Legislature(1999 - 2000)
01/20/1999 09:01 AM Senate FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
January 20, 1999
9:01 AM
TAPES
SFC-99 # 1, Side A & Side B
CALL TO ORDER
Co-Chair Sean Parnell convened the meeting at approximately
9:01 AM.
PRESENT
Senator Sean Parnell, Senator John Torgerson, Senator Randy
Phillips, Senator Dave Donley, Senator Loren Leman, Senator
Gary Wilken, Senator Lyda Green, Senator Pete Kelly, and
Senator Al Adams.
Also Attending: Wilson Condon, Commissioner, Department of
Revenue; Deborah Vogt, Deputy Commissioner, Department of
Revenue; Ross Kinney, Deputy Commissioner, Department of
Revenue; Brett Fried, Division Of Income and Excise Audit,
Department of Revenue; David Teal, Director, Division of
Legislative Finance; Phil Okeson, Ginger Blaisdell, Fiscal
Analysts, Division of Legislative Finance; and aides to
committee members and other members of the Legislature.
SUMMARY INFORMATION
Co-Chairs Parnell and Torgerson introduced Senate Finance
Committee staff and their prospective office staff.
Under other "housekeeping" duties, Senator Al Adams and
Senator Dave Donley resolved differences left from the
previous session.
Co-Chair Sean Parnell introduced WILLIAM CONDON,
Commissioner of Department of Revenue, whom in turn
introduced Chuck Logsdon and Brett Fried.
Mr. Condon explained to the committee how the department
made its annual forecasts. He told them that it involves
people from many other areas of state government, was done
twice a year, a short-term forecast in April then a long-
term price forecast in November
He detailed the eight Department of Revenue staff involved
in the process along with research staff from Department of
Labor, Office of Management and Budget and the University
of Alaska.
The group also included an observer from Division of
Legislative Finance. He explained that considerations for
separation of power stipulated that the Division of
Legislative Finance did not participate in decision making.
Mr. Condon referred to the process as a "bottom-up"
process, which looked at supply and demand, reviewing
events in producing regions and all the consuming regions
of the world. Then a judgement was made concerning the
business as well as the politics.
He then talked about how the department did a volume
production forecast. He said a petroleum engineer was on
contract with the department along with others from
Division of Oil and Gas, Department of Natural Resources
and staff from Oil and Gas Conservation Commission. The
review was done on a field by field or prospect by prospect
basis. It did not include undiscovered hydrocarbons. It
did however make judgements about hydrocarbons that had
been discovered in the likelihood of being developed.
After making those judgements, the group did a detailed
review of both approved and proposed plans of operation
with respect to discoveries and producing areas that are
being forecasted. Once the internal review was complete
the group approached the North Slope operators with the
forecast and the operator's approved plans of operations
for review and consensus.
This was the method for determining a production volume
forecast.
Mr. Condon then reviewed the price forecast the department
had made for the current and the next fiscal years.
He spoke of the FY99 forecasted price of $13.80 per barrel
of oil and FY00 of $15.20. However, he stated, events from
the OPEC meeting held after the forecast was made official
plus other events during that time, made it clear that the
judgements made in the official forecast would not be the
case.
Mr. Condon referred to the December, 1998 prices that fell
to the eight-dollar range and said it became clear that
short-term range was too optimistic. The department was no
longer relying on short-term forecast.
The updated forecast for FY99 was an average destination
price of $11.58 and FY00 was $12.50. The revenue forecast
for the remainder of this year and next year was based on
the updated figures.
He commented on the media focus on short-term prices in the
media. He said that the importance was than while the oil
prices were low today, even if oil prices rose
substantially, they would not change the longer-term
revenue outlook for the state that much.
Mr. Condon then stated that if oil prices remained as they
were today and the state continued to draw from the
Constitutional Budget Reserve at the same rate, the fund
would be exhausted in about four years. If prices went up
to an average of $16 then the CBR would last five years, he
speculated. Therefore, he concluded, anticipated production
volumes and oil and gas revenue had declined to the point
where the state simply can not make ends meet under the
current revenue and spending practices.
Senator Randy Phillips asked about projected production.
Mr. Condon responded that the department anticipated daily
ANS production for FY99 to be 1,180,000 barrels per day and
for FY00, 1,117,000 barrels per day. He noted that the
FY99 projection was just less than 100,000 barrels per day
from the previous year and that FY00 production would be
about 190,000 less. He attributed the decline to some
delays in some of the major projects, short-term
investments made in large production fields and some of the
fields having less capacity as expected.
Senator Randy Phillips then asked if the CBR projection was
about two billion dollars by June 30. Mr. Condon said the
Department of Revenue's projection was about $2.5 billion
based on expected interest earnings this year.
Senator Dave Donley brought up the question of withdrawals
from the fund. Co-Chair Sean Parnell clarified that the
figure included this year's anticipated withdrawal.
Mr. Condon began showing the committee graphs on an
overhead projector.
He showed the history of the CBR up to the end of FY98
including settlement amounts, investment income, net loans
to the General Fund showing the actual flow of funds in and
out of the fund.
Co-Chair Sean Parnell wanted to know if the figures showed
the estimated FY03 numbers. Mr. Condon said the chart
showed average oil prices and changes in the budget and
then showed when the CBR fund would be exhausted. Under
the Department of Revenue's forecast, the fund would be
emptied in February 2003.
Mr. Condon showed another graph showing the various oil
prices over the last year in comparison to the forecast.
Senator John Torgerson said he had seen settlement fund
projections of $120 million in settlements. Mr. Condon
responded the figure had been adjusted to $106 million over
the next five years.
Co-Chair Sean Parnell wanted to if the budget increase of
two-percent every year was the Governor's proposal. Mr.
Condon said the department's projections incorporated a
flat budget over the next five years. Co-Chair Sean Parnell
pointed out that while the fund would still expire in the
next five years, with a two-percent budget increase, the
deficit would be greater by hundreds of millions of
dollars.
Senator Randy Phillips asked for confirmation that the fund
would be wiped out in about two and one-half year unless
oil prices greatly recover. Mr. Condon confirmed.
Senator Gary Wilken requested a copy of the overheads.
CHUCK LOGSDON, Deputy Commissioner, Department of Revenue
discussed the Fall Revenue Forecast based on the
information presented by the commissioner. He told the
committee of the division's website
(www.revenue.ak.state.us), which contained information
resources including daily oil prices plus division reports.
He brought the committee's attention to a handout: Net
Disposable General Fund Unrestricted Revenue. He explained
that this information was being used for spending purposes.
It was the department's estimate of unrestricted revenues.
He noted some exceptions of generated income that was not
included in this figure.
He pointed out that in FY98 the state brought in $1.853
million and reflected the drop in oil prices. He said
there was a substantial drop of about one-third of the
revenues.
He noted the change in previous unrestricted revenues to
this stage of lower prices and said the state would have to
wait several years before oil prices recover.
He pointed out that December 21, 1998 saw the lowest price
in ANS Westcoast history of $8.63 per barrel. The lowest
average annual ANS Westcoast spot price occurred in 1998.
He detailed low prices in the past and made comparisons.
Senator Pete Kelly asked about the differences between FY99
and FY00 and wanted to know if that took into account an
income tax. Mr. Logsdon replied that this information was
based soly on current taxes and royalties.
Mr. Logsdon spoke of things that affected the current
budget situation: The Asian financial crisis, which had
turned into a major economic crisis and in effect lowered
oil consumption. He also noted the importance of the El
Nino winter, which also cut down on fuel consumption. In
addition, OPEC raised their production rates at the same
time making a deal with Saddam Hussien allowing Iraq to
produce as much oil as they needed to meet their needs,
which flooded the market with an increase in oil. That is
what caused prices to clash
Senator Pete Kelly had questions about consumption and
referred to an industry article stating that Saudi Arabia
had decided to go towards the market share and squeeze
independent producers out of production. He wanted to know
if that assumption was true. He also said he heard that
the Y2K problem was expected to be much more severe in Asia
and wanted to know what affect that would have.
Mr. Condon said that according to Saudi Arabian public
statements, the country was suffering economically. He
also said the country had other considerations with getting
along with neighbors and said he anticipated they would
"play ball." He spoke in further detail about the Middle
East economic and political situation.
The Department of Revenue had not specifically factored the
Y2K situation into their forecasts. They anticipated Asia
would not recover until after 2000, according to Mr.
Logsdon.
He continued laying out the path of the price in the
market, giving historical data from the past ten years. He
told the committee that the last OPEC meeting was one of
the most unproductive he had ever seen and that he felt
that was due to the politics involved. He spoke about the
new president of Venezuela, Hugo-Chavez and his subsequent
appointment of a new Oil Minister. Mr. Logsdon said that
the new oil minister's statements had been more favorable
with regard to reducing oil production despite his left-
wing tendencies.
Mr. Logsdon again said that winter temperatures have been
much warmer than anticipated and that this adversely
affected fuel consumption citing Department of Energy data.
Mr. Logsdon moved along to the next handout: ANS Market
Price, Fall 1998 vs. Spring 1998. He pointed out a big
spike in the year 2001 and that he believed there would be
no economic recovery in Asia until that year. He said the
department believed that OPEC would muddle through and he
figured that by the year 2002 prices would go up to $12.50.
He felt that the world economy would remain strong during
this period and that over time, OPEC would be increasing
its market share. Other non-oil nations' economy would
suffer from the low oil prices in the long run, according
to Mr. Logsdon.
Tape: SFC - 99 #1, Side B 8:50 AM
Production Assumption. Mr. Condon used this handout to
stress that low oil prices would have an adverse affect on
oil production. Although strides were being made to run
more efficiently, he stated there was no giant oil reserve
to rely on.
Mr. Logsdon reiterated that cooler temperatures made for
better oil production. However, warmer temperatures would
provide for slower production and allow the department to
better judge the average production rates.
He summarized various oil fields and their production.
Badami was not doing as well as expected, he said. However
Tarn was doing well.
Mr. Logsdon spoke to the next handout: Average ANS
Severance Tax Rate.
The next handout was General Fund Unrestricted Revenue,
Fall 1998 vs. Spring 1998. Mr. Logsdon explained that this
summary chart showed an overview of the items discussed.
Next handout: FY99 General Fund Unrestricted Revenue
Sensitivity Matrix. This was to show relative sensitivity,
according to Mr. Logsdon.
Mr. Logsdon summarized his presentation by saying that the
uncertainty was very high. A lot of it revolved around
OPEC decisions and the Asian financial crisis. With the
low oil prices, he pointed out that other state revenue
sources brought in about equal amounts of income.
Co-Chair Sean Parnell had a question on the FY00 price
forecast of $12.50 per barrel and $11.58 for FY99 and
wanted to know where those figures fell on the department's
worst and best-case scenario. Mr. Logsdon called that his
reference case and gave background on how they came up with
those numbers. He qualified that there were some
objectives that could change that market forecast.
Senator Loren Leman said he recently attended the Energy
Council International Conference and said that he thought
the Department of Revenue projections were more optimistic
then he had heard at the meeting. Others said prices would
take more than five years to recover. He asked if the
weather considerations the department had referred to
included the whole world or just the U.S. noting that
winter temperatures were warm throughout the world as well.
He also wanted to know if they also considered warm summer
temperatures when oil would be needed for cooling.
Mr. Logsdon said they only considered US weather. He said
that last summer; they didn't have a positive rise due to
warm temperatures.
Senator Loren Leman talked about Asian recovery and also
wanted to know if the Russian economy was considered in
determining the forecast.
Mr. Logsdon said the expectations for the Russian economy
were dismal. They did not expect demand to rise for
several years. However, their oil supply rates were
holding steady because of limited ability to get oil to
market. Therefore, they considered the Russia situation to
not be an advantage or a disability to the Alaskan economy.
Senator John Torgerson said the committee in the past used
a figure of about 70 million dollars premium for export of
oil to Asia when the export ban was lifted. He wanted to
know if exports were still being made to Asia and if Mr.
Logsdon had seen any increase. He asked what could be used
for a premium in today's market.
Mr. Logsdon responded that unfortunately in today's market
of reduced production and economic slowdown in Asia,
exports had pretty much dried up over the last six months.
Senator John Torgerson then wanted to know if there were
any impacts on oil prices from the recent mergers of BP,
Exxon and other oil companies. Mr. Logsdon had seen an e-
mail suggesting conspiracy but didn't feel that would
effect the state as far as pricing was concerned and that
more effects would be seen in production practices. He
qualified that something could come up in the future.
BRETT FRIED of the Division of Income and Excise Audit,
Department of Revenue gave a presentation on non-petroleum
revenue sources.
Handout: Non-Petroleum Revenues.
Mr. Fried said he would address four largest non-petroleum
tax types. These were corporation income, motor fuel,
tobacco, and fisheries taxes.
He referred to a handout titled, Historical and Projected
Corporation Income Tax Revenues. This showed corporate
income revenues since FY96 with a forecast for FY00. He
told the committee of the relatively flat numbers from the
general corporations. However oil corporation taxes had a
greater variation with a current downward trend from FY97
to FY99. The figures went up from FY99 to the forecasted
FY00 as the oil prices recover.
The next handout showed tobacco revenues. He pointed out
the substantial rise in income due to the change in tax
fees from 25 to 75 percent. He related this tax to the
school fund.
Next handout: Motor Fuel Revenues. He pointed out that
while the figures appeared flat, it was important to look
at the breakdown between the highway, aviation and marine
taxes. He related the changes in revenue amounts to some
statutory changes. Aviation tax rates were changed to apply
to indirect flights as well as direct flights. Motor fuel
revenues dropped in part due to the repeal of the gasohol
tax exemption. Marine fuel tax revenues changed due to the
activation of the bunker fuel exemption. However, the main
influence on the marine fuel revenues was due to the
fishing industry difficulties. He showed how this
correlated with the dropping prices of fish. That also
affected the revenue generated by the fish tax revenues.
The final tax-type he discussed was the Fish Tax revenues.
He continued speaking to the effects of the fishing
industry difficulties.
Senator Randy Phillips wanted to know if the fishing
industry was paying their way or were they being
subsidized. He wanted all sources included in the
determination. Mr. Condon said he would compile that
information.
Co-Chair Sean Parnell requested that the Department of
Labor compile that information and identify all sources of
revenue included.
Senator Randy Phillips wanted to know the amount of the
proposed motor fuel tax increase. Mr. Fried said the tax
would be raised from eight cents to seventeen cents per
gallon. Senator Randy Phillips then asked if that would
apply to just the highway motor fuel or to aviation and
marine as well. Mr. Fried answered that was just for the
highway motor fuel. He stated that the forecast did not
include that proposal.
Senator Randy Phillips asked why the increase was not
proposed for marine and aviation motor fuel as well.
Senator Pete Kelly understood the motor fuel tax was
increased to meet federal transportation match
requirements.
Senator Pete Kelly wanted to know if cigarette consumption
had changed as a result of the recent cigarette tax
increase and if the Department of Revenue incorporated
those anticipated changes. He figured that the income
generated from the tax should trend down with a decline in
consumption. Mr. Fried said they had incorporated a 13
percent drop into the forecast.
Senator Al Adams wanted a month-to-month cash flow
projection. He referred to last year's budget front
section and stated that a projection would be helpful in
making budget decisions.
He wanted to know if Department of Revenue had looked at
ideas for shoring up unrestricted revenues such as assets
the State presently had like the Alaska Railroad and the
permanent fund unrestricted fund.
Senator Al Adams also requested a past projection, a state
forecast and a date when the supplemental would be issued.
Mr. Condon said he did not know when a supplemental would
be produced.
Mr. Fried responded that with respect to FY99, most events
that would determine the revenues had already happened. If
there was a change, he hoped it would not be of a large
magnitude. As for FY00, that number could be influenced to
a greater extent, he answered.
Senator John Torgerson requested FY00 forecasts. He was
surprised that information was not included in the packet
before the committee. He was told that information would
be in the Fall 99 forecast report.
He then referred to the repeal of the gasohol tax. He
wanted to know if the exemption repeal was just for
Anchorage or statewide. It was pointed out that only areas
where gasohol was mandated had the exemption and that the
tax had essentially been reduced from eight to two cents
per gallon.
Senator Loren Leman clarified that the exemption applied to
noncompliance area where gasohol was required.
There was further discussion on what areas of the state had
the gasohol requirements.
Senator Gary Wilken asked what was the horizon that WTI had
traded on. He also asked what in Mr. Logsdon's experience
had been the most valued indicator of future price for WTI.
Mr. Logsdon said most activity was only in the future's
market occurred in the in the first months of the contract.
He added that most liquidity in the market was only in the
first few months. He pointed out that most people used the
future's market to hedge actual transactions. He further
detailed his point.
Senator Randy Phillips repeated his request for information
on monies collected versus cost of activities for the other
fuel taxes as well as the fisheries fuel tax - aviation,
highway and marine. He stated that he wanted to see if the
users of the facilities and services were paying for their
operation through these taxes.
This concluded the presentation.
Senator Gary Wilken asked if a presentation from Cambridge
Energy and from the US Department of Energy similar to the
year before would be given this year. Co-Chair Sean Parnell
said one would be given later this session during the March
forecast time period, closer to the FY00 budget process.
Co-Chair Sean Parnell made announcements regarding future
SFC meetings.
ADJOURNMENT
Co-Chair Sean Parnell adjourned the meeting at
approximately 10:40AM.
SFC-99 (11) 01/20/99
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