Legislature(2021 - 2022)SENATE FINANCE 532
01/28/2021 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Dor - Fall 2020 Revenue Forecast | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
January 28, 2021
9:03 a.m.
9:03:43 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman
Senator Natasha von Imhof
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
Senator Donny Olson
PRESENT VIA TELECONFERENCE
Lucinda Mahoney, Commissioner, Department of Revenue; Dan
Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue.
SUMMARY
^PRESENTATION: DOR - FALL 2020 REVENUE FORECAST
9:03:43 AM
Co-Chair Stedman commented that the committee would be
hearing about the fall budget forecast, which provided the
executive branch and the legislative branch with historical
and short-term revenue projections. The information would
be used in the upcoming budget process and was a standard
review. He wanted to ensure that new members of the
legislature and the public could follow the conversation
and could see how the information was pertinent to the
subject of the structural deficit. The presentation would
concentrate on state revenue.
9:06:19 AM
LUCINDA MAHONEY, COMMISSIONER, DEPARTMENT OF REVENUE
(present via teleconference), thanked the committee for the
opportunity to share the revenue forecast, which was
prepared during a time of great uncertainty. She noted that
adjustments had been made to the Revenue Sources Book as
the state transitioned from dependence upon oil revenue to
dependence upon primarily investments. More information
about investments had been put in the book, including
fiduciary duties, management fees, and investment risk
volatility. She commented that the market was at an all-
time high but had dropped the previous day. She commented
on the volatility of the market. She noted that the
Permanent Fund balance was just over $74 billion the
previous day.
Commissioner Mahoney continued her remarks. She cautioned
that Callan (as well as other Wall Street consultants) had
forecast lower returns in the future. The economic research
group had done its best to develop forecasts to provide the
foundation for policy and decision making by the
legislature. She pointed out that the forecast was
independent, objective, and without political bias. She
noted that the department would be providing two additional
presentations the following Tuesday regarding cash
management of the state's reserves, and the state's debt.
The department had also prepared a presentation regarding
the current oil production tax methodology and
calculations.
9:09:32 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE (present via
teleconference), discussed the presentation "Fall 2020
Forecast Presentation" (copy on file).
Mr. Stickel addressed slide 2, "Agenda":
1. Forecast Background and Key Assumptions
2. Fall 2020 Revenue Forecast
? Total State Revenue
? Unrestricted Revenue
3. Petroleum Forecast Assumptions Detail
? Oil Price
? Oil Production
? Oil and Gas Lease Expenditures
? Oil and Gas Credits
Mr. Stickel showed slide 3, "Forecast Background and Key
Assumptions."
Mr. Stickel referenced slide 4, "Background: The Revenue
Sources Book":
1. Historical, current, and estimated future state
revenue
2. Discussion and information about major revenue
sources
3. Prepared in accordance with AS 37.07.060 (b)(4),
and supports long term plan under AS 37.07.020
4. Official revenue forecast used for Governor's
budget proposal; updated in spring
5. Located at tax.alaska.gov
Mr. Stickel relayed that the department sometimes referred
to the Revenue Sources Book as "the RSB." He noted that the
RSB was an annual publication. He shared that the
department gathered data from the tax revenue management
system, the state accounting system, and state agencies to
report actual revenue for the most recent year. The
economic research group maintained models for each of the
state's major revenue sources to generate a ten-year
forecast for each source. In addition to the basic data,
the RSB contained details about each of the state's revenue
sources and key forecast variables. He reiterated that
there had been some changes to the document, including
reordering of chapters according to highest revenue
magnitude to lowest. He discussed the topics of various
chapters. There was also new information about investment
revenue and its role in funding government services.
9:12:11 AM
Mr. Stickel turned to slide 5, "Key Alaska Economic
Indicators":
1. Real State GDP: $50.9 billion in Q3 2020
? Up 7.2% from Q2 2020, still down 4.9% from Q3
2019
2. Employment: 290,400 in December 2020
? Down 24,100 (-7.7%) compared to December 2019;
heaviest impacts in leisure/hospitality,
transportation/warehousing, and oil/gas
industries
3. Wages & Salaries (seasonally adjusted): $21.8
billion in Q3 2020
? Up 5.2% from Q2 2020 and flat from Q3 2019
4. Alaska Bankruptcies: 313 for calendar year 2020
? Compared to 400 for all of 2019
5. Foreclosures: 98 in Q3 2020, 303 for all of 2020 so
far
? Compared to 197 in Q3 2019 and 729 for all of
2019
6. Housing Starts: 1,325 so far in 2020 (through
November)
? Compared to 1,540 through November 2019 and
1,692 for all of 2019
Note: Quarters on this slide are based on Calendar
Year, i.e., Q1 = Jan-Mar, etc.
Sources: Federal Reserve, "Total Real Gross Domestic
Product by Industry for Alaska, Millions of Chained
2012 Dollars, Quarterly, Seasonally Adjusted Annual
Rate," Federal Reserve, "Total Wages and Salaries in
Alaska, Thousands of Dollars, Quarterly, Seasonally
Adjusted Annual Rate" (divided by 4), Alaska
Department of Labor and Workforce Development
"Research and Analysis Section," American Bankruptcy
Institute "Filings by State and Jurisdiction," Alaska
Department of Labor "Alaska Foreclosures," Federal
Reserve "New Private Housing Units Authorized by
Building Permits for Alaska, Units, Monthly,
Seasonally Adjusted"
Mr. Stickel expressed that it was important to consider the
state economy in addition to state revenue. He spoke to
foreclosures as listed on the slide and explained that
foreclosures being lower was likely due to various
government programs that provided temporary aid and put
limits on foreclosures. He noted that the state had likely
not seen the full impact of COVID-19 and the recession on
housing and foreclosures. He explained that the recent
federal stimulus package had provided some additional
support.
Senator von Imhof thought Mr. Stickel was correct in that
despite unemployment being down, bankruptcies and
foreclosures were also down. She agreed that federal funds
from the Coronavirus Aid, Relief, and Economic Security
(CARES) Act helped to keep people in their homes. She had
learned that banks reported an increase in deposits by more
than 20 percent, which she thought indicated people were
holding onto cash and waiting. She thought the committee
should consider the fact that there was a lot of cash
sitting idle in the economy.
Senator Wilson asked about foreclosures and asked if there
was an estimate on how the rate might go up when the
moratorium was lifted at the end of the month.
Mr. Stickel did not have forecast for foreclosures. He
thought there could potentially be a negative impact on
bankruptcies and foreclosures, and acknowledged it was an
area of uncertainty.
9:16:57 AM
Mr. Stickel considered slide 6, "Fall Forecast
Assumptions":
The economic impacts of COVID-19 are uncertain; DOR
has developed a plausible scenario to forecast these
impacts.
? Key Assumptions:
o Investments: Stable growth in investment
markets, 6.75% Permanent Fund returns.
o Federal: Some CARES Act funds shown in FY 2021,
no additional stimulus in FY 2022+.
o Petroleum: Alaska North Slope oil price of
$45.32 per barrel for FY 2021 and $48.00 per
barrel for FY 2022. No further oil production
curtailments.
o Non-Petroleum: Most economic activity will
return to baseline levels by FY 2022, except
tourism full recovery by summer 2023.
Mr. Stickel stated that the Covid-19-related recession had
affected every aspect of state revenue. He referenced
Senator von Imhof's remarks about people holding onto cash,
which he thought was an example of the tremendous level of
uncertainty around the situation. He cautioned that while
there was always a level of uncertainty with the forecast,
the uncertainty was particularly large in the current time.
Mr. Stickel continued to address the slide. He noted that
the forecast had assumed a 50 percent capacity tourism
season for 2021, a 75 percent capacity season for 2022, and
back to normal for 2023 and beyond. He qualified that
"normal" signified numbers akin to 2019 levels, which saw a
little over one million cruise ship passengers.
Co-Chair Stedman asked for Mr. Stickel to update the
information regarding major cruise ship participants. He
thought the cruise industry was updating schedules.
9:19:51 AM
Senator von Imhof thought it was hard to determine the
economic impacts of COVID-19. She had gleaned that when
travel fully opened and labor was in full force, there
would be a significant pent-up demand. She thought the
Gross Domestic Product would grow higher than three to four
percent. She referenced the Spanish Influenza epidemic of
1920, which she precipitated the "roaring twenties" economy
boom. She was observing many of the same behaviors and
indicators. She thought there would be a tightening of oil
supply as oil production decreased due to the new
presidential administration. She thought there was
potential for some significant growth in the state. She
asked if Mr. Stickel was seeing some of the same indicators
she mentioned.
Mr. Stickel emphasized the amount of uncertainty around the
forecast. He affirmed that there was absolutely opportunity
for revenue to be higher than expected, however the
opposite was also true. He relayed that the department's
approach was to highlight the uncertainty when discussing
the forecast. He echoed the point of Co-Chair Stedman about
updating the forecast regularly.
9:22:46 AM
Co-Chair Bishop asked Mr. Stickel to look into an update
from the air travel industry. He thought there were new
carriers coming to the state and he wondered about
anticipated growth.
Mr. Stickel stated he would reach out to the airline
association as part of the spring forecast process. He
reiterated that he would take another look at tourism
assumptions and would reach out to industry while preparing
the spring forecast.
Senator Hoffman did not see any bullet points referencing
the governor's decision with regard to Permanent Fund
Dividends (PFDs) or his early CARES Act payments. He asked
if the items would affect the economy of the state in any
way.
Mr. Stickel stated that the goal of the presentation was to
lay out the revenue forecast under the status quo, without
any proposed legislative changes. He thought that the
Office of Management and Budget (OMB) would present the
governor's proposed budget the following day.
Co-Chair Stedman affirmed that OMB would be presenting the
following day and Senator Hoffman could pose his question.
Co-Chair Stedman shared that the expectation of committee
members was to get through the operating budget in the
first or second week of March. He thought the legislature
might need the spring forecast numbers earlier than normal.
He thought it would beneficial if DOR kept the timing in
mind as the committee worked through the budget process.
9:25:46 AM
Mr. Stickel displayed slide 7, "Relative Contributions to
Total State Revenue: FY 2020," which showed a graphical
representation of the various sources of state revenue. He
commented that the graphic showed the relative importance
of the different revenue sources to total state revenue. He
pointed out that federal revenue, investment earnings, and
oil and gas were the biggest sources of state revenue,
respectively. While other revenue sources made
contributions to state revenue, the top three were
significantly higher. All other revenue sources outside
federal investment and petroleum amounted to a little over
12 percent of total revenue in FY 20.
Senator von Imhof asked if the federal revenue included the
$5.4 billion in federal CARES Act funds that came to the
state.
Mr. Stickel noted that FY 20 federal revenue included a
portion of the CARES Act money. Some of the funds flowed
directly to the state, and the money was reflected in FY 20
and FY 21. Some of the CARES Act fund did not flow through
state government.
Co-Chair Stedman asked for a rundown on investment earnings
and how the state was dealing with the Permanent Fund's 5
percent payout. He asked if the percentage of petroleum
revenues listed was net of all offsets due to any credit
payments.
Mr. Stickel noted that there were upcoming slides that
might be helpful. He detailed that slide 7 showed total
state revenue, including both realized and unrealized
earnings of the Permanent Fund regardless of if the funds
were used for dividends, government spending, or retained
in the fund. Petroleum revenue and total state revenue
included all revenue net of tax credits that were applied
in calculation of tax liability.
Co-Chair Stedman asked about investment earnings and asked
if the earnings would be zero or negative if the market was
declining. He asked if Mr. Stickel was not using the 5
percent payout, but rather the actual market returns in the
fiscal year.
Mr. Stickel answered in the affirmative and thought there
was additional information on slide 9 would further address
Co-Chair Stedman's question.
Co-Chair Stedman thought some of the concepts might need to
be restated. He emphasized that market returns would not be
indicative of what was being considered at the table. The
committee would consider the five-year average of the
Permanent Fund with the 5 percent payout. He thought the
numbers could be vastly different.
9:29:28 AM
Mr. Stickel showed slide 8, "Fall 2020 Revenue Forecast."
Mr. Stickel looked at slide 9, "Total Revenue Forecast: FY
2020 to FY 2022 Totals and Percent Change from FY 2020,"
which showed a table with total state revenue from all
sources for FY 20 and forecast for FY 21 and FY 22. He
clarified that the slide put the graphic from the previous
slide in numeric form. Total revenue included four
different sources: investments, federal receipts,
petroleum, and other non-petroleum revenues. In the revenue
forecast and budget, revenues were broken into four
categories of restriction. Unrestricted General Funds (UGF)
were revenues that could be appropriated for any purpose
and were the focus of most budget discussions.
Mr. Stickel explained that Designated General Funds (DGF)
were technically available for appropriation but
customarily used for a specific purpose. He used the
example of alcohol tax revenue to illustrate Designated
General Funds (DGF), half of which was customarily
appropriated to the Alcohol and Other Drug Abuse Treatment
and Prevention Fund. Other restricted funds had dedicated
uses and generally were truly not available for
appropriation. He used the example of royalty revenue to
the Permanent Fund and School Fund, and motor fuel tax
revenue from aviation that was federally required to be
used for specific purposes. All federal revenue had to be
used for specific purposes and was considered restricted
revenue.
Mr. Stickel continued to speak to slide 8. For FY 20, total
state revenue from all sources was about $8.7 billion. For
FY 21 the total was forecast at $10.9 billion, and $10.3
billion for FY 22. The UGF portion of the total was $4.5
million in FY 20, and $4.3 billion was forecast for both FY
21 and FY 22. He directed attention to the two columns on
the far right of the table, which showed the percent of
change between FY 20 and FY 22 as well as the change
between FY 21 and FY 22. Overall, the FY 22 forecast for
UGF was 5.8 percent lower than FY 20, and 1.4 percent lower
than FY 21. The total state revenue was 19 percent higher
in FY 22 and 5 percent lower than FY 21 forecast.
Co-Chair Stedman asked for greater clarification on slides
when dealing with the investment revenue. He thought the
size of the Permanent Fund could distort numbers. He noted
that the committee would be concentrating on the 5 percent
payout with a five-year lookback for smoothing for the
budget process, rather than the expectation of one-year
gains or losses.
9:33:32 AM
Senator von Imhof thought when investment revenue was under
UGF, it would be nice to label the funds as the 5 percent
payout. She thought it would be nice to indicate the amount
of the PFD payout. She thought it was important for the
public to know. She asked about the blue bar showing the
history of FY 20 revenue and asked about if "Investment
Revenue" under the Other Restricted Revenue category, which
showed a negative $1.2 billion.
Mr. Stickel stated that for the PFD, the percent of market
value (POMV) draw was counted, and any residual balance of
the Permanent Fund was counted as "Other Restricted
Revenue." In FY 20, the POMV took a little more out of the
fund than the total earnings of the fund for the year.
Going forward, the opposite was forecast.
Co-Chair Stedman thought it was important to work on
clarity around the topic so that committee members and the
public clearly understood. He stated that members would be
focusing on the cash flow and what was available for
appropriations following the guidelines. he thought the
public and the vast majority of the legislature would
struggle to understand the chart on slide 9.
Senator Hoffman referenced the Petroleum Revenue listed on
the chart under "Other Restricted Revenues," and asked
about the drastic 57.5 percent reduction from FY 20 to FY
022.
Mr. Stickel stated that the Other Restricted Petroleum
Revenue consisted of two components. One component was the
Constitutional portion of royalties that were deposited to
the Permanent Fund and School Fund. The other component was
tax and royalty settlement deposited to the Constitutional
Budget Reserve (CBR). Both of the amounts were expected to
be lower in FY 21 and FY 22 compared to FY 20.
Co-Chair Stedman stated his staff would work with Mr.
Stickel to have the information on slide 9 reworked in a
new format in order to be clearly delineated.
9:37:42 AM
Mr. Stickel addressed slide 10, "Unrestricted Revenue
Forecast: FY 2020 to FY 2022 Totals," which showed a table.
He specified that investment revenue was the largest source
of unrestricted revenue to the state. Investment revenue
contributed nearly $3 billion in FY 20 and was estimated to
contribute $3.1 billion of unrestricted revenue in FY 21
and FY 22. The main element of the revenue was the POMV
transfer from the Permanent Fund, which began in FY 19.
Petroleum generated about $1.1 billion of UGF revenue in FY
20 and was forecast to contribute a little under $1 billion
in each of the two next fiscal years. Lastly, non-petroleum
sources were expected to contribute a little under $400
million of unrestricted revenue in each of the next two
years. He shared that the next few slides would walk
through each of the revenue sources in more detail.
Co-Chair Stedman asked Mr. Stickel to keep in mind that the
committee was curious about items such as the $861.7
million from FY 21, and whether it was net cash on the
table or if was before the dilution of any offsets. He
asked Mr. Stickel to review the details of funds as he went
through the presentation.
Mr. Stickel advanced to slide 11, "Unrestricted Revenue
Forecast: FY 2020 and Changes to Two-Year Outlook." The
slide summarized some of the key changes to the
unrestricted revenue forecast between the spring 2020
forecast released in April and the current fall 2020
forecast. He highlighted the Alaska North Slope (ANS) oil
price had increased by $8.32/bbl for FY 21 to $45.32/bbl.
The price increased by $7/bbl for FY 22 to $48/bbl. The
reason for the increase was some recovery and stabilization
in the oil market as it worked through COVID-related
issues. He shared that the price was actually currently
higher than the forecast being discussed.
Mr. Stickel continued to address slide 11. There was no
change to the FY 21 forecast for the Permanent Fund
transfer, but the FY 22 estimate was increased by $21
million due to stronger than expected market returns to the
end of FY 21. He added that FY 21 was the last year in the
calculation of the five-hear average for the FY 22
transfer. For total unrestricted revenue, FY 20 was close
to expectations, while the FY 21 the forecast was increased
by $87.5 million primarily due to the higher oil price
forecast. For FY 22, the forecast was decreased by nearly
$60 million, even with the higher oil price assumption. The
biggest contributor to the change was some reductions to
the corporate income tax forecast, which he would address
in greater detail later in the presentation.
9:41:11 AM
Mr. Stickel looked at slide 12, "Unrestricted Investment
Revenue: FY 2020 to FY 2022 Totals," which showed a table
providing more detail on unrestricted revenue. He
reiterated that investments were now the state's largest
source of unrestricted revenue and the Permanent Fund
transfer alone was expected to account for at least two-
thirds of unrestricted revenue every year going forward. He
thought the ratio spoke the importance of the Permanent
Fund and the realty of living with low oil price and oil
production. The Permanent Fund transfer contributed $2.9
billion in FY 20 and was estimated to contribute $3.1
billion in FY 21 and FY 22. In addition, there was a small
amount of other unrestricted investment revenue which
represented primarily earnings on cash balances of the
General Fund.
Mr. Stickel showed slide 13, "Unrestricted Investment
Revenue: Percent of Market Value (POMV) Transfer Forecast,"
which also showed a line graph entitled 'POMV Transfer
Forecast':
? The statutory POMV rate changes to 5% beginning FY
2022.
? For FY 2019 FY 2021 this rate was 5.25%.
? Forecast assumes Permanent
Fund's long-term total return expectation of 6.75%.
? Differing Permanent Fund returns and petroleum
deposits could significantly alter actual POMV
Mr. Stickel stated that the slide showed the estimated
transfer from the Permanent Fund to the General Fund for FY
20 and each year for the next ten years. The transfer was
estimated to be over $3 billion each year, growing to $3.7
billion by FY 2030. The forecast was based on an assumption
of a 6.75 percent annual return for the fund, and a 5
percent of market value calculation. The Permanent Fund
transfer was a fairly stable revenue source due to how it
was calculated. the annual transfer was based on the
average market value for the first five of the last six
fiscal years, which removed a lot of the impacts of market
volatility. He reiterated that the slide showed a baseline
forecast and did not incorporate any additional draws on
the Permanent Fund beyond the POMV calculation.
Co-Chair Stedman stated that the projected rate of return
might need to be updated, as well as the impact ad hoc
draws or any other issues that affected the management
style of the fund and the probability of a predictable cash
flow.
Senator von Imhof thought there should be alternatives
shown. She pondered different amounts of draws based on
different scenarios and the governor's proposed budget and
bills. She asked if Co-Chair Stedman thought there should
be various colored lines on the chart to depict different
scenarios.
Co-Chair Stedman thought that it would be better to wait
until proposals were being considered, and the committee
could run scenarios, including the effect of lowering the
payout. He anticipated a full review of the options and the
ability for members to make their own political
interpretation and position. He thought it was important
for the members and public to know what decisions were
being made.
Co-Chair Bishop commented that the committee would get to
the discussion, but he thought it was imperative that the
state not overdraw. He referenced a comment by Co-Chair
Stedman that the state "had to make payroll."
9:45:45 AM
Mr. Stickel referenced slide 14, "Unrestricted Petroleum
Revenue: FY 2020 to FY 2022 Totals," which showed a data
table. He highlighted that there were four main sources of
unrestricted petroleum: property tax, corporate income tax,
production tax, and state royalties. The state levied a
property tax on all oil and gas property in the state,
which was a fairly stable revenue source that generated a
little over $100 million per year. He noted that the table
only showed the state's share of the property tax, and not
the over $400 million generated for municipalities. He
discussed corporate income tax on profits. The previous
year had been difficult, and the tax had generated zero
revenue. The department forecast only $5 million for FY 21
and $20 million for FY 22.
Mr. Stickle discussed the oil and gas production tax, the
state's severance tax on petroleum. For North Slope
production there was a net profits tax with a gross minimum
tax floor. At current prices, the state was in the minimum
tax regime throughout the forecast. The production tax was
expected to bring in a little under $200 million per year
for the next two years, which was revenue after accounting
for deductions and credits applied against tax liability.
Mr. Stickel continued that royalties for oil and gas
production on state land was the largest source of
unrestricted petroleum revenue, bringing in $675 million in
FY 20 and forecast at between $500 and $600 million in the
following two years. He noted that the amounts did not show
all royalties, but just the unrestricted share. In addition
to the amount shown on the slide, a portion of the royalty
revenue was deposited into the Permanent Fund and the
School Fund. Later in the presentation he would address
they key assumptions driving the petroleum revenue
forecast, including price, production, and company
investment.
Co-Chair Stedman asked about Mr. Stickel's comment about
going into more detail about the petroleum revenue
forecast.
Mr. Stickel affirmed that the last section of the
presentation was a detailed discussion of the various
assumptions behind the petroleum revenue forecast.
Co-Chair Stedman stated he would hold his questions until
the discussion. He asked if Mr. Stickel could highlight the
negative expectation of corporate income tax for FY 22. He
thought pricing had been advanced a bit, and volume might
be up a bit. He asked why there was a negative projection
for corporate income tax, versus the debacle in FY 20 when
there was zero.
Mr. Stickel informed that slide 16 and slide 17 would
specifically address the corporate income tax forecasts.
Co-Chair Stedman agreed to hold his question until slide
16.
Senator Hoffman had the same question as Co-Chair Stedman.
9:49:01 AM
Mr. Stickel turned to slide 15, "Unrestricted Non-Petroleum
Revenue: FY 2020 to FY 2022 Totals," which had a data
table. The largest component of the unrestricted non-
petroleum revenue was taxes. Typically, corporate income
tax was the largest source, and it had generated $100
million in FY 20. The forecast was only $30 million for FY
21 and $25 million for FY 22. The following two slides
would go into greater detail on corporate income tax. Other
significant taxes include the mining license tax, the
insurance premium tax, fisheries taxes, and excise taxes.
In total, non-petroleum taxes were forecast to generate
$215 million in FY 21, and $228 million in FY 22. Other
than taxes, other non-petroleum revenues include a variety
of licenses and permits, charges for services, fines and
forfeitures, non-petroleum rents and royalties, and
miscellaneous revenues like dividends from state
corporations. The total non-petroleum unrestricted revenue
was expected to be $363 million in FY 21, and $373 million
in FY 22.
Senator von Imhof asked if the decrease in many of the
taxes was not necessarily due to a change in tax rates but
due to less in economic activity. She mentioned fisheries
taxes. She asked what Mr. Stickel about the cause of the
decrease.
Mr. Stickel stated that the impacts of the COVID-related
recession were incorporated into the revenue forecast. The
expectation of lower economic activity and value had
impacted some sources such as fisheries taxes. More
significant impacts were forecast for tourism-related
taxes. The information was reflected in the drop from FY 20
to FY 21. He thought the decrease in tobacco taxes had to
do with the declining use of cigarettes.
Co-Chair Stedman thought it was apparent that there was
increasing mining taxes and marijuana taxes.
9:52:11 AM
Mr. Stickel considered slide 16, "Unrestricted Revenue
Forecast: Non-Oil & Gas Corporate Income Tax (CIT)," which
showed a bar graph entitled 'Non-Oil & Gas CIT
Collections." He noted that one of the major changes in the
fall revenue forecast had to do with corporate income
taxes, which was a major area of focus for the forecast
research group. The group had built a model that analyzed
top taxpayers in each industry, that attempted to project
company profitability and tax payments over the next
several years. There were two major unusual impacts that
were considered in the forecast: the significant recession
and impacts from the CARES Act. One provision of the CARES
Act allowed corporations to carry back net operating losses
(NOL) from tax years 2018, 2019, and 2020 up to five years
back to receive relief funds for taxes paid.
Mr. Stickel continued to speak to the effects of the CARES
Act on corporate income tax. There was another provision in
the CARES Act that allowed companies to accelerate certain
alternative minimum tax refunds into tax year 2019. The
state adopted the federal tax code by reference, so the
CARES Act provisions were automatically applied to Alaska's
tax, unless the legislature chose to de-couple or modify
the provisions.
Mr. Stickel relayed that there was an expectation of lower
revenue in FY 21 for general corporate income tax based on
the weak economy. The CARES Act impacts further reduced the
FY 21 revenue by another $20 million. For FY 21, the
impacts were based on the CARES Act-related relief funds
for tax years 2018 and 2019. For FY 22, he estimated $72
million in CARES Act related refunds, bringing the net
revenue to $25 million. The biggest refunds were expected
for tourism-related companies, which were expected to show
huge losses for tax year 2020. For FY 23, the department
forecast that general corporate income tax revenue rebound
to $130 million, based on an assumption of economic
recovery.
Co-Chair Stedman asked if the department would be bringing
forward legislation to uncouple the state income tax with
federal income tax. He asked if the department considered
the coupling as fair and equitable and needing to be
maintained.
Commissioner Mahoney stated that the department had been
evaluating uncoupling with federal code and was open to
discussing options with the legislature regarding the
impact. She thought it was important to take the impact to
the state's revenues into consideration. She reiterated
that the tourism industry was hard-hit, and the funding
provided a small cushion.
Co-Chair Stedman asked for the administration to inform the
legislature if it had a position on the matter. He added
that the legislature had not given the matter much thought
or discussion.
9:56:10 AM
Mr. Stickel displayed slide 17, "Unrestricted Revenue
Forecast: Oil & Gas Corporate Income Tax (CIT)," which
showed a bar graph entitled 'Oil and Gas CIT Collections.'
The slide presented a similar chart to previous slides but
for oil and gas corporate income tax. He referenced Senator
Hoffman's question and commented that the oil and gas
industry was especially impacted by Covid-19 and paid
essentially no corporate income tax for FY 20. The
department forecast very low revenue for FY 21, even before
the CARES Act impacts. After the impacts, the department
expected only $5million for FY 21 oil and gas corporate
income tax. For FY 22, there was an estimated $63 million
of CARES Act related refunds, bringing the net revenue to a
negative $20 million. The numbers were based on anticipated
CARES Act-related refunds for tax year 2020 losses. Oil and
gas corporate tax revenue was estimated to be $55 million
for FY 23, which was far lower than the several hundred
million per year in the last decade.
Senator von Imhof did not fully understand the calculation
of how the CARES Act cash flow was affecting corporate
income tax.
Mr. Stickel explained that prior to the CARES Act, if a
company incurred a NOL in a given year, it could carry the
loss forward and potentially reduce corporate income tax
payments in future years. The CARES Act allowed a company
with a NOL in a given tax ear, for tax years 2018 - 2020,
the company could carry any loss back and restate tax
returns to obtain refunds for previous taxes paid. The
yellow bar on slide 17 showed the estimation of oil and gas
corporate income tax based on payments expected during the
fiscal year for activity during the fiscal year. The blue
bar adjusted for expected CARES Act-related refunds. The
difference between the two bars in FY 21 would be expected
refunds for 2018 and 2019 losses that were carried back up
to five years. In FY 22, some companies were expected to
have lost significant amounts of money in 2020, and the
2020 loss could be carried back five years.
9:59:48 AM
Co-Chair Stedman asked when the execution of the refund
would impact the treasury.
Mr. Stickel stated that some companies had already filed
returns for FY 18 and FY 19 refunds. He expected to pay the
refunds in the remainder of FY 21. The refunds for FY 20
were due in April, or due in November with an extension. He
anticipated that refunds for any 2020 losses would be paid
out of FY 22.
Co-Chair Stedman asked if the department cut the check for
the refunds or rather offset the amount against current tax
implications.
Mr. Stickel stated that companies requesting a refund could
request a check or choose to offset the refund against
future tax liability. Given the magnitude of the payments,
the forecast expected sending the money by wire.
Senator von Imhof asked Mr. Stickel to provide a breakdown
of how much the state expected to be paying out for tax
refunds over the next three or four years.
Mr. Stickel stated that the expected refunds specific to
the CARES Act would be the difference between the yellow
and blue bar. For FY 22, he estimated $63 million of CARES
Act refunds.
Co-Chair Stedman thought the committee could request the
information be included in future discussions about the
state's cash position so that the impact of the CARES Act
could be clearly understood.
Senator von Imhof did not think the information was clear.
10:03:23 AM
Co-Chair Bishop had the same question as Senator von Imhof.
He thought the refund amounts should be clearly stated on
the slide.
Senator Hoffman thought the slide showed the effectiveness
of the oil and gas lobby and how the lobby's impact on a
national level effected the state. He asked if the
department was monitoring the next big federal stimulus
package being contemplated, and if the same provision would
apply to Alaska.
Mr. Stickel stated that the ability to carry back a NOL for
corporate income tax purposes was built into the forecast
and assumed the law would remain the same at the federal
level. He affirmed that the department was following the
discussion regarding the potential upcoming federal
stimulus package. He thought OMB was following the
discussions the most closely. The department would be
reviewing the developments and incorporating them into the
spring forecast update. He was not anticipating any changes
to the corporate income tax ability to carry back.
Co-Chair Stedman thought it was important to clearly
delineate the information for future legislatures. He
thought the corporate income tax figures were significant,
and the details might not be clear. He stressed that he was
not commenting on the policy, but rather the importance of
clarity.
10:06:50 AM
Mr. Stickel showed slide 18, "Petroleum Forecast
Assumptions Detail." He noted that the final slides would
consider oil prices, oil production, and company spending.
Mr. Stickel looked at slide 19, "Petroleum Detail: Changes
to Long-Term Price Forecast," which showed a line graph of
oil prices. The slide showed the DOR Fall 2020 forecast
compared to the DOR Spring 2020 forecast for ANS. He
detailed that the oil price forecast was based on the most
recent futures market projections. The fall forecast
numbers were generated on December 1, 2020. Oil prices had
stabilized over the last few months as demand recovered and
markets worked through excess supply. The fall forecast
included an average oil price for FY 21 of $45.32/bbl, an
increase of $8.32 above the spring forecast. For FY 22, the
oil price forecast was $48/bbl, an increase of $7 higher
than the spring forecast. Beyond 2022, the department
anticipated that oil prices would increase with inflation
by a dollar or two per year. The forecast was based on a
"lower for longer" paradigm going forward.
Co-Chair Stedman conveyed that the committee would ask Mr.
Stickel to update the forecast in a couple of months. He
hoped the legislature would be done in the middle of March.
Mr. Stickel addressed slide 20, "Petroleum Detail: Nominal
Brent Forecasts Comparison as of 1/20/2021," with a chart
that showed how the department's price forecast compared to
other forecast sources. He explained that the state's
Alaska North Slope (ANS) forecast was compared to Brent oil
prices from the Energy Information Administration (EIA). He
detailed that futures markets and average analyst forecasts
were compared to Brent, which was an international
benchmark crude that was typically priced similarly to
Alaska crude oil. He noted that the forecast was still very
close and within a dollar or two of the futures market and
EIA forecast. He thought it was interesting that analysts
on average expected slightly higher prices than the futures
market or the state's forecast for FY 22 and beyond.
10:09:44 AM
Mr. Stickel advanced to slide 21, "Petroleum Detail: UGF
Relative to Price per Barrel (without POMV): FY 2022,"
which showed a line graph that showed how UGF for FY 22
changed with different oil prices. He noted that the chart
came from Appendix A of the RSB. He highlighted that for FY
22, there was a price of $48/bill, below which each dollar
signified about $15 to $20 million of unrestricted revenue.
Above the forecast price, each dollar of change equated to
$20 million to $30 million of unrestricted revenue.
Co-Chair Stedman asked for assistance in understanding the
tipping point to go into the net profits tax under the
current price and volume scenario.
Mr. Stickel explained that Co-Chair Stedman was referencing
provisions of the oil and gas production tax where a
taxpayer for North Slope oil production paid a higher of a
gross minimum tax or a net tax (after credit). The forecast
oil price of $48/bbl was around the level at which some
taxpayers started to pay above the minimum tax. The level
at which a company went from the minimum tax floor to the
net tax after credit depended upon each company's portfolio
of operations and investment. The range extended from about
$50/bbl to about $90/bbl. There was a steeper slope in the
revenue curve when going above the forecast price.
Co-Chair Stedman thought Mr. Stickel was discussing
consolidated data from multiple companies. He asked about
the aggregate tip-over point.
Mr. Stickel stated he would be happy to calculate an
aggregate number. He referenced the range shown on the
slide that extended from $50/bbl to $90/bbl depending upon
the company.
10:13:07 AM
Co-Chair Stedman referenced the gross tax and thought the
well-head value was easy to calculate. He was curious about
any offsets that would come against the amount. He wanted
to know how the $5 per barrel credit was impacted. He asked
about the Middle Earth and Small Producer credits.
Mr. Stickel stated that the department was developing a
presentation that would walk through all the details of
production tax calculation for delivery at a later date.
Co-Chair Stedman agreed to discuss his questions at a later
date. He asked if Mr. Stickel was referring to the order of
operations.
Mr. Stickel affirmed that the department was updating the
presentation and would go into as much detail on production
tax as the committee would like.
Co-Chair Stedman thought the corporate tax structure was an
important topic. He thought it would be good for new
members and staff to gain a basic understanding of the
order of operations and complexities of the tax structure.
10:16:20 AM
Mr. Stickel looked at slide 22, "Petroleum Detail: North
Slope Petroleum Production Forecast," which showed a line
graph depicting the forecast for oil production on the
North Slope for the next ten years. There was a high case
and low case shown for the next ten years. In general, the
production forecast showed a decline in FY 22 of 8 percent
to 440,000 barrels per day. The decline was largely due to
not doing much development drilling in 2020 due to low
prices and the COVID-19 pandemic. For FY 23 and beyond,
production was expected stabilize and increase slightly to
reach 482,000 barrels per day by FY 30. The increase was
based on an assumption that drilling resumed in existing
fields and new fields cam online. He used the example of
new fields including Greater Moose's Tooth 2, Pikka, and
Willow. He explained that the official forecast shown on
the graph was a "most likely" value taken from a range of
possible outcomes. He commented on the uncertainty as shown
in the high and low cases on the graph.
Mr. Stickel noted that there had been a question the
previous day about differences in DOR versus the DNR
forecast. There were two key differences in the numbers the
departments produced. He explained that for the Revenue
Sources Book, DOR took the DNR forecast and updated it with
actual production figures that were available. Another
difference was how natural gas liquids were accounted for.
In its revenue forecast, DOR assumed that 10,000 barrels
per day of natural gas liquid would be shipped from Prudhoe
Bay to Kuparuk, to be used in a large-scale enhanced
recovery project. The natural gas liquids were considered
produced for royalty purposes and were included in
production numbers from DNR. Conversely, for tax purposes,
DOR did not consider the natural gas liquids produced until
they flowed into the pipeline and the 10,000 bpd were not
included in the forecast being presented.
Co-Chair Stedman asked Mr. Stickel to consider the
political impact of the new presidential administration on
the production forecast. He thought there was concern that
the administration may try to hinder Willow and other
projects, which could significantly hinder the state and
its partners. He was very concerned about the restrictive
policy directional change that could be forced upon the
state.
10:20:00 AM
Senator Wielechowski asked what sort of tax deductions were
allowed by the state on federal properties such as Willow
and Pikka.
Mr. Stickel clarified that Pikka was on state land and
Willow was located within the National Petroleum Reserve
which was federal land. He noted that the same production
tax applied to all production within the state regardless
of the land type. He reiterated that the department would
be bringing a presentation before the committee in the near
future that would address deductions in greater detail.
Co-Chair Stedman asked Mr. Stickel to refresh everyone's
memory about differences in oil credits, stimulus, or
offsets. He considered differences due to ownership.
Senator Wielechowski asked about incumbent producers on
federal lands such as Willow - he understood that the
company could write the project off against any Prudhoe
Bay, Kuparuk or Alpine taxes at a rate of about 35 percent.
Mr. Stickel stated that for an existing producer was
investing in new production, the calculation for production
tax was a slope-wide calculation. To achieve a 35 percent
value for the investment, it would require quite high oil
prices. He would address the nuances in the forthcoming
presentation.
Co-Chair Stedman thought Senator Wielechowski was
referencing the base tax versus the corporate income tax.
He suggested Mr. Stickel consider ensuring clarity of the
various tax levels for each corporation. He discussed
write-offs for development expenditures. He thought the
time frame affected the economics of the decision. He
wanted the upcoming presentation to clear up some
misconceptions.
10:24:25 AM
Senator von Imhof recalled the passage of SB 111 three
years previously, which had established ring-fencing. The
provision affected how various companies could apply or
deduct certain expenses from one well to another well. She
was sure Mr. Stickel and the department would address some
of the provisions passed in SB 111 that still affected how
taxes were being collected.
Co-Chair Stedman thought the forthcoming presentation would
clear up some misconceptions about the oil and gas tax
structure.
Mr. Stickel spoke to slide 23, "Petroleum Detail: Changes
to North Slope Petroleum Production Forecast," which showed
a line graph which compared the fall forecast to the spring
2020 forecast. He observed that the overall changes shown
on the graph were fairly minor. He pointed out that the
forecast had been reduced slightly for FY 21 and FY 22
based on lower levels of activity. The FY 22 reduction was
4 percent lower than the spring forecast. The FY 23 to FY
25 forecast had been increased partly due to the impact of
delayed activity and revised expectations for new
development. The long-term forecast was slightly lower than
the spring forecast, but there was a lot of uncertainty in
the out years as shown on the previous slide.
10:26:44 AM
Mr. Stickel referenced slide 24, "Petroleum Detail: North
Slope Allowable Lease Expenditures," which showed a line
graph that depicted how allowable lease expenditures had
changed over the past decade along with a 10-year forecast.
The data reflected costs of production reported on tax
returns that were deducted in the net profit calculation in
the production tax. Company spending was also an important
measure of current and planned investment in Alaska.
Mr. Stickel cited that in FY 20, North Slope capital
expenditures were $2.6 billion and operating expenditures
were $2.9 billion, signifying the second year of increases
but still below the middle of the last decade. For FY 21,
there were dramatic cutbacks in spending, but there were
some signs of recovery. He expected FY 21 total North Slope
spending to be down by $1.6 billion from the prior year.
Capital expenditures were forecast to increase in FY 22 and
FY 23 as companies invested in major new developments while
also resuming drilling major fields. In a longer term there
was expected stabilization of a little over $2 billion per
year in capital expenditures. Many of the reductions over
the last year for operating expenditures were expected to
be permanent as companies reduced costs. There was a small
increase mid-decade with the addition of costs for new
fields that would come online.
Senator Wielechowski understood that lease expenditures
included those that happened on federal land. He asked how
many of the expenditures took place on federal land.
Mr. Stickel did not have a breakdown of expenditures on
federal versus state land at hand. He offered to provide
the information at a later time. He affirmed that the
amounts shown on slide 24 represented all allowable lease
expenditures across the North Slope, which would include
state, federal, and private land.
Co-Chair Stedman pondered whether the root of Senator
Wielechowski's question was if there was allowable lease
expenditure deduction, was there a severance tax to come
against for the field.
Senator Wielechowski was trying to determine the impacts of
the Biden Administration decisions. He was curious how many
lease expenditure tax write-offs were being allowed on
federal lands.
Co-Chair Stedman asked for Mr. Stickel provide the
information to the committee. He asked if Mr. Stickel would
include any information highlighting impact of potential
changes by the Biden Administration.
10:30:38 AM
Mr. Stickel turned to slide 25, "Petroleum Detail: North
Slope Transportation Costs," which showed a line graph
depicting the changes in North Slope transportation costs
per barrel over time. He detailed that the costs, also
known as neck-back costs, reduced the value of oil for both
tax and royalty purposes. The transportation costs included
all costs of getting oil to market, including feeder
pipeline tariffs, the Trans-Alaska Pipeline tariff, and
anchor transportation costs. For FY 20, the average
transportation cost for ANS oil was $8.15/bbl. The forecast
was $9.21/bbl for FY 21, and $9.91 for FY 22, increasing to
about $11/bbl by FY 30. The increases for the following two
years were largely a function of lower oil production in
the pipeline and further out the increases were a function
of oil production, inflation, and a greater portion of
production being subjected pipeline tariffs.
Co-Chair Stedman had noticed there had been a lot of notice
within financial periodicals regarding lenders not wanting
to lend to entities dealing with hydrocarbon extraction,
particularly in Alaska. He wondered if the commissioner had
any comment and how damaging the issue might be to the
state's development prospects.
Commissioner Mahoney thought what was happening in the
finance community regarding North Slope investment was
extremely disappointing. She emphasized that the state
operated the fields with extreme care for the environment,
and she wondered if the message was widely communicated.
She thought it was difficult to say how the situation would
impact future investment, which was a function of return on
investment and how a project would fit within a potential
investor's portfolio. She thought that the state could work
to impact or change the messaging to convey that the state
was a very environmentally sound developer.
Co-Chair Stedman was concerned about final investment
decisions about Willow and Pikka and did not want to have
spent massive amounts of credit. He asked the department to
get back to the committee with information about the two
areas. He asked about the financial exposure the state
might be facing if the Biden Administration blocked the
projects. He asked for ideas as to how to help clear the
outstanding cash credits the state owed. He referenced a
bond package that did not go forward due to constitutional
issues and was interested in hearing ideas about how to pay
the tax credits.
10:36:06 AM
Commissioner Mahoney stated that the issue of tax credits
was important to the department and to the governor. She
stated the department was actively looking at two different
proposals to pay down the liability quicker. She noted that
the statutory payment was included in the FY 22 proposed
budget to pay off the FY 22 component.
Co-Chair Stedman asked about the amount of the statutory
payment in the budget.
Commissioner Mahoney thought the amount was $60 million.
Mr. Stickel thanked the committee for the opportunity to
present. He looked forward to returning and discussing oil
taxes in detail.
Co-Chair Stedman asked Mr. Stickel to work with the
committee on updating some of the slides. He offered to
work with the department on the order of operations
information. He reiterated importance of the public
understanding of the process and thought the tax structure
was one of the most complicated in existence.
Co-Chair Stedman discussed the agenda for the following
day. He shared that the committee was forming budget
subcommittees.
ADJOURNMENT
10:39:56 AM
The meeting was adjourned at 10:39 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012821 DOR Fall 2020 Revenue Fcst Presentation.pdf |
SFIN 1/28/2021 9:00:00 AM |
DOR Fall Revenue Forecast |
| 012821 DOR Treasury Graphs GeFONSI-SBRF.pdf |
SFIN 1/28/2021 9:00:00 AM |
DOR 2020 Fall Revenue Forecast |
| 012821 Slides for SFIN Response 2020.01.28 Hearing.pdf |
SFIN 1/28/2021 9:00:00 AM |
DOT Fall 2020 Revenue Forecast |
| 012821 DOR Letter for SFIN Response 2020.01.28 Hearing.pdf |
SFIN 1/28/2021 9:00:00 AM |
DOT Fall 2020 Revenue Forecast |