Legislature(2007 - 2008)SENATE FINANCE 532
02/13/2008 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB256 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | SB 256 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
February 13, 2008
9:03 a.m.
CALL TO ORDER
Co-Chair Hoffman called the Senate Finance Committee meeting
to order at 9:03:11 AM.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson
MEMBERS ABSENT
None
ALSO PRESENT
Karen Rehfeld, Director, Office of Management and Budget;
Pat Pitney, Vice President, Budget and Planning, University
of Alaska; Nancy Slagle, Director, Division of
Administrative Services, Department of Transportation and
Public Facilities; Pat Galvin, Commissioner, Department of
Revenue; Michael D. Williams, Chief Economist, Tax Division,
Department of Revenue; Jerry Burnett, Director, Division of
Administrative Services, Department of Revenue.
PRESENT VIA TELECONFERENCE
Michelle Rizk, Director of Budget, University of Alaska; Pat
Pitney, Vice Chancellor, Administrative Services, University
of Alaska.
SUMMARY
SB 256 "An Act making supplemental appropriations,
capital appropriations, reappropriations, and
other appropriations; amending certain
appropriations; ratifying certain expenditures;
making appropriations to capitalize funds; and
providing for an effective date."
SB 256 was HEARD and HELD in Committee for further
consideration.
9:03:19 AM
SENATE BILL NO. 256
"An Act making supplemental appropriations, capital
appropriations, reappropriations, and other
appropriations; amending certain appropriations;
ratifying certain expenditures; making appropriations
to capitalize funds; and providing for an effective
date."
DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES
Section 7 - 9. Statewide Aviation: Funding for Southeast
Airport Leasing Officer
Funding of this existing position, located in
Juneau, will increase the direct contact with
airport tenants and on-site airport management
personnel which will lead to better oversight of
airport tenant operations. Duties of this
position include negotiating leases, permits and
concession agreements that generate revenues
sufficient to cover the costs of this position.
$35,000
NANCY SLAGLE, DIRECTOR, DIVISION OF ADMINISTRATIVE SERVICES,
DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES (DOT/PF),
stated the item requests $35,000 in receipt supported
services authority to add a position for a leasing officer
for Southeast region to deal with rural airport leasing
issues. There is a backlog of work that needs to be
addressed. The receipt supported services are generated by
airport leasing revenues that the position would collect.
Section 7 - 9. Measurement Standards and Commercial Vehicle
Enforcement: Travel to remote sites for inspections.
Alaskan businesses are more frequently requesting
Weights and Measure Inspectors to perform an
inspection or re-inspection outside of the normal
inspection cycle. When this occurs, the business
requesting the inspection agrees to pay for all
costs associated with the trip. In the past, the
overall amount of trips was minimal, but the
number of trips has been steadily increasing over
the past several years as companies become aware
of this service.
$30,000
Ms. Slagle reported the item as requesting receipt supported
services authority for measurement standards and commercial
vehicle enforcement. It allows the department to receive and
expend monies for third party individuals requesting a
certification of weighing or measuring devices in rural
areas. The requests are outside the normal routine or have
failed previous inspection. The community provides funding
for the department to travel to do the inspection.
Section 7 - 9. State Equipment Fleet: Credit card payments
for increased cost of fuel.
The State Equipment Fleet (SEF) maintains
contracts which allow a vehicle credit card to be
used to purchase fuel and necessary consumables.
These charges are paid directly by SEF and
subsequently, SEF bills executive branch state
agencies for reimbursement.
$326,000
Ms. Slagle informed the committee that the item requests
funds for the equipment fleet to receive and expend monies
specifically related to fuel costs. They hold the main
contract for all state vehicles for fuel and administer the
credit card process.
Section 7 - 9. Central Region Facilities: Fuel and Utility
Increases.
Fuel prices continue to be higher than our base
funding level of $1.84/gallon and additional
funding provided through Sec 22, Ch 28, SLA 2007.
Likewise, utility rates (electricity, natural
gas, water/sewer, waste disposal) have continued
to rise and require additional funding.
Janitorial Contract Increases $58.4 - Central
Region Facilities has 12 janitorial contracts
that service 18 facilities throughout Central
Region. Numerous contracts expired and were rebid
resulting in net price increases.
$315,800
Section 7 - 9. Northern Region Facilities: Fuel and Utility
Increases
Fuel prices continue to be higher than our base
funding level of $1.93/gallon and additional
funding provided through Sec 22, Ch 28, SLA 2007.
Likewise, utility rates (electricity, natural
gas, water/sewer, waste disposal) have continued
to rise and require additional funding.
Section 7 - 9. Southeast Region Facilities: Fuel Increases
Fuel prices continue to be higher than our base
funding level of $2.37/gallon and additional
funding provided through Sec 22, Ch 28, SLA 2007.
Janitorial Contract Increases $35.1 - The Juneau
7-Mile Complex, AMHS Reservations Building and
the Ketchikan Court and Office Building are
currently under contract for janitorial services.
In June 2006, the three year contracts for both
7-Mile Complex and the AMHS Reservations Building
were scheduled to expire. In May 2006 Invitations
to Bid were advertised for new three year
contracts. The low bid for this combined contract
came in higher than the total of the previous
contracts.
Ms. Slagle explained that the three items relate to
DOT/PF's three regional facilities components. The majority
of the items request funding for fuel and utility cost
increases. She reminded the committee of a separate
appropriation that has provided for fuel and utilities
above what is in the department's base, and emphasized that
the appropriation was not increased for FY 08; the items
cover increases above that amount. In addition, the Central
and Southeast Region items include increased costs for
janitorial contracts that were changed through re-bidding
or through expiration and re-bidding.
Ms. Slagle commented that the next three items were related
to increased fuel costs, specific to highways and aviation:
Section 7 - 9. Central Region Highways and Aviation Fuel
and Utility Increases
Fuel prices continue to be higher than our base
funding level of $1.84/gallon and additional
funding provided through Sec 22, Ch 28, SLA 2007.
Likewise, utility rates (electricity, natural
gas, water/sewer, waste disposal) have continued
to rise and require additional funding.
Section 7 - 9. Northern Region Highways and Aviation Fuel
and Utility Increases
Fuel prices continue to be higher than our base
funding level of $2.01/gallon and additional
funding provided through Sec 22, Ch 28, SLA 2007.
Likewise, utility rates (electricity, natural
gas, water/sewer, waste disposal) have continued
to rise and require additional funding.
Section 7 - 9. Southeast Region Highways and Aviation Fuel
and Utility Increases
Fuel prices continue to be higher than our base
funding level of $1.84/gallon and additional
funding provided through Sec 22, Ch 28, SLA 2007.
Likewise, utility rates (electricity, natural
gas, water/sewer, waste disposal) have continued
to rise and require additional funding.
Skagway Lease Increase $51.0 - The Skagway
maintenance station sits on leased property. The
lease is required in order to retain legal rights
to use the property. Commodity Increases: The
harsh winter of 2006-2007 in Southeast Alaska
diminished levels of available chemicals and sand
used on roads and airports to a very low level.
This necessitated the purchase of larger
quantities of both to provide for the upcoming
2007-2008 winter season. Additionally, snow
plowing blades were used heavily and were in need
of replacement.
Ms. Slagle added that the item for Southeast region also
includes $51,000 for a new lease for the maintenance station
in Skagway. The station is on private land that was recently
purchased by another private investor. The department is
looking at purchasing the land in the future, which will
require approximately $475,000 in capital budget funds. The
Southeast item also includes a commodity increase related to
winter chemical and sand purchases.
9:09:22 AM
Section 7 - 9. Marine Vessel Operations
IBU [Inland Boatman's Union of the Pacific]
arbitration settlement related to the grounding
of the M/V LeConte.
$142,500
Ms. Slagle explained that when the M/V LeConte went aground
in 2004, there was no language in the union contract
allowing the department to contract out for services
without using Marine Highway employees. The department
needed to continue providing services to Alaskans and other
passengers, but without that language, the department was
in violation of the contracts. An arbitrator found against
the state and is requiring payment of $142,500 to the
union.
Section 7 - 9. Marine Vessel Operations
MMP [International Organization of Masters Mates
and Pilots] arbitration settlement related to the
grounding of the M/V LeConte.
$251, 400
Ms. Slagle stated that the item was for the MMP settlement.
Language added to the contracts allowed the state to expand
out-port service, but arbitration determined that
inadequate notification was provided to the union for the
contracting services. The new language required thirty days
notice, which does not apply to emergency response. The
department is still working to understand appropriate
timing of notifications. The department believed that
signing the contract for the services for a month out and
letting the union know about it at the same time was
adequate notice. The arbitrator said that it needed to be
at the time of the RFP being issued. The department is in
negotiations to be able to respond in future to emergency
situations.
9:11:49 AM
Section 7 - 9. Marine Vessel Operations
The Alaska Marine Highway System (AMHS) projects
fuel cost increases of $1,880.0 due to higher
than expected prices. The AMHS FY08 business
plan reflects a fuel budget based on
$2.60/gallon. AMHS is currently paying
$3.00/gallon and burning 10.2 million gallons
annually. Another 4.7 million gallons are yet to
be purchased this year.
Ms. Slagle noted that the item covers fuel cost increases
for the Alaska Marine Highway system.
Section 10 - 12. Capital Ports and Harbors: Long Range
Transportation Plan
Funding to prepare a statewide ports and harbors
plan, to be undertaken cooperatively with the
Corps of Engineers and the Denali Commission.
Supplemental funding is requested as the Request
for Proposals (RFP) to develop a long range port
and harbor transportation plan is expected to be
advertised in May of 2008.
$500,000
Ms. Slagle described the capital budget request to pursue a
ports and harbors long-range transportation plan, called
"2030". The draft 2030 transportation plan made it evident
that this area is lacking. The department has been working
with the Corps of Engineers and the Denali Commission to go
forward with a plan; both organizations are providing
matching funds. This is a change in direction for the state,
which has been attempting to divest ports and harbors and
hand them over to local communities.
9:13:37 AM
Section 15(a). Traffic Signal Management: Anchorage Traffic
Signal TORA (Transfer of Responsibility Agreement)
The Department reached an agreement with the
Municipality of Anchorage in 2005 for continued
maintenance and operation of the State's traffic
and street lights in downtown Anchorage. This
agreement allows for an increase based on the
Consumer Price Index (CPI) and additional signals
in future years.
$97,000
Ms. Slagle explained that the item would provide CPI for
contracts the state has had for maintaining street lights
and traffic signals in the municipality of Anchorage. The
state has a transfer of responsibility agreement (TORA) with
the municipality that they provide the maintenance and
upkeep for the lights and signals.
Section 15(b). Capital: Airport Improvement Program
Appropriation
The FY08 Airport Improvement Program
appropriation increases by $1,500.0 due to the
allocation change below:
Sec 1, Ch 30, SLA 2007, Pg 105, Ln 27
Section 15(c). Capital: Airport Improvement Program
Allocation
Amend Unalaska: Airport Environmental Analysis by
$1,500.0 from $1,500.0 to $3,000.0
Sec 1, Ch 30, SLA 2007, Pg 110, Lns 8-10
Updated planning information is needed by the
Federal Aviation Administration (FAA) for use
during the preparation of an Environmental Impact
Statement (EIS) for improvements to the airport.
The FAA would like to begin work on the EIS in
March to take full advantage of the 2008 field
season for data collection and analysis. This is
the second phase of the project and the
contractor is already on board. This project is
ready to go forward now.
Ms. Slagle described the first item as the appropriation
level for the airport improvement program line; the second
item represents the actual allocation for an increase to
complete an environmental analysis for the Unalaska airport.
This is federal receipt authority. The Federal Aviation
Administration is managing the project but has to direct the
money through the state. The project is in its second phase
and ready to move forward.
9:15:42 AM
Section 15(d). Capital: Surface Transportation Program
Appropriation
The FY08 Surface Transportation Program
appropriation increases by $5,000.0 due to the
allocation change below:
Sec 4, Ch 30, SLA 2007, Pg 110, Lns 15-16.
Section 15(e). Capital: Surface Transportation Program
Allocation
Amend Anchorage: Old Seward Highway
Reconstruction, O'Malley Road to Brandon by
$5,000.0 from $11,500.0 to $16,500.0
Sec 4, Ch 30, SLA 2007, Pg 111, Lns 30-33
The need for additional funding is due to
adjustments in the engineer's estimate to reflect
increased costs due to inflation. Fast track
supplemental funding is necessary to advertise
and award the construction contract in the spring
to allow for a full first season of construction.
Ms. Slagle described the paired items as the appropriation
and allocation levels for an increase for reconstructing the
Old Seward Highway. Additional adjustments to the engineer's
estimate will require $5 million. The project is ready to go
to construction in the spring.
Section 15(f). Capital: Airport Improvement Program
Appropriation
The FY06 Airport Improvement Program
appropriation increases by $1,880.0 due to the
allocation changes below:
Sec 1, Ch 3, FSSLA 2005, Pg 69, Ln 11.
Section 15(g). Capital: Airport Improvement Program
Allocation
Amend Ekwok: Snow Removal Equipment Building by
$680.0 from $820.0 to $1,500.0
Sec 1, Ch 3, FSSLA 2005, Pg 70, Lns 32-33
The increased construction cost is primarily due
to cost increases in fuel and building materials.
This project will be ready to advertise in April.
The Federal Aviation Administration wants the
state to use these grant funds as early as
possible so that the benefits from their use can
be achieved as quickly as possible.
Ms. Slagle covered the appropriation and allocation requests
related to the airport improvement program. The second item
is a request for an amendment to the Ekwok snow removal
equipment building, which needs replacement. The increase is
due to a refined engineer's estimate. The project will be
ready to advertise in April.
Section 15(h). Capital: Airport Improvement Program
Allocation
Amend Seldovia: Snow Removal Equipment Building
Construction by $1,200.0 from $700.0 to $1,900.0
Sec 1, Ch 3, FSSLA 2005, Pg 73, Lns 16-18
The increased construction cost is primarily due
to cost increases in fuel and building materials.
This project will be ready to advertise in
February. The Federal Aviation Administration
wants the state to use these grant funds as early
as possible so that the benefits from their use
can be achieved as quickly as possible.
Ms. Slagle turned to the next item covering increased
design and construction costs for a new snow removal
building in Seldovia. The item is an increase over previous
authorization. The project is ready to advertise
immediately. The Federal Aviation Administration wants
DOT/PF to get the project going as soon as possible.
Section 15(i). Capital: Surface Transportation Program
Allocation
The FY05 Surface Transportation Program
appropriation increases by $3,000.0 due to the
allocation change below:
Sec 1, Ch 159, SLA 2004, Pg 40, Lns 12-13
Amend Haines: Ferry Terminal to Union Street
[THROUGH TOWN TO OLD HAINES HIGHWAY] by $3,000.0
from $13,000.0 to $16,000.0
Sec 15(b)(5), Ch 6, SLA 2005, Pg 24, Lns 13-14
This project is ready to bid and construction can
occur as early as this spring if supplemental
authorization is provided. This timeframe will
allow full advantage of this year's construction
season. This additional authorization is
requested to fully cover the engineer's estimate
as well as inflationary factors occurring after
the development of the estimate. In addition, a
scope change has been requested. At the start of
this project in 1996, the terminus on the town
side was identified as "Mud Bay Road". This term
proved to be confusing to community members. In
response, DOT&PF has determined that it was in
the best interest to define the terminus side of
town as "Union Street". This terminus avoids
confusion as to the limits of construction work
within the city center of Haines.
Ms. Slagle defined the allocation as a combination of a
project name change and the addition of $3 million. She
described community confusion regarding where the project is
located; the department believes a name change will clarify
that. Additional funding is needed to cover increased costs.
Construction can begin in the spring.
9:19:11 AM
Section 15(j). Capital: Surface Transportation Program
Appropriation
The FY02 Surface Transportation Program
appropriation increases by $750.0 due to the
allocation change below:
Sec 1, Ch 61, SLA 2001, Pg 35, Ln 19.
Section 15(k). Capital: Surface Transportation Program
Allocation
Amend Ketchikan: Tongass - Third Avenue Extension
Completion by $750.0 from $10,000.0 to $10,750.0
Sec 1, Ch 61, SLA 2001, Pg 41, Lns 18-21
This project adds a new route for storm water to
reach tidewater, and is necessary to respond to
neighborhood problems concerning current drainage
patterns. These urgently needed changes will
prevent damage to private properties from high
water flows on the downhill side of the Third
Avenue Bypass. This funding is needed so that
construction bids can be solicited early in the
year, before heavier rainfall later in the
season.
Ms. Slagle described the two items as the appropriation and
allocation levels to amend the Ketchikan Tongass-Third
Avenue extension completion. The project has been completed
except for drainage problems that need to be resolved to
avoid impact to private homes. The installation of the new
drainage has environmental approval and can be constructed
once the easements are obtained.
Section 15(l). Capital Appropriation: Susitna Valley High
School Rural Beacon System
Funds are requested to cover the emergency
installation of a temporary school crossing
beacon system at the Susitna Valley High School.
Last summer, the permanent school building
sustained catastrophic fire damage rendering the
school facility unusable. Subsequently, portable
temporary school facilities were set up at the
local senior center to house the students for the
next two school years, while the permanent
building is reconstructed. This temporary
facility is directly across the Parks Highway
from the permanent location, causing students to
cross the highway to get to and from classes.
$180,000
Ms. Slagle detailed the request to cover the cost for the
emergency installation of a temporary school crossing beacon
in Susitna. Last summer the Susitna Valley High School
burned down and the students are temporarily housed in the
senior center, which necessitates students crossing the
Parks Highway. An emergency beacon system was set up for
safety.
9:21:02 AM
Section 26(a). Capital: Appropriation
Amend: Emergency and Non-Routine Repairs (Sec 1,
Ch 82, SLA 2006, Pg 85, Lns 17-18) by $128.2 from
$250.0 to $378.2 to cover the costs of the Kenai
Peninsula Flood - $48.2 and the Copper River
Highway - $80.0.
Ms. Slagle pointed out that DOT/PF did not receive capital
funds in the current fiscal year for emergency and non-
routine maintenance. The item requests funds for work
related to the Kenai Peninsula flood in November, and to
address erosion on the Sterling Highway, the Copper River
Highway, and in Ninilchik.
Section 26(b). Capital: Scope Change
Scope Change - Pilot Station: Airport Relocation
[RUNWAY REHABILITATION] in Sec 1, Ch 3, FSSLA
2005, Pg 73, Lns 11-12.
A scope change is requested as the Pilot Station
airport rehabilitation project became a
relocation project in the Master Planning
process. The master plan recommended the airport
be relocated to a nearby ridge which is aligned
favorably with the wind, situated on excellent
material and does not have obstructions.
Ms. Slagle explained the next item as a name change request
on a previous appropriation for Pilot Station. Previously
the project was identified as "Runway Rehabilitation." It is
not feasible to lengthen the runway at its current location.
The master plan recommended relocating the airport.
Section 26(c). Capital: Scope Change
Scope Change - Stony River Airport Relocation and
Airport Improvements [REHABILITATION] in Sec 100,
Ch 2, FSSLA 1999, Pg 63, Lns 6-7.
The initial rehabilitation project scope was to
include an extension of the runway. The project
has been revised to relocate the airport due to
the village's encroachment at the existing
facility as well as the topographical constraints
caused by the airport's current location between
meanders of the Kuskokwim River.
Ms. Slagle said the request changes the name of the Stony
River Airport. The issue is the encroachment of the village
on the existing facility; the airport will be relocated.
9:23:40 AM
Section 26(d). Capital: Airport Improvement Program
Appropriation
The FY07 Airport Improvement Program appropriation
increases by $9,000.0 due to the allocation change
below:
Sec 1, Ch 82, SLA 2006, Pg 88, Ln 32.
Section 26(e). Capital: Airport Improvement Program
Allocation
Amend Kipnuk: Airport Reconstruction by $9,000.0
from $2,600.0 to $11,600.0
Sec 1, Ch 82, SLA 2006, Pg 91, Lns 3-4
Funding delayed to July would delay significant
draw down of the grant until the following
construction season. FAA is requiring early fiscal
year delivery dates to ensure that projects are
developed and bid early enough to take advantage
of the construction season in the year the grant
is issued.
Ms. Slagle detailed the two items as appropriation and
allocation levels for an amendment for the Kipnuk Airport
reconstruction project. The project will resurface the
runway and provide lighting and a snow removal equipment
building. The department is requesting an increase because
the engineer's estimate has increased significantly. The
project will be ready to advertise in May.
Section 26(f). Central Region Support Services
The Environmental Protection Agency (EPA) has
initiated an enforcement action against DOT&PF,
alleging multiple violations of the Clean Water
Act. In addition, EPA is requesting information
regarding sand and gravel sources. EPA believes
that DOT&PF and its contractors have been
operating material sites without appropriate storm
water permits.
The EPA has proposed settling the case if the
State agrees to the entry of a consent decree(s)
that could involve the payment of significant
fines (Idaho and Hawaii have paid fines between
$500,000 and $1,000,000), be required to conduct
supplemental environmental projects, and provide
training within DOT&PF.
This funding would be used to collect evidence,
present a defense and begin negotiating a
settlement. It is anticipated that costs are
expected to be at least $500.0 during calendar
year 2008 so an extended lapse date through June
30, 2009 is requested.
$500,000
Ms. Slagle turned to the last item requesting GF for
collecting evidence, developing a defense, and negotiating
with EPA regarding violations in connection with
construction projects and dealing with the 2002 Kenai
floods. The majority of the violations identified have to do
with issues such as paperwork, permitting, or identifying a
qualified inspector. The department does not think any of
the violations are related to contamination. She gave the
example of a violation related to the Kenai flood: EPA said
the department put too much rip wrap back into the river
compared to what was there before. Part of the funding would
be used to take aerial photos of the area to compare and
determine the appropriateness of the department's response.
9:26:43 AM
Co-Chair Stedman referred to the item addressing the
grounding of the M/V LeConte and asked if there was anything
in the contract with the union to cover catastrophic
situations such as grounding. He questioned whether the
state had to pay for ferry service after the grounding. Ms.
Slagle responded in the affirmative. She explained that at
one time there was no language for contracting out. When the
language was added, there were no stipulations on how to
deal with emergencies. Thirty-day notification was required.
Co-Chair Stedman questioned the presence of the item in the
supplemental. He thought it should have been in the
operating budget. Ms. Slagle remarked that the grounding was
in 2004. She added that the expenditure is for 2008 to be
able to be in compliance with an arbitrator's decision.
9:29:14 AM
Co-Chair Stedman wanted to know where the money would go.
Ms. Slagle responded that the amount is paid to the union.
Co-Chair Stedman asked if it went to employees or to the
union fund. Ms. Slagle replied that she was not sure where
the money goes within the union. She did not think it went
to individual union members.
Co-Chair Stedman wanted final information on who gets the
money. Co-Chair Hoffman asked Ms. Slagle to get the
information for committee members.
Co-Chair Stedman asked if the department would recommend
modifications of the fuel calculation for the upcoming
operating budget in order to reduce supplemental requests
for fuel.
KAREN REHFELD, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
(OMB), explained that OMB has been looking into the issue
carefully because of the supplemental requests. She said
that some of the requests would be incorporated into the
amended budget request.
9:31:18 AM
Senator Dyson was intrigued by the M/V LeConte settlement.
He wondered how the union contract limited the state's
ability to respond to an emergency and asked if something
should be done in future to better respond to emergencies.
9:32:30 AM
Senator Elton queried why the request regarding the ports
and harbor long-range plan was in the supplemental if the
money would be required in the current fiscal year. He asked
if the department considered using commercial vessel funds.
Ms. Slagle explained that DOT/PF does not advertise projects
without adequate funding in place. She did not think there
had been specific identification of projects to be funded
from the cruise ship tax.
Ms. Rehfeld added that there was potential to use the cruise
ship tax funds in that manner.
9:34:31 AM
Co-Chair Hoffman asked when the long-range transportation
plan for ports and harbors would be completed. Ms. Slagle
did not know the answer but offered to find out.
9:35:24 AM
Co-Chair Stedman thought most of the harbors had been turned
over to municipalities except for a few without the tax base
or revenue source to support them. He asked what the long-
range plan would encompass besides that. Ms. Slagle replied
that the plan encompassed more than state-owned harbors. It
will include and try to identify the needs of rural areas.
The Corps of Engineers and Denali Commission are interested
in looking at the needs for all ports and harbor facilities
in order to evaluate available funding.
Co-Chair Hoffman asked what the involvement of local
governments would be in the planning process. Ms. Slagle
thought local governments would be very involved.
Co-Chair Stedman queried using agencies outside DOT/PF when
the department has 70 to 80 planners. He also wondered why
the item is not a normal capital expenditure.
9:38:01 AM
Co-Chair Hoffman requested that the committee be provided
with the scope of work.
Senator Elton also wanted the scope of work. He asked
whether the Corps of Engineers and Denali Commission have
committed money to the project, and if so, how much. He
wondered how the plan fits within the wider scope and
regional transportation plans.
9:39:06 AM
Ms. Slagle replied that both the Corps of Engineers and the
Denali Commission have committed $500,000 apiece for the
project. She said she would answer the question of how the
project fits into the regional plans.
Senator Elton referred to the $500,000 request to negotiate
a settlement with the EPA. He pointed out that the
department had mentioned that some of the dollars would go
to Southcentral Region and wondered why the project was
identified as Central Region support services. He also
suggested breaking the item into two sections, since the
description describes costs over two fiscal years.
Ms. Slagle explained that Southcentral is part of Central
Region. The department thought that was the most appropriate
place to put the funds as the Central Region is coordinating
discussions with the EPA. Regarding the split of two fiscal
years, she said the department is not sure what expenditures
would be in the upcoming year. At one point there was
discussion about the item being in the capital budget, but
she thought it made sense to have it in the operating
budget.
9:41:44 AM
Senator Elton asked if EPA had concerns only in the Central
Region. Ms. Slagle responded that currently most of the
items are in Central Region. She added that if the state
does not address the issues, there could be broader ones in
the future.
9:42:26 AM
Senator Huggins asked if the subject of highway safety
corridors was being addressed. He did not see anything
concrete being done. He recalled that there were four and
maybe five highway safety corridors.
Ms. Slagle thought two safety corridors had been identified
and a third was being considered. She referred to actions
that were being taken. She maintained that some portions of
the program have been successful in reducing accidents.
9:44:49 AM
Senator Huggins agreed that such progress takes time, but he
could not justify how long it has taken to constituents. He
encouraged the department to be proactive and create highway
safety corridors as well as solve the problems and save
lives.
9:45:55 AM
Co-Chair Stedman asked if the capital products had been
included in the Statewide Transportation Improvement Program
(STIP), and if they were, if STIP has been submitted and
approved by the federal government. Ms. Slagle responded
that the state was in the process of developing an amendment
to STIP, but the long-range transportation plan had to be
completed first. She did not know if federal highways had
agreed to the plan.
Co-Chair Stedman requested information regarding costs of
polling. He thought there was a poll underway in Ketchikan
and one concerning the marine highway. He wanted to know the
revenue sources and costs of the polls and why DOT/PF is
conducting them. Ms. Slagle said the department would
address the question directly with the senator.
Senator Olson queried details regarding the Pilot Station
airport relocation. Ms. Slagle understood that the existing
runway is narrow, not long enough, and has dangerous cross
winds. The community feels the current runway is a safety
hazard. A plan to extend the runway is not feasible in the
present location. In addition, a school was built adjacent
to the runway. This is a safety issue. The master plan
determined it would be more appropriate to move the airport
to a nearby ridge. The FAA has approved that plan.
9:49:42 AM
Co-Chair Hoffman asked if emergency requests for flooding in
Copper River and Susitna Crossing were high enough priority
for the governor to use the emergency fund. Ms. Slagle
responded that the governor had not declared either of the
events disasters, so federal dollars were not available.
This is considered heavy maintenance, and the responsibility
of the state.
Co-Chair Hoffman remarked that the governor does have
emergency funds available and wondered why they were not
being used. He queried the criteria used to access emergency
funds.
Ms. Rehfeld responded that the governor has contingency
funds. She did not know if the projects were considered for
the funds. She said she would find out more.
9:52:15 AM
UNIVERSITY OF ALASKA
Section 7 - 9. Statewide Services: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Anchorage Campus: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Kenai Peninsula Campus: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Kodiak College: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Matanuska-Susitna College: Increase Fuel
Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Prince William Sound Community College:
Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Bristol Bay Campus: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Chukchi Campus: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Fairbanks Campus: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Interior-Aleutians Campus: Increase Fuel
Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Kuskokwim Campus: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Northwest Campus: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Juneau Campus: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Ketchikan Campus: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
Section 7 - 9. Sitka Campus: Increase Fuel Costs
Funding received in FY08 as part of the fuel
trigger mechanism only replaced the FY07 one-time
funding, leaving UA at the FY07 funding level.
Therefore, in addition to the existing funds
received through the fuel trigger mechanism in
FY08, UA is requesting a FY08 supplemental to
cover the utility increases from FY07 to FY08.
MICHELLE RIZK, DIRECTOR OF BUDGET, UNIVERSITY OF ALASKA
(testified via teleconference), outlined the items totaling
$2.3 million for utility cost increases in excess of what
the trigger mechanism covered for each campus. The mechanism
only replaced the FY 07 one-time funding.
Co-Chair Stedman stated that a substantial number of
campuses are in hydro-based communities. He asked if the
university has considered conversation from oil to electric
boilers to save money.
PAT PITNEY, VICE CHANCELLOR, ADMINISTRATIVE SERVICES,
UNIVERSITY OF ALASKA (testified via teleconference),
responded that she expected each of the campuses to look at
the costs of major renewal and replacement upgrades as they
establish their priorities. A boiler transition from oil to
electric would apply. She thought the Sitka campus was the
only one that would allow a hydroelectric option. Electric
utilities in other regions are run through coal or diesel.
Co-Chair Stedman pointed out that Juneau, Kodiak, and
Ketchikan are also on hydroelectric.
9:56:15 AM
Pat Pitney remarked that depending on the campus, there are
both electric utility and diesel boilers. Not all buildings
have stand-alone boilers; some use local electric utilities
for their heat.
AT EASE: 9:56:54 AM
RECONVENED: 10:02:24 AM
DEPARTMENT OF REVENUE
Co-Chair Stedman called for the fall 2007 revenue forecast
used for FY 08 numbers. He emphasized that he wanted to gear
the discussion towards the mechanics of the gas tax to
refresh understanding of the complicated relationship
between the gas tax and the net tax.
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, reported
that the department's staff puts together the Revenue
Sources Book twice each year. He added that the presentation
would have more detail than in the past to provide a clear
picture of the new tax system.
10:06:03 AM
MICHAEL D. WILLIAMS, CHIEF ECONOMIST, TAX DIVISION,
DEPARTMENT OF REVENUE (DOR), described the plan as a team
effort involving economists and staff as well as OMB and the
Department of Treasury. He stressed that forecasting is a
dynamic process and methods vary by revenue source. The
official forecast is updated twice each year. The finalized
spring forecast is expected April 11. The information is
difficult to process as it comes in various forms. The
department is attempting to develop a fully integrated
management information system to better handle the data.
10:08:21 AM
Dr. Williams said he would cover four topics:
1. 2008 Unrestricted Revenue
2. Key Assumptions, including methods used to
forecast production tax
3. Volatility
4. Evaluation of Price Forecast
Dr. Williams pointed out that there are two types of
projected revenue: unrestricted revenue and restricted
revenue. His discussion would focus on unrestricted revenue,
defined in the Revenue Sources Book as:
Revenue not restricted by the constitution, state,
or federal law, trust or debt restrictions or
customary practice. Most legislative and public
debate over the budget each year centers on this
category of revenue.
Dr. Williams turned to general purpose unrestricted revenue
for FY 2008 for oil and non-oil. There are four categories
of oil income:
1. Royalty, $1.8 billion, or 28 percent of the
total;
2. Production tax, $3.4 billion or 50 percent;
3. State corporate income tax, 9 percent; and
4. Property tax, less than 1 percent.
Dr. Williams said that together the four categories total
around $5.9 billion, or 89.5 percent of the budget. The
total budget is $6.6 billion; the remainder is non-oil
income.
10:10:53 AM
Dr. Williams detailed that all the various tax categories,
such as corporate income tax, mining tax, insurance
premiums, and so on, represent about 58 percent of the non-
oil total. Investment income represents 26 percent, and
other income is around 16.1 percent. Mining accounts for
about 11.4 percent of non-oil revenues; chapter three of the
revenue sources book is devoted to mining, an area that is
getting more public debate. He encouraged the committee to
study the chapter, which covers the mines in operation,
mines being developed, and exploration for new mines.
10:11:42 AM
Co-Chair Stedman informed the public that the Revenue
Sources Books are available online at the Department of
Revenue and can be downloaded and read. He noted that the
books change twice each year and concentrate on different
areas.
Senator Huggins queried the fish tax number. Dr. Williams
replied that the fish tax is not showing as it is relatively
small. He said that chapter five in the Revenue Sources Book
deals with non-oil income; page 58 shows that fish tax for
FY 08 was $23.6 million.
Co-Chair Stedman requested the oil price the figures are
based on. Dr. Williams replied that the assumptions for oil
are based on $72.64 per barrel, with production of 730,000
barrels per day.
10:13:56 AM
Co-Chair Stedman remarked that taxes like fish taxes are
dwarfed by the oil source. Mining and fish taxes increase
over several years. Historical data is available.
Senator Elton stressed the importance of the Permanent Fund
as a revenue source that dwarfs everything. He wondered why
it was not reflected under non-oil revenues.
10:14:56 AM
Dr. Williams replied that the Permanent Fund is categorized
as restricted funds, which are non-oil earnings. Revenue
from royalties goes into the Permanent Fund; that money is
invested in stocks, bonds, real estate, and so on. The
earnings from that are not directly from oil, but from the
investments. In general, invested income is considered
restricted revenue.
Senator Elton asked what restrictions are put those funds.
Dr. Williams said the funds are restricted by law. He did
not know the laws that applied but could find out.
Senator Elton thought a majority vote in both bodies could
access those earnings for expenditure.
Co-Chair Stedman agreed the realized earnings reserve could
be accessed.
10:16:15 AM
Dr. Williams compared the spring 2007 to the fall 2007
forecasts, the two forecasts for FY 08. The total forecast
budget increased by $3 billion or by 85.9 percent, which is
substantial. The main reason for the increase was the
production tax, which increased $2.4 billion, or 240
percent. The royalty increased about $0.4 billion, or 30
percent. Oil price was 32 percent higher in the fall
forecast, and production was 4.3 percent less. Royalty is
the state's share of the oil produced. Generally, royalty is
about 12.5 percent. If prices go up, revenue is expected to
go up the same amount. He pointed out that actual royalty
went up 30.5 percent, while prices went up 32.5 percent. The
difference occurred because production went down about 4.5
percent.
Dr. Williams reported that income tax was up about 17
percent. The state uses apportionment in collecting
corporate income tax, which goes beyond Alaskan prices and
volumes; it is affected by international prices. Non-oil
went up about 20 percent; one of the drivers was the higher
prices for minerals. Overall the total budget between the
two forecasts increased close to 86 percent. The main driver
was the production tax, which increased 24 percent.
10:19:20 AM
Co-Chair Stedman asked a question about how current price
changes could affect the forecast. Dr. Williams responded
that most likely there would be a higher figure depending on
production and costs. Prices appear to be dominating.
10:20:13 AM
Dr. Williams turned to key assumptions for production tax.
Production tax statutes are new, which has caused the main
difference. The formula used comes from the Revenue Sources
Book (Figure 4.4, "ACES Tax Liability Calculation," page 32,
Revenue Sources Book, 2007,
http://www.tax.alaska.gov/programs/documentviewer/viewer.asp
x?1202f):
ACES Tax Liability = [(Value - Costs)*Tax Rate] -
Credits
The terms used in the equation are defined as follows:
Value = Volume of Oil and Gas Produced X Wellhead Value
Costs = Operating Expenditures + Capital Expenditures
Tax Rate = 25% + 0.4% for every $1 barrel that this
"net income" exceeds $30
Credits = (20% X Capital Expenditures)* + (20% X
Eligible Transition Expenditures)** + Base Allowance
*spread over two years
**limited to those credits earned while the PPT was in
effect and could not be used
Dr. Williams explained that the tax liability is a function
of value minus cost, times the tax rate, minus the credits.
Value is equal to the volume of oil and gas produced at the
wellhead. Value refers to taxable barrels, so excludes
royalties. The costs are operating expenditures plus capital
expenditures, and the tax rate is 25 percent, which is the
base rate, plus 0.4 percent for every dollar per barrel that
this net exceeds $30 per barrel. Credits equal 20 percent of
capital expenditures, plus 20 percent of eligible transition
expenditures, plus a base allowance.
Dr. Williams emphasized how important it was to understand
the basic formula.
Dr. Williams turned to the chart on page 32 of the Revenue
Sources Book, which compares the current tax law, Alaska
Clear and Equitable Share (ACES) with the previous tax law,
Petroleum Profits Tax (PPT). He listed and compared key
areas:
· Lease expenditures: ACES-must be affirmed by
regulations; PPT-ordinary and necessary.
· Standard deduction: ACES-for Prudhoe Bay and Kuparuk;
PPT-no standard deduction.
· Base rate: ACES-25%; PPT-22.5%
· Progressive factor: ACES-0.4%; PPT-0.25%
· Maximum tax rate: ACES-75%; PPT-47.5%
Co-Chair Stedman requested clarification regarding the tax
rate. Mr. Galvin replied that figure is not accurate; it
should be 50 percent.
Co-Chair Stedman asked for information on maximum marginal
rates versus the average rate.
10:24:33 AM
Dr. Williams explained that what happens with the
calculation of production tax under ACES is that as profits
increase, the marginal tax rate for the entire production
increases. He suggested thinking in terms of fixed amount of
cost, and price just increasing. As that occurs, the volume
subject to the progressive tax gets larger and larger. The
marginal tax rate is 75 percent at a certain price, around
$92.50 per barrel.
Co-Chair Stedman requested further information. He surmised
that when the industry does well, through oil prices going
from a gross to a net structure, the state's treasury does
well.
Dr. Williams agreed that state does very well. In terms of
the concept of having a net-based tax, the companies as well
as the state are well served. If costs were much higher or
prices lower or volumes were lower, or any combination to
make the situation less profitable, the companies would pay
much less tax. The credits stimulate investment and
progressivity ensures that the state receives its fair
share.
10:26:02 AM
Dr. Williams addressed the subject of credits. Under PPT,
all credits were given in the first year. Under ACES, they
are spread out over two years.
Dr. Williams turned to page 36 of the Revenue Sources Book
(Fall 2007, Figure 4-6, "Basic Data used for ANS Oil and Gas
Production Taxes"). He encouraged the committee to study the
page as it contains useful information. He stated his goal
to familiarize the committee with how to read the data. He
pointed out the components of the chart, including the major
categories:
· State Production Tax Revenue from the North Slope;
· Key North Slope Assumptions;
· Implied North Slope Data, resulting from taking the
assumptions and dividing one unit by another; and
· Notes.
Dr. Williams detailed that three fiscal years are presented
in the columns:
· FY 2007, which is history;
· FY 2008, which is current, a projection based on
historical data with a forecast; and
· FY 2009, which is completely forecast.
Dr. Williams read all the notes at the bottom of the page,
and stressed their importance:
1. Costs for FY 2007 are unaudited and for the entire
North Slope. Cost data reported July 2006 through
December 2006 are actuals. January 2007 through June
2007 are estimates.
2. Costs for FY 2008 and FY 2009 are estimated after
having reviewed the annual filings from oil
companies and incorporating adjustments based on our
assessment of future cost increases.
3. Assumptions for the transitional credits and the $12
million credits are not included in the table.
4. The average production value per barrel presented in
this table would differ from estimates the oil
companies would prepare for tax liability purposes
for several reasons: [a] the data in the chart are
North Slope wide averages; [b] different companies
have different cost structures and operate in
different fields; [c] a company computing this
average for tax liability purposes would only
include the barrels it gets to keep, i.e., the
company would exclude the barrels it pays in
royalty.
5. FY 2008 ANS West Coast price forecast is as of
November 30, 2007.
10:29:10 AM
Dr. Williams highlighted the most important points of the
chart. He did not intend to list the data but wanted the
committee to conceptually understand what is available. He
touched on key North Slope assumptions, the first category.
Three assumptions for prices are laid out.
Dr. Williams explained that the wellhead value is obtained
by subtracting the transit costs, which are between the West
Coast price and the wellhead value. The next items are
production in barrels per day, royalty barrels per day, and
taxable barrels per day. Then operating expenditures (OPEX)
and capital expenditures (CAPEX) are listed. He said to keep
in mind that for the OPEX there is the standard deduction
for Prudhoe Bay and Kuparuk for CAPEX. There are no
restrictions on the CAPEX. There are also credits for the
CAPEX.
Dr. Williams elaborated on implied data. The credits can be
calculated if the CAPEX are known. For lease expenditures
per barrel, if the OPEX are divided by the number of
barrels, the result is the OPEX per barrel; the same applies
for CAPEX. For the average production value per barrel, one
is divided by the other.
Dr. Williams added that future Revenue Sources Books will
contain the same table; he encouraged the committee to
become familiar with it. Finally, the table has the
production price collected per barrel.
10:31:04 AM
Senator Huggins asked if the examples were about oil. Dr.
Williams affirmed that they were. Senator Huggins wondered
how to convert the examples to gas. He asked if both were
addressed in ACES. Dr. Williams replied that both were
addressed in ACES. He added that Deputy Commissioner Marcia
Davis had given a presentation to the Senate Resources
Committee about the subject. Oil and gas are taxed the same
and have a different cost structure and different transit
costs. On a Btu barrel equivalency, they have different
values. There are a number of factors that are different,
but all three of the factors come into play when looking at
the tax basis.
Senator Huggins asked if the first sale of North Slope gas
was going to Fairbanks. He thought that was exempt from the
provisions mentioned.
Dr. Williams remembered some exemptions, but he was not
sure. He had assumed they would pay tax; it would most
likely be under the ELF (Economic Limit Factor). Compared to
the bigger picture of dollars collected for oil, the amount
would be small, about $1.5 million.
10:33:05 AM
Mr. Galvin added that the exemption was the so-called Cook
Inlet tax treatment. That would be applied to any gas
produced for the purpose of use within the state. There
would be similar treatment in terms of calculation; the
difference is the rate applied will not be 25 percent but
something significantly lower. This would result in much
lower tax due.
10:33:40 AM
Co-Chair Stedman informed the committee that he had asked
Commissioner Galvin to prepare a presentation on the tax
structure of the gas supply into Fairbanks because of the
expansion of the methodology used in Cook Inlet going north.
He wanted the committee to fully understand what the tax
collection is and what it is not. He also wanted them to
understand that the tax structure for the large gasline
would be different.
Mr. Galvin explained that the increase in production
expenses would be small and the increased tax due would be
fully born by production. The tax rate would be affected.
The department would put together a model of how the tax
would be calculated on a small sale.
10:36:08 AM
Co-Chair Stedman thought there were two questions. The first
was regarding the impact of the expansion of the Cook Inlet
provisions to the north, and how that affects the state
treasury. The second question was the dilutive effect of gas
to the oil tax, which would be addressed in more detail in
the future.
10:36:46 AM
Co-Chair Hoffman asked the reasons for substantial increases
in transit costs. Dr. Williams remarked that it was due
first to volume of oil going through the Trans-Alaska
Pipeline System (TAPS), and second to methodology. Regarding
the volume of oil, tariffs are computed by adding OPEX and
other relevant expenses and dividing them by volume, which
results in the per barrel charge. On the North Slope
currently, volumes are declining but some costs are
increasing. This results in a higher cost per barrel.
Dr. Williams reported that there has also been a transition
from the TAPS settlement methodology to a cost-based
methodology. He believed that enters assumptions in 2009.
Looking at what is going on with the costs themselves, there
is a strategic reconfiguration. Large costs and smaller
volumes impact the tariff per barrel.
Co-Chair Hoffman questioned if the percentage will increase
more rapidly because of further declines in volume. He
wondered what the projected figure would be in three to six
years.
10:39:40 AM
Dr. Williams pointed to page 109 of the Revenue Sources Book
(Fall 2007, Appendix on Prices, B-2b, "Nominal Net-back
Forecasts"), which contains the forecast for the TAPS
tariff. He noted that it declines as it moves into the cost
of service methodology versus the TAPS settlement
methodology. Overall, it increases, after first going down.
Towards the end the driver is decreasing volumes.
Mr. Galvin added that the switch between the methodologies
is occurring in a forecasted way between FY 09 and FY 10. In
10 years the forecast would be back up to current levels.
10:41:17 AM
Senator Thomas wondered if the potential in Prudhoe Bay had
been considered in this forecast. Dr. Williams replied that
the department has a volume forecast that includes fields
currently in production, fields under development, and
fields that are being evaluated. To the extent a new
producer is under development, such as Oooguruk, the new
volumes are incorporated into new forecasts. Forecasts go
out many years; the Revenue Sources Book has a ten-year
outlook.
Senator Thomas questioned how actual, historical numbers
overlap with fiscal years and line up with tax years. Dr.
Williams responded that all actuals are historical data and
all data are in fiscal years. The recent change to the PPT
meant forecasting methods had to be altered to incorporate
calendar annual tax into fiscal year forecasting.
Senator Thomas queried what date a projected forecast change
to a historical or actual forecast.
10:44:35 AM
Dr. Williams replied that historical data are usually
finalized at the end of October and then would become
historical or actual.
Commissioner Galvin reported that the receipts are tracked
through June 30 and reported in October. A series of reports
are reconciled with an annual calendar year tax return.
Assumptions are then readjusted.
10:46:22 AM
Senator Huggins asked for an explanation of department plans
regarding methodology. Dr. Williams described the dynamic
nature of forecasting. Everything changes and requires a new
response. A proactive approach entails looking into the
future to find the best method of dealing with these
changes.
Dr. Williams gave examples of his proactive methods in
various situations. The department was keenly aware of
changes regarding the TAPS settlement methodology; they knew
they had to develop different ways to forecast. He relayed
another example related to cost. When the department first
started projecting costs, they did not have much actual
data. When they knew that costs were related to prices, they
adjusted the formula so that when prices changed, costs
changed.
Dr. Williams pointed out that costs are related to many
things, including the maturity of a particular oil field,
general inflation, technology, and so on. The question is
how to develop methodology to estimate or forecast costs
with all those factors. That is a current challenge.
Dr. Williams spoke of looking at how other entities respond
to similar situations. They found one group that actually
projects costs; the department is considering using an index
of their projected costs and applying it to Alaska's costs
and adjusting for such things as technology and one-time
events.
Senator Huggins asked about shut-downs. Dr. Williams said
that was covered by one-time events.
10:49:54 AM
Mr. Galvin related stories on coming up with estimates.
Dr. Williams remarked that when DOR evaluates a forecast,
they look for errors, which are often repetitive. He puts
together charts, which can reveal such things as
overestimating production values. When the reasons for
overestimating volumes were evaluated, two causes were
discovered: the fact that the technology associated with
heavy oil was taking longer to develop and implement, and
the fact that Alaska is dealing with mature infrastructure.
This means more time must be allocated for maintenance and
down time. These factors caused the department to change the
formulas. This is an example of being proactive, which they
do with all revenue sources and attributes.
10:52:14 AM
Dr. Williams considered the computations for estimating the
production tax. This is for the North Slope only. The top
line reads "Total taxable value," which excludes royalty.
For FY 08, this is about $15.5 billion; for FY 09, it is
about $13.4 billion. The numbers are broken down into
prices, volumes, and costs. The total is the wellhead price
times the number of taxable barrels. Deductible lease
expenditures are about $4.3 billion for FY 08 and $4.3
billion for FY 09. Comparing this to the previous chart
reveals a difference. The footnote reads, "Lease expenditure
excludes the $0.30 per barrel CAPEX exclusion." The CAPEX
exclusion was not on the previous chart. The net taxable
income is then about $11.3 billion for FY 08 and about $9
billion for FY 09. This is aggregate, for all the producers.
For each producer, there needs to be an estimate of what is
due under the base tax rate plus progressivity. Adding that
up for all the producers comes to about $3.7 billion in FY
08 and about $2.7 billion in FY 09. From that, credits are
subtracted. Credits are used against tax liability;
producers have revenue which they can offset with credits.
Non-producers would get something from the state. There are
two categories of credit, which leaves the state with tax
revenue of about $3.4 billion in FY 08 and about $2.2
billion in FY 09.
10:54:38 AM
Co-Chair Stedman requested more information to be presented
after the meeting recess. He specifically wanted the gross
value of what the resource is worth when it comes out of the
ground. Dr. Williams asked if he wanted taxable barrels plus
royalty barrels added together times the net value at the
wellhead. He said he could get the information.
Co-Chair Stedman also requested more information on the
sensitivity of the dollar per barrel. He pointed out that
deductible lease expenditures do not include property tax.
Dr. Williams said he would check on that.
10:56:32 AM
Senator Thomas asked where federal taxes were computed. Dr.
Williams revealed that federal taxes are not used in
computing production taxes. Production taxes are costs
expenses for companies when they file federal income taxes.
Federal income taxes are not an expense for the companies in
paying production taxes at the state level.
10:57:30 AM
Co-Chair Stedman asked about credits used against tax
liability and credits for potential state purchase. Dr.
Williams advised thinking in terms of producers. Companies
that have production or revenue have credits for their
capital expenditures that can be used to offset their tax
liability. By contrast, credits for potential state purchase
apply to explorers that have capital expenditures but no
production revenue. Under ACES, those companies would get
checks from the state for credits, as opposed to offsetting
tax liability.
Co-Chair Stedman pointed out that the offset is not always
shown, and there will be a request for a payment for the
credit. He advised remembering there are two credits when
working on the budget.
10:59:04 AM
Senator Elton questioned if FY 08 total taxable value was
based on last November's prices, and does not reflect the
reality of recent prices. Dr. Williams responded in the
affirmative.
RECESSED: 10:59:58 AM
RECONVENED: 1:04:58 PM
Dr. Williams addressed the Co-Chair's questions and the tax
rate before he continued with the informational overview.
Dr. Williams read from Section 15 of the ACES bill, Statute
43.55.011(e), which covers the base tax rate:
The annual production tax value of the taxable oil
and gas as calculated under 43.55.168(1) is
multiplied by 25 percent.
Dr. Williams elaborated that in Section 17 the bill deals
with progressivity. 43.55.011(g) says that the sum
determined under this paragraph may not exceed 50 percent.
Therefore, the maximum progressivity factor is 50 percent.
Adding the progressivity factor to the base rate equals 75
percent. The tax rate in the Revenue Sources Book is correct
at 75 percent.
Co-chair Hoffman queried how much of the revenue was
attributed to the multiplying factor in future reports.
JERRY BURNETT, DIRECTOR, DIVISION OF ADMINISTRATIVE
SERVICES, DEPARTMENT OF REVENUE, explained that for a bill
in the House, the department did a fiscal note showing the
estimated progressivity surcharge for the next five years,
which shows the approximately $900 million range in FY 08
and the $350-400 million in future years.
1:07:42 PM
Co-Chair Stedman suggested working with the administration
and/or DOR consultants to analyze the average and marginal
tax rate along with the progressivity impact at varying
dollar amounts for oil. There is substantial impact at $80-
90 per barrel prices. He wanted to know what components of
the tax are driving what dollars.
Dr. Williams noted the point led to an earlier question
regarding the impact on revenue if prices increase $1. He
reminded the committee how taxes are estimated under ACES.
The price, the cost, and the volume are needed. When
discussing increasing prices $1 per barrel, there is an
assumption that costs and volumes remain the same. Those are
major assumptions. He also explained that the information is
not linear. If prices are $35 per barrel, the progressive
factor is 0.4 percent for the volumes, but when the price is
$80 per barrel, there is more volume. When prices go up
there is a non-linear relationship. In addition, at very
high prices, progressivity goes to 0.1 percent. He gave the
figures requested (which assume keeping volumes and costs
constant):
$60 a barrel would mean an extra $120 million
$80 a barrel would mean an extra $160 million
$100 a barrel would mean an extra $195 million
Dr. Williams noted the funds are General Fund unrestricted
revenue.
Dr. Williams referred to sensitivity charts on page 37 of
the Revenue Sources Book that forecast prices for FY 08 and
FY 09. He noted the charts each have the forecast prices for
high and low prices. The middle category has high costs
which calculates numbers if costs are ten percent higher at
constant volumes. The last category assumes low costs, at 90
percent.
Dr. Williams next pointed to page 95 of the Revenue Sources
Book, with additional sensitivity matrices. At the bottom of
the page is a chart, "FY 2009 General Fund Unrestricted
Revenue with Price Sensitivity." The vertical scale is in
billions of dollars and shows how revenues change to the
state as prices go up.
1:12:45 PM
Dr. Williams addressed the question of property taxes, which
are deductible as lease expenditures; the department
estimates they will be about $200 million in 2008.
Dr. Williams discussed the gross value of production. The
ANS West coast price in the forecast of $72.64 per barrel is
multiplied by the total volumes at Pump Station #1; the
totals are estimated to be about $19.5 billion for FY 08 and
about $17 billion for FY 09. That includes both royalty and
taxable barrels. Subtracting the transit cost brings the
wellhead value for both royalty and taxable barrels to about
$17.9 billion for FY 08 and $15.4 billion for FY 09. When
the royalty barrels are removed, the taxable barrels are
left, at about $15.6 billion in FY 08 and $13.4 billion in
FY 09.
Co-chair Stedman clarified that for FY 08 the starting
number is $19.4 billion, with adjustments bringing it to
$15.5 billion.
1:15:07 PM
Dr. Williams continued with the presentation. He divided
volatility into three areas: crude oil price volatility,
crude oil production volatility, and crude oil costs.
Historically, volatility has referred to price volatility.
He highlighted that in the forecasting business, all three
are dealt with.
Dr. Williams started with crude oil price volatility and
referred to a graph on a slide. He detailed that the prices
were ANS West Coast dollars per barrel. The highlighted area
is the 95 percent confidence interval, which is based on
statistics derived from the mean of daily prevailing value
prices. The average, or mean price is $71.93. The
distribution, or range of prices, surrounds that mean. One
standard statistic is called the standard deviation. Two
standard deviations translates to the 95 percent confidence
level. The range is $96.54 on the high end and $47.72 on the
low end. This means that a forecasted number within that
range is correct approximately 95 percent of the time.
Dr. Williams noted that the low for the calendar year 2007
was $47.72 per barrel and occurred in January. The high was
$96.54 per barrel and occurred in November. He emphasized
that the price more than doubled during the year. If the
actual volatility was compared with previous years, the
amount of volatility in 2007 was higher than other years
historically. Therefore, volatility is increasing. Prices
came down as rapidly as they went up in the cycle of
business commodities. He asserted the importance of this.
1:18:11 PM
Dr. Williams turned to crude oil production volatility and
referred to a chart on ANS crude oil production in barrels
per day for the calendar year. The average is about 739,745
barrels per day. Most of the data points fit in the 95
percent confidence interval, but the low was 305,299 barrels
per day, which occurred in August. This was associated with
the planned closure of the TAPS pipeline for the strategic
reconfiguration. He reminded the committee of an earlier
discussion about purposely lowering the forecast. There are
both planned and unplanned events, which makes the situation
more volatile and more challenging to forecast. The field is
mature and a lot of unpredictable things happen.
1:19:44 PM
Co-chair Stedman recalled the accuracy of a petroleum
consultant's testimony regarding production amounts. Dr.
Williams agreed that the consultant was pleased when he saw
the graphs. He granted that the problem with forecasting is
how frequently the forecast is wrong.
Dr. Williams examined cost volatility, which was not an
issue prior to having a net tax. He referred to a chart put
together by Cambridge Energy Research Associate (IHS/CERA)
depicting the Upstream Capital Cost Index. The series
depicts historical data from 2000 through mid-2007 and a
forecast out to the third quarter of 2007. This is upstream
capital costs only, developed by the consulting company
using data from 28 projects world wide.
1:21:51 PM
Dr. Williams indicated that the rapid rise in oil prices has
taken oil companies by surprise as well as the state. He
reminded the committee that steel is a commodity that is a
major component used in the oil business. China is now
exporting steel, so prices could come down. Commodities tend
to move in cycles.
Co-chair Stedman commented that industry representatives
have been asked to come to the committee to talk about price
changes in capital costs and to speculate about what is in
store for the future.
Dr. Williams advised getting a spokesperson from the steel
industry to talk specifically about who is exporting and
importing, the types of steel, and their opinions about the
market. The oil companies may do their own forecasts or rely
on a service, but he stressed the importance of learning
about steel.
1:23:45 PM
Senator Dyson referred to earlier testimony about the price
of oil, specifically regarding geopolitical tensions. He
said international experts he had spoken to reported that a
significant part of the rise in oil prices was caused by the
decline of the value of the U.S. dollar compared to
international currencies, a factor which was not in Mr.
William's presentation. He asked if the costs on the graph
were in constant dollars. Dr. Williams believed the numbers
were in nominal dollars that are indexed.
Senator Dyson pointed out that what would happen with the
loss of the value of the dollar was not shown. He thought
costs would be distorted. Dr. Williams agreed.
Senator Dyson asked how the loss of value of the dollar
would affect costs. Dr. Williams deliberated that costs
might be lowered. The 28 projects the data was collected
from are located world wide, so the currency is foreign. He
was not able to speculate on how much the costs would be
affected. He added that labor is also a key factor in
projects around the world. This goes beyond the value of the
dollar; there is also a lack of petroleum engineers. He
recalled when crude oil prices fell by 50 percent in 1986,
which was the beginning of contraction in the oil and gas
industry. There were a lot of mergers and acquisitions as
companies attempted to remain profitable. When they merged
with one another, they got assets and were able to reduce
their administrative overhead, so the cost per barrel fell.
There was less demand for petroleum engineers at that time,
so people were out of work and there were fewer graduates
from universities in the field. Twenty years later, there is
a demand for petroleum engineers, but the universities are
not preparing them, and previously trained engineers are
beginning to retire.
1:27:28 PM
Dr. Williams concluded his presentation on volatility by
stating that there were record unrestricted revenues,
continued dependency on oil, and volatility in three areas:
prices, volumes, and costs.
Senator Thomas remarked that he was pleased with the
volatility of crude oil because it has been upward, and that
he was concerned about production volatility being up and
down. He was concerned about the volatility of the vast
majority of Alaska's revenue source. Non-oil revenue is not
enough to even pay for any one segment, such as education.
He wanted to consider what should be done rather than hoping
for increased production.
1:29:40 PM
Dr. Williams agreed getting 90 percent of the state's income
from oil was a major concern.
Co-chair Stedman commented on possible future revenue, which
could be large enough to equal all other tax collections
outside of oil and gas.
1:30:49 PM
Dr. Williams turned to the subject of forecasting crude oil
prices. He had two types of analysis:
1. Dollars per barrel: current and next year, comparing
DOR forecasts with actual dollars per barrel.
2. Percent error: comparing DOR with New York Mercantile
Exchange (NYMEX) and the Energy Information
Administration (EIA) of the U.S. Department of Energy.
Dr. Williams began with current year comparisons (Slide 17).
The vertical axis is dollars per barrel; the horizontal has
FY 99 through FY 08. The red dash line represents the
forecast for the current fiscal year; the blue line depicts
actual prices. For the fall of 2007, DOR is projecting FY
2008. He highlighted that the forecast is close to actual
and that DOR tends to underestimate. The red dash line in
general is below the blue line. The difference is down at
the bottom at the left; it is about $2 per barrel or 7
percent.
Dr. Williams turned to Slide 18 which depicts the next year,
which starts in FY 2000, one year out. He pointed out that
the distance between the blue and red lines is greater. This
is because DOR underestimates compared to the actual, and
the error is larger, about $12 per barrel or 32 percent. In
the near term, the errors are smaller; the further out the
forecast, the larger the errors.
1:33:35 PM
Dr. Williams next compared DOR forecasts with other
organizations (Slide 20). On the vertical axis of the chart
is the percent error; the horizontal axis has five years, FY
03 through FY 07. Red is DOR forecasts and shows percentage
errors from the actual numbers. He pointed out that in FY
03, DOR was off 8 percent, NYMEX was off 4 percent, and the
EIA was off 1 percent. In FY 04, DOR was 13 percent, NYMEX
13 percent, and EIA 12 percent. In general, DOR's average
error for the current year is about 6 percent, NYMEX is 4
percent, and EIA about 4 percent.
Co-Chair Stedman asked when he had become employed by DOR.
Dr. Williams replied January 2005.
Dr. Williams reported that the errors are larger across the
board for all the organizations at two years out. The DOR
average is 33 percent, NYMEX is 25 percent, and EIA is 24
percent.
1:35:27 PM
Dr. Williams emphasized that prices have been going up on
all the charts. This is the first time in 150 years of
recording prices that prices have increased five years in a
row.
Dr. Williams examined the next chart (Slide 22), which looks
forward and depicts the quarterly prices of West Texas
Intermediate (WTI) in dollars per barrel. At the bottom are
actual prices for quarters three and four for 2007. The red
dash line represents DOR; the solid blue with black squares
line represents Strategic Energy and Economic Research
(SEAR); the pink line represents JP Morgan; the dark green
line represents EIA; and the solid blue line represents
Morgan Stanley.
Dr. Williams pointed out that DOR forecasts prices higher
than the other organizations, who say that prices are
unsustainable at the current level and are looking for
correction downward. The Organization of Petroleum Exporting
Countries had a meeting recently and publicized that $80 per
barrel was a price at which they would review, or reduce,
production. Dr. Williams did not know if they would do that,
but stated there is rationale for near-term support for
crude oil prices.
Dr. Williams stated in summation that DOR tends to
underestimate actual prices, is more accurate in the near
term, and the data is inconclusive when compared with other
organizations.
1:38:46 PM
SB 256 was HEARD and HELD in Committee for further
consideration.
ADJOURNMENT
The meeting was adjourned at 1:39 PM.
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