Legislature(2023 - 2024)ADAMS 519
01/19/2024 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Revenue Forecast | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 19, 2024
1:34 p.m.
1:34:14 PM
CALL TO ORDER
Co-Chair Johnson called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Bryce Edgmon, Co-Chair
Representative DeLena Johnson, Co-Chair
Representative Julie Coulombe
Representative Mike Cronk
Representative Alyse Galvin
Representative Sara Hannan
Representative Andy Josephson
Representative Dan Ortiz
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
Representative Neal Foster, Co-Chair
ALSO PRESENT
Adam Crum, Commissioner, Department of Revenue; Dan
Stickel, Chief Economist, Department of Revenue.
SUMMARY
PRESENTATION: REVENUE FORECAST
Co-Chair Johnson welcomed committee members and staff. She
gave an overview of the agenda for the day.
^PRESENTATION: REVENUE FORECAST
1:35:54 PM
ADAM CRUM, COMMISSIONER, DEPARTMENT OF REVENUE, introduced
the PowerPoint presentation "Fall 2023 Forecast
Presentation House Finance Committee" dated January 19,
2024 (copy on file).
Co-Chair Johnson asked Commissioner Crum about Mr. Brandon
Spanos, the acting director of the Tax Division within the
Department of Revenue (DOR). She wanted to know the status
of the position and whether there were recruiting efforts
for the position.
Commissioner Crum responded that there was an initial
posting for the position but there was an error in the
posting that had since been fixed. He had gone through
candidate resumes and there were interviews set up in the
following week. Other employees had stepped up to
compensate for the unfilled position.
Co-Chair Johnson asked if Commissioner Crum anticipated
there being a new hire within the next few weeks.
Commissioner Crum responded in the affirmative. He assured
her that all of the duties and responsibilities for the tax
director were still being covered.
1:38:33 PM
DAN STICKEL, CHIEF ECONOMIST, DEPARTMENT OF REVENUE,
advanced to slide 2 and detailed the agenda of the
presentation. He continued to slide 4, which provided some
detail on the revenue forecast. He noted that DOR published
the fall forecast on December 14, 2023, and the forecast
was published in the 2023 Revenue Sources Book. He
explained that the book and the forecast became the basis
for the governor's budget proposal. The department would
update the forecast in March or April and the spring
forecast would become the forecast that underlined the
final version of the budget. The entire revenue book
included significant information and charts and tables
around state revenue sources and the ten-year forecasts for
the sources. All of the information was available on the
department's website, which was included as a link on the
slide.
Mr. Stickel continued on slide 5. He reiterated that the
fall revenue forecast was a one-point forecast within a
range of uncertainty. The slide listed key assumptions that
were considered in the forecast. He noted that any of the
assumptions could be wildly inaccurate due to volatility.
The department was forecasting a 7.45 percent investment
return for the Permanent Fund in FY 24 and 7.20 percent for
FY 25 and beyond. The investment forecast incorporated
actual revenue through the end of October of 2023 and a
7.45 percent projection through the end of the fiscal year.
Investment revenues had significantly outperformed since
the end of October of 2023. The department had incorporated
stimulus funding into its assumptions about the federal
impacts and the forecast included updated estimates of
potential Infrastructure Investment and Jobs Act (IIJA)
funding. The petroleum forecast was based on the Alaska
North Slope oil price of $82.39 per barrel for FY 24 and
$76.00 per barrel for FY 25. The department was projecting
continued economic growth for non-petroleum revenues.
Strong tourism was projected to continue with an assumption
of 100 percent capacity for the 2024 cruise season. The
department assumed a continued three-year recovery for the
fishing industry. The forecast for the mining industry was
based minerals prices from the futures markets.
1:42:42 PM
Representative Galvin asked for a better sense of
perspective as to which assumption represented the biggest
risk to the bottom line. She asked if the state would lose
more money from a 25 percent drop in oil prices or from a
25 percent reduction in expected returns.
Mr. Stickel responded that in terms of short-term impacts,
the largest component of the investment revenue to the
general fund was the percent of market value (POMV) draw
from the Permanent Fund. The draw was a fairly stable
revenue source because the transfer to the general fund was
based on the average ending value of the first five fiscal
years out of the last six fiscal years. The general fund
portion was less subject to volatility. Petroleum revenue
had a progressive fiscal system which meant that revenue
streams were significantly impacted by oil prices
increasing or decreasing.
Representative Josephson referred to the Alaska North Slope
oil price of $82.39. He asked what price projections the FY
24 operating was based on.
Mr. Stickel responded that he had a future slide on the
topic. The spring forecast for FY 24 was $73 per barrel.
1:45:09 PM
Representative Stapp understood that all of the market
pressure indicated downward trends. He asked whether there
was reasonable expectation that $82.39 per barrel would be
the average.
Mr. Stickel responded that oil prices were volatile and the
likelihood that the barrel price prediction would be exact
was low; however, the department had accurately predicted
oil prices within a one dollar range as of the prior week.
Commissioner Crum added that for the public's knowledge,
the estimate was derived during the first five days of
December of 2023 and indicated the median oil price. The
estimate would change as more complete data was collected,
but the estimate would not be reflected in the forecast
until it was updated in the spring.
Co-Chair Johnson asked when the spring forecast would be
released.
Commissioner Crum responded that he was shooting for March
15, 2024.
1:47:12 PM
Co-Chair Edgmon understood that FY 24 was about halfway
over. He asked whether the department considered low-case,
mid-case, or high-case scenarios. The probability would
seem to be a low-case scenario given the volatility in oil.
Mr. Stickel replied that the department acknowledged that
the prices of oil were volatile and conducted a sensitivity
analysis to look at the impacts of a range of oil prices.
The department also had the ability to run a sensitivity
analysis to look at different values for oil production and
investment returns. He had a future slide illustrating the
revenue sensitivity around oil prices in particular. The
department was able to incorporate actual data through the
end of November of 2023 for the FY 24 forecast issued in
December of 2023.
Co-Chair Edgmon asked if the department released monthly
tallies or forecasts.
Commissioner Crum responded that the department conducted
an internal analysis but it was not planning on publishing
its findings. The department used the data to ensure that
the spring forecast was sound. If there were a massive
global event, the department would work with the Office of
the Governor and highlight the potential variances in
prices. There was no intention of posting the internal
analyses because the price predictions were tracking
tightly to the actuals.
Co-Chair Edgmon thought the department had conducted
monthly forecasts at some point in the past.
Commissioner Crum responded that his predecessor had
conducted monthly forecasts.
Co-Chair Edgmon wanted to emphasize that monthly forecasts
had occurred in the department's past.
1:50:11 PM
Co-Chair Johnson asked what would cause the projections to
be released in April rather than March.
Commissioner Crum responded that the department was aiming
to release the projections on March 15, and it was likely
to do so. There was the possibility that the market could
become volatile and an event like the war in Ukraine could
cause the projections to be delayed. The projections were
likely to be released on March 15 unless there was a
catastrophic global event that would drastically change the
market.
Co-Chair Johnson commented that there were two days of low
oil prices in 2023, which were reflected in the [2023]
spring forecast. She thought it was problematic.
Representative Ortiz asked for clarification that the FY 24
budget was based on a $73 assumption for the price of oil.
He understood that on June 30, 2024, the average price
would likely be $82.39. He asked if he was correct in his
understanding.
Mr. Stickel responded in the affirmative. He had an
upcoming slide with more details.
Representative Ortiz asked how much more revenue was
expected. He asked if it was reflected in the $200 million
figure.
Mr. Stickel responded in the affirmative.
1:52:48 PM
Mr. Stickel continued on slide 6, which was a visual
depiction of the relative contributions to total state
revenue in FY 23. The state revenue was dominated by
federal revenues, investments, and petroleum. In FY 23, all
other revenue sources amounted to about 7.4 percent of the
total revenue.
Mr. Stickel moved to slide 7 and relayed that it was
expected that federal revenue would account for almost 50
percent of total state revenue. Investment earnings were
based on actual performance through the end of October of
2023 as well as a projection for the remainder of the
investment for FY 24. He shared that earnings had
significantly outperformed expectations.
Representative Galvin noted that the portion of expected
total federal contributions reached nearly 50 percent in FY
24 which was up from 37 percent in FY 23. She thought a 50
percent reliance on federal dollars seemed high. She
wondered if a high reliance on federal dollars was common
and whether there was concern that the reliance could set
the state up for failure.
Mr. Stickel agreed that 50 percent was a high share. The
high number was related to temporary federal spending and
COVID-19 relief funds. The ten-year projections
incorporated the way in which the stimulus bills would flow
through the budget and eventually taper off.
1:56:01 PM
Representative Hannan asked Mr. Stickel to describe the
three main sources in gross dollars rather than
percentages.
Mr. Stickel deferred the question because he had the exact
numbers on an upcoming slide.
Representative Josephson understood that the investment
earnings were up by $2.5 billion and the increase was even
greater on the corpus [of the Permanent Fund] side. He
asked if his understanding was correct.
Mr. Stickel responded that the estimate was based on all
investment earnings and included both the corpus and the
Earnings Reserve Account (ERA). The figure was an
approximate number based on analysis.
Representative Josephson commented that there had been a
much publicized concern about the state's inability to fund
a dividend. He asked if the concern had been overcome.
Commissioner Crum responded that it was a much more
positive outlook. The Alaska Permanent Fund Corporation's
(APFC) consultant, Callan and Associates, confirmed that
the outlook was improving significantly. He argued that
there had been a massive step forward. The market returns
were particularly significant in the domestic equity sector
and had helped APFC as well as the Alaska Retirement
Management Board (ARMB) funds.
1:58:50 PM
Mr. Stickel moved to slide 9, which showed a summary of the
changes between the spring 2023 revenue forecast and fall
2023 revenue forecast. The slide was focused on the
unrestricted revenue portions. The FY 24 assumption for oil
prices had increased by $9.39 per barrel and the FY 25
assumption by $6.00 per barrel. The assumptions were based
on the most current assumptions from the futures markets.
There was a small decrease in the FY 25 Permanent Fund
transfer to the general fund based on final performance
information for FY 23. The value for the FY 25 transfer was
now known with certainty. The unrestricted revenue,
excluding the Permanent fund transfer, had increased for FY
24 by $228.3 million and for FY 25 by $86.9 million. The
unrestricted revenue including the Permanent Fund transfer
had increased for FY 24 by $228.2 million and for FY 25 by
$79.1 million.
Mr. Stickel advanced to slide 10, which detailed the total
revenue forecast for FY 23 through FY 25. The revenues were
broken out into four different categories in the forecast
and in the budget: unrestricted general fund (UGF),
designated general funds (DGF), other restricted revenue,
and federal revenue. The remainder of the slides in the
presentation were focused on the UGF revenues that could be
appropriated by the legislature for any purpose. The
designated general funds were technically available for
appropriation for any purpose, but were customarily
appropriated for a specific purpose, such as a share of the
alcohol tax revenue being allocated to alcohol abuse
treatment and prevention. He noted that federal revenue
showed all federal receipts as restricted.
Co-Chair Johnson asked Mr. Stickel to detail the numbers on
slides 8 and 9.
Mr. Stickel responded that the Revenue Sources Book
reported that total state investment revenue for FY 23 was
$4.7 billion, $1.8 billion for FY 24, and $5.5 billion for
FY 25. Total federal dollars were $5.8 billion in FY 23,
$5.9 billion in FY 24, and $6.3 billion in FY 25. Total
petroleum revenue was $3.9 billion in FY 23, $3 billion in
FY 24, and $2.6 billion in in FY 25. Non-petroleum revenues
were $1.2 billion in FY 23 and $1.3 billion for both FY 24
and FY 25. Total state revenue in FY 23 was $15.5 billion,
$12 billion in FY 24, and $15.6 in FY 25. He reiterated
that totals were lower in FY 24 due to lower investment
revenues. He highlighted that investment revenues would be
about $2.5 billion higher if the numbers were run on the
present day. The vast majority of higher investment
revenues would be in the DGF and other restricted
categories.
2:03:59 PM
Representative Stapp asked Mr. Stickel what a $1 per barrel
price change equated to in terms of revenue to the state.
Mr. Stickel responded that a $1 change equated to about a
$45 million to $50 million change to UGF revenue.
Representative Stapp commented that he understood that
there was a $220 million change in revenue and a $9 price
change in oil. He asked for an explanation of the numbers.
Mr. Stickel responded that there was a positive increase to
the revenue forecast based on the higher oil price
assumption that was partially offset by the impacts of a
slightly lower production forecast. Increased expectation
for company spending or investment also impacted the
production tax revenue.
Commissioner Crum added that there was about a $70 million
dollar change in the prior year due to a decreased
projection in oil production. He clarified that the dollar
amounts originated from the production level projections.
2:06:14 PM
Co-Chair Edgmon understood that Mr. Stickel was referring
to capital spending.
Mr. Stickel responded that the department had increased its
expectations for capital spending. The Willow Project was
one of the major fields coming online and the final
investment decision at Willow was a positive development
and increased the department's expectations and certainty
around the project.
Co-Chair Edgmon commented that Mr. Stickel's response
sounded like "positive speak" because the state was paying
for the development in the short-term with the expectation
that the state would be paid back in the future.
Representative Stapp observed there was a risk for the
state. He thought the oil price upside was not as
profitable to the state as it had been previously. He saw
the same amount of revenue loss risk when the price
decreased. He asked if his assessment was fair.
Mr. Stickel responded that there was a net profits based
tax for production which meant that as companies spent more
money, profits would decrease. If companies were to cut
investments, there would be a higher share. Expectations
for capital spending had increased based on positive
development of projects like Willow and increased drilling
in existing fields. Companies would benefit from making
investments in the state.
Representative Josephson noted that the legislative
auditors made sure that the capital and operating
expenditures were qualifying expenditures. He understood
that later in the decade, the state would begin to reap
rewards from Willow.
Mr. Stickel responded in the affirmative.
2:09:48 PM
Mr. Stickel moved to slide 11. He would be focused on the
UGF portion of the forecast for the remainder of the
presentation. Investment revenue was one of the two largest
sources with the biggest piece being the transfer from the
Permanent Fund to the general fund. Investment revenue
contributed about $3.5 billion of unrestricted revenue in
FY 23, $3.6 billion was forecasted to be contributed in FY
24, and $3.7 billion was forecasted for FY 25. Petroleum
revenues contributed $3.1 billion of unrestricted revenue
in FY 23, $2.4 billion was forecasted for FY 24, and $2.1
billion was forecasted for FY 25. Non-petroleum revenues
generated $466 million in FY 23, $455 million was
forecasted for FY 24, and $485 million was forecasted for
FY 25. Total unrestricted general fund revenues were over
$7 billion in FY 23, $6.5 billion was forecasted in FY 24,
and $6.3 billion was forecasted in FY 25.
Representative Galvin asked if there was a vision for the
long term. She noted that there was a decrease in petroleum
revenue year over year due to the increase in Willow
project funds. She presumed that revenues would begin to
increase again soon. She asked if there were big
expenditures in FY 26 and FY 27.
Mr. Stickel responded that increased spending was part of
the reasoning and the other part was oil prices that were
projected to decrease. He continued to slide 12 and
explained that the vast majority of UGF from investments
was due to the Permanent Fund transfer. The transfer was
expected to account for between 49 and 62 percent of total
unrestricted revenue over the next ten years. In addition
to the Permanent Fund transfer, there would be around $90
million of additional unrestricted revenue primarily due to
the cash balances of the general fund.
Co-Chair Edgmon asked if the year during which the
Permanent Fund lost 3.2 percent was 2021.
Mr. Stickel responded that he believed it was FY 22.
Commissioner Crum confirmed that it was FY 22 and the loss
happened primarily in the month of June.
Co-Chair Edgmon asked whether FY 22 was incorporated into
the current averages.
Mr. Stickel responded in the affirmative.
2:14:11 PM
Mr. Stickel moved to slide 13 which included some
additional information on the market value transfer. The
slide showed the real purchasing power of the transfer over
time. The department was forecasting that the transfer to
the general fund would be stable at around $1 billion in
real terms. The figure would increase to $4.4 billion in
nominal terms by FY 33 and was based on a long-term
assumption of 7.2 percent returns for the Permanent Fund. A
high-case and a low-case scenario was added in addition to
the baseline and the projections examined a range of
potential outcomes for the transfer. The transfer was
reasonably predictable in the short term but there was a
wider bandwidth of potential outcomes in the long term.
Co-Chair Edgmon understood that Callan was forecasting 6.25
percent returns in the ten-year forecast but 7.2 percent in
the short term.
Mr. Stickel responded in the affirmative. The expected
return had increased in recent years.
Co-Chair Edgmon understood that the fund total was almost
$80 billion.
Mr. Stickel responded that there was a higher expected
return value from a slightly lower starting value. The
markets were up prior to FY 22 and the long-term expected
return had decreased. The ending value for the fund was
similar with a higher expected return.
Co-Chair Edgmon thought it was important to note that the
value of the fund had decreased by about 10 percent. The
Permanent Fund totaled $84 billion at one point in time and
was increasing. He found it encouraging to hear that Callan
was more optimistic than it was a few years prior.
Commissioner Crum responded that Co-Chair Edgmon's
assumption was correct in that there had been significant
course correction in response to lost funds. Callan had
revised and updated its long-term projection of 7.2
percent. The assumption for real spending dollars in 2024
was using Callan's market long-term inflation rate
assumption of 2.5 percent.
Representative Cronk understood that the POMV was being
overdrawn because it was under 5 percent. He asked
Commissioner Crum if it was concerning to him.
Commissioner Crum responded that he would refer to it as a
real rate of return which involved subtracting the
inflation aspect from the absolute rate of return. He noted
it was important to be mindful of the real rate of return
when considering withdrawal and the long-term
sustainability of the fund. The process had been referred
to as intergenerational equity against inflation for future
spending power.
2:19:11 PM
Mr. Stickel continued to slide 14 and relayed that there
were four main sources of petroleum revenue. The state
levied a property tax on all oil and gas property in the
state, which was a stable revenue source and generated
about $125 million annually. The municipalities also levied
a property tax on all oil and gas property which generated
$480 million in FY 23. The department levied a corporate
income tax on most oil and gas companies, but there were a
few exceptions. The department was forecasting $240 million
in revenue generated from the corporate income tax in FY 24
and $300 million in FY 25.
Mr. Stickel continued that the state's oil and gas
production tax consisted of a tax based on net profits on
the North Slope, against which companies could apply for a
tax per barrel credit. There was a gross minimum tax floor
calculation in the oil and gas production tax as well. A
company's gross profit in addition to its spending totaled
the company's net profit. Severance tax brought in about
$1.5 billion in FY 23 and the department forecasted $938
million in FY 24. Royalties from state land brought in
about $1.2 billion in FY 23 and were forecasted to bring in
about $1.1 billion in FY 24 and $1 billion in FY 25. Since
the figures were based on gross value, the revenue source
was considered to be more stable than corporate tax or
production tax which were based on net profits. There was
also a significant restrictive revenue component that
represented the share of royalties deposited by
constitution and dedicated to the Permanent Fund and school
fund.
Representative Hannan asked Mr. Stickel to provide his
thoughts on the corporate income tax. Up until a few years
ago, small operators were the main entities that were
excluded from the requirement of paying a corporate income
tax; however, the largest petroleum operator in the state
now was not paying corporate income tax. She asked if there
had been analysis to show how much the state was losing by
not requiring all operators to pay corporate income taxes.
Mr. Stickel responded that he did not have the exact
numbers on hand, but he recalled that the spring 2023
forecast reported that it was around $100 million per year.
He offered to follow up with the exact numbers.
Representative Hannan would like to be provided with the
exact figures.
Co-Chair Johnson asked the department to provide the
numbers to the committee at a later date.
Commissioner Crum clarified that the difference would be
between an S corp and a C corp [S corps were taxed under
Subchapter S of the Internal Revenue Service (IRS) code and
C corps were taxed under Subchapter C].
Co-Chair Johnson asked the department to follow up via
email.
2:23:29 PM
Mr. Stickel moved to slide 15 looking at the unrestricted
non-petroleum revenues. The largest component of non-
petroleum revenues was taxes and the largest component of
taxes was corporate income taxes. He relayed that corporate
income tax brought in $124.4 million in FY 23, the forecast
for FY 24 was $130 million, and the forecast for FY 25 was
$160 million. The increases were due to general economic
growth and increased profitability as well as recovery in
industries like mining and tourism. Other significant taxes
included mining license tax, tobacco taxes, and various
excise taxes. The line on the bottom of the slide
represented unrestricted revenue from a range of other
categories such as dividends to the state from state-owned
operations, non-petroleum royalties, and licenses and
permits. He indicated that unrestricted non-petroleum
revenues totaled nearly $500 million per year.
Representative Cronk asked whether there was an explanation
for the reduction in fisheries taxes.
Mr. Stickel replied that the slide was specific to the UGF
portion of the fisheries taxes and about half of the taxes
were shared with municipalities. He emphasized that 2023
was a poor year for fisheries and the FY 24 collections
represented a preliminary estimate of what the revenue
would be for the 2023 catch year.
Representative Cronk understood that the fisheries were in
trouble and revenue would continue to reduce because of the
diminishing amount of marine life in the sea.
Mr. Stickel reiterated that 2023 was a tough year for the
fisheries industry but the department was assuming a three-
year recovery.
Representative Ortiz commented that the decline was because
of fish prices rather than lack of fish. He asked why there
was a decline in mining license taxes.
Mr. Stickel responded that mining license taxes primarily
had to do with prices as well. Prices for precious metals
such as gold and silver had increased but prices for base
metals such as zinc and lead had decreased significantly.
The zinc prices had declined so drastically that zinc mines
in other areas of the world were closing down operations
due to the low prices.
Co-Chair Johnson asked about the fisheries tax. She asked
if the figures were based on a forecast for fish prices.
Mr. Stickel replied that the FY 23 fisheries revenue was
known. The department had developed a preliminary estimate
for FY 24 and had been advised by industry experts in order
to make an accurate estimate. The department had assumed
that prices would recover by FY 25.
Co-Chair Johnson was hoping that there was a reason for
increased fisheries taxes in FY 23 and that there was a
consensus that the market would recover.
2:28:34 PM
Mr. Stickel replied that the three-year assumption was
admittedly naïve. The department thought that the events of
2023 were likely temporary. The assumption was in place for
modeling purposes.
Representative Coulombe asked for an explanation of the
insurance premium tax. She relayed that insurance had
increased in the state and she was wondering what the tax
was based on.
Mr. Stickel responded that insurance premium tax was based
on a percentage of value for insurance premiums for certain
companies that were not subject to the corporate income
tax. He explained that the Department of Commerce,
Community and Economic Development (DCCED) administered the
tax and crafted the projections and DOR was not involved.
Representative Josephson asked whether the mining license
tax was synonymous with severance tax.
Mr. Stickel responded in the affirmative. The mining
license tax was a net income-based tax and it was the state
severance tax on mining operations.
Representative Josephson asked if royalties were included
on the slide.
Mr. Stickel responded that any royalties from mining on
state land would fall into the "other" category on the
slide. There were also significant mines that were not on
state land.
Representative Josephson was accustomed to seeing the
mining industry's contributions at around $100 million.
Mr. Stickel responded that the total contributions from the
mining industry included mining license tax, rents and
royalties, and the mining industry's share of non-petroleum
corporate income tax. The department had the exact figures
and he would be happy to follow up with the information.
2:32:01 PM
Representative Hannan asked for more information on the
tobacco tax. She was aware that the tax division was
keeping track of the amount of vaped tobacco. She asked if
the amount of vaped tobacco in the state was known and
whether the state could collect taxes on it.
Mr. Stickel replied that the department had developed some
estimates and he would be happy to follow up with the
findings.
Mr. Stickel continued to slide 16 which relayed that the
next portion of the presentation would detail the petroleum
forecast assumptions. He moved to slide 17 which showed the
ten-year oil price forecast for Alaska North Slope oil. The
graph showed the difference between the spring 2023 revenue
forecast and fall 2023 forecast. The department utilized
features market projects through FY 32 to develop the fall
forecast. As Commissioner Crum mentioned, the department
used the final five trading days of December as a basis for
the forecast and released the forecast on December 14,
2023. As compared to the spring forecast, the fall forecast
included a $9.39 per barrel increase for FY 24 and a $6 per
barrel increase for FY 25, but by FY 31 the delta decreased
and the forecast was essentially unchanged from the spring
forecast.
Mr. Stickel continued on slide 18, which was a chart
comparing the forecast to various other forecast sources.
The forecast was within the $70 to $80 range when compared
with other forecast sources. The slide was updated as of
January 17, 2024.
Mr. Stickel advanced to slide 19 and addressed the issue of
volatility. The slide showed a forecast for FY 25 of $76
per barrel resulting in about $2.6 billion in general fund
revenue before accounting for POMV. The slide looked at how
the revenue number would change if company spending was
held equal and the price of oil was the only element that
varied. There was about a $45 million to $50 million change
to unrestricted revenue from each dollar of oil price and
the delta changed as the oil price increased and decreased.
For example, if oil prices were about $100 per barrel, it
would equate to about a $75 million impact for oil prices
but if oil prices were $50 per barrel, the impact would be
about $25 million.
2:37:07 PM
Mr. Stickel continued on slide 20 and detailed North Slope
petroleum production. The general story was that there
would be fairly steady production for the next several
years and declines in existing fields were offset by
increased drilling on new fields. Beyond FY 26, the impact
of new production was apparent, and it was forecasted that
over 500,000 barrels of oil would be produced. The slide
included a high case and low case forecast. If reservoir
performance and other dynamics of the production were to
come in differently than expected, there would be a wide
range of potential outcomes for oil production.
Co-Chair Edgmon understood that the state was transitioning
out of legacy fields to newer fields and different
components of the oil tax structure would be coming into
play. Production and price used to be indicative of the
future of oil, but it seemed to not be the case anymore. He
asked if he was correct that there was a transition taking
place.
Mr. Stickel responded that he would characterize it as
continued production and continued significant
reinvestments in the legacy field and new developments. For
the next several years, the relatively stable production
outlook was due to the legacy fields and some of the
reinvestments made by companies. The increase in the later
years was due to the addition of new fields.
Co-Chair Edgmon commented that it seemed like there was a
hybrid transition.
Mr. Stickel advanced to slide 21 which restated the
production forecast and showed the comparison between the
spring and fall forecasts. The production forecast for FY
24 though FY 26 had decreased but the production forecast
for FY 27 through FY 33 had increased. There were
substantial increases at the tail end of the fall 2023
forecast that suggested that production would be up by
66,000 barrel per day as compared to the spring 2023
forecast.
2:40:55 PM
Representative Josephson remarked that he would have
expected that the red line on the chart [representing fall
2023] would have been higher than the blue line
[representing spring 2023]. He asked what caused the
separation.
Mr. Stickel responded that the Department of Natural
Resources (DNR) could better provide the details. One of
the significant factors was changes in expected well
productivity and DNR reevaluated the performance
expectations for new wells. The change in productivity was
one of the factors in the forecasted decrease for the next
few years; however, there was increased certainty around
projects like Willow in the future which was reflected as
an increase to the production forecast in later years.
Representative Cronk asked how the revenues for Willow
would be paid out. He wondered how much revenue the state
would actually receive.
Mr. Stickel replied that the department presented a
detailed analysis of Willow in the last legislative
session. In general, the state would collect property tax
on Willow to the extent that the companies involved were
subject to corporate income tax. The state would also
collect production taxes on Willow. The royalties would go
to the federal government, but half of the royalties would
be shared back with the state. There would be certain
restrictions around the ways in which the state could use
the royalties.
Mr. Stickel added on slide 21 that the increased through-
put from the production would reduce tariffs on the Trans-
Alaska Pipeline System (TAPS) which would increase taxes
and royalties from other fields.
2:44:10 PM
Mr. Stickel moved to slide 22 and detailed allowable lease
expenditures and how the expenditures had changed in the
last few years. A significant increase was expected for
capital expenditures. He relayed that capital expenditures
were $2.3 billion in FY 23 which was already a significant
increase from the prior two years during which there were
low oil prices due to the COVID-19 pandemic. The department
was forecasting a significant increase in capital
expenditures for FY 24 through FY 26 in excess of $4
billion per year. There were significant new investments in
fields like Willow as well as other smaller new
developments. A substantial amount of additional drilling
was also happening at the legacy fields which was feeding
into the increased capital expenditures forecast. The
department was forecasting capital expenditures to
eventually taper off, but still remain robust at about $2.5
billion to $3 billion per year. Companies had made
significant cuts in operating expenditures but inflation
pressure had begun to increase the operating costs. The
department expected operating costs to slowly increase
throughout the forecast period.
Co-Chair Edgmon commented that he just spoke to one of his
constituents about the issue and noted that it was
complicated and confusing to the public. He would like to
see a line on the graph that showed the projected oil
revenue. He thought the forecast on the slide was good
news; however, the state would "pay for it" in the short
term. He thought it was important for the information to be
easily digestible to the public.
Mr. Stickel responded that he would follow up.
Co-Chair Johnson asked for verification that the state was
allowing capital expenditures and using the expenditures to
offset the revenue of other fields.
Mr. Stickel responded in the affirmative. There was a
"slope-wide ring fence" for North Slope oil production.
The term meant that when a company calculated its taxes,
the total lease expenditures from oil production on the
slope subtracted from the value of the total oil production
on the slope to generate the net profit calculation.
Co-Chair Johnson responded that it would not be any
different if it were in the National Petroleum Reserve-
Alaska (NPRA). The state was not receiving royalties
because it was an issue of taxes rather than royalties.
Commissioner Crum responded in the affirmative. All other
taxes were applied and assessed by the state.
2:49:07 PM
Representative Galvin understood that even if a development
was not new, a company could still receive credit for
expenditures. She asked if her understanding was correct.
Mr. Stickel responded that generally speaking, a company
would add up the value of all the oil it produced and all
of the investments it made in order to determine its
production tax value and net profits tax calculation. The
calculation was the same whether the investments were in a
new field or an old field.
Representative Galvin asked if the intent was to encourage
new investments despite the tax law allowing both new and
old investments.
Mr. Stickel replied that investments were incentivized by
implementing a net profits tax. The ability to benefit from
the investments was an integral part of the tax system.
There were also some separate provisions that provided
additional incentives for new investments such as the gross
value reduction on production tax.
Co-Chair Johnson suggested that Mr. Stickel finish the
presentation before the members ask any further questions.
2:51:44 PM
Mr. Stickel continued to slide 23 and detailed the
transportation costs. The costs were deducted from the
sales price of oil to calculate the value for both tax
purposes and royalty purposes. The most significant costs
were the marine costs and costs related to the pipeline. A
slight increase to transportation costs was expected to
occur in FY 24 and then a stabilization of the costs was
expected for the remainder of the forecast period. The
increase in FY 24 was driven mainly by increased marine
costs.
Mr. Stickel concluded on slide 24. Prior to 2016, there
were various oil and gas tax credits in state statute that
could either be applied against a liability or could be
turned into a tax credit certificate that could be
presented to the state for cash purchase. Up until 2016,
the state had purchased all of the requested tax
certificates, but the process changed due to budget
pressure. He explained that 2016 was the first year in
which the full outstanding balance of tax credits was not
purchased and in 2020 and 2021, there was no money
appropriated for the purpose of tax credits. The
outstanding balance created a liability and the legislature
took action in 2016 and 2017 to phase out the ability to
earn new tax credits, but the balance remained. For the
last three years, the legislature had appropriated funds to
purchase outstanding remaining credits and the tax credits
were now completely paid off.
2:54:42 PM
Co-Chair Johnson asked if Mr. Stickel was finished with the
slide.
Mr. Stickel responded that he was finished.
Representative Josephson was interested in tax credits and
forgoing revenue or paying cash for capital efforts and
production. He understood that there was a bill from the
governor on royalty relief in the Cook Inlet and he was
concerned that the bill would relieve royalty payments for
existing production, but it seemed that only new production
would be impacted. He asked if his understanding was
correct.
Mr. Stickel thought DNR could provide a better response to
Representative Josephson's question. His understanding was
that the bill would apply to new production above and
beyond what was included in the revenue forecast.
Commissioner Crum added that there were no cash-value tax
credits in the bill.
Co-Chair Johnson suggested that Mr. Stickel take the
remaining questions from the committee and then highlight
the important components in the appendix of the
presentation.
Representative Galvin referred to slide 10 and asked about
restricted investment revenue reflected on the graph. She
asked for some context to understand the rise and fall of
the revenue.
Mr. Stickel responded that the department utilized actual
returns through the end of October when it produced the
revenue book for the FY 24 forecast. The returns had been
negative for several of the funds through October. The
department used an assumption of the returns for the
remainder of the fiscal year, which was why there was a
reduction in investment revenue in particular under both
DGF and other restricted investment revenues. The Permanent
Fund was in a negative situation as of the end of October.
If the graph were to be updated to reflect the present
situation, the negative $1.8 billion figure would be about
a positive $570 million.
Representative Galvin appreciated the differentiation and
understood the situation.
2:58:29 PM
Representative Ortiz referred to slide 20. He understood
that the slide showed that there were about 500,000 barrels
of oil produced per day and if the department's forecast
were to come to fruition, about 600,000 barrels would be
produced per day by 2033. He asked if he would be correct
in saying that 2 million barrels per day were being
produced 15 years prior.
Mr. Stickel replied that peak production was about 2
million per day, but it was more than 15 years ago.
Representative Ortiz commented that he understood the
excitement about new development and projects, but it was
not going to be the "big savior" because even the best case
scenario numbers would not approach the peak production
numbers. The state made about $9 billion in revenue in peak
years and current projects were closer to $2.5 billion. He
thought the ability for the state to "make everything work"
was a lot lower than it used to be. He asked if his
understanding was correct.
Commissioner Crum responded in the affirmative. The massive
windfalls were not expected and only significant and
catastrophic global events could bring about such
windfalls. The forecast projected a steadiness and then a
slight increase, but it would take much more to return to
peak production numbers.
Co-Chair Edgmon added that the role of fracking in the
country was impactful. The price of oil had not spiked as
it normally would have in the past in response to the
conflict in Israel.
Commissioner Crum replied that Alaska lines had been
described as slow declining assets, which provided a
diversification opportunity for oil companies. The prices
were less likely to spike but also less likely to fall. The
fracking aspect cushioned the country's oil prices against
catastrophic global events.
Co-Chair Edgmon remarked that it was interesting that
Alaska could be getting more oil but less revenue. The
growth of the Permanent Fund was heartening. The state was
not going to have the same amount of money as it did during
peak times, but the future was promising.
Commissioner Crum replied he had met with credit rating
agencies in New York in the prior week and just experienced
a credit rating bump which was partially due to the
consistent POMV draw for the past five years and the
excellent performance of APFC. The diversification and
steadiness were seen as a big positive and helped provide
stability.
3:04:07 PM
Representative Cronk referred to an article on his phone
that included statistics about the successes of the
Canadian forestry industry. He thought that although Alaska
had an oil industry, it did not have a forestry industry
that could make up a significant amount of revenue for the
state.
Commissioner Crum responded that he agreed. He added that
Sweden had doubled its productive acres of forest in the
last 100 years but Sweden's industry was mature. There was
a project in progress to determine what a similar system
would play out in Alaska. There were architectural and
design changes in the world in order to sequester carbon.
He aimed to develop the timber industry in the state
because active forest management was a significant growth
industry. He argued that the state could protect its
forests by cutting trees down and growing more sustainable
species over time.
Mr. Stickel thanked the committee for the opportunity to
present the forecast.
3:07:24 PM
Co-Chair Johnson reviewed the agenda for the following day.
ADJOURNMENT
3:07:56 PM
The meeting was adjourned at 3:07 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HFIN DOR Fall 2023 Forecast Presentation 01.19.24.pdf |
HFIN 1/19/2024 1:30:00 PM |
|
| DOR Response to HFIN Fall 2023 RSB Presentation 02.06.24.pdf |
HFIN 1/19/2024 1:30:00 PM |