Legislature(2013 - 2014)SENATE FINANCE 532
01/24/2013 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Department of Revenue - State Savings Accounts 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
January 24, 2013
9:03 a.m.
9:03:52 AM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 9:03 a.m.
MEMBERS PRESENT
Senator Pete Kelly, Co-Chair
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Bryan Butcher, Commissioner, Department Of Revenue; Bruce
Tangeman, Deputy Commissioner, Tax Division, Department of
Revenue; William Barron, Director, Division of Oil and Gas,
Department of Natural Resources; Angela Rodell, Deputy
Commissioner, Treasury Division, Department of Revenue;
PRESENT VIA TELECONFERENCE
SUMMARY
DEPARTMENT OF REVENUE - STATE'S SAVINGS ACCOUNTS UPDATE:
OVERVIEW OF FALL 2012 REVENUE FORECAST
^DEPARTMENT OF REVENUE - STATE SAVINGS ACCOUNTS UPDATE.
OVERVIEW OF FALL 2012 REVENUE FORECAST
9:04:09 AM
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE,
presented the PowerPoint presentation "Overview of Fall
2012 Revenue and Price Forecast" (copy on file).
Commissioner Butcher turned to slide 2 "Outline.":
· Fall 2012 Revenue Forecast
o Ten-year overview
o Comparison to Spring 2012 Forecast
o Total Revenue
o Unrestricted Revenue
o Oil and Non-Oil Revenue
· Components of Production Tax Forecast
o Oil Production
o Oil Price
Commissioner Butcher discussed slide 4, "Price, Production,
State General Fund Unrestricted Revenues FY 2012 - 2022."
The blue row showed the projected price forecast over the
next 10 years; the expectation was that the price would
hover around $108 to $112 bbl., increasing gradually as the
years progressed. The yellow row was the production
forecast and reflected that production would continue to
decline as it had over the past several decades. As a
result of the decline the general fund unrestricted
revenues were projected to drop as well.
Commissioner Butcher discussed slide 5, "Comparison: Fall
2012 forecast with Spring 2012 forecast." He highlighted
that the price of oil was down approximately $1.77 from
what had been forecasted in the spring and production was
down about 10,000 barrels. The primary reason for the
reduction was because at the beginning of the fiscal year
the production had been at a lower level than had been
anticipated when the data had been collected. He shared
several factors that had contributed to the decline:
spending on the North Slope was higher than anticipated in
spring which had resulted in less revenue coming in from
production taxes, corporate taxes were down, and the
investment income was several million less than
anticipated. He stated that the fall forecast used a
slightly higher oil price and 29,000 barrels less were
expected in FY 14 than had been anticipated. Higher
spending was being forecast on the North Slope than the
department had anticipated, which had resulted in a
forecast of $678 million less than had been presented.
Combining FY 13 and FY 14 resulted in $1.6 billion less in
the most recent forecast than had been anticipated in the
spring.
9:10:00 AM
Commissioner Butcher stated that an updated spring forecast
would come out in April and would include new and
unanticipated factors.
Senator Hoffman asked about FY 14 and the justification for
the reduction of the 29,000 barrels.
Commissioner Butcher responded that he could not get into
the specifics of companies projects. In general project
delays and reduced performance expectations had been
observed by the department.
9:11:11 AM
Commissioner Butcher discussed Slide 6, "Total Revenue
Forecast: FY 12, 13 & 14 (million$)," Which compared the
actuals for FY 12 to the forecasts for FY 13 and FY 14. He
stated that the forecasted dip in the unrestricted general
fund reflected the department's attempt to be conservative
about what the state's investment revenue would bring in
considering the continued low interest rates. Notably,
investment revenue under other restricted revenue reflected
actuals of $109 million; the forecast for FY 13 and FY 14
were up over $3 billion thanks to the permanent fund. The
permanent fund had a flat year in FY 12 but was expected to
increase.
9:13:07 AM
Commissioner Butcher discussed slide 7, "General Fund
Unrestricted Revenue." He stated that the majority of the
revenue was from the production tax. Approximately $1.5
million could be attributed to the corporate income tax,
with property tax averaging $100 million.
Commissioner Butcher discussed slide 8, "Unrestricted Non-
Oil Revenue." He said that the total was just over $600
million. He noted that 90 percent of the state budget was
paid for by oil revenues.
Commissioner Butcher turned to slide 9, "Production History
and Forecast." The slide provided the breakdown of Prudhoe
Bay and the Prudhoe satellite fields. Slide 10, "Production
History and Forecast" showed a close-up of more recent
history from 2002 to 2022, which was the 10 years that the
department was looking forward in their forecast. He noted
that the large effect that current legacy fields would have
on the department's future forecasts. He said that the
projection was that 10 years into the future the majority
of the oil will come from legacy fields, with less than 50
percent coming from new fields.
9:15:13 AM
Commissioner discussed slide 12, "Price Forecast
Methodology":
· Four components to price forecast
o DOR oil price forecast session October 2, 2012
with 31 participants from DOR, DNR, DOL, OMB,
University, Legislative Finance and outside
participants
ƒConsider supply, demand, geopolitics,
financial markets, outside expert forecasts,
etc.
ƒAsked to forecast Alaska North Slope (ANS)
crude price directly, not to forecast West
Texas Intermediate and adjust, as in
previous years, due to widening differential
of ANS to WTI.
o Energy Information Agency (EIA) forecast
o New York Mercantile Exchange (NYMEX) - futures
market
o Analyst forecast
· Forecast is an average of DOR participant forecast
from Forecasting Session "blended" (averaged) equally
with NYMEX, EIA, and analysts to derive price
forecast.
Commissioner Butcher stated that a number of participants
from around the state and the country attended the 2012 oil
forecast session. The department blended the forecasting
session, along with worldwide analyst's forecasts in order
to determine price forecast for the next 10 years.
Commissioner Butcher continued to slide 13, "Price
Forecasts as of October 2012." The slide illustrated where
the price of oil had been over the past 5 years, as well as
expert forecasts into the next 5 years. The lines on the
graph indicated where different analysts believed the price
of oil would land. He noted that the department had
received kudos for the conservative price forecasts. He
assured the committee that the goal was to forecast not
only conservative numbers but accurate numbers.
9:20:07 AM
Senator Hoffman asked if the new approach in methodology
would allow for more accurate projections.
Commissioner Butcher felt that the department would
continue to improve the projections.
9:20:46 AM
Commissioner Butcher informed the committee that slide 14,
"General Fund Unrestricted Revenue Price Sensitivity FY
2013-2013." He stated that the slide dealt with price
sensitivities. The slide reflected what the projected
production was, as well as how much general fund
unrestricted revenue the state could expect to bring in
under varying price levels.
Senator Olson asked about slides 9 and 10, which reflected
the downslope in production. He queried offshore
exploration and the expectation for more oil in TAPS.
Commissioner Butcher responded that the department had
discussed offshore drilling; however, there had not been
any wells drilled or analysis done for the department to
give a solid estimate on when production could begin or the
level of production that could result. He noted that there
were things on the horizon that has not been included in
the forecast because the department lacked the information
form industry to make projections.
Senator Olson understood that the department was not
anticipating any offshore production before 2022.
Commissioner Butcher clarified that the department did not
have enough information from industry to make projections.
Co-Chair Kelly asked about any possible revenue from
offshore drilling.
Commissioner Butcher responded that there was not projected
revenue from offshore oil. Theoretically, more oil in the
pipe would reduce the tariff, which would benefit the
state.
9:24:31 AM
Vice-Chair Fairclough asked about future discussion
regarding investments.
Commissioner Butcher responded the department would provide
a presentation on investments.
9:27:12 AM
BRUCE TANGEMAN, DEPUTY COMMISSIONER, TAX DIVISION,
DEPARTMENT OF REVENUE, presented "Oil Production Forecast."
copy on file. He noted that oil revenue constituted 90
percent of the state revenue. He said that it was critical
that the decision makers from both the executive branch and
the legislative branch receive the best available
information for short-term budgeting and long-term
planning. He discussed slide 2, "Statutory Concerns.":
AS 37.07.020 (b) - Ten Year Fiscal Plan.
Declares that OMB "must set out significant
assumptions used in the projection with sufficient
detail to enable the legislature to rely on the fiscal
plan in understanding, evaluating, and resolving
issues of state budgeting,"
Mr. Tangeman discussed slide 3, "Comparing the Production
Forecasts Over Time." The slide cross sectioned various
forecasts over the last decade and depicted consistently
overoptimistic production forecasts. He noted that the
lines were close for the first two years, but the years 6
to 10 out illustrated an increased error rate of 40-65
percent. The process that the department had relied on over
the past decade needed input from industry in order to
formulate the production forecast. The department had
noticed that the group of people working on the production
forecast had been incomplete. The department had hired a
consultant that was a petroleum engineer who spoke to
fellow petroleum engineers from industry in order to come
up with possible production numbers. At that time the
budget people from industry had not been involved in the
process, which resulted in the best case scenario evolving
into the production forecast; budgets were not being
considered.
Senator Bishop asked whether industry had alerted the
department that they would be making turn around changes in
production.
WILLIAM BARRON, DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, responded that each summer
the North Slope producers did turnarounds at various flow
station or general gathering centers. This was done because
production was typically lower in the summer than in the
winter. He could not specifically address whether the
companies had informed the state that the turnaround was
occurring, but it would be intuitive that the department
should expect it.
Senator Bishop asked if the testifier was an engineer or a
geologist.
Mr. Barron responded that he was a petroleum engineer.
Mr. Tangeman discussed the quotes on slide 4, "Legislative
Direction.":
Request for improved production forecast that better
incorporates variables:
· "Is it possible for the department to come
forward with a plan for providing more
accountability to the productions forecasts?" …
"I'm looking at a graph, from your department,
that shows the forecast, starting in 2001 to
2010, and it seems that the trend is that the
department is optimistic in its forecast of the
production. I'm wondering if you take into
account, relooking at how you are assessing, how
you're figuring out what the forecast will be."
· Rep. Costello, House Finance Committee, February
18, 2011
· "What I am asking is that I be given something
that will give me more confidence that the
projections that we see are, not necessarily 100%
accurate, but that they have taken into account
everything that they can, and we've got the best
shot we can get."
· Rep. Doogan, House Finance Committee, February
18, 2011
Mr. Tangeman relayed that the questions had led to a
discussion about the department, the Department of Natural
Resources and the Division of Oil and Gas working together
on the forecasting process.
9:34:44 AM
Mr. Barron addressed slide 5, "Forecast Errors by Years in
Advance being Forecast." He described the spider diagram
which detailed the various errors by year in the production
forecasts. He called attention to the diagram and noted
that the outward spiral gained uncertainty and error with
each passing year. He stated that he was not surprised by
the diagram given the past forecasting methods.
9:36:46 AM
Mr. Barron discussed slide 6, "Department of Revenue
Response.":
· Addressing consistent over-estimation of production
began in 2009.
· In 2012, a DOR team analyzed past forecasts comparing
them to actual production.
o This developed a reasonable range of "confidence
bands" for future production.
Mr. Barron explained that slide 7, "Historical Production",
illustrated a statistical measure standard deviation. He
noted that a change of scale had been made on the "Y" axis;
it was not a logarithmic scale. He stated that typically
engineers looked at production forecasting and production
decline in a semi-log manner; if the decline was
exponential it would be linear on a semi-log exhibit. If it
were a hyperbolic, it would still be closer to representing
a straight line than what would be reflected in a Cartesian
plot.
Co-Chair Kelly admitted that he could not follow the
testifier's specific language.
Mr. Barron said that changing the scale allowed for a
clearer understanding of decline. He added that the green
dotted line was a confidence range using production decline
from 1992-2011. The other interval, the purple dotted line,
used the 2002-2006 confidence range of production decline.
He stated that the flattening was a comparison of Alpine
and Prudhoe Bay. He stated that there were four tranches to
the equation, but that in a production forecast only three
were addressed.
9:40:23 AM
Mr. Barron detailed slide 8, "Components of the Production
Forecast."
o Currently Producing ("Old Oil"):
ƒOil from wells that are in production and
following typical reservoir engineering
optimization without major investment.
o Under Development (UD):
ƒOil from projects that will add incremental oil
to existing fields or will bring new fields
into production.
ƒProject must have senior management approval
and be allocated funds in the company's budget.
o Under Evaluation (UE):
ƒOil from projects that are likely to occur in
the future, but have not met the requirements
of the previous category.
ƒRequires that oil reserves are known and
recovery is technically possible with current
technology.
Under Development + Under Evaluation = "New Oil"
***These definitions are not equivalent to those used
by the Society of Petroleum Engineers (SPE) or
Securities & Exchange Commission (SEC) and should not
be used as such***
9:44:02 AM
Mr. Barron noted that the fourth tranche was not included
in any production forecasts. He explained that exploration
was so speculative that it would not be wise to include in
any forecast of production. He listed that the work being
done by Shell, Repsol, and Great Bear was exploratory.
Senator Dunleavy asked whether the forecasts dealt with oil
that the state would receive revenue from; were off-shore
and other fields included in the forecasts.
Mr. Barron responded no. He offered the example of the
exploratory work being done by Repsol. Repsol had several
wells already drilled which were still categorized as
exploration activities. If after the winter drilling season
the company felt that it was a project that would move
forward then the company would issue a forecast the
following year that would be classified under the
evaluation category.
9:45:51 AM
Mr. Barron discussed slide 9, "The concept of Risk"
· "Risk is the probability of an event occurring and the
potential impact of that occurrence.
· "Good E&P business decisions require assessment of
both technical and non-technical risk"
· "The ability to convey the relative riskiness of
various O&G projects in a consistent manner is an
elusive and desirable goal."
Mr. Barron stated that the industry was trying to send the
message that as the time reached further out there was less
confidence in the production profile.
9:46:46 AM
Mr. Barron addressed slide 10, "Accounting for the Risks
Appropriately"
· "Currently Producing" oil was not risked in this
forecast
· The "New Oil" portion of the forecast was adjusted for
these risks starting in FY2015
· The "Under Evaluation" portion of the forecast was
risked at a greater rate than "Under Development"
· Technical and Non-Technical risk must be considered
Mr. Barron stated that the DOR consultant had examined all
of the production profiles and had built them up from the
ground up, well by well, and rolled it into an aggregate at
the participating field level. The field graphs were
examined for reasonability; the currently producing levels
were reasonable.
Mr. Tangeman interjected that the process that DOR had
followed did not apply to FY 13 or FY 14. The forecast
applied to FY 15.
Senator Hoffman asked how fracking impacted the production
forecasting and the accounting of risk.
Mr. Barron stated that hydraulic fracturing was very common
in the field today. Roughly 25 percent of all wells in the
state had been hydraulically fracture stimulated. He stated
that the practice would not impact the forecasts because it
was a common occurrence.
Senator Dunleavy understood that the fracking in the state
was not associated with shale oil.
Mr. Barron explained that the fracking was a method used by
the industry for over 100 years and had improved over time.
While it was typically associated with shale it was a
common approach to increase production from classic sand-
stone formations and carbonates.
Senator Dunleavy asked if the state presently had any shale
oil on line.
9:49:48 AM
Mr. Barron said that shale oil was not included in the
forecast because it would be classified as an exploration
component.
Mr. Barron relayed that there were technical and non-
technical risks. He noted that the longer it took for
projects to progress the lower the confidence levels in the
project.
Co-Chair Meyer thought that it was important to point out
that it was highly speculative that drilling for shale oil
would work in the Arctic. He highlighted that the drilling
for shale oil in Alaska would be significantly more
difficult than in the lower 48.
Mr. Barron declared that shale oil continued to hold
promise, but the risk was so great that it would be
virtually unseen in the forecast.
Mr. Tangeman stated that the potential for shale was
applicable, but the infrastructure was not yet available.
He stated that the price of oil needed would need to rise
to make drilling for shale oil economically viable.
Co-Chair Meyer recalled that Great Bear had issued a press
release that stated they had stopped drilling activity for
the time being. He understood that in planning for new oil
the department would meet with the producers in an effort
to ascertain each company's five-year plan for existing
fields.
Mr. Barron concurred that the first step was to gather each
company's gross production data. He said that the preview
of the data allowed for preparation of a forecast. He
relayed that the engineers tended to be optimistic
regarding forecasting sessions.
9:55:32 AM
Mr. Tangeman interjected that discussions with other
explorers also occurred so that the department could assess
where the companies were in the process.
Mr. Barron discussed slide 11, "Risk Factor 1: Delays." The
slide charted historical predictions of new fields coming
on line. He read a quote from the slide:
"Over 35% of projects are over budget and exceed cycle
time by over 10%"
-Booze Allen & Hamilton
He shared that the quote was an industry statement and was
not Alaska specific, but he highlighted the point that
overtime things tended to cost more and were usually
delayed; the slide illustrated that point.
9:58:00 AM
Mr. Barron detailed slide 12, "Risk Factor 2: Performance
Deviates from Expectations." The slide listed the various
projects along with their varying levels of success.
Senator Dunleavy said that the oil associated with Prudhoe
Bay had exceeded predictions over the years.
Mr. Barron agreed.
Senator Dunleavy furthered that the majority of the
projects that were further out had underperformed.
Mr. Barron replied that there were many projects that had
been successful, but just as many that had not.
Senator Dunleavy asked whether Prudhoe Bay producing more
than projected had played into the overall projections of
oil production.
Mr. Barron replied that the increase of the stabilization
of production had been included in the statistical
assumption.
10:01:00 AM
Senator Dunleavy understood that the overproduction of
Prudhoe Bay became the norm for projecting.
Mr. Barron agreed.
Mr. Tangeman added that if Revenue Source books from
previous years were examined it would be found that by year
10 it was nearly a 50/50 mix of old oil and new oil. He
said that the current revenue source book changed the
numbers to approximately 75/25; more of the total oil was
coming from the currently producing section. The department
recognized the upside of the under-development/under
evaluation, but it was not being assumed that the oil would
come on line by year 10.
Mr. Barron discussed slide 13, "Historical Production." The
slide illustrated the bounds of reasonable expectations for
future production based on historical production.
10:04:05 AM
Mr. Barron highlighted slide 14, "Applying the refined
method." He explained the definitions of each line related
to the confidence intervals.
Mr. Barron explained slide 15, "Applying the refined
method." The lines on the graph illustrated the historical,
forecasted, high case, and low case projections in the un-
risked total, FY 13 forecast and currently producing
scenarios.
10:06:52 AM
Mr. Barron displayed slide 16, "New Oil share of Total
Production." The bar graph reflected a considerably less
optimistic forecast for 2012 than had been predicted in
2011.
10:07:34 AM
Mr. Barron discussed slide 17, "Testing the refined
method." He explained that the red curve represented the
average; and the blue curve represented the new projections
made with room for error. He stated that the answer was
somewhere in between. He offered that the projection
removed 50 percent of the error from what historically
would have been included in a forecast.
10:08:49 AM
Mr. Tangeman displayed slide 18, "This will be an ongoing
process.":
…of assessing the risk associated with Under
Development and Under Evaluation.
"The ability to convey the relative riskiness of
various O&G projects in a consistent manner is an
elusive and desirable goal."
Development and Implementation of an Integrated
Risk Assessment Methodology. Cutten, Evoy, Grecu.
SPE conference paper 1993
Mr. Tangeman said that the undertaking by the department
was to reset a more conservative baseline for decision
makers, while recognizing the upside that state resources
could possibly provide.
Vice-Chair Fairclough wondered whether the projections were
conservative or realistic.
Mr. Tangeman believed both. He stressed that the main
concern for the department and the governor was how the
process would be viewed by Wall Street and the rating
agencies. He noted that the state had maintained its AAA
rating with Moody's and SMP; additionally, Fitch advanced
the state to an AAA rating in 2013. He quoted an SMP
analysis:
"The state's Department of Revenue has a good track
record forecasting year-ahead prices and production
levels. A big issue for the state is measuring the
long-term rate of oil production decline. Since
peaking in 1988, the average annual rate of decline in
production has been around 5.5 percent; however, the
state's long-term forecast has consistently projected
a long-term rate of annual decline of oil production
of just under 2.5 percent - or lower. As a result the
state's long-term forecast has tended to overestimate
actual production levels. With its fall 2012 forecast
the Department of Revenue has revised the methodology
used to develop its longer-term production forecast.
The new approach applies risk factors to discount the
projected oil production from oil fields that are
still under development or in an evaluations stage.
Previously, production estimates and the forecasts
from such fields were not adjusted downward to account
for their higher level of uncertainty."
Mr. Tangeman stated that the process would be continually
reviewed and revised in an effort to craft more accurate
projections.
10:12:54 AM
Senator Dunleavy asked if Kuparuk was considered part of
Prudhoe Bay when considering the slope curve on the big oil
fields.
Mr. Barron replied that Kuparuk was not part of Prudhoe Bay
but it was considered part of the Alaska North Slope.
Senator Dunleavy asked whether Kuparuk had exceeded
expected production similar to Prudhoe Bay.
Mr. Barron replied that Kuparuk had over-performed from the
initial development concepts.
10:13:59 AM
AT EASE
10:19:20 AM
RECONVENED
ANGELA RODELL, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE, presented "State of Alaska An Update
on the State's Savings Accounts."
Ms. Rodell began with slide 3, "General Fund and other non-
segregated investments." She relayed that as of December
31, 2012 the general fund had a balance of approximately
$11,670,000. The main portion of the funds, $5.48 billion,
was located in the statutory budget reserve. The reserve
had nearly doubled since 2011 due to a $1.75 billion
deposit made in FY 12, a $250 million deposit made in FY 13
and an additional $805 million from FY 12 surpluses. The
additional portion was in the Alaska Housing Finance
Corporation (AHFC) and Alaska Housing Capital Corporation
(AHCC). She stated that the fund had a moderate risk
profile with a short to intermediate investment horizon.
The department was expecting a return rate of 1.52 percent
for 2012. The projected 10 year rate was 2.87. To date
there was a return of 0.37 percent. She opined that short-
term cash treasury bills were not yielding any notable
return.
10:22:51 AM
Ms. Rodell discussed slide 4, "Constitutional Budget
Reserve Fund (main and sub)." The balance of the main fund
on December 31, 2012 was approximately $5.7 billion. The
sub fund had a balance of $5.5 billion. She noted that a
deposit into the fund of $160 million was made by British
Petroleum (BP) per a settlement. The balance of the
settlement went to the public school trust fund and the
permanent fund corporation. She said that the FY 12 return,
to date, was 3.22 percent on the CBR main fund primarily
because that fund was kept in intermediate and short-term,
low or moderate risk investments. The sub fund had been
carved off to take a higher risk profile and had 60 percent
in equities, yielding a higher return, but also maintaining
a higher volatility.
Ms. Rodell detailed slide 5, "Power Cost Equalization
Fund." The fund had a balance of $787 million on December
31, 2013, which was primarily invested in equities and
fixed income. The PCE fund had a higher risk profile
because there was a 7 percent targeted payout on the fund.
The FY 12 return was 7.3 percent.
Ms. Rodell introduced slide 6, "Public School Trust Fund
(Principal and Income accounts)" The fund had a current
balance of $487 million. She relayed that the interest
earning were put in the income fund which had a very low-
risk, short investment horizon and the money was then
appropriated out to schools for the foundation formula. The
fund had 27 percent equity in the principal fund which
generated income.
10:26:12 AM
Ms. Rodell discussed slide 7, "PERS and TRS." She stated
that both funds had moderate risks. The target actuarial
assumed rate of return for both funds was 8 percent and the
asset allocations had been designed for that rate of
return. A certain amount of cash in low and short-term
investments needed to be maintained in order to be able to
make benefit payouts. The Balance of the PERS account as of
December 31, 2012 was $12 billion, the FY 12 return was .52
percent. She said that the fund was off to a better start
for 2013 and had a FYTD of 5.63 percent. The TERS balance
as of $5 billion and had a return for 2012 of .59 percent
with a FYTD return of 5.68 percent.
10:27:39 AM
Ms. Rodell explained slide 8, "APFC." She stated the
corporation had a balance of approximately 44 billion as of
December 31, 2012. The FY 12 return was .02 percent and was
currently at 7.34 percent for the FYTD.
Ms. Rodell introduced slide 10, "FY 13 Investment Revenue
Forecast." She stated that rather than using the 10 year
return assumption on cash of 2.87, the department had
looked at actual earnings on cash which was closer to
somewhere between .3 and .6; the department was using .6
for the forecast. The slide reflected that some investment
income was lower than it had been in the past in order to
take into account current market conditions for the short-
term market.
Senator Bishop asked what the historical average percent
was on the permanent fund return.
Commissioner Butcher responded that the department would
provide the information at a later date. He added that the
projection of 5 percent was not unrealistic based on
history.
10:30:46 AM
Vice-Chair Fairclough whether an allocation on a capital
budget appropriation would move into a higher risk pool
when moved from long-term investment to short-term
investment.
Ms. Rodell stated yes. She noted that if the money was in
the general fund it would not change. The risk would only
change if the move was out of the CBR.
Vice-Chair Fairclough asked whether the state was
experiencing any disadvantage due to the large capital
budgets of the past two years; general fund revenue had
been used and some of the allocations would not be used for
a number of years and should be left as long-term
investments.
Commissioner Butcher suggested that Gary Bader could
provide a more in-depth answer. He noted that a challenge
for the general fund and the retirement fund as well was
the balancing act between how much should be kept liquid
and how much could be invested long-term.
10:33:22 AM
Ms. Rodell added that the state had approximately 47
percent of the general fund investments in intermediate
term bonds which had a one to three year horizon. This was
helping to push the yields closer to the one percent mark
but when averaged along with the liquidity needs, the state
was not seeing a return.
Vice-Chair Fairclough wondered whether the committee should
look into the policy decision. She noted that the state was
making incremental payments on the PERS and TERS system
directly out of the general fund. She asked if the funds
were moved into higher risk investments the state could
experience a greater rate of return.
10:34:49 AM
Senator Dunleavy asked if the department had any specific
concerns over the next five years.
Commissioner Butcher responded that the greatest
uncertainty was with the global economy.
10:36:31 AM
Senator Hoffman discussed legislation that had been
previously considered that would make deposits into the
PERS and TRS funds; primarily, because drastic increases in
deposits from the general fund were expected. He understood
that the general fund deposits for FY 14 would not be as
large as in FY 15, FY16 and FY 17. He wondered if the
administration had any solutions to the increasing deposit
size.
Commissioner Butcher responded that many options existed.
He said that the various solutions were being examined in
order to make the most prudent decision going forward.
Senator Hoffman asked whether the department had a time
table for when the proposals would come before the
legislature.
Commissioner Butcher noted that an ARM board meeting would
happen in February.
ADJOURNMENT
The meeting was adjourned at 10:38 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 13 01 24 Oil Production Forecasting - FINAL.pdf |
SFIN 1/24/2013 9:00:00 AM |
DOR Budget Overview |
| APFC201212.pdf |
SFIN 1/24/2013 9:00:00 AM |
DOR Budget Overview |
| Senate Finance Fall 2012 Revenue Forecast OVERVIEW vFINAL2 01242013.pdf |
SFIN 1/24/2013 9:00:00 AM |
DOR Budget Overview |
| State of AK GOs - 2013 Fitch Report.pdf |
SFIN 1/24/2013 9:00:00 AM |
DOR Budget Overview |
| State of AK GOs - 2013 Moody's Report.pdf |
SFIN 1/24/2013 9:00:00 AM |
DOR Budget Overview |
| State of AK GOs - 2013 SP Report.pdf |
SFIN 1/24/2013 9:00:00 AM |
DOR Budget Overview |
| State Savings Accounts Update 1 22 13.pdf |
SFIN 1/24/2013 9:00:00 AM |
DOR Budget Overview |