Legislature(2023 - 2024)SENATE FINANCE 532
01/31/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Administration Response to Prior Meetings: Department of Natural Resources | |
| Administration Response to Prior Meetings: Department of Revenue | |
| Administration Response to Prior Meetings: Office of Management and Budget | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
January 31, 2023
9:00 a.m.
9:00:31 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:00 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
John Crowther, Deputy Commissioner, Department of Natural
Resources; Adam Crum, Commissioner, Department of Revenue;
Dan Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue; Pam Leary, Director,
Treasury Division, Department of Revenue; Neil Steininger,
Director, Office of Management and Budget, Office of the
Governor; Cori Mills, Deputy Attorney General, Office of
the Attorney General, Department of Law; Senator Cathy
Giessel.
SUMMARY
ADMINISTRATION RESPONSE TO PRIOR MEETINGS
DEPARTMENT OF REVENUE
DEPARTMENT OF NATURAL RESOURCES
OFFICE OF MANAGEMENT and BUDGET
^ADMINISTRATION RESPONSE TO PRIOR MEETINGS: DEPARTMENT OF
NATURAL RESOURCES
9:02:20 AM
JOHN CROWTHER, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, (DNR) referred a letter from DNR (copy on file):
Capital expenditures
We understand the Department of Revenue (DOR) provided
information responsive to this during and after their
hearing on the revenue forecast. Below, we provide
information that is publicly available with respect to
historical and future expenditures on the North Slope.
Although DNR does have access to information regarding
capital expenditures of some projects, this
information is subject to confidential treatment
defined under AS 38.05.035(a)(8)(D).
A. Historical expenditures
DOR reports that the allowable capital
expenditure on the North Slope for fiscal year
2022 was $1.4 billion. Source: Revenue Sources
Book, page 44. (source:
http://tax.alaska.gov/programs/documentviewer/vie
wer.aspx?1761r.)
B. Future expenditures
For the next two fiscal years, the forecasts for
capital expenditures are $2.3 billion and $2.7
billion, respectively. (source: Revenue Sources
Book, page 44. (source:
http://tax.alaska.gov/programs/documentviewer/vie
wer.aspx?1761r.)
Pikka:
Capital expenditures are estimated at $2.6
billion. Annual operating expenditures are
estimated at $150 million. Source: Santos
Media Release (source:
https://www.santos.com/wp-
content/uploads/2022/08/Santos-announces-
Pikka-FID1.pdf)
Willow:
ConocoPhillips: Cost to develop estimated at
approximately $8 billion (no breakdown of
expenditures into operating and capital)
(source:
https://static.conocophillips.com/files/reso
urces/fact-sheet-willow-final.pdf)
BLM Northern Economics Inc. (consultant)'s
estimation of Willow expenditures: Drilling
capital expenditures range from $3.6 billion
to $3.9 billion. Facilities capital
expenditures range from $4.5 billion to $5.4
billion. Operating expenditures range from
$4.6 billion to $4.9 billion. Source: Willow
Master Development Plan, Environmental
Impact Statement, Volume 6: Appendices E.8
through E.16, August 2020 (source:
https://www.arlis.org/docs/vol1/BLM/2020/118
3900266/Willow_MDP_FEIS-v6.pdf)
Other developments:
ConocoPhillips plans to invest $25 billion
of capital for the period 2020 2030.
(source:
ttps://www.petroleumnews.com/pntruncate/3130
99022.shtml)
No public information is available for
capital expenditures for CRU Narwhal CD8,
MPU Raven Pad, and KRU Nuna Torok. These
were the three other "key future projects"
presented on slide 7 of the Department's
presentation.
9:06:47 AM
Senator Bishop wondered whether the drilling plan was over
the life of the project.
Mr. Crowther replied that it was a holistic assessment of
the project life.
Co-Chair Stedman asked for an overview of the royalty and
how it was produced and split.
Mr. Crowther replied that the Willow project was in the
Natural Petroleum Reserve-Alaska (NPRA), which was federal
lands to the west of the Prudhoe Bay unit. He shared that
the royalty percentage was allocated 50 percent between the
federal government in the general federal treasury; and 50
percent went to the state of Alaska, but was allocated to
the Community Impact Assistance fund primarily under
current state and federal law. He stated that the revenues
deposited into that fund went through the legislature and
grant application process in local communities on the North
Slope.
9:08:29 AM
Co-Chair Stedman surmised that there was no cash flow into
the treasury itself, and the impacted communities applied
for grants that would normally exceed the 50 percent
royalty.
Mr. Crowther agreed. He stated that, historically, there
were not significant revenues in the fund, so the
applications sometimes exceeded the availability of funds.
He remarked that there was an anticipation that an
increasing amount of funds on a regular basis would be
going into that fund. He felt that the funds would
significantly increase with the Willow project.
Co-Chair Stedman stated that there had been some confusion
on the cash flow to the general fund, so he pointed out
where the money would be directed in the states coffers.
9:10:38 AM
Mr. Crowther continued to refer from the letter from DNR:
Smith Bay development status
Petroleum News reported in May of 2022 that the
Smith Bay Company planned to pursue unitization
and drilling in 2023. A unit formation
application was received by the Division of Oil
and Gas in October 2022. It has not been deemed
complete, pending data submittals in support of
the application, so it has not yet been publicly
noticed for comment.
Two wells have been drilled in the Smith Bay
lease block, though they have not been tested.
The Smith Bay Company has purchased and analyzed
seismic surveys for the area in the interest of
future exploration. Their stated plan of
exploration under the application is to drill
during the 20252026 winter season. The
application cover letter has been attached to
this letter.
Senator Bishop wondered whether there was a new company
operating the wells.
Mr. Crowther replied that that the current operator was
identified as a Smith Bay company, and believed that there
were some transactions affecting the ownership and control
of the corporate entities managing the prospect. He agreed
to follow up with further information.
Mr. Crowther continued to discuss the letter from DNR:
When confidential information becomes public
Information received by DNR and requested to be
held public under AS 38.05.035(a)(8)(C) and (D)
does not ever become public under law. This
includes the information collected from operators
in support of production forecasts, as well as
any information in support of lease and unit
plans of exploration, development, and
operations. This longstanding statute is in place
to protect sensitive commercial information that
would deter investment and activity in Alaska if
released.
Data received under the effectively repealed AS
43.55.025 tax credit program is released on a
varying schedule (210 years). (see available
data). DNR anticipates data under the program
will continue to be released on a rolling
schedule in the years ahead until all periods
have expired. Data received by the Alaska Oil and
Gas Conservation Commission (AOGCC) for
development wells is released one month after
completion, or two years after completion for
exploration wells. Note that well data for the
Smith Bay wells (CT-1 and CT-2) was released in
January 2020. (see AOGCC data website). Operators
can request extended confidentiality in limited
circumstances described in law at AS 31.05.035(c)
and applicable regulations.
The Department of Revenue may have tax-related
financial data it can release in a limited form
in accordance with federal law.
9:15:59 AM
Co-Chair Stedman noted that there had been concerns about
the disclosure rules, so the public can see what is
happening with the state funds. He felt that maybe the
credit laws could be changed, in the event that the credit
discussion occurred in the future.
Mr. Crowther continued with the letter from DNR:
Cumulative volume of future North Slope projects
The sum of the volume wedge for the "Under
Evaluation" or "UE" category shown in the chart
on slide 14 is 531.9 million stock tank barrels
of oil (mmstbo) over 10 years.
9:20:06 AM
Co-Chair Olson wondered whether the $19 billion was in
reference to only Prudhoe Bay.
Mr. Crowther stated that the undervaluation was meant to
capture all projects, including additional development
drilling in existing fields.
Mr. Crowther referred to a spreadsheet (copy on file) to
compare with the points highlighted in the letter from DNR:
Facility capacity status
Attached please find a table describing facility
capacity status of major North Slope units. The
following is an explanation of the data
collection:
1) The facility throughput limitations with
regards to oil, gas, and water are estimated
using public information; if not available,
are estimated based on historical peak rates
from the AOGCC database, in case of the
historical production showing decline or
flat trends.
2) Some facilities still have upward trends
in water or have produced very little water
up to date. Historical peak rates might not
reflect the true facility capacity, so those
estimates are not given (indicated in the
table by a question mark).
3) Production from fields with multiple
facilities is aggregated to field level due
to the interconnectivity between facilities
and no clear way of assigning production
volumes from certain wells to a specific
facility for a given period. For example,
Prudhoe Bay Unit.
4) Estimation of facility capacity is based
on historical peak rates and so may not
reflect the real nameplate capacities of the
respective facilities and fields, but rather
our best estimate if the facility could
deliver those volumes historically. These
rates may or may not be achievable under
present conditions. Furthermore, operators
may remove equipment from service if their
forecast shows historically high rates may
never be achieved again, and it is not cost-
effective to keep them in service.
Co-Chair Stedman wondered whether it was possible to
increase 500,000 barrels a day to 1 million barrels per day
with the current constraints.
Mr. Crowther replied that there were a variety of factors
to ensure optimization of output.
Co-Chair Stedman surmised that a factor could be because of
the mix of oil and gas in the output.
Mr. Crowther agreed.
Co-Chair Stedman asked for a rundown of the facility
limitations.
Mr. Crowther addressed the column on the slide that related
to the facility limitations. He stated that gas and water
were constrained in the Prudhoe Bay field. He remarked that
the operations of managing both gas and water in a field
were significantly complex in a facility like Prudhoe Bay.
He remarked that water management required a variety of
steps, and each step could be affected by many factors.
Co-Chair Stedman wondered whether the Prudhoe Bay
processing facilities had been enhanced by an increased
flow of oil.
Mr. Crowther replied in the affirmative.
Mr. Crowther explained continued to address the limitations
on the facilities.
9:33:21 AM
Co-Chair Stedman asked that the presentations include the
facility limitations. He felt that it was important to
understand the complicated factors that go into oil
production and output.
Mr. Crowther agreed.
9:34:21 AM
AT EASE
9:36:17 AM
RECONVENED
^ADMINISTRATION RESPONSE TO PRIOR MEETINGS: DEPARTMENT OF
REVENUE
9:37:15 AM
ADAM CRUM, COMMISSIONER, DEPARTMENT OF REVENUE, introduced
himself.
9:38:06 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, discussed the
presentation, "Fall 2022 Forecast Presentation Follow-up
Senate Finance Committee" (copy on file). He highlighted
slide 2, "Unrestricted Investment Revenue: POMV Transfer
Forecast, Inflation Adjusted."
Co-Chair Stedman noted the lowering of the actual
purchasing power.
Mr. Stickel replied that examining the issue in real terms
showed that the percent of market value (POMV) would be
fairly stable, whereas the nominal terms showed an increase
over time.
Co-Chair Stedman stated that it would be better to focus on
the increase, because expenditures were expected to
increase.
Mr. Stickel pointed to slide 3, "Unrestricted Investment
Revenue: POMV Transfer Forecast, High and Low Case." He
stated that the slide showed a high and low case for the
transfer. He remarked that the forecasted distribution of
potential returns was provided by the Permanent Fund
Corporation investment consultant, Callan and Associates.
He stated that the numbers had been run through a
statistical analysis, which generated a ninetieth and tenth
percentile for potential transfers to the general fund. He
noted that the low case had a flat transfer in nominal
terms, and the high case had an transfer growth even more
than the official forecast. He noted that it was still a
fairly stable revenue source as it related to a more
volatile source such as oil revenue.
9:40:03 AM
Co-Chair Stedman wondered why there was no divergence for
FY 24.
Mr. Stickel stated that the POMV calculation was based on
the ending balance of the permanent fund in the first five
of the last six fiscal years. He explained that using a
five-year average provided stability to the transfer to
help filter out some of the volatility.
Co-Chair Stedman felt that it was an important concept as
it relates to predictability of the budget. He noted that
the POMV was roughly half of the revenue.
Senator Wilson wondered why the low case scenario looked
higher than the forecast from the previous slide.
Mr. Stickel replied that comparing slides 2 and 3 showed a
separate representation of nominal versus real terms.
Co-Chair Stedman felt that adding in the inflation
adjustment would result in a more similar result.
Mr. Stickel agreed to further examine that issue.
Senator Bishop noted that the slide would like much
different if there was not the addition of $9 million into
the corpus of the fund.
Mr. Stickel displayed slide 4, "Petroleum Detail:
Historical North Slope and Brent Futures Oil Prices." He
remarked that the slide showed a comparison of the forecast
and several oil price outlook sources.
Co-Chair Stedman stated that the chart was requested
because of the common focus on future price. He stressed
the consideration of accounting for the possibility of
running out of cash.
Mr. Stickel stated that the futures market was best
representation of a most likely case, but agreed that it
was within a wide range of outcomes due to oil price
volatility.
9:46:54 AM
Co-Chair Stedman noted that there was a desire to see the
industry be profitable at $60 per barrel, but the slide
showed profitability at around $80 per barrel.
Mr. Stickel addressed slide 5, "Petroleum Detail: Oil Price
Forecasts." He stated that the slide showed a comparison of
the fall forecast to the futures market outlook and an
average outlook from industry analysts.
Mr. Stickel looked at slide 6, "Petroleum Detail: UGF
Relative to Price per Barrel (without POMV), FY 2024." He
stated that the chart showed the sensitivity of UGF revenue
relative to oil price.
Mr. Stickel discussed slide 7, "Petroleum Detail: UGF
Relative to Price per Barrel (without POMV), FY 2024FY
2026." He stated that the slide reflected the numbers in
slide 6, but in table form.
Co-Chair Stedman recalled that the information was only
recently included in the Revenue Sources Book.
Mr. Stickel pointed to slide 8, "Petroleum Detail: Changes
to North Slope Petroleum Production Forecast, FY 2020FY
2026." He shared that the slide showed a more narrow y-axis
with a wider outlook to show the direction of the
production forecast in the upcoming five years.
9:51:07 AM
Mr. Stickel looked at slide 9, "Petroleum Detail: Changes
to North Slope Petroleum Production Forecast, FY 2020FY
2026." He also displayed slide 10, "Petroleum Detail:
Capital Lease Expenditures." He stated that the slides were
a breakout between deductible and nondeductible
expenditures.
Co-Chair Stedman asked about what would happen to the
nondeductible expenditures.
Mr. Stickel responded that the deductible lease
expenditures were used as part of the current year tax
calculation and impact current year tax revenues. He stated
that any nondeductible lease expenditures turned into a
carryforward annual loss. He stated that those could be
used to offset the two-year tax cut.
Senator Bishop noted the seven year timeline for the
carryforward loss.
Mr. Stickel explained that the carryforward lease
expenditures could be carried forward indefinitely. He
stated that the unused items would see a reduction, which
was called a down lift that reduced them in value by ten
percent.
Co-Chair Stedman queried the time value in money on that
issue.
Mr. Stickel replied that adjusting for the impacts of
inflation or cost of capital would show that the real value
of those expenditures decreased over time.
9:55:27 AM
Co-Chair Stedman stressed that it was in the industrys
best interest to use those expenditures sooner rather than
later.
Mr. Stickel agreed.
Co-Chair Stedman remarked that there might be questions on
the forward accumulation of those credits.
Mr. Stickel addressed slide 11, "Petroleum Detail:
Operating Lease Expenditures." He noted that the vast
majority of operating expenditures were expected to be
considered deductible expenditures, because most of the
operating costs were the cost of operating units in current
production.
Mr. Stickel pointed to slide 12, "Petroleum Detail: North
Slope Allowable Lease Expenditures." He stated that the
Department of Labor and Workforce Development (DOLWD) had a
current forecast for oil and gas employment. He stated that
in FY 23 the forecast was 700 jobs, and a FY 30 forecast
showing 9060 jobs.
Commissioner Crum invited Ms. Leary to address the
responses.
9:58:19 AM
PAM LEARY, DIRECTOR, TREASURY DIVISION, DEPARTMENT OF
REVENUE, discussed a letter from the tax division (copy on
file):
1. Provide information about management fees for
Treasury-managed funds, similar to the information
provided for the Alaska Retirement Management Board
(ARMB) and Permanent Fund in the Revenue Sources Book.
According to the Treasury Division, total costs for
managing non-ARMB assets in FY 2022 were $4.0 million.
On June 30, 2022, the net asset value of these assets
was $9.4 billion, costs were approximately 4.2 basis
points (0.042 percent) of net assets.
Co-Chair Stedman asked for a definition of basis points.
Ms. Leary replied that a basis point was one one-hundredth
of one percent.
10:00:57 AM
AT EASE
10:02:29 AM
RECONVENED
10:02:47 AM
Ms. Leary referred to the response letter from the DOR
(copy on file):
1. Provide historical information on the asset
allocation and performance of the Power Cost
Equalization fund and additional information to the
Co-chairs to assist in evaluating the future
investment of the fund.
As requested, Attachment 1 presents 5 years of
quarterly target and actual asset allocations as well
as quarterly performance compared to benchmarks.
Average annual performance over the past 5 years
ending was 2.43 percent, slightly ahead of the
benchmark of 2.42 percent.
Additionally, to assist in evaluating future
investment of the fund, Treasury is preparing
information for the Co-chairs on prospective return,
risk, and the impact of downside return scenarios on
spending using both 3-year smoothing and 5-year
smoothing. Treasury just received updated 2023 capital
market assumptions and it will take some additional
time to incorporate them.
10:05:17 AM
Co-Chair Stedman remarked that there would be a future
presentation on Power Cost Equalization (PCE).
Ms. Leary looked at Item to of the letter:
2. Did the restructuring of airport system debt extend
the amortization period? What was this savings due to?
Amortization changes, lower interest rates, or
something else?
Bond refinancing or refunding are used by state and
local governments to achieve debt service savings on
outstanding bonds. In some cases, the refunding of
bonds can also be issued to removed or bond covenants
or to restructure debt service payments. In this case,
through authorization from the State Bond Committee
and the AIAS, in August 2021, AIAS issued $85.5
million of Series 2021 A, B, and C revenue refunding
bonds, which in conjunction with the contribution of
$40.0 million of cash and prior debt service funds on
hand of the AIAS, defeased/refunded $154.4 million of
par of then outstanding AIAS revenue bonds. The
transaction resulted in an $81.8 million gross
reduction in total scheduled debt service payments
between FY2022 and FY2036 and net present value
savings of approximately $24.9 million associated with
the refunding portion. The transaction was structured
to frontload maximum benefit of airline rate
reductions over the first two years in order to
provide immediate pandemic relief support to AIAS
customers. The restructuring of outstanding debt of
the airport system reduced future debt service
payments from FY2022 through FY2036 without extending
the amortization. Debt service savings from the
restructuring were realized due to lower interest
rates, and the cash contributions of the airport
system.
Co-Chair Stedman noted that the state did not extend the
term.
Ms. Leary pointed to Item 3:
3. Are there any GeFONSI funds that are having
problems or are doing really well?
There are currently 185 funds that are invested within
the GeFONSI funds. The Treasury manages the GeFONSI as
one investment fund and each fund that is allowed to
receive earnings by statute is assigned earnings on a
daily basis. The Treasury does not, however, analyze
how every individual fund within the GeFONSI is being
used by agencies. Rather, it is the Division of
Finance, the Office of Management and Budget and
Legislative Finance that monitor balances to ensure
that the funds are not over appropriated.
Co-Chair Stedman noted that there was normally a briefing
on the Legislative Finance Division (LFD), to point out any
red flags and also fund balances.
Ms. Leary pointed to Item 4:
4. How many other funds have asset allocations like
the Alaska Higher Education Investment fund?
There are five funds with the State's highest
risk/return asset allocation, and they are the Power
Cost Equalization Fund, The Public Schools Trust Fund,
The Alaska Higher Education Investment Fund, the
Education Endowment Investment Fund, and the Illinois
Creek Mining Reclamation Fund. All five funds are
invested in the same underlying asset class building
blocks, but they are not commingled at the fund level
and do not need to have the same asset allocation.
Ms. Leary looked at Item 5:
5. How exactly is a benchmark decided? Are we using
the right ones?
Asset class benchmarks are selected to best represent
the risk and return that could be produced by
passively investing in each underlying asset class.
The State used the following industry-standard
benchmarks for each asset class:
The process for selecting these benchmarks was
transparent and independent and ultimately the fund
fiduciary went through a diligent process to make sure
they were the right benchmarks. All of the benchmarks
are subject to ongoing scrutiny by compliance,
independent consultants, and investment advisors.
Fund benchmarks are calculated using a combination of
the asset class benchmarks and each fund's asset class
target weights over time. Performance measurement is
the responsibility of Treasury's middle
office/compliance group and is independent of the
investment process.
Co-Chair Stedman asked about the background on the Russell
3000.
Ms. Leary replied that the Russell 3000 were common
institutions that were known for index management.
10:11:11 AM
Co-Chair Stedman surmised that it was 3000 of the largest
funds by capitalization.
Ms. Leary agreed.
Co-Chair Stedman stressed that his questions were mostly to
provide information.
Ms. Leary stated that the benchmarked asset classes were
used as building blocks for the fund.
Co-Chair Olson queried a tolerance used to called it a
missed benchmark.
Ms. Leary replied that Attachment 1 showed the change in
target.
10:15:17 AM
Co-Chair Olson wondered whether it fit into the category of
a basis point.
Ms. Leary replied in the affirmative.
Co-Chair Hoffman wondered whether the terminologies were
broadly the same when it comes to equities.
10:17:13 AM
Ms. Leary replied that they equated to one another.
Co-Chair Hoffman wondered whether there was also an impact
on bonds.
Ms. Leary replied in the affirmative.
Co-Chair Stedman wondered whether there was a difference
between global equity and international equity.
Ms. Leary replied that there were different indexes, and
global equity was used in the response.
Ms. Leary pointed to Item 6:
6. Which funds have missed benchmarks?
All of the underlying asset classes outperformed for
the 1-year ended 12/31/2022. This is not common and is
the byproduct of a combination of investment skill and
fortuitous cash flow timing.
Both broad market fixed income and short-term fixed
income had the highest outperformance and benefited
from skillful active investment management by Treasury
staff during a difficult market environment. Staff has
a long history of adding value by actively managing
these portfolios and expects to continue to do so
moving forward.
The equity strategies are invested in index funds that
are expected to closely track their respective
benchmarks. However, cashflow timing can result in
modest deviations from the benchmark over time that
are outside Treasuries control. During 2022 these
differences turned out to be positive, but this is not
expected to repeat with frequency. As you can see in
the following schedule, relative performance was
positive for the 1-year period, but there were some
negative deviations over other periods:
At the fund level, GeFONSI II was the only fund that
did not outperform since it had a higher level of
initial cash due to cash transfers at the start of the
fiscal year. All of the other funds benefitted from
the outperformance of the underlying asset class
building blocks discussed above. The breadth of this
outperformance is uncommon. Treasury manages these
portfolios with tight risk controls and material
underperformance is not expected moving forward, but
modest levels of both outperformance and
underperformance due to cashflow timing is normal.
10:20:40 AM
Co-Chair Stedman looked at PCE, he noted the increase in
allocation with a reductio in bonds. He wondered whether
there was a discussion on making allocations slower or
faster depending on the market conditions.
Ms. Leary replied that asset allocations were made at the
start of a quarter, and there was an attempt to make those
changes as soon as possible.
Co-Chair Stedman queried the trigger of the asset
allocation in the first quarter of FY 23.
Ms. Leary replied that the change occurred in response to
the legislation.
Co-Chair Hoffman queried the prior investment rule before
the prudent investment rule.
Ms. Leary replied that the target at that point when the
change was made was that the fund should receive a 5
percent return target, which had been lowered from 7
percent.
10:25:11 AM
Co-Chair Stedman requested an examination of the fourth
quarter to first quarter from FY 21 to FY 22.
Ms. Leary agreed to provide that information.
Co-Chair Hoffman asked for a comparison of the prudent
investment rule for the PCE to the investment rules of the
permanent fund.
Ms. Leary agreed to provide that information.
Co-Chair Stedman felt that the benchmarks and target
returns should be included in that response.
Co-Chair Hoffman looked at Item 4, and wondered whether the
categories were in the prudent investment rule. He also
asked when the other funds went into the criteria of the
prudent investment rule.
Ms. Leary replied that the prudent investment rule was
adhered to by the commission of the Department of Revenue
(DOR) when reviewing and setting asset allocations for the
fund.
Co-Chair Hoffman wondered whether the funds were set by law
to follow the prudent investment rule, as was outlined for
PCE in the year prior.
Ms. Leary agreed to provide that information.
Co-Chair Stedman asked for a definition of the prudent
investment rule.
Ms. Leary replied that the prudent investor rule was
written in statute, and detailed how a prudent would invest
a specific fund based on various factors. She agreed to
outline the prudent investor rule.
10:33:20 AM
Co-Chair Hoffman stressed that he and Co-Chair Olson were
the most impacted by PCE. He remarked that there was a 20
percent loss to the fund after requiring the prudent
investor rule to PCE.
Ms. Leary pointed to Item 7:
7. Provide a copy of the Cash Deficiency MOU.
Cash in the State's General Fund is essential to
ongoing day-to-day operations. Without cash in the
fund, the State cannot pay its bills and the daily
operations of the State come to a halt. The State's
daily cash need can be as much as $200 million in a
single day. For purposes of this operating plan, a
cash deficiency situation exists any time the General
Fund cash balance is projected to, or does, drop below
$400 million and is expected to stay below $400
million for five days. In the 1990s, the Departments
of Law, Revenue, Administration, and the Office of
Management and Budget jointly developed a Cash
Deficiency Operating Plan to accomplish this goal.
This document is updated as needed. The most recent
update is provided as Attachment 2.
Ms. Leary pointed to Item 8:
8. Provide timing of the call for POMV disbursement.
The POMV amount and how it will be used to pay out
dividends and support operations is known at the start
of the fiscal year based on the budget, as approved by
the legislature. For fiscal year 2023, $1.68 billion
was transferred on 7/15/22 to pay dividends. The
remaining $1.68 billion will be transferred to the
general fund during the second half of the fiscal year
and is somewhat dependent on when transfers from the
general fund to the CBRF occur. For fiscal year 2024,
the total POMV draw will be $3.52 billion. The
Governor's budget reflects $2.47 billion to be used to
pay dividends leaving $1.05 billion for operations.
The timing of the transfer will again depend on cash
projections as the new fiscal year approaches.
Ms. Leary discussed Item 9:
9. The presentation mentioned 14 defined benefit
funds. Could you let us know what these 14 funds are?
The 14 defined benefit funds include the following:
Public Employees' Retirement System (PERS)
• Retirement Pension Trust
• Retirement Health Care Trust
• Occupational Death and Disability*
• Police and Fire Occupational Death and
Disability*
• Retiree Medical Plan*
• Health Reimbursement Arrangement*
Teachers' Retirement System (TRS)
• Retirement Pension Trust
• Retirement Health Care Trust
• Occupational Death and Disability*
• Retiree Medical Plan*
• Health Reimbursement Arrangement*
Judicial Retirement System (JRS
• Retirement Pension Trust
• Retirement Health Care Trust
National Guard/Naval Militia Retirement System (MRS)
• Retirement Pension Trust
*Defined benefit component of the defined
contribution plans
10:38:26 AM
Co-Chair Stedman wondered whether there was reference to
the old legislative pension that was only in place for one
year thirty years prior.
Ms. Leary replied the item related to the occupational
death and disability funds for Public Employees' Retirement
System (PERS).
Ms. Leary pointed to Item 10:
10. Provide a break down the $1.37 billion balances on
slide 13.
The $1.37 billion as of June 30, 2022, represents the
cash balance of $910 million in the Constitutional
Budget Reserve Fund (CBRF) and $410 million in the
Statutory Budget Reserve (SBR) fund. The accrued
balances of these funds in the state's Annual
Comprehensive Financial Report (ACFR) available for
appropriation on June 30, 2022, are in the process of
being audited. Based on discussions with the Division
of Finance and Office of Management and Budget (OMB),
the accrued balance of the CBRF as of June 30, 2022,
is estimated to be $2.2 billion, resulting from
transfers from the general fund to the CBRF for fund
surpluses and sweep amounts. The SBR is expected to
have an accrued balance of $370 million as of June 30,
2022
Commissioner Crum looked at Items 11 and 12:
11. Provide a minimum balance or minimum range for the
Constitutional Budget Reserve Fund (CBRF).
This is an OMB policy and will be addressed
accordingly in their response/presentation.
12. How would rating agencies view a $500 million CBRF
balance?
The rating agencies view of the State's credit rating
profile as very unique compared to other States within
the U.S due to the State's economic concentration and
dependence on a volatile oil and gas industry. That
being said, rating agencies have viewed the State's
rating outlook as stable/positive due to its financial
standing (i.e. low debt profile, reduction in pension
obligations and other postemployment benefits
obligations including the State's sizeable
constitution budget reserve).
^ADMINISTRATION RESPONSE TO PRIOR MEETINGS: OFFICE OF
MANAGEMENT and BUDGET
10:43:30 AM
NEIL STEININGER, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, introduced himself.
10:45:29 AM
AT EASE
10:47:23 AM
RECONVENED
10:47:50 AM
CORI MILLS, DEPUTY ATTORNEY GENERAL, OFFICE OF THE ATTORNEY
GENERAL, DEPARTMENT OF LAW, addressed a question about
statehood defense:
Senator Olson asked what the success rate is for
litigation relating to statehood defense, and what the
running total is for such costs.
Currently, Department of Law has many cases still
pending in district courts or on appeal, please see
attached list of current litigations funded with the
multi-year appropriations for Statehood Defense. Out
of all these cases four were lost in the district
court and are currently on appeal (attachments 3 and
4).
10:50:22 AM
Co-Chair Olson queried the percentage of decisions made
where there was a loss at the district level.
Ms. Mills replied that three were in the appeals court.
Co-Chair Olson stressed that the case was important because
it related to local control.
10:54:14 AM
Co-Chair Hoffman queried the cost related to the case.
Ms. Mills replied that the estimate was approximately
$150,000.
Co-Chair Hoffman wondered why the funds would be asked for
now, rather than a supplemental request.
Ms. Mills replied that the success rate on all cases was
not yet known, but the navigability cases were generally
successful. She stated that it was difficult to know when a
case would suddenly be expensive.
Senator Bishop stated that he would ask his question
offline.
Senator Kiehl requested approximate price tags on the
multiyear needs.
Ms. Mills replied that only certain cases fit within the
appropriations. She agreed to provide an estimate.
10:58:32 AM
Co-Chair Stedman noted that the state defense had many
angles. He asked about returning state artifacts.
Ms. Mills agreed to look at the specific language.
Co-Chair Stedman wondered whether there was a new
appropriation for $10 million.
Mr. Steininger replied in the affirmative.
Co-Chair Hoffman noted the change in direction on whether
the funds should be included in the operating budget.
Mr. Steininger agreed.
Co-Chair Hoffman felt that the operating budget may be a
better approach, in order to fully examine the specifics of
the request.
Co-Chair Stedman stated that the remaining responses from
OMB would be presented at a later meeting. He discussed the
following day's agenda.
ADJOURNMENT
11:02:37 AM
The meeting was adjourned at 11:02 a.m.