in FY 20 and FY 21. He noted that the federal
funding was considered restricted revenue in the forecast.
Mr. Stickel continued to address the revenue outlook on
slide 4. He discussed that oil prices had plunged in April,
immediately after DOR had released its forecast. He
reported that oil prices had gone negative for one day on
April 20, but they had headed back up and were now slightly
above the spring forecast level. Oil production was
curtailed in April through June, first due to Trans-Alaska
Pipeline System (TAPS) prorations caused by concerns about
oil storage capacity and then due to low prices where
ConocoPhillips had chosen to reduce production at Kuparuk
and Alpine because of unacceptable pricing levels. The
curtailments had ended, but DOR was still waiting for
drilling to come back at Prudhoe and Kuparuk in particular.
He reported that it had been a rough year for tourism and
many other industries, which was largely baked into the
spring revenue forecast. He noted that the federal CARES
Act had made some changes to corporate income tax that
would reduce revenue slightly over the next couple of
years.
10:46:55 AM
Mr. Stickel turned to slide 5: "Fall Forecast Process." The
slide provided a high level overview of the fall forecast
process, which was just getting underway. He noted that
FY 20 data was still preliminary and would be finalized
later in the month. The department was in the process of
updating its forecast models and assumptions and it would
be working through them over the next couple of months. The
fall forecast and Revenue Sources Book would be released in
early to mid-December, which would be the next official
update to the revenue forecast and would form the basis for
the governor's budget proposal.
Mr. Stickel reviewed the key economic indicators for Alaska
on slide 6. He noted that while DOR focused substantially
on state revenue, it was important to look at how the
overall state economy was doing. He reported that state
gross domestic product (GDP) was down slightly in the first
quarter after gains in seven straight quarters. The second
quarter GDP had been released earlier in the day and was
down 33.8 percent for Alaska, which was slightly more than
the national decline of 31.4 percent. The declines were at
a record level and COVID-19 had a major impact on the goods
and services produced in the national economy and Alaska.
Mr. Stickel shared that slide 6 included the unemployment
rate because it was a widely followed economic indicator;
however, he noted the figure was slightly misleading at
present. He explained that the unemployment rate
calculation was an estimate of the share of people in the
labor force who are out of work and actively looking for
work. He expounded that some COVID related issues had
complicated the unemployment rate calculation, including
the enhanced unemployment benefits as well as difficulty
conducting the survey that helped to inform the
calculation. He informed the committee that currently the
best read on the unemployment situation likely came from
looking at jobs numbers and claims for unemployment
insurance benefits. He pointed out that unemployment
insurance claims were still nearly 7 times higher than one
year earlier and despite the unemployment rate, employment
in the state was actually down by 37,000 people or 10.5
percent compared to one year earlier.
Mr. Stickel reported that wages and salaries were down 6
percent from one year earlier and showed an impact of
COVID-19. He relayed that bankruptcies and foreclosures
were less than the prior year, likely due to various
government programs providing temporary aid and limiting
foreclosures. He noted that COVID's full impact had not yet
been seen in the bankruptcy and foreclosure category. He
concluded slide 6 by reporting that housing starts were
down slightly from 2019. He remarked that a big question
was what the last three indicators looked like throughout
the fall with federal support and limitations on
foreclosures and bankruptcies tapering off. He explained
that without further federal stimulus, it was possible the
indicators could begin to look very bad and Alaskans could
be looking to the state for help.
10:50:14 AM
Mr. Stickel discussed the current revenue outlook and oil
price forecast update on slide 7. He detailed that the next
set of slides showed how FY 20 ended up relative to the
spring forecast and an updated view on FY 21 and 22. He
noted that two years of history had been included for
comparative purposes. The FY 20 average Alaska North Slope
(ANS) oil price was $52.12, which was slightly ahead of the
spring forecast of $51.55. Oil prices had plunged in April
and on April 20, ANS prices were assessed at a negative
value for the first time ever. Slide 7 showed a revised oil
price outlook for FY 21 and FY 22 based on futures market
prices from the end of the previous week. The projected
FY 21 price was $42.97 compared to the $37 spring forecast.
The projected FY 22 price was $45.91 compared to the $41
spring forecast. He reported that overall, the department
was seeing some possible support for oil prices; global oil
demand had rebounded faster than supply and April lows. He
elaborated that inventories were being drawn down. He
stated that while they were still above historical
averages, absent a second wave of COVID, there was some
stability.
10:51:58 AM
Mr. Stickel reviewed the oil production forecast update on
slide 8. The slide included a chart comparing the ANS
average daily oil production to the spring forecast. He
reported that FY 20 production came in at 472,000 barrels
per day compared to the spring forecast of 486,000 barrels
per day. The production curtailments in April through June
caused production to drop below the forecast. He relayed
that the drilling of new wells was on pause in Prudhoe Bay
and Kuparuk, which impacted oil production. The revised
outlook was based on a low oil price scenario prepared by
the Department of Natural Resources in April. The
information also included actual production so far in
FY 21. The revised outlook for FY 21 was 468,000 barrels
per day compared to 487,000 barrels per day included in the
spring forecast. The revised outlook for FY 22 was 448,000
barrels per day compared to the spring forecast of 458,000.
Mr. Stickel relayed that DOR was actively revising the
production outlook for the fall forecast. He shared that
the department had begun meeting with companies earlier in
the week to understand how their plans had changed since
the spring.
10:53:13 AM
Mr. Stickel provided an updated unrestricted revenue
forecast (not including the POMV from the Permanent Fund)
on slide 9. He relayed that FY 20 revenue was still
preliminary and could come in slightly higher or lower than
the forecast when the reconciliations were complete. He
reported that it currently looked like the state had
received $1.6 billion of unrestricted revenue, which was in
line with the spring forecast. He explained that the
rebound in oil price in May and June roughly offset the
impacts of lower production. The department's revised
outlook was based on the revised price and production
numbers, in addition to other revenue changes. He shared
that both FY 21 and FY 22 were looking to be right in line
with the spring forecast, as the slightly higher price
offset slightly lower production and other impacts.
Mr. Stickel elaborated that for FY 21 and FY 22, DOR was
expecting $1.2 billion and $1.3 billion of unrestricted
revenue, respectively. The slide contained good and bad
news - while the outlook had not worsened, the projected
revenue was historically low, and the state's fiscal
situation remained extremely challenging.
10:54:36 AM
Representative Wool surmised that Mr. Stickel was saying
the forecast was almost as predicted because oil prices
were slightly higher, and production was slightly lower
than expected. He asked if it was fair to say that price
was more volatile, so if price were to dip down, production
was harder to rebound, especially in the short-term. He
asked if the reduced production was based on low demand as
a result of COVID. He wondered if the low demand was
expected to continue even if COVID was remedied. He
remarked on more people working from home and fewer people
flying for business travel.
Mr. Stickel replied that he believed the concern about oil
demand was legitimate. Demand had rebounded faster than
supply on a global level; however, demand was still not
back to its pre-COVID level. There was some question about
when and if demand globally would return to those levels.
Speaking specifically to Alaska's production, he explained
that the revised outlook was based on a low oil price
scenario that DNR prepared in April and May. The scenario
was based on the presumption that production would be
paused. He reported that drilling was still on pause at
major fields. He suggested paying attention to the
announcements coming out of major fields including Prudhoe
and Kuparuk where production had been paused in order to
learn how oil production may compare to the outlook.
10:57:05 AM
Mr. Stickel turned to slide 10: "POMV Revenue Forecast
Update." The slide included a chart showing the POMV
transfer from the Permanent Fund, which was currently the
state's largest source of unrestricted revenue by far. He
detailed that the POMV draw was available for dividends and
government spending; the split was up to the legislature to
determine. He elaborated that the POMV was a fairly stable
revenue source, based on the Permanent Fund's average
ending market values of the first five of the last six
fiscal years. The FY 20 draw was $2.9 billion, and the
FY 21 draw was $3.1 billion. The FY 22 draw was estimated
at just under $3.1 billion. He detailed that the FY 22 draw
was $21 million higher than projected in the spring
forecast, which was due to a better than expected
investment recovery at the end of FY 20 (the final year
that went into the FY 22 POMV calculation).
10:58:25 AM
Mr. Stickel covered the areas of uncertainty impacting the
revenue outlook in the fall forecast on slide 11. He
indicated there was always uncertainty with commodity
prices and production, but there were additional hurdles to
deal with in the current year.
Representative LeBon asked if it were safe to predict there
would not be a need for a supplemental budget appropriation
when the 32nd legislature met in January 2021.
Commissioner Mahoney responded that it was too difficult
for DOR to predict an answer at present.
10:59:55 AM
Representative Josephson referred to slide 10. He believed
Mr. Stickel's testimony that the POMV draw was stable was
the best news. He stated that the Alaska Permanent Fund
Corporation (APFC) reported an ERA balance of $10.3
billion. The corporation anticipated that the legislature
would spend $3 billion of the balance. The corporation also
reported that $1.7 billion could not be realized. He
suggested that if the legislature were to pay the
retroactive dividends of $4.6 billion it would leave an ERA
balance of $1 billion. He wondered if the earnings were
sufficient to get back up to the $3 billion sustainable
draw shown on slide 10.
Commissioner Mahoney answered that it was difficult to
speculate. She offered to run the analytics to reevaluate
the balances before responding in writing.
Representative Josephson accepted the offer and thanked
Commissioner Mahoney.
11:01:31 AM
Mr. Stickel reviewed the uncertainties around COVID-19 on
slide 12. He stated that the uncertainty around the
pandemic and potential and current recovery impacted all of
the state's major revenue sources in some way. He relayed
that the potential for investment volatility was a major
concern as it was the state's primary source of
unrestricted revenue. He reported that federal stimulus
funding through the CARES Act and other programs totaled
$5.6 billion thus far. He elaborated that the federal funds
had helped put a floor under many parts of the economy, but
it was unclear whether the support would be extended and
what would happen when the funding ceased. Petroleum
revenue had been impacted by low prices and demand
destruction and a resurgence in COVID cases could cause
demand to fall again. He noted that the low prices
threatened the economics of new projects.
Mr. Stickel addressed uncertainty on the non-petroleum side
on slide 12. He noted that the revenue sources were
impacted in several ways. He explained that the tourism
season had been lost, for the cruise industry in
particular. The department was anticipating a slow return
to normal. He detailed that it currently looked like there
could be a half-capacity season in the summer of 2021;
however, the possibility was speculative. He highlighted
that COVID had impacted many of the state's basic
industries such as mining and fishing. He explained that
impacts to the basic industries were an extra challenge
because they threatened state revenue and directly impacted
communities and their economies.
Mr. Stickel reported that corporate income tax had been
impacted in two ways. First, corporate income tax was based
on profits and there was significant uncertainty about what
the taxes would look like for the calendar year 2020.
Second, the CARES Act made a change to the corporate income
tax that allowed companies to carry back any losses for the
2018, 2019, and 2020 tax years, up to five years back. He
explained that Alaska statutes were tied to the federal law
and the department estimated that the carry back provision
would have an impact of up to $200 million across FY 21 and
FY 22. He added that the estimate was uncertain because
what 2021 would look like was not yet known.
11:04:14 AM
Co-Chair Johnston noted Mr. Stickel had mentioned the
federal CARES Act funding on slides 11 and 12. She stated
that the last time Alaska had a similar amount of federal
funding injected into its economy was during the Exxon
Valdez oil spill. He asked if anyone had taken a look back
to see if any adjustment had been made because there were
very few ways to get the secondary and tertiary revenues
from the federal funding unless it impacted the state's
corporate tax. She remarked that it could impact sales or
property taxes at a local level. She asked if DOR had
looked back to see what impact there had been on the bottom
line during the Exxon Valdez oil spill in order to
determine what the effect may be during the current year.
Mr. Stickel replied that it was not something DOR had
looked at directly, but he thought it was an excellent
suggestion. He remarked that one of the interesting things
about the current federal funding was it was largely
replacing what would have been in the private economy. The
federal stimulus had replaced wages and salaries lost
through the unemployment benefits and to replace economic
activities such as the lost tourism season.
Co-Chair Johnston considered what effect the situation had
on the state's bottom line.
11:06:22 AM
Mr. Stickel discussed investment volatility on slide 13. He
stated that as witnessed in the current year, investments
could be extremely volatile. He pointed out that in March,
the stock market had lost over one-third of its value in a
single month; however, markets had rallied back to all time
highs since then. For example, the anticipated return for
large cap stocks was expected to range from a 10.7 percent
loss to a 24.7 percent gain about two-thirds of the time,
which was too broad of a range to base a budget on,
especially when the other major revenue source was based on
oil price. One way to reduce the volatility was through
diversification. For example, in FY 21, the Permanent Fund
had an expected return of a 0.2 percent loss in the low
case and a 13.9 percent return in the high case. He
explained it was a smaller range of uncertainty through
diversification. He noted that for comparison, the
Permanent Fund had a 2 percent positive return in FY 20.
Mr. Stickel shared that investment volatility was further
reduced for the POMV draw through its calculation method.
He explained that the draw was based on an average fund
value of the first five of the last six fiscal years. He
elaborated that even with the range of possible FY 21
returns with volatility reduced through diversification,
the range of returns did not impact the POMV calculation
until FY 23 and then the potential range on the FY 23 draw
was about $50 million.
11:08:21 AM
Co-Chair Johnston asked for verification that the current
year had closed out at a 2 percent return.
Mr. Stickel replied affirmatively. He confirmed that the FY
20 net return for the Permanent Fund was 2 percent.
Co-Chair Johnston asked for verification that the target
return for the Permanent Fund was 7 percent over the five-
year lookback.
Mr. Stickel replied that the 7 percent was the expected
return baseline assumption from Callan Associates that went
into the Permanent Fund calculation.
Mr. Stickel continued to the last area of uncertainty on
slide 14: "Ballot Measure 1." He relayed that the
information on slide 14 was taken from an FAQ document DOR
had prepared in conjunction with the public hearing
conducted by the lieutenant governor the previous week. The
department had used one potential interpretation of the
ballot measure for its modeling, based on how the sponsor
had described the initiative. He clarified that the
interpretation was subject to change. He detailed that
Ballot Measure 1 provisions would apply to the Prudhoe Bay,
Kuparuk, and Colville River units. He detailed that the
minimum tax would be increased to at least 10 percent of
gross value; all per barrel credits, carried forward
losses, and other offsets would be prohibited; and there
would be an additional net profits tax that would take
effect at higher oil prices.
Mr. Stickel elaborated that the ballot measure would
increase state revenue and decrease producer profit. The
department had not yet attempted to evaluate the net
impacts of the revenue increase compared to changes in oil
production and the economy; however, some companies were
delaying decisions pending the outcome of the election.
11:11:00 AM
Mr. Stickel reviewed slide 15: "Ballot Measure 1:
Production Tax Revenue." The slide showed estimated
production tax revenue for FY 22 under current law and
Ballot Measure 1 at several different oil prices. The
analysis was based on the spring forecast assumptions,
assuming no changes in oil production and company
investments as a result of the tax change. He explained
that the revenue impact depended on the oil price. At an
oil price of $35 per barrel, Ballot Measure 1 was expected
to bring in $224 million in incremental revenue, which was
a 215 percent increase in production taxes. At an oil price
of $75 per barrel, Ballot Measure 1 was estimated to bring
in just over $1 billion of incremental revenue, which
represented a 223 percent increase in production taxes. He
asked members to keep in mind the estimates did not factor
in any potential changes to oil production or investment.
11:11:58 AM
Mr. Stickel discussed the government and producer take
under Ballot Measure 1 on slide 16. The slide showed an
estimate of how oil production profits would be shared
between the different stakeholders at different prices. The
analysis was based on the spring forecast assumptions for
FY 22. He noted that the analysis looked at the three units
[Prudhoe Bay, Kuparuk, and Colville River] that would be
impacted by the ballot measure. He explained that the
government and producer take calculations looked at the
profit leftover after accounting for transportation costs
and lease expenditures and the share of that profit that
went to the state, federal government, and producers. At
$35 per barrel, under current law, the state's revenue was
higher than the profit per barrel. He detailed that the
state's take was greater than 100 percent and the
producers' take was negative. Under the example, costs for
the impacted fields amounted to about $30 per barrel,
leaving a profit of approximately $5 per barrel. He noted
that the state took slightly more than that amount.
Mr. Stickel continued to address slide 16. He detailed that
under Ballot Measure 1 at an oil price of $35 per barrel,
the government take increased to 140 percent and the
producer take was even more in the negative. At higher
prices under Ballot Measure 1 the producers' share went
positive. At a price of $45 per barrel the total government
take was 70 percent with 30 percent going to producers. At
an oil price of $75 per barrel, the total government take
was 62 percent with 38 percent going to producers. He
reiterated his earlier statement that the estimates did not
factor in any potential changes to oil production
investment.
11:13:37 AM
Representative Josephson looked at the information on slide
16 and could not tell what the producer take was under
SB 21 [oil tax legislation passed in 2013] at oil prices
other than $35 per barrel. He observed that the department
had a position about the total government take and the
producer take, but he did not have much to go off of for a
comparison.
Mr. Stickel replied that he could follow up with the
information. He reported that at under current law the
producer take would be 39 percent at a price of $45 per
barrel, 49 percent at $55 per barrel, 52 percent at $65 per
barrel, and 50 percent at $75 per barrel. He noted there
was a significant difference between the two laws.
Representative Josephson highlighted Mr. Stickel's comment
that it was not possible to predict how producers would
respond if Ballot Measure 1 were to pass. He reasoned there
were many variables on the producers' plates, including
price, that were not entirely in the producers' control.
Mr. Stickel agreed; however, DOR had not attempted to
predict what the producers' response would be.
11:15:46 AM
Vice-Chair Ortiz asked how the producer take under SB 21
compared to the producers' locations in other states. He
asked if the producer take under SB 21 was generally higher
or lower than in other tax regimes.
Mr. Stickel responded that there had been some third party
studies comparing the current tax system under SB 21 to
other tax regimes. He was happy to direct committee members
to some of the studies. It was his understanding that
Alaska was competitive with other tax regimes under the
current law.
Co-Chair Johnston asked the federal take at an oil price of
$45 per barrel.
Mr. Stickel responded that slide 16 showed the federal
corporate income tax at the current marginal tax rate of 21
percent. The reason it was not shown in the $35 barrel
price range was because there was no profit to the company
to be taxed at that price.
Co-Chair Johnston thanked the presenters for their
presentation.
^PRESENTATION: FY 21 AND FY 22 FISCAL OUTLOOK: LEGISLATIVE
FINANCE DIVISION
11:18:18 AM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION (via
teleconference), introduced a PowerPoint presentation
titled "FY21/FY22 Fiscal Update: House Finance Committee,"
dated October 2, 2020 (copy on file). He shared his intent
to discuss the outlook for FY 21 and FY 22, but noted it
was necessary to first look at FY 20, which had just been
completed. He relayed that actual expenditures and revenue
would not be finalized until the release of the
Comprehensive Annual Financial Report (CAFR); therefore,
all FY 20 numbers were currently in draft form.
Mr. Painter shared that the Legislative Finance Division
(LFD) was frequently asked about the prospects for the
Constitutional Budget Reserve (CBR) balance going forward.
Unfortunately, it was not possible to rely on extrapolating
from the cash balance of the CBR any longer for a couple of
reasons. First, over the past few years increasing direct
appropriations had been made from the CBR for the previous
year's capital budget and for a portion of the current
year's operating budget. He explained that looking at cash
did not capture the fact that appropriations for capital
projects could be drawn out over several years. Second, as
the CBR balance had diminished, the amount of cash in the
general fund at the end of the fiscal year that belonged to
the CBR was becoming a more important factor in the
balance. He elaborated that it was a variable number that
was not known until the CAFR was published later in the
year.
Mr. Painter reported there was currently about $1 billion
in cash in the CBR. He expected the final number at the end
of the current fiscal year would be lower than that;
however, it would likely be a bit higher than the balance
in the LFD fiscal summary, which was just under $600
million. He stated that looking ahead, it was likely the
reasonable range that could be expected.
11:20:28 AM
Co-Chair Johnston asked for verification that the CAFR did
not include the supplemental under revenues and
expenditures.
Mr. Painter clarified that the CAFR included supplementals
spent in the given fiscal year. He elaborated that the
report included all state expenditures in a fiscal year,
regardless of when they were appropriated.
11:21:14 AM
Representative Josephson congratulated Mr. Painter on his
new job. He assumed part of the reason the balance was
higher was because the April 7th vetoes left over $200
million in the CBR.
Mr. Painter replied that the $586.9 million in the fiscal
summary projection included the vetoes. The primary reason
the balance was looking to be a bit higher than the
projection was due to lapsed funding. For example, there
had been a mild fire season; therefore, some of the fire
supplemental lapsed to the General Fund. Additionally,
deposits to the CBR appeared to be slightly higher than the
forecast. He shared that it looked like the state may be a
little better off than had been anticipated - the amount
would be known once the numbers were finalized.
11:22:19 AM
Co-Chair Johnston indicated that it was her understanding
in the spring that approximately $550 million was available
from the CBR to be used as the cash resource for the
budget. She asked for the accuracy of her statement.
Mr. Painter responded that it depended on the year. He
elaborated that at the end of FY 19, the General Fund ended
at a fairly high balance. He explained that there had been
about $500 million that belonged to the CBR that was in the
General Fund at the end of FY 19 for cash flow. He reported
that FY 20 had ended with a much lower level of cash and it
was possible the CBR would owe the General Fund when the
numbers were finalized. He confirmed that about $500
million was used for cashflow, but how it ended up at the
end of a fiscal year was highly variable. There had been
large swings from year to year based on cash management
needs. He clarified that $500 million was an average, but
it had been higher and lower in different years.
11:23:40 AM
Representative Josephson suggested the state was in a red
or danger zone. He recalled the Treasury Division saying
they did not like a balance anywhere near the number
projected for the CBR.
Mr. Painter responded that in the past several years the
legislature had drawn from the CBR before going to the POMV
draw, which allowed APFC to maximize investment earnings.
He explained that if there was no CBR and the POMV draw
took place first, it would cost the state investment
revenue. He stated that the situation was not unmanageable,
but it was costly because the Permanent Fund earned
7 percent per year and the CBR was in much shorter term
investments. The situation would result in losing out on
higher return investments because it would be necessary to
use the POMV draw earlier in the year.
11:25:05 AM
Representative LeBon asked Mr. Painter if he had a
prediction for what the 32nd legislature may face in
January with regard to a potential supplemental budgetary
need. He discussed that a couple of years back the
legislature needed to deal with the economic fallout from
an extreme fire season and the Anchorage earthquake. He
asked if Mr. Painter had any prediction about what the
legislature may be facing in January due to COVID-19 and
other issues.
Mr. Painter replied that there were several areas LFD had
identified that may have supplemental needs. He relayed
that the following few slides would address some of the
potential supplemental issues. He noted it was very
difficult to put a number on some of them at present.
11:26:12 AM
Mr. Painter began addressing some of the potential
supplemental needs on slide 3 titled "FY 21 Incomplete
Capital Budget." He explained that in the past few years
the typical capital budget had been limited mostly to
federal matching funds; the majority of that funding had
been included in the FY 21 operating budget as the
legislature tried to get out of session quickly. Additional
RPLs [Revised Program Legislative] had been approved in
August that had added some of the missing capital projects;
however, a fairly large chunk of the capital budget
remained outstanding.
Mr. Painter relayed that when comparing the governor's
capital budget submission with what the legislature had
passed, LFD had identified about $150 million in projects
that had not yet been funded. He noted that about $33
million of the total was undesignated general funds (UGF).
He elaborated that some of the outstanding funding may be a
result of policy decisions to not fund things the governor
requested, but some of the things were normal big ticket
items that were included every year such as deferred
maintenance and Alaska Energy Authority projects like the
Bulk Fuel Program. Many agencies had very little of their
capital budget funded such as the Department of Fish and
Game and the Department of Natural Resources.
Mr. Painter reported that skipping payment for some of the
items for a year meant likely missing the 2021 construction
season for deferred maintenance. He elaborated that if
funding were not appropriated for items until April or May
it would be very difficult to get the funds spent quickly.
For many of the projects, the earlier it could be
appropriated the better. He highlighted that the first
deadline had already been missed because the federal fiscal
year had ended earlier in the week. He relayed that
precisely how much the state had lost because of the missed
deadline was not yet known. He continued that more detail
may be available by the start of session. He stated that
not appropriating funding to some of the items likely cost
the state some federal revenue.
Co-Chair Johnston remarked that there had been quite a bit
of discussion about the topic the past spring. The
legislature had learned from the federal delegation that
there were lapsed funds from other states that Alaska could
potentially take advantage of. She cautioned that other
states were in as bad or worse shape than Alaska and she
hoped it did not mean the matching funds would not be
available.
Mr. Painter replied that it was a good point. He explained
that the situation would vary by grant and it was currently
unclear how much the state lost because the federal
matching funds were not in place. As the administration
went through its budget process, he expected there to be
more information on the topic by the time session began.
11:29:48 AM
Mr. Painter moved to slide 4: "FY 21 Emerging Budget
Issues." He stated that some agencies had lost significant
revenue due to COVID-19 and may need some supplemental
appropriations. The most prominent being the Alaska Marine
Highway System (AMHS). He detailed that the department had
estimated about $45 million of lost revenue between FY 20
and FY 21 and had responded with a drastically reduced
schedule; however, AMHS may still need additional funding
in order to get through the year and pay for the required
vessel overhauls. There were other agencies reliant on fees
or designated taxes such as the Department of Fish and Game
(DFG) and the Department of Environmental Conservation
(DEC) to a lesser extent. He elaborated that some of those
agencies may have shortfalls and whether they could make
the shortfalls up out of carryforward or other things would
be clearer at the start of session.
Mr. Painter continued to review emerging budget issues on
slide 4. Another large potential supplemental item had to
do with school enrollment decreases in many districts. He
noted there had been numerous news articles about the
situation. He explained that the October student count
would make the scope of the issue much clearer (the count
had begun on Monday and would go for four weeks) within the
next couple of months. He believed that once the numbers
were available it would be much easier to see exactly how
much enrollment was down in different districts and what
sort of fiscal impact it would have. For the first nine
months of the year, districts received payments from the
state based on the student count from the previous year -
only the last quarter of payments depended on the new
student count. He explained that no matter how the student
count came out, districts would receive a solid revenue
stream until April and any revenue declines would start to
be felt at that time.
Mr. Painter highlighted that there was a statutory hold
harmless provision for reduced enrollment. He clarified
that a district with a 5 percent enrollment reduction got
to keep 75 percent of the enrollment difference between the
prior and current years. He stated that while some of the
news reports about enrollment being down 10 percent were
alarming, it would trigger the hold harmless provision and
districts would keep 75 percent of the difference between
the two years' funding. He recognized that the funding loss
was not insignificant; however, it may not be as severe as
doing the straight line math [without factoring in the hold
harmless provision]. He discussed that there may be
districts that lose just under 5 percent that were actually
worse off than the district losing exactly 5 percent. He
noted there may be some equity issues that the legislature
may want to address. He reiterated that once the student
count was available it would be much clearer which
districts fell under the hold harmless category, which
districts did not, and what the budgetary impact would be.
Representative Wool stated his understanding that if school
enrollment were down in October - it was currently down by
more than 5 percent in his district - the previous year's
numbers would be used for the first three-quarters of the
year. He reasoned that the following year would use the
current year's numbers. He asked if it meant districts
would take a cut in funding for the following year based on
the attendance in the current year.
Mr. Painter explained that districts' early payments would
be reduced and the true up payments in the last quarter of
the fiscal year would get districts to their total amount.
He noted that it may cause some cash flow issues for
districts if their enrollment rebounded next year and they
were receiving reduced payments throughout the first three
quarters of the year.
Representative Wool stated his understanding that districts
would be made whole at the end of the year to make up for
the first three-quarters of the year that were low as a
result of being based on the current year's [enrollment]
numbers. Additionally, he understood that if enrollment
dropped by greater than 5 percent there was a mechanism for
districts to receive 75 percent of the difference between
the two years, meaning that the situation was not as bad as
it may look. He asked if the University of Alaska, as an
entity that would see a significant decrease in funding due
to COVID-19, was included in the category with AMHS, DFG,
and other agencies.
Mr. Painter confirmed that the University had communicated
that it had seen significant tuition decreases. Although
the latest numbers were a little less than the original
projections, the University was seeing a significant loss.
11:36:03 AM
Vice-Chair Ortiz understood there would be more information
once the October school count had been completed. He was
trying to determine how much funding may be needed for a
supplemental or increase in funding in FY 22 to make
districts whole. He noted that slide 4 showed AMHS being
down by $45 million; however, the school district portion
of the slide only showed enrollment percentages, which was
hard to equate to potential actual dollars.
Mr. Painter replied that it was very difficult to identify
a number because it was not yet known which districts would
trigger the hold harmless provision. He explained that if
numerous districts came in with a 4.5 percent enrollment
decline it would be a very different situation than having
numerous districts with a 5 percent decline, which would
trigger the hold harmless provision. He clarified that
because of that threshold it was very difficult to project
the scale until the student count was available. In regard
to AMHS, because of the schedule reductions and secured
CARES Act funding, the supplemental need would not be the
full $45 million. He relayed that the number would be
significantly less, and the department would come out with
its proposal in the governor's budget. He did not want to
speculate on the amount at present.
Representative Carpenter asked if current law allowed
school districts to submit enrollment numbers based on the
previous year. If not, he wondered whether it would require
a change in statute to do so.
Mr. Painter responded that the department did not have that
flexibility under current law. The department was required
to distribute funding according to the statutory formula.
He remarked that the legislature could try to come up with
some complicated language to accomplish the same thing;
however, a statutory change would be much cleaner. He added
that a statutory change would be highly preferable to
trying to backfill with an appropriation.
11:39:36 AM
Mr. Painter turned to slide 5 and continued to review
emerging budget issues. He reported that a significant
portion of the CARES Act funding flowing through the state
was currently unspent. Particularly, some local governments
had been slow to receive and spend their funding. The state
Small Business Grant Program had a slow start, but if all
of the current applications were approved the funding would
be exhausted. He noted that the slide did not show the
portion of funding going through the Department of Health
and Social Services (DHSS) budget for use in other state
agencies. He explained that the funding had largely been
allocated, but it had not all been spent. He noted there
were only several more months to spend the funding.
Mr. Painter reported that it was not yet known what would
happen if there was money remaining at the end of the year.
There had been some expectation earlier on that the federal
government may extend the deadline or change some of the
rules; however, it was unclear what would happen if there
was money left over from any of the allocations. There had
been speculation that the funding could be used to shore up
the balance in the Unemployment Trust Fund. He stated it
could happen but there were questions about whether the
administration could take the action without the
legislature.
Mr. Painter continued to review emerging budget issues on
slide 5. He relayed that the Election Fund would need a
minor supplemental appropriation to the Division of
Elections early in the 2021 calendar year. The RPL process
had enabled the state to get federal funding into the
Election Fund to be used for the November election;
however, the RPL process could not be used to get money out
of the election fund. He explained that the division was
spending more from the fund than it would be able to do
under the current appropriation and would need a
supplemental to continue operating throughout the full
year.
Mr. Painter shared the good news that the state had a mild
fire season. Funds had lapsed in FY 20 and there was about
$11 million remaining for the second half of the fiscal
year. Depending on the forecast for next year's fire
season, there could be a small supplemental or none at all,
which was a large difference from the previous year.
Mr. Painter cautioned that when the CBR vote had been
included in HB 205 [FY 21 operating budget bill], there had
been no headroom or space for future supplementals without
taking another three-quarters vote. He explained that any
future appropriation bills that spent from the General Fund
beyond the level in HB 205 would require another CBR vote.
He elaborated that in past years there had been some amount
that could be used without another CBR vote, but that was
not an option in the current year.
11:43:23 AM
Representative Josephson referenced election funding and
CARES Act dollars. He recalled that the administration had
declined some of the CARES Act funding that it could have
accepted, presumably during the April/May timeframe that
would have helped with COVID impacts on elections. He asked
if Mr. Painter recalled the situation.
Mr. Painter replied that he would follow up on the
question.
11:44:06 AM
Representative Wool addressed the unspent CARES Act
funding. He believed local governments were required to
spend the funding on certain things directly related to
COVID and many communities did not have the direct
expenses. He wondered if other states had similar issues
and whether the deadline could be extended, or restrictions
could be loosened. He knew that some of the issue was
federal and the answers were not known. He remarked that
the Municipality of Anchorage had meetings with the federal
government over buying a building. He knew that when the
funding had been given to communities, they did not all
have direct expenses that could be attributed to COVID. He
wondered about the solution and wanted to keep as much of
the funding in Alaska as possible. He cited past discussion
about returning the unspent funds to the state to be
reappropriated elsewhere in Alaska. Alternatively, he
wondered if new legislation was required to override the
RPLs.
Mr. Painter replied that the RPL statute allowed for
appropriations to be increased; there was no provision to
allow appropriations to be decreased through the RPL
process. He was unsure how the situation would play out if
the funding were to be redistributed. There were some
places in the budget, such as unemployment, where there was
open-ended federal receipt authority. He stated it was
possible the administration could merely shift the funding,
but he recommended talking to Legislative Legal Services
about the concept. He did not want to speculate on what
could and could not be done through the RPL process as
there were some conflicting opinions. In terms of what
other states had experienced, some states had substantial
unspent money and others had been able to spend the funding
quickly. He explained that the funding had a floor of $1.25
billion that hit every state from Wyoming to Kansas in
population. He detailed that Alaska had received the same
amount of funding some of the states with populations far
exceeding its own. Consequently, those states had much
higher needs and had been able to spend the funds quickly.
He believed it had been harder for some other states to
spend the funding. He reported there was a lot of variation
in states' ability to spend the funding. He had last heard
there was some interest at the federal level of extending
the deadline; however, he could not speculate on what
Congress would do.
Representative Wool had heard other states were in a
similar position. He remarked that the flat amount given to
many states helped explain the situation.
11:47:49 AM
Mr. Painter moved to slide 6: "FY 22 Budget Outlook." He
explained that to look at the coming year, LFD was adopting
the Congressional Budget Office's methodology where they
consider current law and current policy as potential
baselines. He explained that on the federal level sometimes
there was a little less distinction, but in Alaska there
could be a large distinction because of its lack of
dedicated funds. The current law outlook assumed the state
would fully fund statutory obligations such as the
statutory Permanent Fund Dividend (PFD) calculation, school
debt reimbursement, the Regional Educational Attendance
Area (REAA) fund, community assistance, and the oil tax
credits of $40 million for FY 22. He reported that the
statutory PFD was projected at about $2 billion or
approximately $3,100 per recipient in FY 22. The other
statewide items that were not funded in FY 21 but were
still on the books statutorily, added up to about $174
million UGF in FY 22. He noted it was a rough projection
because the newer school debt projections and a couple of
other things that may vary, were not yet known.
Mr. Painter highlighted that the current policy outlook
assumed that FY 22 would match up with FY 21 with a
dividend of roughly $1,000 and no funding for school debt
reimbursement, the REAA fund, community assistance (beyond
the amount coming from the Power Cost Equalization (PCE)
Fund), or oil tax credits. He explained that both baselines
assumed flat agency operations in FY 22, which given
natural increases in the budget each year, may necessitate
some cuts to get there. He elaborated that both baselines
used the revenue forecast DOR had presented earlier in the
meeting.
11:50:17 AM
Representative LeBon noted Mr. Painter had mentioned school
bond debt to communities, REAA, and community assistance.
He asked for the actual number projected for the items for
FY 22.
Mr. Painter directed attention to the appendix on slide 11
showing FY 22 scenarios for statewide items. He reported
that LFD estimated the UGF portion of school bond debt
reimbursement at $82.6 million, which assumed about $15
million would come from the school fund that was funded
with tobacco tax revenue. The REAA fund deposit was
projected at approximately $34 million, which was a
percentage of school debt reimbursement. He explained that
a portion of PCE Fund earnings could be used for the
Community Assistance Program, which was about $12 million
based on the calculation. The remaining amount to reach $30
million deposit was about $17.6 million. He expounded that
a higher deposit for community assistance was possible
because statute specified depositing $30 million or the
amount needed to reach a $90 million fund balance. Oil tax
credits would be $40 million based on DOR's numbers
provided earlier in the meeting.
Representative LeBon discussed that the state was helping a
variety of school districts around the state with their
bonded debt reimbursement. He asked Mr. Painter to repeat
the number for the next fiscal year.
Mr. Painter replied that the number was about $82.6 million
UGF; however, it was an old projection from the spring. He
relayed that an updated projection was not yet available.
He elaborated that LFD's figures assumed $15 million would
come from the tobacco tax revenue. The total number was
just under $100 million.
11:53:09 AM
Mr. Painter previewed the FY 22 budget under current law in
a table on slide 7. The revenue figures on the first line
for agency operations had been presented earlier in the
meeting by DOR. The baseline assumption was that agency
operations would be flat at $3.9 billion. The statewide
items would increase because some of the items were
unfunded in FY 21. The capital budget was estimated at $150
million, which reflected an average over the past six years
rather than the incomplete capital budget of about $120
million in FY 21. The table included a placeholder of $50
million for supplemental appropriations. He noted the
number may be conservative, but they did not want to go
overboard on the figure given the absence of any headroom
in the current fiscal year. The result was an FY 22 deficit
of just over $2.4 billion. The number reflected about
36 percent of the total budget. He detailed that if the
dividend was removed from the equation it was just over
half of the non-dividend budget. Without further revenue or
major budget reductions, the baseline assumption going
forward was a deficit that equaled about half of the
state's budget (excluding the dividend).
Representative Wool surmised that Mr. Painter was saying
that the deficit of $2.4 billion (with the dividend
excluded) would be about half of the budget. He observed
that if the dividend were removed, the budget would
decrease substantially. He elaborated that $2 billion would
be removed from the PFD line [on slide 7] and the deficit
would be roughly $0.4 billion. He thought if the dividend
was removed from one end it should be removed from the
other.
Mr. Painter clarified that under the governor's budget the
dividend was paid, but the amount was excluded from the
governor's fiscal summary. He relayed that if a statutory
PFD were paid out, the deficit would be equal to about half
of the other expenditures. He confirmed that without a
dividend the deficit would be about $400 million.
Representative Wool stated his understanding that
Mr. Painter was explaining a scenario where the dividend
was taken out of the budget but was included as a $2.4
billion expenditure in another category outside of the
budget. Under the scenario, the $2.4 billion would be half
of the budget.
Mr. Painter agreed; it was how the governor's fiscal
summary had portrayed the dividend over the past couple
years.
Representative Wool observed that it was "more of a
bookkeeping thing."
Mr. Painter added that he had included the information [on
slide 7] to give an idea of the scope of the problem. He
stated it was difficult to see what the deficit number
meant in scale. He elaborated that putting in 36 percent of
the total budget or half of the non-dividend budget
provided a sense of scale of the deficit.
11:56:58 AM
Mr. Painter addressed an FY 22 budget preview under current
policy on slide 8. He highlighted that the data on the
slide was identical to the previous slide with the
exception of statewide items that dropped to $456.2 million
[from $630.2 million on slide 7] and the PFD that dropped
to $680 million [from $2.024 billion on slide 7]. The table
assumed that items not funded in FY 21 continued to not be
funded in FY 22. The reduction to the dividend line would
result in a PFD of approximately $1,000 per recipient. The
table on slide 8 showed a deficit of $900 million, which
still exceeded the remaining CBR balance.
11:57:36 AM
Mr. Painter reviewed the projected fund balances available
in FY 22 on slide 9. He detailed that going into FY 22, the
CBR balance was projected at around $600 million or so. The
ERA was expected to have a balance of approximately $11.7
billion, which did not include unrealized gains. He
explained that gains had to be realized before they were
spendable. He noted that there had been various numbers
mentioned when the ERA balance was discussed. He clarified
that the slide showed the amount projected to be available
on the first day of FY 22 prior to a POMV draw and any
earnings coming in; the number reflected the starting
point. He noted that sometimes people took out the POMV
draw but did not count the earnings, which resulted in
different numbers. The number on slide 9 reflected the
number shown in the history and projections sheet produced
by APFC.
Representative LeBon referenced the $587 million balance in
the CBR shown near the top of slide 9. He asked if the FY
22 balance accounted for an untouchable working capital
cushion of $1 billion, which he deemed to be the floor of a
working capital amount for the state.
Mr. Painter replied in the negative. He clarified that the
working capital was available for appropriation. He
elaborated that if the CBR was fully expended down to zero
there were other cash options that were more costly (e.g.
the ERA). He reported that after FY 22 there would not be
anything available in the CBR beyond the amount used for
cashflow. He explained that the amount could be drawn, but
it would result in having to turn to higher earning savings
accounts or other accounts in order to meet the cashflow
need. The state had already passed the point where
$1 billion could be kept in the CBR because the balance was
already below that amount.
Co-Chair Johnston asked if the projected ERA balance of
$11.7 billion included unrealized gains.
Mr. Painter replied that the figure did not include
unrealized gains. He expounded that $11.7 billion reflected
the spendable cash level projected to be in the ERA on
June 30 of the current fiscal year.
12:01:02 PM
Representative Josephson stated that the [ERA] number
currently used by APFC was $10.3 billion or $10.5 billion.
He asked if Mr. Painter was projecting earnings of $1.2
billion over the following nine months.
Mr. Painter responded that $11.7 billion was the number
APFC was projecting to be available at the end of the
current fiscal year with the remaining earnings. He
explained that the realized earnings thus far had slightly
outpaced the forecast.
12:02:07 PM
Mr. Painter identified the last item on slide 9 as the
balance in funds the administration listed as sweepable. He
knew there were some legislators who disagreed with some of
the funds included in the list. He explained that because
the administration was responsible for the sweep, the items
it included were the default; however, the legislature
could contest the action. The balance was approximately
$1.5 billion with the vast majority held in the PCE Fund
and Higher Education Fund (funds that had not been
considered sweepable until the past couple of years). He
noted there was very little remaining in other funds. The
available funds in addition to the CBR were not quite
sufficient to balance the FY 22 budget under the current
loss scenario. Absent action by the legislature to reduce
the budget or add new revenue, LFD expected that other
sources would be necessary.
12:03:18 PM
Representative LeBon referenced the appendix on slide 11
that referenced school bond debt reimbursement of $82.6
million and the REAA Fund deposit of $33 million. He asked
for Mr. Painter to address how the two items were
interconnected.
Mr. Painter replied that there was a complex REAA
calculation in statute that linked the student count in
REAAs versus organized areas and giving a percentage of the
bond debt reimbursement accrued in organized areas into the
REAA Fund to be used by the department to fund school
construction and maintenance in the unorganized boroughs.
He emphasized that over the past few years when there had
been vetoes or reductions to school debt reimbursement,
there had also generally been a corresponding reduction to
the REAA Fund deposit because they were linked in statute.
Mr. Painter explained that the consent decree that created
the REAA Fund found that the school construction was a
state responsibility regardless of what happened elsewhere
because the areas did not have the ability to raise their
own funds through bonding. He elaborated that even if
school bond debt reimbursement were zeroed out going
forward, the state would be out of compliance with the
order if it also zeroed out the REAA Fund going forward. He
characterized continuing to reduce the REAA Fund deposit as
legally risky regardless of what the state wanted to do
with school bond debt reimbursement despite the statutory
linkage between the two items.
Representative Josephson considered the question of
sweepable funds. He referenced Mr. Forrer's success in
stopping a broader interpretation of the state's authority
to bond. He shared that he had recently spent about five
hours reading Hickel v. Cowper. He had been struck by the
hearings that occurred on the Senate side in July 2019
about the differences of opinion between the administration
and LFD about what was sweepable. He mentioned the Forrer
case because he believed there could be litigation if the
PCE Fund was swept. He explained that the PCE Fund was part
of the Alaska Energy Authority and it was unclear in
Hickel v. Cowper what the court would make of the action.
He concluded that the legislature should not assume that
the funds were available for expenditure without some
pushback.
Mr. Painter responded that the sweepable funds statute
passed in the 1990s was found unconstitutional in Hickel v.
Cowper; therefore, there was no statutory guidance to
follow. He believed that how the Alaska Supreme Court would
rule on the case was ambiguous. He stated it could be
argued that the current sweepable list was not large enough
and because ERA funding was used for the general
government, it should also be considered sweepable. He
stated it had not been tested and it was unclear how the
courts would rule. He continued that it was possible to
speculate on how the courts might rule, but there was
significant uncertainty about what was sweepable because
the supreme court had invalidated the statutes and no
replacement had been made.
12:08:11 PM
Representative Merrick asked for the average rate of return
on the PCE Fund.
Mr. Painter answered that the last projection he had seen
was 6.2 percent going forward. He had not looked to see if
there was an updated projection. He stated that generally
the funds managed by DOR returned at a fairly similar rate
to the Permanent Fund over the long-term. He believed the
Higher Education Fund return was also projected at
6.2 percent.
Co-Chair Johnston believed the actual return for both [the
PCE Fund and the Higher Education Fund] had been very
similar to the Permanent Fund in the current year at
2 percent.
Representative LeBon looked at the $40 million for oil and
gas tax credits line item on slide 11. He asked for
verification that the $40 million was the minimum payment
required in FY 22 related to the state's total obligation
of approximately $743 million.
Mr. Painter replied affirmatively. He elaborated that the
amount reflected the statutory calculation for the deposit.
The obligation was subject to appropriation and the
legislature could opt to deposit more or less.
Co-Chair Johnston thanked the testifiers and members for
their participation.
ADJOURNMENT
12:10:19 PM
The meeting was adjourned at 12:10 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR Presentation - Update on Tax Credits and Revenue Projections 10.02.2020.pdf |
HFIN 10/2/2020 10:00:00 AM |
DOR Updates - HFIN |
| Leg Finance Presentation - FY21 & FY22 Fiscal Update 10.02.2020.pdf |
HFIN 10/2/2020 10:00:00 AM |
LFD Fiscal Update - HFIN |
| HFIN Fiscal Update Response to Q 100220.pdf |
HFIN 10/2/2020 10:00:00 AM |
|
| DOR Response to HFin Revenue Outlook 11.2.2020.pdf |
HFIN 10/2/2020 10:00:00 AM |
HFIN DOR Response |