Legislature(2005 - 2006)
01/14/2005 08:32 AM House W&M
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| Overview: Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SPECIAL COMMITTEE HOUSE WAYS & MEANS
January 14, 2005
8:32 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch Chair
Representative Norman Rokeberg (via teleconference)
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
MEMBERS ABSENT
Representative Carl Moses
COMMITTEE CALENDAR
OVERVIEW: DEPARTMENT OF REVENUE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
WILLIAM CORBUS, Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Offered an overview regarding the Department
of Revenue's fall forecast.
TOMAS H. BOUTIN, Deputy Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Presented an overview regarding the
Department of Revenue's fall forecast.
DAN DICKINSON, Director of the Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions and further explained
the fall forecast during the overview of the Department of
Revenue.
ACTION NARRATIVE
CHAIR WEYHRAUCH called the meeting to order at 8:32:56 AM.
Representatives Samuels, Seaton, and Wilson were present at the
call to order. Representatives Gruenberg and Rokeberg (via
teleconference) arrived as the meeting was in progress.
^OVERVIEW: DEPARTMENT OF REVENUE
8:32:56 AM
CHAIR WEYHRAUCH commented that it was a pleasure to have the
same group of Representatives working on the House Special
Committee on Ways and Means as last year. He announced that the
purpose of today's meeting was to have an overview with the
Department of Revenue.
8:33:54 AM
WILLIAM A. CORBUS, Commissioner, Department of Revenue, would be
presenting on behalf of the Department of Revenue and he noted
the presence of the following from the department: Tomas Boutin,
Deputy Commissioner, Department of Revenue, Dan Dickinson,
Director of the Tax Division; via teleconference from Seattle,
Mike Williams, the new Chief Petroleum Economist replacing Chuck
Logsdon, and Brett Fried with Tax Division. He informed the
committee that he would be presenting an outline of the
Department of Revenue's views on the financial condition of
state and the fall revenue forecast.
COMMISSIONER CORBUS conveyed the three financial conditions of
the state: the short-term, long-term, and very long-term. He
stated that the short-term is relatively good; the long-term is
bad, and the very long-term after the pipeline should be good.
8:37:39 AM
TOMAS H. BOUTIN, Deputy Commissioner, Department of Revenue,
commented that the short-term depends on three components: the
cash flow, reserves, and liabilities. The fall forecast
combined with the fiscal year (FY) 05 budget and with the
submitted FY06 budget shows net surplus for the two years. Also
in the OMB [Office of Management & Budget] FY06 Governor's
Budget Fiscal Summary the FY06 budget shows a year-to-year
spending reduction, so the short-term cash flow looks positive.
Mr. Boutin opted to switch topics from fund balances [which
refers to budget] to cash balances [which the Department of
Revenue depicts to the credit rating agencies and are the
measurer of liquidity].
8:39:15 AM
MR. BOUTIN said that the general fund has a cash balance of
about $290 million and another $30 million is in a daily-
suspended account until reconciliation and some portion of that
will be general fund. The Constitutional Budget Reserve (CBR)
amounts to $2.15 billion today and the permanent fund has over
$29.5 billion, which totals a combined liquidity of $32 billion.
8:39:36 AM
MR. BOUTIN stated:
What the State Bond Committee and Department of
Revenue show the rating agencies for their reserve
calculations and their measures of liquidity is a
general fund in the CBR balances combined, plus
permanent fund earnings reserve; and that we show as a
balance available for appropriation. And we compare
that along with forecasted revenues and current year
in expected budgets and that is the liquidity and
reserves that the credit rating agencies, their
analysts, have always used for measures of the state's
current fiscal health. Short-term liabilities consist
of about $13.8 million annually for debt service on
lease debt and $19.7 million this year and $31.8
million for FY06 for general obligation debt service.
Another 9 million dollars each year is for the so-
called GARVEE [Grant Anticipation Revenue Vehicles]
bonds, while those have a general obligation pledge
with them the debts service is substantially paid by
federal receipts. As an aside to the discussion about
short-term liabilities, just in case it would come up,
total general obligation debt outstanding on last June
30 was $461.9 million, including those GARVEE bonds,
and state lease debt outstanding was another $203
million and those two combined we ... in the credit
rating agencies see ... as our general fund
indebtedness.
8:42:04 AM
REPRESENTATIVE GRUENBERG suggested that perhaps a sheet with all
the figures would help clarify the Department of Revenue's
information.
8:42:16 AM
MR. BOUTIN obliged Representative Gruenberg's request. Mr.
Boutin asserted:
Another long-term liability, but one of a very
different nature than debt, is the unfunded pension
liabilities and total unfunded liabilities for PERS
[Public Employees' Retirement System] and TRS
[Teachers' Retirement System], as of 6/30/03 was
$4.959 billion. Final topic in the area of
liabilities is the credit ratings; credit ratings are
a direct measure of the state's financial condition.
The three credit ratings agencies track state revenues
and budget process and maintain regular contact with
the State Bond Committee and Department of Revenue.
They receive formal presentations from Governor
Murkowski and/or members of the cabinet three or four
times a year. The state general obligation ratings
are AA from Standard and Poors, AA II from Moody's,
and a AA from Fitch Ratings. To varying degrees the
ratings anticipate a so-called fiscal solution. And
so, if you will, a fiscal plan that has yet to be
adopted is already discounted in the rating, and by
fiscal solution I mean a plan that matches recurring
revenues with expenditures, the rating agencies
anticipate one will be adopted...Based on their belief
that the state will have no choice but to adopt one
and if the state didn't adopt one after say a current
year and forecasted year of significant decline then,
I think, the ratings would start to reflect that there
wouldn't be a fiscal plan, whereas the ratings today
reflect that the rating agencies expect that there
will be one.
8:45:19 AM
MR. BOUTIN described that Moody's Investors Services Global
Credit Research Rating Update 19 NOV 2004 states that
"conservative financial management and adoption of structural
fiscal reforms are vital" to maintaining the state's high
rating.
MR. BOUTIN stated that the short-term is strong and "The fiscal
decisions made by the Governor have been recognized by the
credit rating agencies that have followed the state's credit
since statehood."
8:48:00 AM
COMMISSIONER CORBUS turned to the long-term outlook for the
state:
The state has a long-term structural financial
problem. Regular reoccurring revenues are expected to
be less than reoccurring expenditures. That has been
the case most of the time, as we look back, over the
last 10 years. Just to illustrate, we would like to
refresh your memory about the history of the
Constitutional Budget Reserve Fund. This fund was
established in 1990 by a constitutional amendment from
settlements from oil, tax, and royalty litigation.
The idea was that during poor revenue years through
the state, mainly when the price of oil is down, that
we would borrow from the Constitutional Budget
Reserve. And during good revenue years, years of high
oil prices, that we would repay the constitutional
budget reserve. Unfortunately it has not quite worked
out that way; during the last 10-year period 7 out of
10 years we borrowed out of the Constitutional Budget
Reserve. The state in total has deposited $5.6
billion into the Constitutional Budget Reserve from
oil settlements and has earned and additional $1.6
billion. During this time frame it has drawn out a
total of $5.1 billion, such that the CBR today equals
$2.1 billion. It is safe to say that when the CBR was
set up that it was intended that we would still be at
this $5 billion level, but we find ourselves at the $2
billion that the administration has been successful at
keeping it at the level for the last several years but
over time it has been depleted. And looking to the
future the outlook for the CBR is not good. This
administration has exercised strong fiscal discipline
and the price of oil certainly has helped, so that we
do find that the life of the CBR has been extended
from some of the earlier projections/predictions. But
as we'll discuss in the fall revenue forecast, the
fund is predicted to be depleted sometime between
September of 2009 and April of 2010, depending on the
spending level that you assume, we're assuming
somewhere between $2.4-$2.5 billion per year to come
up with those parameters.
8:51:35 AM
COMMISSIONER CORBUS related that Governor Murkowski will under
no circumstances, allow the CBR to fall below a minimum of $1
billion, which is necessary to cover the volatility of price of
oil. A budget is based on the certain projected price of oil.
If the price is less then revenues would be less. Another $400
million is general capital for the general working fund, he
mentioned.
8:53:26 AM
COMMISSIONER CORBUS directed attention to the option of the
percent of market value (POMV) which is still available for the
legislature's consideration. He encouraged the legislature to
reconsider the POMV.
In closing he offered to answer any questions on the Department
of Revenue's outlook of fiscal conditions.
8:57:45 AM
CHAIR WEYHRAUCH asked:
You reviewed generally that the state's financial
condition appeared to be good in the short-term, bad
in the mid-term, and good in the long-term with some
major assumptions related to the gas and the ANWR
development. The bad in the mid-term I did not get as
much information on that. Are we just to believe that
it's going to be bad in the mid-term because we don't
have reoccurring sources of revenue to meet
reoccurring sources of obligations, and does it also
assume that we aren't going to address the long-term
liability on PERS and TERS? And we are not going to
address these other issues?
8:58:33 AM
MR. BOUTIN stated that the short answer to Representative
Weyhrauch's question was yes. Pension liabilities are being
addressed with payments and contributions. There will be long-
term changes in the defined benefit programs for new hires, so
the unfunded pension liabilities are being addressed. Recent
pension fund investment earnings have been more favorable than
they were during the 24-30 month bear market. He mentioned
that in discussions with credit rating agencies the Department
of Revenue focuses on the current year and coming year for the
revenue forecast.
9:01:49 AM
DAN DICKINSON, Director of Tax Division, Department of Revenue,
if the Arctic National Wildlife Refuge (ANWR) legislation passes
in Congress this year it would be 9-10 years before the state
starts receiving royalties or severance taxes on a regular
basis. The decade during this period is how the mid-term
forecast would be defined in the OMB budget.
9:27:57 AM
COMMISSIONER CORBUS stated that the Organization of Petroleum
Exporting Countries (OPEC) standard price goal is estimated to
be between $22-28 per barrel. The current estimate for the OMB
budget is $25.50, which is in the mid-range of OPEC. The
current forecast prices were set last October and much has
happened since then. Commissioner Corbus claimed currently [the
department] is less certain about OPEC maintaining the given
price range. In recent times oil prices are hard to predict due
to less reliability.
9:30:00 AM
COMMISSIONER CORBUS provided some reasons for the
unpredictability of oil prices:
In 2004, we had a drop of $18 a barrel over a 49 day
period, which is rather substantial but these type of
changes in the price of oil are not uncommon as we
look back over history. In the build-up for the
second Iraqi oil in 2003, we had a $15 drop over a 48
day period. And back in 1991, in connection with
first Iraqi oil we had a drop of $15 over a 37-day
period. And today the price of oil is about $42, and
that is $8 higher than it was a month ago. Prices are
jumping around. It has been said that we are going
through a wild ride. The overall factors that have
impacted the recent price of oil are... the demand
from China, the second largest consumer of oil and
their growth and demand has been spectacular over the
last several years; uncertainty on supply side;
interruptions in Iraq, Russia threatens strikes in
Nigeria; the value of dollar has gone down and has
certainly impacted the price of oil, most recently
improved the U.S. inventories is one of the reasons
cited for a drop in the price of oil, and the fear
factor, we'll call it, which is a combination of all
the above plus the threat of terrorism have all
impacted the volatility in the price of oil.
9:32:39 AM
COMMISSIONER CORBUS stated that the Alaska oil production
forecast is based on currently known reserves. In FY05 there is
an estimated average production from the North Slope of about
934,000 barrels daily. By 2013, an average production per day
should be about 919,000 barrels. By 2011, new oil developments
will account for 48.1 percent of total production.
COMMISSIONER CORBUS related the positive impact ANWR would have
on oil production for the state.
9:40:18 AM
COMMISSIONER CORBUS concluded that the current outlook for the
price of oil is very high compared to the past. Commissioner
Corbus reminded the committee not to forget that Alaska has a
structural long-term financial problem. In fiscal year 2005,
the average price of oil has been $41.84, as it stands the price
of oil is $1.87 below the projected oil price for the fall
forecast. Commissioner Corbus suggested that the forecast
overall may be optimistic for FY05 oil revenues. The next
update for the revenue forecast will be in April of this year,
he noted.
9:47:00 AM
MR. DICKINSON mentioned that the Department of Revenue is
forecasting comparable to some of the other high power
organizations.
9:59:18 AM
CHAIR WEYHRAUCH asked each member to comment on the House
Special Committee on Ways and Means.
9:59:56 AM
REPRESENTATIVE GRUENBERG related his belief that it is most
important to have an ongoing House Special Committee on Ways and
Means. Over 30 states have such a standing House Special
Committee on Ways and Means separate from appropriation or
finance committees. Representative Gruenberg stressed the
importance of having solid long-range fiscal planning for
Alaska, and therefore he expressed that the committee is far
more proactive than last year. Representative Gruenberg also
mentioned that he would like to have regular meetings.
10:01:17 AM
REPRESENTATIVE SEATON noted his appreciation for being on the
House Special Committee on Ways and Means. He expressed
interest in reviewing the details of bills for the sake of his
constituents as well as the sake of the House.
10:02:01 AM
REPRESENTATIVE SAMUELS expressed his desire to review how
revenue measures will impact the economy of the state.
10:02:25 AM
REPRESENTATIVE WILSON highlighted the importance of
preparedness, and pointed out that the surplus allows the
legislature to prepare now so that the economy is not devastated
if the price of oil drops.
10:03:08 AM
REPRESENTATIVE ROKEBERG agreed that the structural long-term
debt that Commissioner Corbus presented is accurate.
Representative Rokeberg said he would much like to continue
working on the committee expenditure forecast. He suggested
that the legislature should create a forecasting model for near-
term and mid-term expenditures; thus focusing on issues that are
going to impact the budget.
10:04:14 AM
CHAIR WEYHRAUCH related that he looked forward to working with
Commissioner Corbus throughout the session. Chair Weyhrauch
explained that the House of Representatives started the House
Special Committee on Ways and Means in order to address
measures. The committee is committed to looking at the ways
currently used to finance government.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
10:08:15 AM.
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