Legislature(2025 - 2026)ADAMS 519
01/23/2025 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
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 23, 2025
1:32 p.m.
1:32:38 PM
CALL TO ORDER
Co-Chair Josephson called the House Finance Committee
meeting to order at 1:32 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Andy Josephson, Co-Chair
Representative Calvin Schrage, Co-Chair(via
teleconference)
Representative Jamie Allard
Representative Jeremy Bynum
Representative Alyse Galvin
Representative Sara Hannan
Representative Nellie Unangiq Jimmie
Representative DeLena Johnson
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
None
PRESENT VIA TELECONFERENCE
Adam Crum, Commissioner, Department of Revenue; Dale
Yancey, Director, Tax Division, Department of Revenue; Dan
Stickel, Chief Economist, Tax Division, Department of
Revenue.
SUMMARY
PRESENTATION: REVENUE FORECAST
Co-Chair Josephson reviewed the meeting agenda.
^PRESENTATION: REVENUE FORECAST
1:34:28 PM
ADAM CRUM, COMMISSIONER, DEPARTMENT OF REVENUE (via
teleconference), introduced himself.
DALE YANCEY, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
(via teleconference), introduced himself.
DAN STICKEL, CHIEF ECONOMIST, TAX DIVISION, DEPARTMENT OF
REVENUE, (via teleconference), introduced himself.
Commissioner Crum introduced the PowerPoint presentation
"Fall 2024 Forecast Presentation: House Finance Committee"
dated January 23, 2025 (copy on file).
1:35:35 PM
Mr. Stickel began on slide 2 which contained an agenda for
the presentation. He moved to slide 3 and explained that he
would begin with detailing the total state revenue for all
categories of designation and then discuss the unrestricted
general fund (UGF) portion of the revenue forecast. He had
also outlined some detailed assumptions regarding the oil
and gas revenue forecast, focusing on elements such as
price, production, and lease expenditures.
Mr. Stickel continued to slide 4 and explained that the
revenue forecast was released on December 12th, 2024, and
was included in the Revenue Sources Book (RSB). The book
was an annual publication with detailed information about
each of the state's revenue forecasts, sources, and key
variables.
Mr. Stickel noted that the department gathered information
from a variety of sources, including various state
agencies, the state accounting system, and the tax
accounting system. He explained that the Department of
Revenue (DOR) worked with the Department of Natural
Resources (DNR) and reached out to oil and gas companies,
incorporating all of the information into models that were
maintained for each of the state's revenue sources to
produce a 10-year revenue forecast.
Mr. Stickel highlighted that the RSB fulfilled a statutory
requirement that the governor provide a revenue forecast
for the current fiscal year and upcoming fiscal year. The
book also fulfilled a statutory requirement for a long-term
fiscal plan document. He noted that the forecast would be
updated later that spring. The most recent RSB as well as
revenue forecasts and sources books for the last several
decades were published online.
Mr. Stickel continued to slide 5 which contained key
assumptions that underlaid the revenue forecast. The
forecast represented one plausible scenario within a range
of uncertainty and potential outcomes. He explained that
some of the key assumptions the department made for
investments were a 7.9 percent annual return for the
Permanent Fund for the remainder of FY 25 and a 7.65
percent annual return for FY 26 and beyond. The forecast
incorporated actual returns through the end of October of a
given year. The department then applied the forecast for
the remainder of the fiscal year.
Mr. Stickel stated that the department worked with the
Office of Management and Budget (OMB) to incorporate known
funding as of December 1, 2024. The funding included all
known COVID-19 funding, stimulus packages, federal
Infrastructure Investment and Jobs Act (IIJA) funding, and
similar sources. The oil and gas revenue forecast was based
on an oil price of $73.86 per barrel for North Slope oil
for FY 25. The average price figure incorporated actual
prices for the first five months of the year and a forecast
for the remainder of the year. The forecast for FY 26 was
set at $70 per barrel.
Mr. Stickel explained that the general goal for non-
petroleum revenues was continued economic growth. The
department assumed that there would be 1.6 million cruise
ship passengers every year for the tourism industry, which
remained near the strong levels that had been seen the
previous year. He explained that 2023 and 2024 were
challenging years for the fisheries industry, and the
department observed some low prices. The department assumed
a five-year timetable for the recovery of fisheries tax
revenues from the 2024 values. He relayed that a variety of
stakeholders had been consulted to validate that the
assumption was plausible. He noted that a recovery in
fisheries tax revenues would be gradual.
Mr. Stickel explained that the recovery did not necessarily
equal a recovery of the economic impacts of the fisheries
industry. He also noted that for mining, the department
incorporated futures markets for price projections and
assumed that current mines such as the Red Dog Mine and the
Fort Knox Mine would continue operations. He clarified that
no major new mines were included. Throughout the revenue
forecast, there was a long-term inflation assumption of 2.5
percent.
1:40:38 PM
Co-Chair Josephson thought that there were favorable return
numbers presented on slide 5. He noted that there were
concerns about investment returns, specifically in relation
to obligations such as the Permanent Fund Dividend (PFD)
and the Percent of Market Value (POMV) draw. He asked
whether there was any sense that the state was "out of the
woods" regarding the risk of falling short on the POMV
draw.
Mr. Stickel deferred the question to Commissioner Crum.
Commissioner Crum replied that the 7.9 percent investment
return helped, particularly when considering the 2.5
percent assumed rate of long-term inflation. He clarified
that in order to ensure stable funding for the POMV, a
return rate of 7.5 percent would be required. Therefore,
the 7.9 percent return, along with the 7.65 percent
assumption for 2026, supported the overall case for the
POMV draw.
Commissioner Crum relayed that there had been concerns at a
meeting in December about the Earnings Reserve Account
(ERA), specifically the distinction between realized and
unrealized gains. According to projections, there had been
some relief, but the situation was still dependent on
ongoing market conditions. He emphasized that he regularly
reviewed the issues, both as a commissioner and a trustee
on the Alaska Permanent Fund Corporation (APFC).
Commissioner Crum added that there would be an update on
the issue in the next meeting, which was scheduled in
approximately two weeks.
Representative Hannan asked about the production forecasts
from the DNR, noting that there had been some calculation
errors that led to over-calculating the anticipated
production. Since production directly correlated to
revenue, she wondered whether the same calculation error
had been present in previous forecasts and if adjustments
had been made to the FY 25 revenue predictions based on the
corrected methodology.
Commissioner Crum thought that Mr. Stickel would be better
equipped to address the issue of de-risking production
forecasts.
Mr. Stickel responded by confirming that the fall forecast
prepared by DNR had fully addressed the calculation errors
and the corrections had been incorporated into the revenue
forecast. He explained that a comparison between the spring
and fall revenue forecasts would highlight how the
production outlook had changed as a result of the
adjustments.
Representative Hannan asked for verification that the same
calculation methodology had been used by DOR, but it had
been corrected beginning with the spring forecast and
moving forward.
Mr. Stickel offered reassurance that the corrected
methodology had been incorporated starting with the fall
2024 forecast and the updated revenue predictions were
accurate.
1:44:49 PM
Mr. Stickel continued on slide 6 which offered a graphic of
the relative importance of different sources of total state
revenue through FY 24. He explained that Alaska did not
have a statewide sales tax or personal income tax which
meant that the state's revenue generation relied on a
"three-legged stool." He noted that federal revenue,
investment earnings, and petroleum revenues made up the
vast majority of state revenues. All other revenue sources
contributed about 7.4 percent of total revenue in FY 24.
Other industries contributed a small share of the total
state revenue, but the industries were still important in
terms of economic impact and employment.
Mr. Stickel continued to slide 7, which included a similar
breakdown for the FY 25 forecast. The forecasted total
state revenue for FY 25 was $16.8 billion, with the three
top categories of federal revenue, investment revenue, and
petroleum revenue contributing about 92 percent of the
total revenue for the state. All other sources were
forecasted to contribute just over 8 percent of total state
revenue.
Mr. Stickel advanced to slide 9, which summarized some of
the key changes to UGF within the revenue forecast. He
would explain the changes in more detail on the following
slide. He clarified that the UGF revenue was the category
of revenue over which the legislature had the most
discretion and was often most important in the budget
discussions.
Mr. Stickel relayed the department had decreased its FY 25
assumption for oil prices to $73.86 per barrel for North
Slope oil, a deduction of $4.14, and its FY 26 assumption
to $70, a reduction of $4. The changes were based on
updated information from the futures market. The forecasted
average North Slope daily oil production had decreased by
about 10,000 barrels per day for FY 25. However, the
forecast had been increased by over 12,000 barrels per day
for FY 26, bringing the forecast to 469,500 barrels per
day.
Mr. Stickel noted that there had been a small increase in
the FY 26 forecast for the Permanent Fund POMV transfer.
The increase was due to the fund's better-than-expected
performance in the final months of FY 24, which had
affected the transfer calculation. He explained that
because of the way the transfer to the general fund was
calculated, the transfer for FY 26 was now known with
certainty at approximately $3.8 billion. When all factors
were netted out for total unrestricted revenue, the
department had decreased the FY 25 forecast by about $220
million and the FY 26 forecast by about $232 million. He
noted that the lower oil price assumptions had been the
primary drivers behind the decreases.
Co-Chair Josephson asked whether the deficit would be worse
in FY 26 because the state had run a surplus in FY 25.
Mr. Stickel responded in the affirmative. He would defer to
OMB to provide specific details regarding the surplus and
deficit.
1:49:11 PM
Mr. Stickel advanced to slide 10, which detailed total
state revenue from all sources and was the last slide that
discussed total revenues. The presentation would focus on
UGF revenues going forward. The slide broke down historical
revenue for FY 24, FY 25, and FY 26 into four categories of
restriction.
Mr. Stickel clarified that UGF revenues were the revenues
that the legislature could appropriate for any purpose and
were typically the focus of most budget discussions. He
added that the slide also showed designated general fund
(DGF) revenues, which were revenues technically available
for general appropriation but were customarily used for
specific purposes. An example of a DGF revenue was the
state's vehicle rental tax revenue, which was deposited
into a special sub-account and customarily appropriated for
tourism, marketing, and development. There were other
restricted revenues, which were revenues that were truly
dedicated in how the monies could be used. The legislature
did not have much discretion regarding how the restricted
revenue funds could be spent. He cited the commercial
passenger vessel tax as an example, under which any
revenues had to be used in direct support of the cruise
ship industry and passengers, as mandated by federal law.
Mr. Stickel then discussed federal revenue, which was
reflected as entirely restricted revenue due to the federal
government's specific restrictions on how the funds
provided to the state must be used. He provided the total
revenue breakdown, stating that for FY 24, total state
revenue from all sources had been $16.3 billion, with
forecasts of $16.8 billion for FY 25 and $15.7 billion for
FY 26. The unrestricted portion had been $6.6 billion for
FY 24, and it was forecasted to be $6.2 billion for both FY
25 and FY 26.
Co-Chair Josephson asked what accounted for the substantial
decrease in federal receipts.
Mr. Stickel responded that federal revenue had been
supported by a variety of stimulus packages, including
COVID-19 relief funds, IIJA funds, and the Inflation
Reduction Act (IRA). He noted that the state had been
receiving between $3 billion and $4 billion per year. He
explained that the decrease in federal revenue from FY 25
to FY 26 was due to a tapering off of the stimulus funds;
however, $5.8 billion in federal revenue was still
considered a robust level of federal support.
Representative Stapp asked for more information about the
production taxes. He noted that the FY 26 production tax
revenue was forecasted to decrease nearly every year until
2034. He assumed that it was because companies paid minimal
taxes.
Mr. Stickel replied that the reason for the decline in
production tax receipts was due to a combination of lower
oil prices and dramatically higher spending by companies
investing in major new developments. He explained that the
production tax was essentially a net profits tax with a
gross minimum tax floor. The forecasted lower oil prices,
combined with higher spending, reduced the tax base for the
net profits share of the calculation. He did not know the
exact number of companies paying above the gross minimum
tax floor, but he confirmed that multiple companies were
expected to be paying above the minimum tax floor, while
others were expected to pay at or below the minimum tax
floor.
1:54:24 PM
Representative Stapp asked for clarification on what the
minimum tax was.
Mr. Stickel explained that the production tax consisted of
a net profits tax with a 35 percent nominal rate and a per
taxable barrel credit that could be applied against the
tax. Additionally, there was a gross minimum tax floor,
which was 4 percent of gross value at most oil prices. He
explained that the basic production tax calculation
involved a company calculating the 35 percent net profits
tax, adjusted by per taxable barrel credits, down to the
gross minimum tax floor.
Representative Stapp asked if ConocoPhillips was paying the
4 percent minimum tax because of the Willow project. He
wondered if Hilcorp was not investing as much as Conoco. He
wondered how long Conoco should be expected to pay the
minimum tax.
Mr. Stickel responded that he could not speak to specific
companies due to taxpayer confidentiality. However, the tax
fundamentals indicated that, at current oil prices, each
producer had a different portfolio of producing operations,
investments, and developments. He emphasized that to the
extent a producer invested in major developments, producers
would likely be subject to the minimum tax floor, depending
on each company's individual portfolio of operations and
investments.
Co-Chair Josephson commented that previous bills had
reformed the ability for a company to pay less than the 4
percent minimum floor. He asked if there were exceptions to
the rule.
Mr. Stickel responded that he was unsure how detailed the
committee wanted him to get on the production tax
calculation. He relayed that there was an entire
presentation available that covered the detailed order of
operations for the production tax calculation and he could
present it to the committee at a later date if it desired.
The per taxable barrel credits consisted of a sliding scale
credit available for general production and a separate $5
per barrel credit available for new production, which was
referred to as gross value reduction eligible production.
If a company used sliding scale credits, the company would
not pay below the minimum tax. However, if a company chose
to forego sliding scale credits or was ineligible for the
credits, it could use the $5 per barrel credits to pay
below the minimum tax. He noted that for a new entrant or a
company with significant operations from new fields or in a
low-price environment, there was an option to pay below the
minimum tax floor.
Co-Chair Josephson asked if there would be enough time to
go into the details of the order of operations.
Mr. Stickel responded that it could be scheduled for
another time if needed.
1:58:20 PM
Mr. Stickel advanced to slide 11 which gave a high-level
overview on the total unrestricted revenue forecast and its
three primary components. He noted that investment revenue
was currently the largest source of unrestricted revenue,
contributing about $3.7 billion in FY 24, with forecasts of
$3.8 billion for FY 25 and $3.9 billion for FY 26. The
primary share of the revenue came from the POMV from the
Permanent Fund, which had begun in 2019. Petroleum revenue
generated about $2.5 billion of unrestricted revenue in FY
24, with forecasts of $1.8 billion in FY 25 and $1.7
billion in FY 26. Finally, non-petroleum revenue sources
were forecasted to contribute about $584 million in FY 25
and about $587 million in FY 26.
Mr. Stickel moved to slide 12. He explained that the next
couple of slides would drill down into each category of the
unrestricted revenue, starting with investments. He
mentioned that the Permanent Fund transfer alone was
expected to account for between 59 percent and 64 percent
of unrestricted revenue over the 10-year revenue forecast.
Mr. Stickel explained that the funds represented by the
transfer were both to support the state budget and to pay
the Permanent Fund Dividend (PFD). The transfer was $3.5
billion in FY 24, and $3.7 billion was forecasted for FY 25
and $3.8 billion for FY 26. In addition, there was a modest
amount of other UGF revenue, which primarily represented
earnings on cash balances of the general fund. The UGF
revenue amount contributed about $150 million in FY 24, and
it was projected to decrease to $88 million in FY 26,
reflecting an expected reduction in interest rates on cash.
Co-Chair Josephson asked whether any Constitutional Budget
Reserve (CBR) income stayed with the CBR.
Mr. Stickel responded in the affirmative and relayed that
the CBR income was considered restricted revenue.
Representative Johnson commented that the state had a
surplus when the budget was completed the previous year but
it now appeared to have a slight deficit. She asked if Mr.
Stickel could address the deficit.
Mr. Stickel responded that he did not have the budget
documents in front of him but explained that oil prices had
been slightly stronger since the release of the forecast,
which could potentially offer some relief. He added that a
future slide would address the point further.
Representative Galvin asked for more information about the
2023 investment revenue forecasts. She noted that the
earnings had been severely underestimated in the fall of
2023 and contributed to a much larger share of total state
revenue compared to the forecast made in the fall of 2023.
She requested additional information regarding why the
investments performed better than anticipated.
Commissioner Crum replied that the state had experienced an
unexpected boost in the stock market. He explained that the
state's data for the RSB had been processed through October
30, 2023, but in November and December, there had been what
was referred to as the "Santa rally." The rally led to a
gain of over 20 percent in the stock market, which
significantly impacted the state's budget and investments.
He relayed that it was one of the major changes between the
fall forecast and the spring update in 2024.
2:03:12 PM
Representative Galvin agreed that the "Santa rally" was
something that could not have been predicted and asked for
Mr. Stickel's perspective on how often such events occur.
She acknowledged that she hoped for similar events but also
wanted to be responsible in her expectations. She wondered
whether the event was a major factor behind the forecasted
2025 and 2026 revenue, which was more positive than
expected, though still below her hopes.
Commissioner Crum replied that the "Santa rally" had
affected all of the state accounts, including the Alaska
Retirement Management Board (ARMB), APFC, and other
accounts. He explained that the magnificent 7, which were
a group of seven major corporations such as Alphabet and
Apple, had been largely responsible for the market gains.
Commissioner Crum explained that the investment world
continually debated whether the gains were sustainable or
if the gains represented a bubble. A significant shift was
that the largest corporations in the world were currently
driving the market gains. The situation was different from
past market bubbles, where the highest gainers typically
had limited market share. The belief at the time was that
the floor for the investments might have been continually
resetting, reflecting a new market dynamic.
Mr. Stickel added that the uncertainty around investment
returns highlighted the challenges in revenue forecasting.
While investment returns could be volatile, the way the
Permanent Fund transfer was structured provided a level of
certainty. The transfer was based on a trailing market
average of the first five of the last six fiscal years,
offering more stability than oil and gas revenue, which was
subject to fluctuations throughout the year.
Commissioner Crum added that in public discussions, the
breakdown of the state's budget was 55 percent from
earnings investments and 37 percent from oil and gas. The
shift marked a significant move forward for the state. He
clarified that while the total dollar amount for the
transfer from the Permanent Fund to the general fund was
known, the state's treasury and the Permanent Fund had
worked together to time the transfer appropriately. Funds
from accounts generating interest were not withdrawn until
they were needed, maximizing the growth of the corpus and
realized gains throughout the year.
2:07:26 PM
Representative Johnson noted that the Legislative Finance
Division (LFD) had reported that there was a $156 million
deficit. She emphasized the need to reconcile the figure
with the state's projections.
Mr. Stickel continued to slide 13 which detailed the POMV
transfer from the Permanent Fund to the general Fund
through FY 35. The forecasted transfer would exceed $3.5
billion each year, increasing steadily to nearly $5 billion
by FY 35, which would be approximately $3.8 billion in
current dollar terms. The estimate assumed a 7.65 percent
long-term annual return for the Permanent Fund, based on
the POMV calculation derived from the trailing market
average.
Mr. Stickel moved to slide 14, which showed unrestricted
petroleum revenue actuals for FY 24, along with the
forecast for the next two years. He explained the four
primary sources of petroleum revenue. The first was the oil
and gas production tax, which was a severance tax on oil
and gas. The production tax was based on a net profits tax
calculation with a gross minimum tax floor. At current oil
prices, some companies were expected to pay above the
minimum tax floor. The production tax was forecasted to
generate $563 million in FY 25 and decrease to $441 million
in FY 26.
Mr. Stickel relayed that next source was the corporate
income tax, which was levied on qualifying oil and gas
corporations operating in the state. The tax applied to
certain companies doing business in Alaska and was forecast
to generate $210 million in FY 25 and $250 million in FY
26. The third source was the petroleum property tax, which
had been levied on all oil and gas property within the
state. The tax had been a relatively stable revenue source
and had generated just over $130 million per year for the
state.
Mr. Stickel explained that there had also been a
significant municipal contribution that was not shown in
the chart which exceeded $500 million per year to
municipalities from oil and gas property taxes. The largest
source of unrestricted state revenue from oil and gas had
been state royalties, which represented the state's
ownership share of oil and gas produced on state land and
had brought in approximately $1.15 billion in FY 24.
Forecasted amounts were $942 million for FY 25 and $898
million for FY 26. He noted the figures represented only
the UGF portion of gas and oil royalties. An additional
portion of the royalties had been deposited into the
Permanent Fund and the school fund.
Representative Stapp noted that the chart on slide 14
showed that while the petroleum corporate income tax had
been increasing, the revenue from production tax and
royalties had been declining. Typically, the only way to
increase corporate tax revenue would be through higher
profits made by corporations because the rate for the
corporate tax remained constant. He asked why the petroleum
corporate income tax revenues had increased while
production and royalty rates had decreased.
Mr. Stickel responded that there were two factors
contributing to the increase in the petroleum corporate
income tax. First, the outlook for worldwide income was
based on projections of earnings estimates. Analysts had
forecasted some increased profitability within the oil and
gas sector. Additionally, there had been some refunds of
prior-year taxes in FY 25. The combination of a growing tax
base and one-time issues rolling off the books for the
corporate income tax had accounted for the increase. The
declines in production tax royalties were primarily due to
a lower price outlook. The production tax had also been
affected by significantly higher expected company spending.
2:12:51 PM
Representative Stapp asked whether any potential refunds
for the corporate income tax could be expected in the near
future.
Mr. Stickel clarified that everything the division was
aware of had already been incorporated into the forecast.
Corporate income tax had been a volatile tax and
forecasting it had been challenging. One of the most
significant impacts on corporate income tax in recent years
had been the effects of the COVID-19 recession, which had
had substantial impacts on the oil and gas industry.
However, the division believed the impacts had been fully
worked through the calculations.
Representative Stapp asked when a rebound in revenues from
production and royalties could be expected.
Mr. Stickel relayed that there was a specific slide later
in the presentation that would touch on the subject. He
explained that the RSB also contained a 10-year outlook for
the revenues, specifically in Appendix A-3. Production tax
revenues were forecasted to remain relatively steady over
the next 10 years, with some increases projected in the
early 2030s.
Representative Stapp understood that the next significant
increase in production tax revenue was expected around FY
33. The production tax revenue was projected at $441
million in FY 26, and it would decrease gradually in the
subsequent years, reaching $428 million in FY 33 and $541.7
million in FY 34.
Mr. Stickel relayed that the projections reflected the
expected oil price outlook, which he would discuss on a
coming slide.
Representative Johnson asked whether the petroleum property
tax applied only to the unorganized boroughs.
Mr. Stickel responded that the state's petroleum property
tax applied to all petroleum property in the state at 20
mills. A credit was allowed for municipal taxes that had
already been paid, meaning that the state received the
amount that was left over between the 20 mills and the
municipal rate for property within a municipality. For
property in the unorganized borough, the state received the
entire share. A table in Chapter 6 of the RSB was
referenced to break out the state versus municipal impacts.
2:16:18 PM
Co-Chair Josephson noted that the vote on the Willow
resolution had been unanimous and asked whether the
department still believed there was a "triple win" in the
long run that was beneficial for labor, the oil and gas
industry, and the treasury, particularly in the 2030s.
Commissioner Crum responded in the affirmative. He
elaborated that an analysis had been conducted for Willow,
which had been posted on the division's website. The
analysis was to be updated, as the prior record of decision
had allowed only three pads, but the new federal
administration was changing it to five pads. The department
was working with partners to update the analysis while
respecting any taxpayer confidentiality requirements.
Although it might take a few years to see cash flow become
positive for the state, it was already positive for local
communities. The North Slope Borough was collecting its
property tax and as soon as the royalties started coming
in, the mitigated communities across the North Slope would
receive 50 percent of the royalties and the federal
government would take its share. He emphasized that the
project represented significant job creation and economic
development.
Co-Chair Josephson asked whether the addition of extra pads
would result in more production.
Commissioner Crum responded that the department would need
to update its analysis based on whether the affected
company chose to change its model, which would impact
production. He clarified that the addition of new pads
would also mean new infrastructure.
Representative Hannan asked which assets were accounted for
under the petroleum property tax. She asked whether
mechanisms existed that would allow a petroleum company to
circumvent property tax obligations by creating a
subsidiary or contracting out the work. In such a scenario,
she suggested that the company might no longer own the well
and would no longer be required to pay property tax.
Mr. Stickel replied that the property tax applied to any
exploration, production, and pipeline transportation
property in the state, and it was levied at the property
owner level. In some cases, the property owner was a
different entity than the producer of the oil and gas.
Commissioner Crum added that the property tax was collected
based on the identification of the property owner,
regardless of the corporate structure.
2:19:44 PM
Representative Galvin noted that according to the
projections and forecasts for FY 25 and FY 26, the state
was expected lose significant revenue due to oil and
production taxes. She understood that a significant portion
of the decrease was due to the state's decision to
encourage other development through credits in the next few
years. She asked if the department had considered how much
a $5 increase in the price of oil would change the
projected $400 million loss.
Mr. Stickel responded that the decrease from FY 24 to FY 25
was largely attributed to the lower price forecast. He
explained that the average North Slope oil price in FY 24
was over $85 per barrel, while the forecasted price was
$73.86 per barrel for FY 25, and $70 per barrel for FY 26.
The department estimated that roughly each $1 change in the
oil price equated to about $35 million in unrestricted
revenue. He added that with a $5 price increase, the change
could amount to around $150 million.
Representative Galvin remarked that that while she
understood the reasons behind the decline, she was hoping
to get a better sense of how much the situation could
improve based on the uncertain oil prices. She was aware
that changes in credits could not happen in time for the
next year. She asked how drastically the situation could
change depending on the unknowns, particularly the price of
oil.
Mr. Stickel responded that in addition to the information
he had shared, Appendix A-1 of RSB provided dollar amounts
based on $10 increments.
Representative Galvin reiterated her desire to better
understand how changes in oil prices could impact the
revenue outlook.
2:22:33 PM
Mr. Stickel advanced to slide 15 which detailed key non-
petroleum unrestricted revenue sources. He explained that
taxes made up the largest component of the sources. Among
non-petroleum taxes, the corporate income tax was typically
the largest, generating a little over $177 million in FY
24. The department was forecasting $210 million in FY 25
and $230 million in FY 26. The forecasts were based on
expected broad-based increases in company profitability and
factored in some recovery in sectors like fisheries and
mining, as well as increased payments from industries such
as tourism.
Mr. Stickel explained that the department was expecting
that some of the losses and negative impacts from the
COVID-19 recession were beginning to roll off the books,
which would result in increased payments from industries
like tourism. He added that other significant taxes
included the mining license tax, insurance premium taxes,
fisheries taxes, and excise taxes. The negative $1 million
shown on the slide for the mining license tax in FY 24 was
due to a combination of one-time issues, including prior-
year refunds paid in FY 24, as well as weak mineral prices,
particularly for zinc, which was one of the state's largest
minerals. Despite the situation, the department expected a
rebound to $45 million in FY 25.
Mr. Stickel relayed that in total, the non-petroleum
revenue sources were expected to contribute about $440
million per year in each of the next two years. He
explained that additional sources of non-petroleum revenue
included things like licenses and permits, charges for
services, minerals, rents, and royalties, as well as
dividends from state-owned corporations and other revenues.
Co-Chair Josephson asked if revenues were designated.
Mr. Stickel responded that the slide showed only the
unrestricted portion of the non-petroleum revenues. There
were a significant amount of designated and dedicated
revenues as well.
Representative Allard understood that the fisheries
business tax and the fisheries resource landing tax were
levied on the processors of the fisheries resource. She
asked if the taxes were applied at the 3 percent value
rate.
Mr. Stickel responded that half of the fisheries taxes were
shared with municipalities, generally before tax credits,
with the remaining half accruing to the state. The revenue
figure provided represented only the retained state share
of those taxes.
2:26:08 PM
Representative Bynum expressed concern about the impact of
oil prices and production on the state's revenue,
particularly considering its significant role in shaping
the budget. He noted that investment income was also an
important component, noting that while the S&P 500 had
experienced significant growth in FY 24, the state's
investment funds had grown at a much lower rate of around
7.9 percent. He asked for further clarification on the
impact on investment income. Although he was aware that the
presentation was an overview, he thought that the public
likely had questions about the difference between their own
investment fund growth and the state's professionally
managed fund.
Commissioner Crum explained that part of the investment
strategy for APFC was to minimize risk while ensuring
modest gains. He emphasized that the strategy had been
crucial in reducing volatility because the PFD was vital
for the state. The corporation's investment approach had
been governed by the prudent investor rule and aimed at
maximizing risk-adjusted returns. There was a consistent
dialogue between trustees, investment staff, and external
consultants like Callan. He explained that while the fund
sought to achieve competitive returns, there had been a
strong focus on maintaining stability and mitigating risk,
particularly considering that the Permanent Fund directly
supported the state's unrestricted general fund through the
POMV draw. The goal had been to avoid major fluctuations
that could negatively impact the ERA, which was crucial
when it came time to pay out the fund. The strategy had
been deliberate and was designed to ensure a diversified
portfolio that generated returns under various market
conditions.
2:30:13 PM
Representative Stapp asked for more information about the
current management fees for APFC on an annuitized basis.
Commissioner Crum responded that he did not have the exact
number off the top of his head but noted that it had not
varied much. He estimated that it was approximately $198
million for the corporation.
Representative Stapp asked for more information about
charitable gaming tax revenue. He acknowledged that it was
a relatively small amount but wondered if the new casino in
Eklutna might impact projections.
Commissioner Crum replied that the department had not
conducted an analysis on it because the latest information
suggested that the casino would be operational by the end
of 2025, which would result in only partial-year data for
analysis. He explained that with the gaming tax revenue in
the range of three million dollars, it could fluctuate
marginally, but it was unlikely to reach $20 million for
state revenue.
Co-Chair Josephson expressed his hopes that the new casino
might help with his dream of a light rail to the Mat-Su.
Representative Hannan asked Mr. Stickel about the mining
license tax. She noted that while the revenue was projected
to grow to $45 million in FY 25, it was expected to drop to
$25 million in FY 26. She asked why the mining license tax
appeared to be volatile during the period.
Mr. Stickel replied that the mining license tax was based
on net income, which made it inherently volatile. He
clarified that the forecasting model took into account the
expected production levels, mineral prices, and costs for
each of the major mines in the state. The revenue for FY 25
was expected to primarily reflect calendar year 2024's
production, with modest mineral prices and increasing costs
expected to drive the decline to $25 million in FY 26.
Representative Hannan noted that alcohol, marijuana, and
tobacco excise taxes appeared to be declining, despite
expectations that tourism would drive higher consumption.
She asked why the revenue from excise taxes was expected to
decline.
Mr. Stickel responded that excise taxes were a complex
topic. He noted that alcohol consumption had leveled off in
recent years and flat consumption was projected to be flat
going forward. He also explained that there had been a
shift away from taxable nicotine products like cigarettes
towards non-taxable nicotine products such as e-cigarettes
and nicotine pouches. There had also been a shift in
consumption toward lower-tax marijuana products, even as
overall marijuana use was expected to slowly increase.
2:35:12 PM
Mr. Stickel moved to slide 17 and detailed the assumptions
surrounding the oil revenue forecast, particularly oil
prices. The forecast was based on futures market data for
as many years as were available, followed by an assumption
that prices would rise with inflation. The forecast
utilized the futures market through FY 32, offering
transparency for the oil price assumptions. He noted that
the price forecast showed slight reductions in the
forecasted oil price by $4 per barrel in FY 26 and further
reductions for the following years. The forecast was
generated using futures data from the last five trading
days of November in 2024.
Representative Bynum asked if the graphs on slide 17 were
shown on an annualized average basis. He wondered if the
historical averages would reflect similar data moving
forward.
Mr. Stickel confirmed that slide 17 utilized monthly
averages for the historical data. He added that annual
average fiscal year prices were available in Appendix B-1
of RSB.
Co-Chair Josephson asked for more information about the
significant increase in oil prices in late 2022.
Mr. Stickel responded that he suspected that it was related
to the war in Ukraine.
2:38:22 PM
Mr. Stickel continued on slide 18 which showed how the
price forecast compared to various other forecast sources.
He added that the department had updated the slide earlier
in the week. The comparison was made to the Brent Crude Oil
Future Expectations from the U.S. Energy Information Agency
and its short-term energy outlook. Additionally, the
comparison was made to the current futures markets as of
January 21, 2025, as well as an average of analyst
forecasts obtained from Bloomberg. He explained that Brent
was used for comparison because it was a comparable crude
to North Slope crude oil in terms of quality, and the crude
oils typically priced similarly. He thought the good news
in the forecast was that the futures markets were
suggesting prices over the next year would be slightly
higher than what had been included in the fall forecast.
However, beyond FY 26, the forecasts generally aligned with
other sources, indicating crude prices would be in the $70
per barrel range, with a variation of $5 to $10 per barrel.
Representative Josephson asked if the slide suggested that
there might be some good news from the department in mid-
March of 2025.
Mr. Stickel responded that if the oil price forecast had
been updated at that time, there would have been a modest
increase in the forecast.
Mr. Stickel moved on to slide 19 which detailed how the
expected revenue for FY 26 could change with different oil
prices. He noted that the department had forecasted a price
of $70 per barrel for North Slope oil in FY 26, equating to
$2.4 billion of UGF revenue, excluding the POMV transfer.
He explained that for every $1 change in the oil price,
there was a $35 million change in revenue. If the price
increased over $100 per barrel, the revenue would increase
by $75 million. Conversely, if the price dropped below $60
per barrel, the change would be around $25 million per
barrel. He attributed the variability to the progressive
nature of the production tax system, which had been
discussed earlier in the presentation.
2:41:18 PM
Representative Allard asked to return to slide 15. She
noted that Representative Stapp had asked about charitable
gaming taxes, which were tied to the potential opening of a
casino. She asked how revenue from the casino would be
allocated to the state under federal law, particularly
since the revenues would not be allocated to her district.
Commissioner Crum asked if Representative Allard was asking
about charitable gaming taxes going to her district or just
to the state.
Representative Allard clarified that she was asking about
revenue coming to the state.
Commissioner Crum explained that the department was working
on an updated analysis regarding the potential revenue from
the Eklutna tribe's casino. He noted that the situation had
been in-flux, with recent developments in the last two
weeks adding complexity to the department's understanding
of the matter and its authority over the collection of the
taxes. Currently, there would be no revenue for the state
or for the community in Representative Allard's district if
the project went through. He noted that the information was
incomplete, as it depended on interpretations of federal
letters and other rules that were still emerging. He
offered reassurance that the department was actively
working on the analysis, but the matter remained unresolved
due to the lack of clarity in the legal framework.
2:43:31 PM
Mr. Stickel continued on slide 20. He stated that the slide
was similar to previous slides and it detailed the forecast
for North Slope oil production over the next 10 years,
including high and low cases. The forecast pointed to
stability, with predictions of 460,000 to 470,000 barrels
per day for the next few years. The stability was expected
to be maintained as natural declines in existing fields
were offset by additional drilling. New production from
fields like Pikka and Willow, along with smaller
developments, would help maintain the overall stability.
Mr. Stickel moved to slide 21, which compared the 10-year
oil production outlook to what had been presented in the
spring 2024 revenue forecast. The forecast for FY 25
through FY 27 had been slightly reduced compared to the
spring forecast, which was a change that had been discussed
earlier.
Mr. Stickel moved on to slide 22, explaining that it showed
how allowable lease expenditures for the North Slope had
changed over the past couple of years, as well as the
forecast for the next 10 years. He clarified that allowable
lease expenditures were the production costs reported to
the department on tax returns, which were deductible in the
production tax calculation as part of the net profits tax
calculation. The expenditures were also an important
barometer of company spending and investment in Alaska. In
FY 24, North Slope capital expenditures reached $4.2
billion, marking a high watermark over the last several
years, while operating expenditures were $2.9 billion.
There had been a continued ramp-up in spending at major new
developments such as Pikka and Willow, along with an active
exploration season on the North Slope. He noted that it was
a busy and active period in the oil industry. For FY 25,
the department was forecasting another increase in capital
expenditures, with continued high levels of spending on a
historical basis over the 10-year forecast. Capital
expenditures were expected to stabilize at around $3.4
billion per year. Conversely, operating expenditures were
expected to increase slowly over time due to cost inflation
and the operating costs of new fields coming online.
Mr. Stickel continued by explaining that the later years in
the lease expenditure projections were presented on a
risked basis. The lease expenditure forecast was correlated
with the production forecast produced by DNR. He explained
that if there was a risk factor applied to production, the
same risk factor was applied to lease expenditures. If all
the new fields came to fruition as hoped, both production
and spending could be higher than forecasted.
2:47:31 PM
Mr. Stickel moved to slide 23, which showed how
transportation costs had been impacted over the last couple
of years, as well as the 10-year forecast. He explained
that the key takeaway was that transportation costs were
expected to remain stable with oil at around $10 per
barrel. The costs represented the expenses of getting oil
to market from the North Slope, typically to the West Coast
of the U.S. The biggest components were marine costs and
the Trans-Alaska Pipeline (TAPS) tariff, while smaller
adjustments included quality bank adjustments, feeder
pipeline tariffs, and other minor costs. Marine costs had
increased significantly over the past several years due to
overall increased fuel costs and price inflation. However,
he expected the costs to moderate going forward. On the
other hand, the TAPS tariff was expected to decline over
the 10-year projection due to the pipeline. With new fields
coming online, the cost of operating TAPS would be spread
across a higher number of barrels, resulting in a decrease
in the charge per barrel.
Co-Chair Josephson asked if slide 23 also related to
royalty, as marine costs and tariffs were a key component
in calculating royalty.
Mr. Stickel responded in the affirmative. He explained that
the transportation costs impacted the gross value
calculation for royalty, the gross value calculation for
the minimum tax floor, and the net profits calculation for
the production tax. He stressed that it was essential to
closely monitor transportation costs.
Mr. Stickel moved to slide 24 and explained that petroleum
revenues varied by land type and not all oil was the same.
He noted that the differences were relevant to ongoing
discussions about existing and potential new developments.
Historically, most production occurred on state land with a
standard state royalty, but some of the major new
opportunities were coming from federal land, including the
National Petroleum Reserve Alaska (NPRA), and potentially
from private land within the Arctic National Wildlife
Refuge (ANWR). He clarified that production tax, corporate
income tax, and property tax were levied on all oil and gas
production within the state and within the state's three-
mile offshore limit, regardless of who owned the land.
However, royalties differed by land ownership. The state
received all royalty income for state-owned land within the
three-mile limit. For federal land in NPRA, the state
received half of the royalties, but the funds had to be
used to benefit local communities rather than contributing
to the state's general fund revenue.
Mr. Stickel explained that the Greater Mooses Tooth
development project was an example of NPRA production. The
Willow development was expected to come online in the next
few years. The state would receive a share of the royalties
without restrictions for federal waters between three miles
and six miles offshore and any production from ANWR or
other federal lands, which would contribute to the general
fund under current law. For federal waters beyond six miles
offshore, there was no direct state revenue benefit.
However, the state might benefit indirectly through reduced
tariffs on the pipeline system and potentially onshore
property or employment related to the production. For
private land, such as land owned by Alaska Native
corporations like the Arctic Slope Regional Corporation,
the state did not receive a direct royalty. However, the
state levied a tax on the private royalty interest, which
was 5 percent of the private royalty value for oil and 1.67
percent for gas.
2:52:56 PM
Representative Stapp asked if it was fair to say that the
state would essentially collect zero royalty income from
the Willow project, other than the pass-through income. He
understood that the 50 percent federal royalty shared with
the state would be passed through to the affected
municipalities.
Mr. Stickel responded in the affirmative. The state would
not receive general fund revenue and 50 percent of federal
royalty revenue would be shared and passed through to the
impacted municipalities.
Representative Stapp asked whether all lease expenditures
would still apply against the production tax for the Willow
project.
Mr. Stickel responded in the affirmative.
Representative Stapp asked if it would be possible to
calculate the total amount of tax revenue lost through
deductions and credits, given that the Willow project would
only yield production tax revenue for the state.
Mr. Stickel responded that the department had conducted an
in-depth study of the Willow project and had made the
findings available online. He added that the study would be
updated in the spring, and he confirmed that the state
would indeed receive production tax revenue from the Willow
project. In addition to production tax, corporate income
tax, and property tax, a significant benefit of the Willow
project was the impact on pipeline tariffs. He noted that
when there was a reduction in the TAPs tariff and some of
the feeder pipeline tariffs, it positively impacted both
tax and royalty revenue received from several other fields.
The details regarding the impacts were outlined in a white
paper available on the tax division's website.
Representative Hannan asked for clarification on whether
the state would be able to collect property tax from the
Willow project or if it would be exempt, especially
considering it was on federal land within the North Slope
Borough, which already collected property taxes.
Mr. Stickel explained that the state taxes applied to all
production within the state, regardless of land ownership.
The state levied property taxes on property within the
North Slope Borough. The municipal share of the property
taxes was allowed as a credit against the state tax, but
the state still received a small share of property tax
revenue.
Co-Chair Josephson noted that he occasionally saw slides in
presentations that had continued value every year, and he
thought slide 24 was one of the continuously valuable
slides.
Mr. Yancey expressed appreciation for Mr. Stickel's team
and the economic research team. He commended the team for
gathering data over a short period of time. He was
impressed by the professionalism and dedication of the
team.
2:57:27 PM
Co-Chair Josephson reviewed the agenda for the following
day's meeting.
ADJOURNMENT
2:58:02 PM
The meeting was adjourned at 2:57 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR - H.FIN Fall 2024 Forecast Presentation 01.23.25.pdf |
HFIN 1/23/2025 1:30:00 PM |
HB 53 |