Legislature(2009 - 2010)SENATE FINANCE 532
02/05/2009 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Revenue Forecast & January 2009 Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
SENATE FINANCE COMMITTEE
February 5, 2009
9:02 a.m.
9:02:22 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee meeting
to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Johnny Ellis
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Pat Galvin, Commissioner, Department of Revenue; Jerry
Burnett, Deputy Commissioner, Division of Treasury,
Department of Revenue.
PRESENT VIA TELECONFERENCE
Cheryl L. Nienhuis, Acting Chief Economist, Department of
Revenue; Dudley Platt, Consultant, Department of Revenue.
SUMMARY
^Presentation: Revenue Forecast & January 2009 Update
OVERVIEW OF FALL 2008 REVENUE FORECAST & JANUARY 2009 UPDATE
Co-Chair Stedman reported that the updated FY09 revenue
projections had been recently released and he wanted the
committee to be aware of changes.
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, introduced
the overview of the revenue forecasting process. He
emphasized the importance of understanding forecasting given
the volatility of oil prices.
9:06:13 AM
CHERYL L. NIENHUIS, ACTING CHIEF ECONOMIST, DEPARTMENT OF
REVENUE (testified via teleconference), provided a
PowerPoint presentation, "Overview of Fall 2008 Revenue
Forecast & January 2009 Update" (Copy on File).
Ms. Nienhuis explained that there are three variables
considered in forecasting both royalty and production tax:
· Production levels,
· Price, and
· Costs, which can also be seen as investment.
Ms. Nienhuis added that up until the passage of the
Petroleum Production Tax (PPT), production and price were
the only variables that had to be considered. The net
profits tax passed with PPT under the Alaska's Clear and
Equitable Share (ACES) required forecasting operating costs
as well as the level of potential investment.
Ms. Nienhuis pointed out that the variables interact on
several levels, and all the variables must be considered in
production tax and royalty forecasts. The economic
fundamentals of supply and demand affects price, and price
has a relationship to both supply and demand. Price also
affects production; if price is high, production might go
up, because price drives investment decisions, which also
drives production levels. Price also affects costs and
investments. If the price is high, there will be more
investment and higher costs. The price of oil drives up the
cost of producing oil.
9:09:29 AM
Ms. Nienhuis addressed a graph on Slide 5, "ANS Production,
History and Forecast" illustrating the history of Alaska
North Slope (ANS) production and the contribution of various
oil fields. She highlighted that Alaska is in a period of
declining oil production. The peak of two million barrels
per day was reached in the late 1980s, followed by a rapid
decline. The forecast is for a slightly lesser decline and
includes a number of lesser fields.
Co-Chair Stedman asked if the oil fields depicted on the
graph showing an early spike and rapid tapering were
reflective of basins globally.
9:11:42 AM
DUDLEY PLATT, CONSULTANT, DEPARTMENT OF REVENUE (testified
via teleconference), answered that the trend of a peak
followed by a steep decline is typical to the extent that
there is not often a lot of surplus capacity to produce, as
experienced in the Organization of Petroleum Exporting
Countries (OPEC). The trend is irreversible. He believed
that ANS production had turned a corner.
9:12:44 AM
Co-Chair Stedman asked for an explanation of production
graphs.
Mr. Platt replied that large alpine fields are complex. A
great deal of science and engineering is used to get the
most oil out of the ground. The usual extraction expectation
is 30 percent. Enhancing techniques will enable ANS
operators to get two-thirds out of the ground, leaving
another third. He listed methods that can be used to recover
more oil, including admissible injection projects and re-
injecting carbon dioxide. One challenge is water in the oil.
Water is a by-product of producing the oil; dealing with
water is expensive.
Mr. Platt described production from other basins with
similar trends from peaks to plateaus and then declining
production.
9:15:38 AM
Co-Chair Stedman asked if industry wanting to maximize
production as quickly as possible shaped the trend. Mr.
Platt replied in the affirmative.
Senator Huggins asked about Point Thompson production. Mr.
Platt answered that the issue had been sensitive. He
forecasts for purposes of cash flow. He does not forecast
for anything that does not exist and he tries to get the
timing right. He does not want to suggest that something is
going to happen sooner than it realistically will happen.
Mr. Platt explained that Point Thompson can be developed two
ways. One is a gas cycling project, requiring compressors to
overcome high pressure as well as building a pipeline for
the liquids. The expense would be high. The North Slope gas
commercialization issues resulted in a second alternative,
producing some of the gas first. Exxon Mobile Corporation
has proposed infrastructure in order to produce 200 million
cf/d of liquid condensate for a $1.3 billion capital
investment for 2014. It is the job of a production
forecaster to discern the right course of action.
Mr. Platt emphasized that he assumes a major gas sale-driven
project, ten years down the road.
9:19:36 AM
Co-Chair Stedman asked how Point Thompson would look on the
chart viewed from the standpoint of a decade earlier. Mr.
Platt conjectured that the project would be seven or eight
years out. Co-Chair Stedman thought it would be producing
revenue.
Commissioner Galvin added that the graph shows the layering
of multiple fields beginning at different times. He called
attention to the width of the bands depicting production.
9:21:52 AM
Senator Elton asked if production in out-years were
predicated on lower shipping costs. Mr. Platt replied that
the forecast for Point Thompson was based on a scenario that
more closely resembles a major gas project. The question is
where the gas would come from. There is gas in other fields
on the North Slope other than Prudhoe Bay. Prudhoe Bay will
be needed. There will be less oil production if gas were
taken from Prudhoe Bay now at the rate of 4.5 bcf/d.
Companies are mitigating the lower gas production by pumping
additional water into the gas cap to keep pressure up.
Pressure keeps oil production going; lower pressure
ultimately means lower production. The Alaska Oil and Gas
Conservation Commission (AOGCC) has been tasked with solving
the problem.
9:23:29 AM
Co-Chair Stedman asked if it were reasonable to expect
Prudhoe Bay and other oil fields to produce two million
barrels per day. Commissioner Galvin answered that it was
not physically possible to produce that much; the time has
passed. The question is whether smaller fields will be cost
effective.
Senator Thomas asked if heavy oil were considered in the
chart. Mr. Platt answered that there is a lot of opportunity
at Oooguruk, where BP and ConocoPhillips are testing new
technologies. The projections do not include oil from
Oooguruk. West Sak is producing about 16,000 barrels per day
and has been an underperformer. ConocoPhillips is trying to
produce more oil out of West Sak, which is a challenging
project. He delayed West Sak heavy oil production in the
forecast. He thought that out of the 5 to 15 billion barrels
of West Sak oil in place, only 400 million barrels have been
recovered, leaving a lot of opportunity.
9:26:12 AM
Commissioner Galvin agreed that there is potential but
technical hurdles have to be overcome before including the
resource in the forecast.
Senator Thomas asked whether the state would want to
encourage the development of the needed technology.
Commissioner Galvin replied that the current tax structure
encourages heavy oil development.
9:27:29 AM
Ms. Nienhuis continued with a graph on Slide 6, "Forecasted
ANS Production, FY 2009 to 2030," showing oil from currently
producing projects and oil expected from new projects. She
agreed that the net profit tax encourages investment, which
increases production several years before the oil comes on
line. The slide highlights the fields coming on-line.
Ms. Nienhuis turned to the second of the forecast variables,
price. In order to forecast price, an oil price "Delphi
session" is held where stakeholders meet with experts in the
field and discuss variables approximately twice each year.
The timeline, depicted on slides 8 and 9, is a process that
takes several months.
Ms. Nienhuis detailed the timeline for developing a price
forecast. A Delphi session was held in October of 2008.
Next, final FY08 revenues were compiled and reviewed. At the
end of October, the production forecast was finalized. On
November 6, the fall forecast was finalized, and on November
10, the cost forecast was finalized. Cost forecasting was
new for the group; it is done by reviewing plans of
development, looking at global costs, looking at data
submitted at monthly information forums, and asking
companies for their best guess of upcoming expenses.
Throughout the following month, a number of things occurred
to finalize the forecasts. Then a fiscal model was created,
which takes the large forecasting model and cycles through
the Department of Revenue (DOR), the Treasury division, the
Alaska Permanent Fund Corporation (APFC), and the Office of
Management and Budget (OMB). The fiscal model incorporates
revenue forecast variables for the years covered. The
various agencies work with the model and contribute input.
9:33:29 AM
Co-Chair Stedman asked if anything was different in the
process this year. Ms. Nienhuis replied that there more
people were invited to the fall forecast price session,
including Legislative Finance, the University, the
governor's office, and the Department of Natural Resources
(DNR). The department wanted more people with a stake in the
forecast.
Co-Chair Stedman asked who attended from OMB. Ms. Nienhuis
replied that John Boucher participated.
Co-Chair Stedman asked why the department did not use
published reports and outside experts that forecast
regularly. He wondered how to keep politics out of the
process.
9:36:17 AM
Commissioner Galvin did not think the participants listed
would be considered part of a political process. He
explained that the method used has been in place at DOR for
ten years and is based on a process that draws from a
variety of views. The collective input provides a broader
perspective. The Delphi system has been the primary method
used for the forecasts.
Commissioner Galvin stated that the department was
uncomfortable with the Delphi results the previous year, so
they ended up blending in other input. The department's
intent was to be timely. He assured the committee that there
was no political motivation to the process.
9:38:41 AM
Senator Elton agreed that the issue of timeliness was
important. He thought other oil price forecasters are more
flexible and came up with numbers faster. He wondered why
the state did not take a blend of other well-known
forecasts. Commissioner Galvin suggested that the
presentation would clarify the question. He stated that the
lag is related to the established budgeting process. The
department is trying to address the issue by providing
interim revenue forecasts during the legislative session.
Typically, volatility is relatively minimal, making two
forecasts adequate for the budgetary process. This year
volatility renders two forecasts inadequate. The department
is responding by using interim steps to augment the process.
9:41:30 AM
Senator Elton opined that the state could get the same
results faster using the International Energy Agency (IEA)
[Energy Information Administration (EIA)]. Commissioner
Galvin replied that the process was not the problem. It
takes time to get a revenue number from a price. Once the
price is settled, there is still a lengthy process to get
the revenue forecast number. He believed the department's
process of doing an independent analysis was appropriate and
reasonably successful. He did not want to be subject to the
biases of other forecasting mechanisms.
9:45:05 AM
Co-Chair Stedman asked what the price was on October 7,
2008.
Ms. Nienhuis finished the forecasting timeline (Slide 9):
· Revenue Forecast Summary to OMB for Budget Development
(11/14)
· Prepare Narrative and Tables for RSB [Revenue
Sourcebook] (First Draft 11/18)
· Internal Review, Revisit Models, RSB to Printer (Final
Draft 12/8)
· Fall 2008 Forecast Released (12/9)
· Governor's Budget Released (12/15)
· Updated Revenue Forecast & Budget Released for FY 2009
(2/2)
Ms. Nienhuis turned to Slide 10 and explained the Delphi
session in more detail:
· Modified "Delphi" technique
· Oct 7, 2008: Prices averaging $92.85
· Expanded Invitee List: 50 Invitees, 29 participants
from DOR, DNR, DOL, OMB, University, Legislative
Finance, Legislature, outside participants
· Presentations: Fundamentals (supply & demand),
geopolitics, financial markets, analyst expectations,
etc.
· 28 forecasts received; Delphi forecast is the "median"
forecast of the participants
Ms. Nienhuis pointed out that adding one more forecast would
have little impact on the whole. She emphasized that the
Delphi technique had been used frequently in the past.
9:49:00 AM
Co-Chair Stedman asked for the numerics for November 12 and
14. Ms. Nienhuis said the Bloomberg price for November 13
was $58.24. She pointed out that the price was settled on
November 6 as $60.77.
9:51:11 AM
Senator Thomas asked what the price was when the governor's
budget was released on December 15. Co-Chair Stedman asked
for prices for various points on the timeline. Ms. Nienhuis
provided the numbers:
· November 14: $57.04
· December 9: $42.07
· December 15: $44.51
· February 2: $40.08
9:52:42 AM
Ms. Nienhuis explained that significant time was spent
looking at other forecasts towards the end of the process,
including forecasts from the EIA, IEA, and the analyst
average available through Bloomberg. Slide 11 demonstrates
the price forecasts available for the period of July 2008
through June 2010. Through the entire period, Goldman Sachs
was around $110 to $125; the EIA was higher than that;
Merrill Lynch saw the price going down; and the New York
Mercantile Exchange (NYMEX), which is updated daily, showed
prices coming down and leveling off and then slowly
climbing.
Ms. Nienhuis turned to Slide 12, "Oil Price Volatility: 80%
decline in 5 months: Historical ANS and WTI [West Texas
Intermediate] Crude Prices, May 1986 through December 2008."
She pointed out that by the time of the fall 2008 Revenue
Sources Book update, the price had not come down to the
range it went to in December and January. There was huge
decline in just five months.
9:55:20 AM
Ms. Nienhuis described Slide 13, "Oil Price Volatility: Two
of the Most Volatile Years in History." The economic
research group looked at about thirty years of prices and
did a measure of volatility. The analysis demonstrated that
1991 and 2008 were the most volatile years. In 1991, there
was a huge price drop with the first Gulf war, then a
leveling out. In 2008 there was not the same level of
volatility, but the year started out relatively calm.
Ms. Nienhuis turned to Slide 14, "Price Forecasts as of
11/6/2008," the date the price forecast was finalized. The
graph shows how the EIA, NYMEX, Analyst Median, Goldman
Sachs, Merrill Lynch, and DOR compare in their forecasts.
9:58:34 AM
Commissioner Galvin pointed out that the graph reflects the
available forecasts on November 6, the expectations of those
following the market. The department was significantly lower
than other forecasts on that day. The revenue forecast in
comparison was higher than DOR's estimate.
Ms. Nienhuis discussed Slide 15, which shows DOR's forecast
as a blend. One forecast incorporated was a low scenario
prepared in fall 2007. Slide 16 depicts what DOR started
with and ended up with. The Delphi median was consistently
in the $90 per barrel range in the last three quarters and
projected into 2010 in the same range. The department was
uncomfortable with the number as it did not seem realistic.
The official fall 2008 forecast was obtained by adding the
NYMEX, EIA, and the DOR fall 2007 low scenario forecasts to
the Delphi meridian.
10:03:37 AM
Ms. Nienhuis explained that Slide 17, "Fall 2008 DOR Oil
Price Forecast," shows the ANS forecast in nominal and real
dollars. She revisited the idea that forecasting often is
advantageous, illustrated by Slide 18, which shows that the
analysts' forecasts follow price. When the forecast was made
influenced how much the forecast was. Slide 19 depicts the
DOR fall 2008 forecast in the low $60 range. Slide 20 shows
recent forecasts, with DOR right in the middle.
10:05:37 AM
Ms. Nienhuis described Slide 21, "Updated FY 2009 Oil Price
Forecast." The forecast was assembled January 20, based on
MYMEX prices. The average includes the high prices of the
first quarter. The FY09 average for ANS is $63.28.
Ms. Nienhuis moved from the price forecast to the cost
forecast for oil and gas revenue, which is new since PPT.
There was not a lot of data to base the price forecast on.
She described the transition investment credit, which
provided for companies taking a certain percentage of their
costs leading up to the PPT as a credit.
Ms. Nienhuis admitted the department was still learning how
to forecast costs.
10:07:52 AM
Ms. Nienhuis discussed Slide 23, which shows the lease
expenditures as projected in the fall forecast. She has
asked for adjusted expenditure forecasts from the companies
investing on the North Slope; those will be incorporated in
future. Companies are cutting back because of low oil
prices. Operating expenditures are relatively flat; capital
expenditures bend as costs are expected to be high. There
appears to be a one to two year lag, so capital expenditures
may come down. She emphasized that capital expenditures lead
up to production and are not necessarily in line with
production. The figure includes future production.
Ms. Nienhuis turned to Slide 24 showing the lease
expenditures per barrel, separated by operating (OPEX) and
capital expenditures (CAPEX). Capital spent per barrel is a
future projection.
Co-Chair Stedman asked about a 50 percent delay in CAPEX. He
wanted the date the CAPEX numbers were solidified and
elaboration on how the changing market conditions affect
them.
10:10:43 AM
Commissioner Galvin explained that the figures are forecasts
for actual costs. When the figures are built into the
revenue forecast, the issue of allowable capital credits
arises. Fifty percent of capital credits are allowable in
the year they accrue and fifty percent have to lag a year.
The numbers on Slide 24 do not reflect the lag but are
projections for the actual expenditures. He referred to
Slide 8, the schedule for developing the fall forecast. The
numbers reflect information available at the time. Companies
have indicated expectations of reduced spending, but there
are not formal numbers. Various tools are used to estimate
expenditure levels. The interim forecast looks at price as
the primary variable for updating the numbers. The other
variables will not change significantly.
Co-Chair Stedman expressed concern regarding the delay of
$1.2 billion in FY10. He asked how the flow of the net would
be affected. Commissioner Galvin answered that the
structural lag in the application of the credits to the
revenue stream is already incorporated into the revenue
forecast.
Co-Chair Stedman talked about effects of the price falling
rapidly.
10:14:34 AM
Commissioner Galvin stated that the revenue number
incorporates the structural lag in the application of the
credit to the revenue forecast. The bottom line number is
buffered from changes in expenditure levels in any
particular year. The margin of difference between what is
forecasted and what is experienced could be half the amount
in any particular year. The justification for making the lag
part of the process is to assist in the rolling revenue
forecast process.
Co-Chair Stedman thought the fifty percent lag was good
policy.
10:16:21 AM
Ms. Nienhuis continued with Slide 25, the capital portion of
Slide 24, showing the history for capital lease expenditures
and illustrating that investment credits help. High price
may help as well. Companies are reporting projected costs
that are probably conservative. The costs could come down.
Ms. Nienhuis turned to Slide 26, FY09 total revenue. There
was a $1.2 billion difference from the fall forecast. Most
of the amount is attributable to price. The slide shows
unrestricted revenue, or that which is available generally
for legislative appropriation, and restricted revenue. The
revenue is restricted from DOR's point of view. Slide 27,
"Restricted vs. Unrestricted Revenues":
· All revenue is classified as either "Restricted" or
"Unrestricted."
· All amounts in the presentation are Unrestricted
Revenue only.
· Restricted = Use of this revenue is restricted by
constitution, state or federal law, trust or debt
restrictions, or customary practice. This means the
legislation normally appropriates money back to fund
programs.
· Unrestricted = Revenue available for general
appropriation. This is the amount typically discussed
in budget context.
10:19:47 AM
Co-Chair Stedman returned to Slide 26 and asked why the
investment earnings number is so large. Commissioner Galvin
explained the number represented unrealized losses to the
value of the permanent fund and the constitutional budget
reserve (CBR).
Co-Chair Hoffman asked the actual unrealized losses at the
end of December.
JERRY BURNETT, DEPUTY COMMISSIONER, DIVISION OF TREASURY,
DEPARTMENT OF REVENUE, answered that he could get the
information.
Co-Chair Hoffman asked if the department anticipated
positive or negative earnings for the last six months. Mr.
Burnett responded that there was no reason to expect
negative earnings for the next six months. However, negative
earnings were not expected for the year. Commissioner Galvin
offered to provide a breakdown of the numbers.
Co-Chair Stedman asked for the December 31, 2008 and January
31, 2009 balances of realized and unrealized gains and
losses on the permanent fund and the CBR balances with sub-
account breakdowns.
10:23:03 AM
Commissioner Galvin clarified that the question was based on
the FY09 forecast of the investment loss, and how much was
based on actuals compared to projections.
Co-Chair Stedman added and that the committee wanted figures
as they were compiled in order to make policy decisions.
Ms. Nienhuis covered Slide 28, "Sources of Unrestricted
Revenue":
· Oil - Property tax, Corporate Income Tax, Production
Tax (ACES), Royalties. Oil will make up 87% of
unrestricted revenue in FY09
· Investment Earnings on General Fund
· Other Non-Oil-Taxes, Charges for Services, Fines and
Forfeitures, Licenses and Permits, Rents and Royalties,
Miscellaneous
rd
Ms. Nienhuis expanded on the effects of HB 11 [from the 23
Legislature], the bill that changed the amount of royalties
deposited to the permanent fund to 25 percent for all leases
until it had a $20 or more impact on the permanent fund
dividend, at which time it would be repealed. Based on the
dividend calculation, HB 11 was repealed in October 2008.
The royalties are back on the old formula of approximately
32 percent. The change is reflected in a decrease in
unrestricted revenue and a corresponding increase in
restricted revenue.
10:26:40 AM
Ms. Nienhuis continued with Slide 29, "FY09 Revenue Overview
(General Fund Unrestricted Revenue)." Production tax is
close to 50 percent of the total revenue expected. Non-oil
revenue makes up about 13 percent. Overall, about 87 percent
of unrestricted revenue comes from oil.
Ms. Nienhuis explained Slide 30, "FY09 Non-Oil Revenue
Detail." The largest part is related to corporate income
tax. Investments are a significant part of non-oil revenue.
Typically non-oil revenue has been from 10 to 12 percent of
annual unrestricted revenue.
Ms. Nienhuis turned to Slide 31, "FY09 Revenue Forecast
Comparison," which compares the fall 2008 forecast with the
January 2009 update. The biggest hit was to the production
tax at about a 25 percent reduction. Overall the total
revenue experienced an 18.2 percent difference. Price is the
primary driver; production went down slightly, and cost and
investment remained the same.
10:29:21 AM
Ms. Nienhuis listed conclusions on Slide 32:
· Record level oil price volatility
· Price forecast in "ballpark" when issued
o Reduced for interim forecast
· Minimum production level changes from previous forecast
· Lower prices likely to impact future costs and possibly
investment
Ms. Nienhuis added that Slide 33 shows more detail on
historical production and price changes as of fall 2008 and
a change in revenue forecasting from "cash basis" to
"accrual basis" accounting:
· Timing issue: Production, prices, and revenue received
in July for June production changed from June to July
· Necessary due to significant monthly variation in oil
revenues
· Shift in fiscal year affected historical production and
price, not revenue
· Greater accuracy in reporting
· Alignment with state financial documents
Ms. Nienhuis detailed the change in accounting systems made
in order to be in alignment with other agencies.
10:34:12 AM
Ms. Nienhuis said that overall the change is good, although
the numbers look different. The change is driven by the fact
that progressivity in the current tax system drives prices
up significantly. Price volatility results in significant
revenue volatility.
Co-Chair Stedman asked why the change was made this year. He
asked if the Revenue Sources Book notified people of the
change. Commissioner Galvin answered that he decided to
change the system because of disparities between the DOR
report and the Comprehensive Annual Financial Report (CAFR).
Revenue for June of 2008 was significantly different than
June 2007 revenue and caused a disparity between the CAFR
and DOR's report. The structure of the 2008 budget created
disparity between the flow of funds and the CAFR. He decided
to make the change as historical numbers have never
completely added up in the past.
Ms. Nienhuis added that the Revenue Sources Book has a
footnote clarifying the change. Commissioner Galvin added
that the note was footnote number 1 on page 116 (Revenue
Sources Book, Fall 2008). He thought it might be beneficial
to continue to publish the footnote in future Revenue
Sources Books.
10:40:17 AM
Senator Thomas queried whether the motor fuel tax listed on
Slide 30 was still in existence. Mr. Burnett answered that
the motor fuel tax was not suspended until later in the
fiscal year, so there is a partial year reflected.
Co-Chair Stedman asked what date the FY10 price could be
expected. Commissioner Galvin thought the FY10 interim
revenue forecast would be released February 18 and would
include a new price forecast.
Senator Huggins queried why the administration had used the
price of $71 for oil when the 2010 budget was based on an
oil price of approximately $74. Commissioner Galvin answered
that the governor's 2010 budget had numbers less than the
revenue forecast, which was based on the $74 price. The $71
was an approximation of the average price used to balance
the governor's budget.
10:44:22 AM
Senator Huggins asked if there would be a Permanent Fund
Dividend. Commissioner Galvin stated that APFD is safe as it
is based on a five year rolling number.
10:45:20 AM
Co-Chair Stedman asked for explanation of how $200 million
in oil and gas taxes is embedded within the budget and
whether it was an offset to revenue.
Commissioner Galvin answered that the bulk of the credits in
the tax credit program are factored into the revenue
projection. The credits accrued by companies with
insufficient production will be reflected in the budget as
expenditures. The next question is the timing of the
payment. The department shows projections in terms of costs
in the year in which they are accrued, but when they filter
into the budget the question is when the payment will be
made. The department thought the system would be faster,
that the companies would submit credits earlier and that
audit cost reports would be quicker. More will need to be
paid out in FY09 than anticipated. The lag time is reflected
in the budget.
10:49:18 AM
Co-Chair Hoffman asked if the expenditures would be
considered cash. He thought the expense should be accrued
and paid at a later time.
Senator Elton asked what creates the lag time between
applications for and payment of the credits. He wondered if
the lag was related to a shortage of audit resources or
something else the legislature needs to consider.
Commissioner Galvin answered that the problem is not a lack
of resources but the extra time required to adjust to a new
system.
10:52:32 AM
Co-Chair Stedman returned to the issue of cash versus
accrual accounting and asked for a timeline of how the
credits should be paid. He stated concerns about a shortfall
for the 2010 budget. Commissioner Galvin promised the
information. If the process is established, the need will be
spread over several years. Co-Chair Stedman stated concerns.
Commissioner Galvin assured the committee that the
department shared the concerns.
Co-Chair Hoffman asked how DOR was going to respond to the
governor's position on unallocated reductions.
Co-Chair Stedman added concerns about the $390,000.
10:56:57 AM
Commissioner Galvin explained that the department responded
to the governor's $390,000 cut from the FYO9 budget by not
filling vacant positions. Co-Chair Stedman noted that
because of the timing, the action was not a response to the
collapse of the price of oil. Mr. Burnett explained that the
particular cut was decided when the governor signed the
budget. The department took action and restricted $390,000
in spending.
Co-Chair Hoffman emphasized that giving departments the
ability to cut services does not reflect policy made by the
legislature. He stated that he would not allocate the amount
to the department on that basis and wondered if the
department would reduce the budget in areas the legislature
would not want.
11:00:26 AM
Commissioner Galvin recognized the legislature's role of
setting priorities and establishing authorization for
expenditures. He believed the governor should exercise
discretion as well. He saw this as part of the give-and-take
between the two branches of government.
Co-Chair Stedman asked the dollar amount of the DOR's
reduction. Mr. Burnett answered $390,000. Co-Chair Stedman
pointed out that $390,000 was the same number in the
supplemental. He confirmed that the cut had been
implemented.
Co-Chair Hoffman did not support what had happened. He
stated that if the governor vetoes portions of the budget,
the legislature can override the cuts. He thought the
governor was obligated to provide the services put in place
by the legislature; he wondered if the department agreed
with that process.
Commissioner Galvin stated that he was not trying to
establish the administration's policy on the matter. He did
not think that the budget set policy on services. He
recognized both legislative prerogative to establish the
priorities of the state and executive prerogative to take
action on the priorities.
11:04:38 AM
Senator Elton thought the issue [of the separation of
powers] was important. He asked if the $390,000 savings
implemented within the department were presented to the
committee. Mr. Burnett replied that the department had not
yet met with sub-committee chairs in either the House or
Senate.
Senator Elton asked if there had been any attempt in the
months since the department made the budget changes to let
the relevant committees know that the department was not
implementing the budget passed by the legislature.
Co-Chair Stedman added that he wondered if attempts of
notification had been made in particular to the two
operating [budget] co-chairs.
Commissioner Galvin surmised that the underlying question
was whether the department was cutting actual public
services. He stated that to the best of his knowledge the
level of service has not been changed. Individuals were
asked to pick up more responsibilities because positions
would not be filled. He stated that DOR chose to exercise
the governor's request through reducing personnel service
costs, and that meant to him that they were stressing the
system a little.
Senator Elton did not think the answer was sufficient and
wanted more information from the department. He wondered if
the department made a $390,000 mistake when discussing the
budget with the legislature the previous year. There may
have been million dollar mistakes made in other departments,
according to unallocated cuts made in those departments. He
was not satisfied with answers given.
11:07:18 AM
Commissioner Galvin said he could only speak for the
Department of Revenue.
Senator Huggins asked how many auditors DOR was short and
how the hiring freeze would affect the department.
Commissioner Galvin stated that auditors were a key DOR
component; the department has been successful in hiring the
master auditors discussed during ACES. He did not know if
there were current auditor openings. The governor's hiring
freeze allows for exceptions if a department can justify a
position as essential. He stated that if a critical auditor
position needed to be filled, the department would pursue a
waiver.
Senator Huggins asked if there were any new personnel
positions in the current budget request. Mr. Burnett did not
believe DOR had new positions in the operating budget.
11:09:35 AM
Co-Chair Stedman stated that the committee has questions
about the viability of using the $200 million oil tax
credit. The committee also has interest in the $50 million
put in as a placeholder in the supplemental budget. In
addition, he had questions about unallocated expenses that
have already taken place, such as in DOR. Finally, he
wondered about new spending of $38.3 million. The committee
needed to know about new general fund spending if the
unallocated reductions have already been made.
Commissioner Galvin clarified that the unallocated cut was
built into the DOR budget as directed by the governor, which
meant it would be achieved over the course of the fiscal
year.
Co-Chair Stedman stated that the committee would sort
details out with OMB and determine a response for revenue
differences in the FY09 budget.
11:14:04 AM
ADJOURNMENT
The meeting was adjourned at 11:13 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Galvin Revenue Forecast 020509.pptx |
SFIN 2/4/2009 9:00:00 AM SFIN 2/5/2009 9:00:00 AM |
|
| DOR Investment Revenue Proj SenFinance 20090219.pdf |
SFIN 2/5/2009 9:00:00 AM |