Legislature(2021 - 2022)ADAMS 519
03/16/2021 01:30 PM House FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Spring Revenue Forecast Update - Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 16, 2021
1:32 p.m.
1:32:09 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:32 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Bryce Edgmon
Representative DeLena Johnson (via teleconference)
Representative Andy Josephson
Representative Bart LeBon
Representative Sara Rasmussen
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
None
PRESENT VIA TELECONFERENCE
Dan Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue; Lucinda Mahoney,
Commissioner, Department of Revenue.
SUMMARY
PRESENTATION: SPRING REVENUE FORECAST UPDATE - DEPARTMENT
OF REVENUE
Co-Chair Foster reviewed the agenda for the day.
^PRESENTATION: SPRING REVENUE FORECAST UPDATE - DEPARTMENT
OF REVENUE
1:33:03 PM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, introduced the PowerPoint
presentation: Spring 2021 Forecast." He began the
presentation with the agenda broken up into 3 sections on
slide 2. First, he would provide a brief background about
the revenue forecast, publication, and some of the key
assumptions of the forecast. He would also walk through the
revenue forecast first looking at total state revenue and
then with a more in-depth focus on unrestricted general
fund (UGF) revenue. Finally, he would provide additional
detail around the petroleum revenue forecast.
1:34:54 PM
Mr. Stickel moved to slide 4 to provide some background
into the spring revenue forecast. He reported that the fall
forecast was published in December in the Revenue Sources
Book. The book was an annual publication with all sorts of
great information about historical and future revenue as
well as information about the various taxes and revenue
sources. The spring forecast came out in March of each year
and was an update to the fall revenue forecast. It updated
key tables and data. Both of the publications were
available on the Tax Division website at tax.alaska.gov.
Mr. Stickel continued to slide 5 to review key Alaska
economic indicators. While his focus was on revenue
forecasting, he also liked to look at how the overall state
economy was doing. The indicators gave him some insight
into that. Data on slide 5 represented the most current
data available for each of the indicators listed as of the
morning of the previous day. There were several updates
expected to be released later in March. State gross
domestic product (GDP) was up significantly in the third
quarter of 2020 following two quarters of significant
losses. The second quarter of 2020 was the largest decline
on record for state GDP with the Covid situation followed
by the largest increase on record in the third quarter. He
was expecting fourth quarter data to be released on March
26, 2021. It would provide him with an important insight
into how the recovery had receded in Alaska.
Mr. Stickel reported that in terms of job numbers, the
January Jobs data was released by the state's Department of
Labor and Workforce Development (DOL) on Friday of the
previous week. Employment in the state was still down by
23,000 jobs or 7.4 percent compared to the prior year in
January. It was a significant improvement from the losses
that the state saw the prior summer. However, it showed the
state had a way to go to a full recovery in the job market.
The largest losses had been in leisure hospitality,
transportation, and oil and gas. Wages and salaries as of
the third quarter had bounced back and were essentially
flat to the prior year's levels. Looking at bankruptcies
and foreclosures, those numbers continued to hold at
relatively lower levels compared to the previous year
likely due to a variety of factors including temporary aid,
government programs, actions by relevant industries to
forestall bankruptcies and foreclosures.
Mr. Stickel continued that housing starts, which was a
forward-looking indicator, were down in 2020 versus 2019
which was somewhat expected with the overall levels of
uncertainty and the job losses in 2019. Finally, the
department had added a new indicator to the slide in
response to some of the feedback from the committee in the
fall forecast presentation. He looked at mortgage
delinquency rates. The latest data was from June 2020 and
third quarter data was expected in the current month. As of
June, the average delinquency to rates were similar to the
prior year with 1.4 percent of mortgages delinquent by 30
to 89 days and less that .5 percent for 90 or more days.
His take on the information was that between government
income support and lenders taking action to work with
borrowers, there had not been a major uptick in
delinquencies as of the previous summer.
1:39:05 PM
Vice-Chair Ortiz asked if the department kept the
indicators by region or statewide only data.
Mr. Stickel thought that some data was available by region.
The Department of Revenue (DOR) had been reporting based on
statewide numbers.
Representative LeBon thanked Mr. Stickel for reporting that
banks had been working with borrowers using tools such as
loan forbearance agreements, refinancing, and
restructuring. There were several tools that could be used
by banks to assist borrows. He also appreciated the
delinquency rate information. He thought it would be
interesting to see how everything was played out in a year.
Mr. Stickel replied that economists would be looking at the
effects of Covid-19 for a significant amount of time.
Mr. Stickel moved to slide 6 which showed some of the key
assumptions of the spring revenue forecast. He indicated
that while the Covid-19 situation seemed to be improving,
it remained a source of uncertainty in the forecast. The
pandemic had impacted every type of state revenue in some
way over the prior year. The department's forecast
represented a scenario for how the recovery would unfold.
However, he cautioned that the uncertainty continued to be
particularly large given the ongoing Covid situation.
Mr. Stickel discussed key assumptions. The department was
forecasting a 6.75 percent annual return on investment for
the Alaska Permanent Fund (PF). In terms of federal
revenue, the forecast included the stimulus bills that were
passed through the end of February 2021. The forecast did
not include the stimulus package, the American Rescue Plan,
passed by congress in the previous week. It would be a
significant influx of state revenue that was not reflected
in the spring forecast.
Mr. Stickel continued that for petroleum revenues, the
estimates were based on a $61 per barrel oil price for FY
22. The department's protocol was to assume flat real
prices beyond FY 22. Prices would increase with inflation
only. For non-petroleum revenue the department was assuming
that most underlying economic activity returned to pre-
recession levels by FY 22. It was the same assumption
included in the fall forecast. While optimistic about some
of the proposals put forward to possibly some cruise ship
tourism in the coming summer, the department assumed that
there would be no large cruise ships for the summer of
2021, and a full recovery would not take place until 2024.
The forecast pushed the recovery assumption by 1 year
compared to what the department forecasted in the prior
fall forecast.
1:43:17 PM
Representative Carpenter asked why the tourism recovery
assumption extended out to 2024.
Mr. Stickel answered that the tourism recovery assumption
was a source of significant uncertainty. He elaborated that
when he was developing the fall forecast, he had numerous
discussions with different stakeholders in the tourism
industry to understand what a recovery path might look
like. It was clear that the state would not go from zero to
1.4 million cruise ship passengers in one year. The
recovery assumption the department built in was that cruise
ship levels would reach 50 percent in the first year, 75
percent in the second year, and 100 percent in the third
year. The benchmarks were not based on any particular
information. Rather, the department tried to come up with a
reasonable scenario. He reported that in developing the
spring forecast when it appeared that there might not be a
cruise ship season in the summer of 2021, the department
pushed the set of assumptions out one year. The scenario
was uncertain which was the reason he drew attention to the
assumptions the department made. He hoped that things could
turn out better than projected.
Co-Chair Foster noted Representative Josephson had joined
the meeting.
Representative Rasmussen spoke to tourism. She thought
there was significant uncertainty with the cruise lines.
She reported having a meeting with a couple of industry
representatives earlier in the day. The feedback she
received was impacts to small businesses providing tours
and other excursions on land could also impact the cruise
lines, as they brought in significant revenue from selling
those tours on the ship. She suggested that how the
legislature handled things at the state level and the
ability to bridge the season for small businesses
throughout Alaska could impact 2023 and 2024.
Representative Wool reiterated the cruise ship levels
indicated by Mr. Stickel. He had heard that some people
would choose to fly rather than take a cruise to Alaska. He
thought that as the vaccination rate improved, additional
travel would be likely, and the economy in Alaska would
improve accordingly.
Mr. Stickel responded that vaccination was one of the
reasons for potential optimism. The Covid-19 situation was
difficult to predict. He hoped there would not be another
leg down with new variants. The approach the department
took was to be very clear on its assumptions. The
department was assuming a 75 percent capacity in 2023 and
would continue to monitor capacity going forward. The
assumptions helped people to review the department's
forecast numbers.
1:48:32 PM
Mr. Stickel moved to slide 7: "Relative Contributions to
Total State Revenue: FY 2020." The slide showed the
relative importance of different sources of total state
revenue for FY 20. He highlighted that federal revenue,
investment earnings, and oil and gas were the largest
sources of revenue. All other sources of revenue added up
to slightly more than 12 percent of total revenue in FY 20.
He iterated that the slide reflected total revenue. In
future slides he would present subsets of total revenue
including unrestricted revenue.
Mr. Stickel continued to the spreadsheet on slide 9 which
showed the total state revenue from all sources for FY 20
and the department's forecast for FY 21 and FY 22. The
total revenue came from four sources: Investments, federal
receipts, petroleum, and other non-petroleum. Within the
revenue forecast and budget documents revenues were broken
out further into four categories that described the
restrictions around how the monies could be used.
reflecting the total revenue forecast from FY 20 to FY 22.
Unrestricted general funds (UGF) could be used for any
purpose. Most of the budget discussions would center around
UGF as would the remaining slides of the current
presentation.
Mr. Stickel continued that there were 3 other categories.
There were designated general funds, revenues technically
available for appropriation but customarily used for a
specific purpose. For example, half of the alcohol tax
revenue was customarily appropriated to the alcohol and
drug abuse treatment and prevention fund. Other restricted
funds were dedicated in how they must be used in some way
and truly not available for general appropriation. An
example would be the constitutional dedication of royalty
revenue to the PF and the school fund. Another example
would be aviation motor fuel tax revenue which federal law
dictated must be used for specific purposes. Federal
revenue also had to be used for certain purposes. The
department considered all federal revenue to be restricted
revenue in the forecast.
Representative Carpenter asked about the number for the
total state revenue for FY 20 in the spring forecast was
different than the number in the fall forecast. He wondered
why the number changed if the number was historical.
Mr. Stickel responded that the historical numbers in the
fall forecast were mostly finalized. However, some of them
were preliminary. He indicated that when the department
released the fall revenue forecast the state's
comprehensive annual report had not been finalized. There
were some numbers that were revised slightly between the
fall forecast and the spring forecast.
1:52:09 PM
Mr. Stickel continued to report on slide 9. He relayed that
total state revenue from all sources for FY 20 was $8.7
billion. The forecast was $11.6 billion for FY 21 and
$11 billion for FY 22. The UGF portion was $4.5 billion for
FY 20. The department was forecasting $4.7 billion for both
FY 21 and FY 22. He noted on the righthand side of the
slide there were two columns showing the percentage changes
from FY 20 to FY 22 and from FY 21 to FY 22.
Mr. Stickel moved to slide 10 and reminded members that for
the remainder of the presentation he would be focusing on
UGF revenue forecast since that was where most of the
budget discussions and flexibility about how the monies
could be used laid. Investment revenue was currently the
largest source of UGF to the state and contributed nearly
$3 billion in FY 20 and forecasted to be $3.1 billion in
FY 21 and FY 22. The main element was the percent of market
value (POMV) transfer from the PF that began in FY 19. In
response to some feedback, he had separated out the PF
piece in the presentation.
Mr. Stickel continued that petroleum revenue generated
about $1.1 billion UGF in FY 20. It was forecasted to
contribute $1.2 billion in FY 21 and $1.3 billion in FY 22.
Lastly, non-petroleum sources were estimated to contribute
slightly under $400 million of UGF in each of the following
2 years. He indicated the next several slides he would walk
through each of the revenue sources in greater detail.
Mr. Stickel advanced to slide 11: "Unrestricted Revenue
Forecast: FY 2020 and Changes to Two-Year Outlook." The
slide summarized some of the key changes to the UGF
forecast. Between the fall forecast released in December
[2020] and the current spring forecast released on the
prior day, the department's forecast of oil prices for the
Alaska North Slope (ANS) was increased by $7.73 per barrel
for FY 21 and by $13 per barrel for FY 22. The price
increases were based on continued recovery in stabilization
in the oil markets as the economy continued to recover from
the Covid related recession.
Mr. Stickel reported no change to the forecast for FY 21
and FY 22 for the PF transfer due to the way it was
calculated. In terms of UGF revenue, the FY 21 forecast had
been increased by $332 million. The FY 22 forecast had been
increased by $460 million. He had not included oil
production on the slide. However, he noted that the
production forecast for ANS oil production was increased by
4,700 barrels per day for FY 21 and by 20,100 barrels per
day for FY 22. Between the improved outlook for oil price
and oil production, they counted for the increases to the
revenue forecast.
1:56:04 PM
Representative Rasmussen asked Mr. Stickel to repeat the
revenues for FY 21.
Mr. Stickel responded that for FY 21 the average daily
production forecast for ANS oil was increased by 4,700
barrels per day. For FY 22 the forecast was increased by
20,100 barrels per day.
Mr. Stickel relayed that slide 12 provided more detail on
each of the sources of UGF revenue starting with
investments. The PF transfer was the largest source of UGF
in the forecast contributed $2.9 billion in FY 20 and was
expected to contribute slightly under $3.1 billion in FY 21
and FY 22. In addition to the PF transfer, there was a
small amount of other unrestricted investment revenue that
was primarily earnings on the cash balances of the general
fund.
Mr. Stickel detailed slide 13 which showed the estimated
transfer for each of the following 10 years. The transfers
were estimated to be more than $3 billion every year
growing to $3.7 billion by FY 30. The forecast assumed a
6.75 percent annual return, the current official return
assumption being used by the Alaska Permanent Fund
Corporation (APFC). The forecast was based on a 5 percent
POMV calculation. He noted that the baseline forecast did
not consider any additional draws on the PF beyond the
statutory POMV draw.
Mr. Stickel moved to slide 14: "Unrestricted Petroleum
Revenue: FY 2020 to FY 2022 Totals." The state levied a
property tax on all oil and gas property in the state and
generated slightly more than $100 million per year. He
highlighted that it represented the state's share of
property taxes. Also, over $400 million was generated for
municipalities each year in oil and gas property taxes. The
municipal share was not reflected in the state's revenue
forecast. The state levied a corporate income tax on
qualifying corporations doing business in Alaska. He
reported that FY 20 was a very challenging year in the oil
industry, and since the corporate income tax was a tax on
profits, there was essentially zero revenue in FY 20. The
department was forecasting $25 million in each of FY 21 and
FY 22.
Mr. Stickel reported that the oil and gas production tax
was the state's severance tax on petroleum. For the North
Slope it consisted of a net profits tax with a gross
minimum tax floor. The production tax was expected to bring
in $311 million in FY 21 and $376 million in FY 22.
Royalties from oil and gas production on state land are the
largest source of unrestricted petroleum revenue bringing
in $675 million in FY 20 and forecasted between $700
million and $800 million in each of the following 2 years.
He pointed out that the slide reflected only the
unrestricted revenue share of the royalties. About 30
percent of royalties were considered restricted revenue
including the portion of royalty revenue deposited to the
PF and also a portion deposited to the school fund. Later
in the presentation he would dive into some of the key
assumptions underlying the petroleum revenue forecast.
2:00:34 PM
Representative Wool referenced Mr. Stickel's presentation
about the order of operations presented on March 3, 2021.
One of the points he made at the time was that the total
tax paid to the state was $163 million. He wondered where
the number was reflected on slide 14.
Mr. Stickel responded that it related to the oil and gas
production tax on slide 14. The bottom line in the order of
operations presentation was looking at the department's
fall forecast for FY 22. That number was currently $376
million. Based on higher oil prices and higher oil
production in the forecast he was expecting an increase in
the production tax revenue compared to what he had expected
in the fall forecast.
Representative Wool thought the state was looking at an
increase of about $200 million. He asked if he was correct.
Mr. Stickel responded in the affirmative. The exact
increase for FY 22 was about $213 million to the production
tax forecast.
Representative Josephson noted there being a significant
amount of talk in the hallways about revenue replacement
from the federal government's American Rescue Plan Act
monies. There was concern about whether those dollars would
be limited to certain types of spending. He wondered about
those dollars being used for revenue replacement if Alaska
could make a case for revenue decline due to Covid-19. He
asked if Mr. Stickel thought it would be a good argument
for the state to make.
Mr. Stickel responded that one way to look at the potential
impacts of Covid and the Covid recession would be to look
at the forecast issued in fall 19. It was the last forecast
before Covid took place. In terms of other commentary on
the recovery plan and potential actions he deferred to the
commissioner of DOR.
2:03:53 PM
LUCINDA MAHONEY, COMMISSIONER, DEPARTMENT OF REVENUE,
reported that the department had looked at Covid impacts
and had done an analysis beginning from 2019 through the
current year. Regarding the interpretation regarding what
constituted revenue replacement, she was awaiting guidance
from the U.S. Treasury to establish what the rules would
specifically mean. Until the department received the
information, it would be premature for her to provide a
detailed response.
Mr. Stickel advanced to slide 15 to examine the
unrestricted non-petroleum revenue totals from FY 20 to
FY 22. He pointed out that the slide only showed the
unrestricted non-petroleum revenues. The largest component
was taxes. Corporate income tax, typically the largest non-
petroleum tax type, generated slightly more that $100
million in FY20. The department was forecasting smaller
revenues over the next 2 years, and he would go over the
details in the next slide. Other significant taxes included
mining license tax, insurance premium taxes, fisheries
taxes, and excise taxes. In addition to taxes, the other
non-petroleum revenues included licenses and permits,
charges for services, fines and forfeitures, rents and
royalties from non-petroleum sources, and miscellaneous
revenue. All of these non-petroleum items added up was
expected to be $389 million for FY 21 and $355 million for
FY 22.
Mr. Stickel continued to slide 16: "Unrestricted Revenue
Forecast: Non-Oil & Gas Corporate Income Tax (CIT)." The
slide provided detail on the corporate income tax forecast.
There were 2 major unusual impacts to consider in the
current circumstance. First, because of the recession,
profits fell in many industries in 2020. Some industries,
such as the tourism industry, were facing a very
challenging 2021 and beyond. Second, there were CARES Act
impacts. He reiterated that a provision of the federal
CARES Act allowed corporations to carry back any net
operating losses from tax years 2018 through 2020. The
losses could be carried back for up to 5 tax years and
potentially receive refunds for previous taxes paid.
Mr. Stickel continued that there was also a provision that
allowed companies to accelerate certain alternative minimum
tax refunds to calendar year 2019. Under Alaska's corporate
income tax statutes, the state adopted the federal tax code
by reference. The Coronavirus Aid, Relief, and Economic
Security (CARES) Act provisions of the net operating loss
carry back were automatically applied to Alaska's tax. For
general corporate income tax, he was expecting lower
revenue in FU 21 even before the CARES Act based on the
weakness in the economy. The CARES Act impacts further
reduced FY 21 revenue by $20.5 million down to a
$55 million forecast. For FY 22 he was estimating $83.6
million of CARES Act related refunds bringing the net down
to $10 million for FY 22. Based on an assumption of
economic recovery in most industries, the department
forecasted that general corporate income tax revenue
rebounded to $130 million by FY 23.
2:08:19 PM
Mr. Stickel relayed that slide 17 was a similar chart but
for the oil and gas income tax. The industry was especially
hard hit by Covid and essentially paid no corporate income
tax for FY 20. The department was forecasting very low
revenues for FY 21 even before the CARES Act impacts. He
was also forecasting 25 million for FY 21 after the CARES
Act impacts. For FY 22 the department was anticipating $56
million in CARES Act related refunds bringing the net
revenue to a total of $25 million. For FY 23 the department
was forecasting $110 million from the oil and gas corporate
tax.
Representative Wool referred to slide 16 and slide 17 in
aggregate he suggested that the state would have about $162
million in lost revenue due to the corporate income tax
being linked to the federal tax code with regards to the
federal CARES Act that allowed the carry back losses for
petroleum and non-petroleum corporations. The states
revenue was $163 million less in FY 22 due to the corporate
tax law. He asked if he was accurate.
Mr. Stickel replied that the $162 million between the 2
taxes would be the total impact of the CARES Act
provisions. In terms of the revenue reductions, if a
company could not carry back the losses, they could carry
them forward which would result in a total revenue
deduction to the state across the 2 years would be somewhat
less.
Representative Wool suggested that if companies carried the
losses back, they could carry them back 5 years. If
companies carried them forward, he wondered if they could
be divided up over the 5 years rather than all in one year
in 2023.
Mr. Stickel replied that the provision under the CARES Act
allowed a company to carry a loss back and offset up to 5
years of prior years' taxes paid if they were paid. Absent
that provision, the rule was that a company could carry a
loss forward and offset up to 80 percent of their taxable
income in a future year.
Representative Wool suggested that if the provision was not
in place and a company carried a loss forward, 80 percent
of $160 million would be realized in 2023. He wondered if
revenue for 2023 would be down 80 percent over the
following year if they carried their losses from 2021.
Mr. Stickel replied that the answer was more nuanced based
on the subset of companies that had the losses and when
they would be expected to have sufficient income to offset
those losses. The concept was correct that if a company
did not carry back the loss in the current year, they would
carry it forward in future years.
2:12:20 PM
Representative Carpenter wondered if it was safe to say
that the tax picture for FY 23 would likely change. Mr.
Stickel confirmed that there was uncertainty in the FY 23
number. He indicated that what he did know was that
tourism-related companies accounted for a significant share
of the expected carry back losses for the non-petroleum
corporate tax. The department was not expecting recovery in
the non-petroleum companies in terms of corporate taxes
until after 2023. He added that to the extent that some of
the recent policy action helped those companies return to
profitability, it would offer a potential upside to the
forecast.
Mr. Stickel moved slide 19 that started with the oil price.
It showed DOR's spring 2021 price forecast for ANS crude
and a comparison to the previous fall forecast. The oil
price forecast was based on the futures market projections
as of the final week of February [2021]. The department
used the futures market to forecast FY 22 and held the
forecast constant in real terms beyond FY 22. The
department had seen that oil prices had stabilized over the
previous few months as demand had recovered and markets had
worked through some of the excess supply. In total, the
spring forecast for FY 21 was $53.05 per barrel which was
$7.73 per barrel higher than the fall forecast. He reported
that for FY 22 the forecast had increased by $13 per barrel
to $61 per barrel.
Representative Carpenter assumed, comparing the fall
forecast to the spring forecast numbers, that the fall
forecast numbers were also based on futures projections.
Mr. Stickel replied he was correct. The department used the
same protocol for both the fall and spring forecasts.
Representative Carpenter thought the fall forecast had been
stuck at $55 per barrel and the forecast was a decline from
that dollar amount. The exact opposite occurred. However,
it was not from the state's guessing. It was based on what
the future's market thought was going to happen. He asked
if he was correct.
Mr. Stickel reported that in the fall forecast, the
department based the FY 22 forecast on the futures market
projections for Brent crude. As of the final week in
November it yielded a FY 22 price of $48 per barrel. The
department updated the spring forecast using the exact same
methodology to yield the price forecast of $61 per barrel.
2:16:56 PM
Mr. Stickel indicated that slide 20 showed how the
department's price forecast compared to various other
sources of forecasts as of March 9, 2021. The Alaska North
Slope price forecast was compared to Brent price, the
benchmark crude the department used for comparison because
of it being a widely traded global crude of a similar
quality as ANS crude and generally priced similarly in the
market. He pointed out the comparison of forecasts to the
Brent forecast from the Energy Information Agency (EIA),
the current futures market outlook, and average analysts'
forecasts. The slide indicated that for the following
couple of years the state's forecast was in the range of
other sources of oil market expectations.
Mr. Stickel turned to slide 21. He highlighted that oil
prices could turn out differently than forecasts. The chart
showed how unrestricted revenue for FY 22 would change with
oil prices higher or lower than forecasted. As a rule of
thumb, below the department's forecasted price, each dollar
change in ANS equated to about $25 million of unrestricted
revenue. Above the state's forecasted price each dollar
change equated to about $35 million of unrestricted
revenue.
Mr. Stickel continued to slide 22 to discuss the production
forecast. The slide showed the forecast for ANS production
as well as a high case and low case over the following 10
years. The production forecast was prepared in
collaboration with the Department of Natural Resources
(DNR). Compared to FY 20, the state was showing a slight
increase in production for FY 21 to 480,000 barrels per
day, then a slight decrease in FY 22 to 460,000 barrels per
day.
Mr. Stickel explained that the reduction in drilling in FY
20 due to Covid was one of the major drivers behind the
fact that the state was looking at a slight production
decline in FY 22. However, for FY 23 and beyond, the
department expected production to increase reaching 565,000
barrels per day by FY 30. There were two major factors that
contributed to the outlook for increasing production. The
first factor was the assumption that drilling would resume
in the existing fields. He had seen some positive
announcements recently and was hoping to see some more in
the near future. He also hoped to see a reevaluation of the
forecasted long-term decline rate assumption for the
existing fields by DNR. The second factor was an improved
outlook for new fields coming online based on the higher
oil price forecast. As always, the production forecast was
the most likely value taken from a range of possible
outcomes. Comparing the high and low cases, by 2030
production could be as high as 800,000 barrels per day or
as low as 300,000 barrels per day.
Mr. Stickel advanced to the graph on slide 23 that showed
the base case spring forecast for ANS oil production and
how it compared to the fall 2020 forecast. Over the full
10-year period the forecast had increased for each of the
years due to a combination of lower expected decline rates
at the existing fields compared to the fall forecast
assumption as well as an improved outlook for new
developments based on the higher oil forecast.
2:21:24 PM
Representative Wool found it interesting in forecasting
that a slight change in oil price for a short period
affected the outcome out 10 years. The previous few slides
reflected an increased projection several years out. He
referenced slide 10 showing that the price of oil changed
from $50 per barrel to $60 per barrel and stayed parallel 8
years to 10 years out. He wondered if the numbers were
fickle.
Mr. Stickel replied that in terms of the oil production
forecast there were two significant components to the
increase in the production forecast. The first component
was the improved outlook for new development based on
higher oil prices. The second component was that DNR took a
look at the existing fields and the reservoir history and
reevaluated the expected long-term decline rate. He noted
the challenge of oil price forecasting. While the
department thought its forecast was the most accurate given
point-in-time, it was worthwhile considering what would
happen under higher or lower prices. He thought the chart
on slide 21 might help to understand how higher or lower
prices would impact the revenue forecasts. The Department
of Revenue also prepared a 10-year outlook with sensitivity
to oil prices and looked at a range of possible oil prices
to help policy makers understand how higher or lower prices
would impact revenue.
Representative Wool suggested that when the price of oil
went up production went up also. He mentioned fracking. He
wondered if his line of thinking was accurate. He was
skeptical looking 10 years ahead. He asked how often DNR
conducted an assessment in the decline of fields.
Mr. Stickel understood that DNR looked at the decline rates
and revisited the assumptions on a regular basis. They
updated the forecast twice per year for DOR's revenue
forecast. He deferred to DNR regarding any nuance questions
about production forecasts. He relayed that DNR had
delivered an excellent presentation on the fall forecast to
the committee. He was certain DNR would be happy to provide
detailed information on their spring production forecast as
well.
2:27:37 PM
Representative Carpenter had looked back at the fall
forecast. He was currently looking at the Brent forecasts
on slide 20. He noted that the DOR, Nymex, analysts, and
EIA forecasts from the fall did not see an increase in the
price from $55 to the current price. He wondered what was
happening and what did everyone miss. He thought of Covid,
elections, or a worldwide influence. He asked Mr. Stickel
to share his thought on what was currently happening.
Mr. Stickel responded that forecasting oil prices was
extremely challenging which was the reason for the range
that could be seen on slide 21. IN terms of what had
changed in the market, he thought the economic recovery and
the optimism about a potential in an improvement in the
Covid situation had gone better than anticipated. He had
discussed the roll-out of vaccines, a process that had gone
better than expected. He mentioned demand and the general
economic recovery had gone better than expected. He largely
attributed the change to a better-than-expected recovery.
He was looking at a note earlier in the day from an
economic analyst who was comparing how long it took the
economy to return to the prerecession trend in historical
recessions versus the current recession. The current
recovery was proceeding much quicker than historically was
the case.
Mr. Stickel reported that slide 24 continued on to look at
how allowable lease expenditures for the North Slope had
changed over the past decade as well as a forecast for the
next 10 years. Company spending was an important measure of
current and planned Investment in Alaska. It was also
something the department tracked because the costs of
production were deductible in the production tax
calculation.
Mr. Stickel continued that in FY 20 North Slope capital
expenditures were $2.6 billion and operating expenditures
were $2.9 billion. It was the second year in a row of
increases. For FY 21 with the Covid situation and the low
prices earlier int eh fiscal year, he had seen significant
cutbacks in spending. He was expecting that for FY 21 North
Slope spending would be down by $2.7 billion year over
year.
Mr. Stickel indicated that there were signs of recovery.
The department was forecasting increases in North Slope
spending in FY 22 and FY 23 based on some of the
investments in the new developments such as Willow and
Pitka as well as the resumption of drilling in the major
fields. Long-term, he was expecting capital expenditures to
stabilize at a little over $2 billion per year.
Mr. Stickel relayed that on the operating expenditure side
there was a reduction in the previous year. He was
expecting that some of the reductions become permanent.
Companies had figured out how to reduce costs, and some of
the cost reductions would be maintained over time.
2:32:02 PM
Representative Rasmussen asked how a $2.7 billion loss in
capital investment trickled down and affected Alaska's
economy.
Mr. Stickel replied that in general, a $2.7 billion
reduction in capital spending would be significant. In the
forecast for FY 22 oil production was expected to decline
year over year. On one hand, less activity would take place
which would impact jobs and the money spent with service
providers who would also be impacted. He noted that for
native corporations, one of the major service providers on
the North Slope, shareholder dividends would be affected.
He confirmed that the loss of capital investment would
reverberate throughout Alaska's economy. The optimism about
future spending bouncing back he definitely hoped would pan
out.
Representative Rasmussen asked Mr. Stickel to speak to how
many different support companies serviced the larger oil
companies on the North Slope.
Mr. Stickel responded that there were several companies
involved with the North Slop operations that employee many
people and generated significant economic activity in the
state. He could follow up with some numbers.
2:34:35 PM
Mr. Stickel reported that slide 25 showed a similar history
in forecast for transportation costs. The transportation
costs were shown on a per barrel basis and they included
all the costs of getting oil from the North Slope to market
including feeder pipeline tariffs, the Trans Alaska
Pipeline tariff, and tanker costs. The department was
forecasting $8.89 per barrel average transportation costs
for FY 21 and $9.72 per barrel for FY 22. The interesting
take-away for the slide was that DOR was forecasting that
transportation costs would remain under $10 per barrel
through FY 30. It was largely a function of oil production
and that the department was forecasting some modest
increases in production. The costs of operating
transportation infrastructure were being spread out over a
slightly increased number of barrels over time which helps
to keep the lid on transportation costs.
Representative Rasmussen noted that a $2 increase in
transportation costs was fairly substantial. She thought
the cost equated to about $8 to $10 per barrel. She asked
Mr. Stickel to highlight what happened between FY 19 and
FY to explain the steep increase.
Mr. Stickel answered that one of the impacts was production
was expected to be slightly lower in FY 22. He suggested
that when production showed even slight declines, there was
an increase in transportation costs on a per barrel basis.
He noted that when production increased, transportation
costs stabilized on a per barrel basis.
Representative Rasmussen asked, if there was a massive
change in the oil tax structure, whether prices could be
driven even higher as a result of lower production. She
thought that if the financials did not work because of oil
taxes getting too high at a certain point companies might
decide to make investments in other places.
Mr. Stickel replied that anything that caused production to
increase would place downward pressure on the pre barrel
transportation costs. Conversely, anything that caused
production to decrease would put upward pressure on
transportation costs on a per barrel basis. There were a
number of factors, fiscal policy being one of them, that
could influence production potentially.
Representative Rasmussen asked how Alaska ranked in terms
of transportation costs compared to Texas and North Dakota.
Mr. Stickel responded that Texas was relatively close to
the delivery point for oil. Whereas South Dakota suffered
from relatively high transportation costs. There was a
significant distance from the production area to market.
2:38:55 PM
Representative Wool understood the relationship between how
much oil was being moved and the cost per barrel to move
it. A set fixed cost was cheaper per barrel. The forecast
was showing a 25 percent increase in transportation costs
over the next couple of years and DOR's forecast was also
showing an increase in production in the same period. He
argued that increased production should make the cost go
down per barrel. He did not understand the correlation. He
commented that in FY 13 the price was different but the
production was higher. The price at the time was just over
$11 per barrel. He wondered if the cost was slightly
fickle.
Mr. Stickel answered that there were multiple factors
influencing transportation costs. Looking back at the early
twenty-teens in addition to higher price production there
were also significantly higher costs such as higher marine
transportation costs. In terms of Representative Wool's
comments about production increase, he clarified that the
production forecast had increased for all years. In
absolute terms DOR was forecasting a year over year decline
in production in FY 22. His comments about production and
the transportation costs for FY 22 were based on the fact
that DOR was, in absolute terms, expecting that production
would be lower in FY 22 which correlated with the higher
per barrel transportation costs that he was expecting.
Beyond FY 22 the department was forecasting increased
production in absolute terms year-over-year which
correlated with a stabilized transportation cost on a per
barrel basis.
Representative Wool commented that the difference in price
was a large percentage, whereas a difference in production
was a small percentage. He realized it was not a
dollar-to-dollar comparison. He believed transportation
costs should be looked at with additional scrutiny later.
2:42:27 PM
Representative LeBon noted it had been stated that
forecasts were either wrong or lucky. He asked how much
one-on-one investigation with the industry players in
developing the forecast took place. He wondered if the
department reached out to the industry to get a feel for
forecasting numbers out to FY 30 or were they just a best
guess.
Mr. Stickel responded that in terms of the petroleum
revenue forecast the department maintained an open dialog
with industry. The department required industry to provide
it with detailed production plans once a year for the fall
forecast. The department also required the industry to
provide a 5-year outlook of capital and operating
expenditures twice a year for the fall and spring
forecasts. In additional to the data that was submitted via
tax returns, DOR met with key players ahead of each
forecast to have discussions about their plans, what they
were seeing, and some of DOR's assumptions and they
provided feedback. The state definitely incorporated
industry input into the forecast.
Representative LeBon wondered if the forecast assumed that
the Arctic National Wildlife Refuge (ANWR) was being
developed. Mr. Stickel responded, "No." He explained that
the high and low case on slide 22 were based on the same
subset of fields in the forecast. The high and low case
represented the improved chance of occurrence for those
fields that were in the forecast as well as different
potential production paths for each field. For a given
field there could be a higher or lower than expected long-
term decline rate. The ANWR production was not in the
department's forecast presently.
Representative LeBon noted that at one time it was
projected that 1 million barrels would get back into the
pipeline. He wondered if that projection assumed several
things would happen together. He mentioned many factors.
The likelihood of all of the factors lining up was a
longshot at best. In order to get back to 1 million barrels
of oil per day would take a combination of events to occur.
2:46:04 PM
Representative Rasmussen was reviewing the history of oil
production. It appeared that between FY 10 FY 14 production
was relatively stable between 400,000 and 640,000 barrels
per day each month. She asked if there were other factors
in that 4-year to 6-year period that caused the
transportation costs to go from about $6 per barrel to over
$10 per barrel. She was confused as to what caused the
large increase in a short window of time with relatively
stable production levels.
Mr. Stickel mentioned that there was a new methodology
agreed upon for Trans-Alaska Pipeline Tariffs which
affected the costs. There was also an increasing share of
production from fields that were paying feeder pipeline
tariffs. He explained that as an increasing share of
production took place further away from the inlet of the
Trans-Alaska Pipeline, the tariffs of getting the oil to
pump station 1 became part of the transportation costs.
Another factor was general inflation of costs.
Representative Wool noted that on slide 22 the difference
between the low and the high forecast was equal to the
amount of production there was currently about 500,000
barrels per day. It seemed like a generous range in terms
of forecasting. He asked how much of the transportation
costs were related to pipeline and tanker in percentages.
Mr. Stickel responded that just looking at FY 22, the total
transportation cost was estimated to be $9.72 per barrel.
He reported the breakdown of the total transportation cost:
$3.43 per barrel for marine costs; $5.82 per barrel for the
Trans-Alaska Pipeline Tariff; $.63 for feeder pipeline
tariff; -$.07 per barrel for a combination of other costs
and quality bank. The quality bank adjustment was an
adjustment for in-state refineries which effectively
high-grade the oil stream slightly. Therefore, they pay
into the bank which was adjusted into the net-back cost.
2:50:32 PM
Mr. Stickel turned to the final slide of the presentation,
slide 26, which looked at tax credits. He reiterated that
prior to 2016 there were various tax credits in statute
that could either be applied against tax liability or
turned into a tax credit certificate. The certificates
could then be purchased by the state at face value.
Mr. Stickel continued that in 2016 and 2017 the legislature
made changes to the credit laws that put sunset provisions
in place for new credits. Companies could no longer earn
any credits eligible for state purchase. However, there was
still an outstanding balance of tax credit certificates
that were earned prior to the sunset dates.
Mr. Stickel continued that there was an estimated
$739 million of outstanding tax credits that were available
for state purchase at the end of FY 21. There was a
statutory formula that suggested an annual appropriation
that might be made for purchase of those credits. The
formula was based on either 10 percent or 15 percent of the
estimated production tax levy before subtracting tax
credits. For FY 21 no appropriation was made. For FY 22 the
statutory appropriation was estimated at $114 million, an
increase from an estimated $60 million in the fall
forecast. He suggested that for the spring forecast if the
statutory appropriation was made in each year beginning in
FY 22, all outstanding credits would be paid off by FY 27.
Representative Josephson reported that in the 30
legislature he would get frequent visitors, typically from
Manhattan. He noted Bank of America for example. They would
be accompanied by a lobbyist and pleaded for their tax
credits. Those visitors were no longer pleading and not
because of Covid or a lockdown. He asked if banks had
decided not to hit their heads against the wall or had gone
belly-up. He wondered if Mr. Stickel knew why legislators
were no longer being dunned.
Mr. Stickel heard that the holders of the tax credits would
still like to be paid for their tax credits. He could not
speak to why they had not been knocking on the
representative's door.
2:54:14 PM
Commissioner Mahoney responded that the banks had been
visiting the Department of Revenue and were still looking
for the credits to be purchased by the state. The
department was continuing to pursue solutions avoiding the
solution overturned in the Supreme Court. As she got closer
to identifying the proper solution, she would let the
committee know.
Representative LeBon confirmed that lenders never moved on
or forgot. They wanted to do everything to collect the
debt. He was glad to hear the commissioner was working on a
solution.
Representative Wool mentioned the governor's current
proposal to pay $60 million in tax credits out of Alaska
Industrial Development and Export Authority (AIDEA)'s
funds. He asked for clarification around the figure of $114
million.
Commissioner Mahoney responded that $60 million was the
original budgeted amount with the funding source being from
AIDEA. The department had just released the numbers with
revenue updates. Obviously, the liability for FY 22 was
much higher due to the increase in price. However, she had
not had an opportunity yet to discuss the issue with the
governor or with the Office of Management and Budget (OMB).
Those conversations would be occurring over the following
few weeks.
Representative Carpenter was speaking to industry. He
relayed that there were financial structures in place such
that if the tax credits did not get repaid, there would be
negative consequences to operators that were promised
payments in the past. He argued that it was not an option
for the state not to pay its debts.
Mr. Stickel was available for questions.
Co-Chair Foster invited the commissioner to make final
comments.
Commissioner Mahoney summarized that the state's fiscal
revenue outlook for FY 21 and FY 22 was much better
presently than it was in the fall forecast. She reported
that for FY 21 the increase UGF over the fall forecast was
$332 million. For FY 22 the increased total UGF was $60
million. The increased revenue estimates as well as the
improved economic indicators, good returns on the state's
large investments, excellent vaccine availability, and the
additional federal stimulus dollars created a sense of
optimism.
Commissioner Mahoney commented that regarding the American
Rescue Plan that was approved in the prior week, it was
likely on legislator's minds how the $2.9 billion allotted
to Alaska would be rolled out. She indicated the department
would be needing guidance from the U.S. Treasury as to how
the money could be spent. The Office of Management and
Budget would manage the entire process. As OMB put together
their documents the information would be shared with the
legislature. She thanked the committee for scheduling the
hearing on short notice. The department wanted to ensure
that the information was provided to the finance committees
as soon as possible.
Co-Chair Foster reviewed the agenda for the following day.
ADJOURNMENT
3:01:44 PM
The meeting was adjourned at 3:01 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR Spring 2021 Revenue Fcst_2021.03.15 HFIN.pdf |
HFIN 3/16/2021 1:30:00 PM |
|
| DOR Response to HFIN Spring 2021 Forecast Presentation 2021.03.22.pdf |
HFIN 3/16/2021 1:30:00 PM |
|
| HB 21 Public Testimony Rec'd by 031622.pdf |
HFIN 3/16/2021 1:30:00 PM |
HB 21 |