Legislature(2023 - 2024)SENATE FINANCE 532
02/06/2024 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: State Debt Update | |
| Administration Response to Prior Meetings: Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 6, 2024
9:02 a.m.
9:02:37 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator 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
Fadil Limani, Deputy Commissioner, Department of Revenue;
Ryan Williams, State Debt Manager, Department of Revenue;
Senator Cathy Giessel; Dan Stickel, Chief Economist,
Department of Revenue.
SUMMARY
PRESENTATION: STATE DEBT UPDATE
ADMINISTRATION RESPONSE TO PRIOR MEETINGS: DEPARTMENT OF
REVENUE
Co-Chair Stedman commented that the committee would review
state debt and related issues, and then hear the Department
of Revenue's (DOR) response to previous questions raised by
the committee.
^PRESENTATION: STATE DEBT UPDATE
9:04:05 AM
FADIL LIMANI, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself.
RYAN WILLIAMS, STATE DEBT MANAGER, DEPARTMENT OF REVENUE,
introduced.
Mr. Limani discussed a presentation entitled "State of
Alaska - Credit Rating Outlook and Debt Summary - February
6, 2023," (copy on file).
Mr. Limani looked at slide 2, "Introduction
Fadil Limani
Deputy Commissioner, DOR
•Appointed Deputy Commissioner of the DOR in January
2023
•North Slope Borough School District CFO 3 years
•North Slope Borough - Deputy Director of Finance 7
years
•KPMG LLP 5 years
Ryan Williams
Debt Manager, DOR
•Alaska Department of Revenue 14 years
•Alaska Department of Revenue State Debt Manager 1
year
•Alaska Municipal Bond Bank Authority Executive
Director 1 year
Mr. Limani spoke to slide 3, "Framework
• State's Bond Rating Overview
• Recent Bond Rating Meetings
• Credit Rating and Market Feedback
• Current Municipal Market Update
• State's Debt Profile
• State's Debt Capacity
Mr. Limani referenced slide 4, "State's Bond Rating
Overview - Bond Rating General Information
• A bond rating is a way to measure the
creditworthiness of a bond, which corresponds to
the cost of borrowing for an issuer. These
ratings typically assign a letter grade to bonds
that indicates their credit quality.
• Bond ratings are provided by third-party
independent rating agencies such as:
Standard & Poor's Global Ratings
Moody's Investors Service
Fitch Ratings Inc.
Kroll Bond Rating Agency
• Rating Agencies conduct a thorough financial
analysis of the issuer based on their published
Public Finance Criteria that generally focus on
different but similar primary credit factors
Government Framework
Financial Management
Economy
Budgetary Performance
Debt and Liability profile
• Bond ratings are critical to alerting investors
to the quality and stability of the bonds and the
issuer
Higher rated bonds "investment grade" provide
lower risk and lower borrowing cost
Lower rated bonds "non-investment grade" provide
for higher risk and higher borrowing cost
Mr. Limani recounted that it was not until the Credit
Rating Agency Reform Act of 2006 that the Securities and
Exchange Commission (SEC) started regulating rating
agencies for criteria and requirements. He discussed the
importance if bond ratings.
9:07:37 AM
Mr. Limani turned to slide 5, "State's Bond Rating
Overview
Importance of Credit Ratings to State of Alaska
• Cost of Borrowing on Capital Improvement Projects
• State Bond Rating Benefits and or Impacts the Alaska
Municipal Bond Bank and underlying issuers
• Positive Bond Rating attract national and global
investors to the State
Mr. Limani pointed out that the state had not done a new
bond authorization in over a decade. He noted that there
were 34 participants that partook in the Alaska Municipal
Bond Bank. The rating from the bond bank was generally a
notch lower than the state. He mentioned the continuing
disclosure requirements.
Mr. Limani considered slide 6, "State's Bond Rating
Overview," which showed a table of the bond rating scale.
He noted that the state had engaged a rating agency that
had assigned an AA, which the state had to publicly
disclose to the market. He continued that the investors
looking at the data were able to see the uptick in the
states rating. He noted that a higher rating attracted
investor groups to do business in the state.
9:10:51 AM
Co-Chair Hoffman asked which communities were eligible to
borrow from the Alaska Municipal Bond Bank.
Mr. Willams noted that he was also the Executive Director
of the Alaska Bond Bank. He explained that all political
subdivisions of the state were eligible to borrow through
the bond bank. Additionally, joint action agencies, joint
insurance agencies, the University of Alaska, and regional
health organizations were eligible to apply to the bond
bank.
Mr. Limani looked at the bond rating scale example on slide
6. He relayed that Moodys had a different scale than the
other agencies. He drew attention to the rating
descriptions and noted that ratings above a BBB or AAA was
considered investment grade, or prime grade quality of
credit. A BB and below was considered a low investment
grade or junk bonds.
Mr. Limani displayed slide 7, "State's Bond Rating
Overview," which showed a table demonstrating the states
bond rating from the four different bond rating agencies.
He highlighted historical ratings in the middle of the
slide. He pointed out a rating of BBB in 1961, followed by
a rating of A in 1971. Fitch ratings was engaged in 1994
and had assigned an AA rating. On July 20, 2023, the new
Kroll Bond Rating Agency had assigned a stable outlook with
an AA rating. There had been movements in the states
rating overall, attributed to the states financial
position. He pointed out recent changes with the states
credit profile at the bottom. The agencies other than Kroll
had changed the rating from negative to stable, or
stable to positive.
9:14:13 AM
Mr. Limani highlighted slide 8, "State's Bond Rating
Overview," which showed another depiction of the state's
credit rating, but in comparison to other states. He noted
that there was no ranking shown for the state compared to
other states, but the department planned to work on a
ranking in the near future.
Co-Chair Stedman observed that California had similar
ratings as Alaska. He asked why the state was not rated
better than California when Alaska had almost $80 billion
in the Permanent Fund. He asked how the fund interacted
with the rating agencies.
Mr. Limani noted that rating agencies looked at different
attributes, and Alaska had a unique credit profile.
California had a diverse economy in comparison, including a
statewide sales tax and income tax and more diverse
industry. He noted that Alaska had much higher reserves on
a per capita basis, which offset Californias advantages
somewhat.
Co-Chair Stedman asked if the rating agencies gave any
recognition for the ability to implement an income tax if
needed.
Mr. Limani relayed that the agencies looked at the volatile
movement of the price of oil and considered revenue
measures (such as tax initiatives) the state could
implement in the case of a deficit.
Co-Chair Hoffman referenced SB 26, which gave the authority
to implement the Percent of Market Value (POMV) draw from
the Permanent Fund.
Mr. Limani thought that rating agencies were not sure how
the POMV draw would work initially, but currently looked
favorably on the transfer and considered how much would go
towards dividends and how much would go towards the General
Fund.
9:18:32 AM
Senator Bishop asked if rating agencies factored reserves
in Prudhoe Bay into calculations.
Mr. Limani affirmed that rating agencies looked at the
economic profile of the state, including proven reserves.
He noted that upcoming slides would address the topic and
particularly the Pikka and Willow projects.
Senator Bishop asked if Mr. Limani would agree that South
Dakota looked [economically] healthy.
Mr. Limani agreed and noted that South Dakota had an AAA
credit rating.
Senator Bishop pointed out that South Dakota had an income
tax, sales tax, and a defined benefit retirement program.
Mr. Limani looked at slide 9, "Recent Bond Rating
Meetings":
Bond Rating Upgrade
JUSTIFICATION
Very Strong Financial Position
• Ample Reserves: Constitutional Budget Reserve
Fund (CBRF) $2.7 billion, Perm Fund Balance $76
billion
Low Debt Load and No New Authorization
• Well Funded Pension Obligations
Fiscal Discipline and Budget Management
Budget Surplus for main operating fund
Ample Oil and Gas Natural Resources
Estimated to have 52 billion barrels of technically
recoverable oil and over 300 trillion cubic feet of
undiscovered, technically-recoverable natural gas,
plus heavy and viscous oil and shale oil and gas
• Large Mineral Deposits
• 12% of the world's coal
• 33.5% of the world's zinc
• 3.5 % of the world's gold
• 2.0% of the world's lead
• 1.8% of the world's silver and copper
Mr. Limani mentioned the goal of raising the states credit
rating, which he had shared with the DOR Commissioner Adam
Crum. He thought some agency's evaluation criteria did not
reflect the uniqueness of the state. He stressed the
importance of being able to accurately articulate the data.
He discussed the amortization of the states GO bond debt.
He commented that the states pension was well-funded
compared to other states.
9:22:39 AM
Co-Chair Stedman mentioned the debt load and asked the
department to provide the committee with a summary sheet of
debt owed by the state, ranked by magnitude. He
acknowledged that the state had a very low GO obligation
bond issuance in the $600 million range. He noted that over
the previous 13 years, the state had paid about $6.3
billion in Public Employees' Retirement System (PERS)
payments, and the liability had gone up about $100 million.
He contrasted that the Teachers' Retirement System (TRS)
payments had dropped in liability by about $1.5 billion. He
commented on the magnitude of cash flow. He referenced the
Alaska Public Debt book (copy on file) and suggested that
the requested information include a table of debt for
municipalities.
Mr. Limani agreed to provide the information, and to
include the information in future presentations.
Co-Chair Stedman noted concern in the past several years
that some of the councils and assemblies did not grasp
refinancing of bonds and debt. He thought the department
could counsel communities on paying off assets.
Senator Bishop referenced the large mineral deposits listed
on slide 9, and asked if the items were known and
technically recoverable.
Mr. Limani affirmed that the slide listed known deposits.
Co-Chair Stedman thought the point could address the
states oil resources as well.
9:27:13 AM
Mr. Limani addressed slide 10, "Recent Bond Rating
Meetings-Continued":
Bond Rating Upgrade
JUSTIFICATION
Prominent Resource Development Projects on the
Horizon
• Willow Development Project $10 billion investment
with projected revenues of $6.3 billion to the State
and more than $5 billion to local municipality and
impacted communities
• Pikka Development Project - $4.6 billion in
operating expenditures and $4.3 billion in capital
expenditures
• Alaska Liquified Natural Gas (LNG) Project - $41
billion initial investment, billions of dollars in
projected State revenues
• Letters of intent currently in place for front-end
development capital
Other Economic Development Prospects
• Carbon Credits and Carbon Capture, Utilization, and
Storage (CCUS)
• Alternative Energy Transition Projects Estimated
Capital Outlay $105-$175 billion
• Grid Resilience and Innovation Project (GRIP) $206
million Grant from US Department of Energy
Commitment towards a sustainable and long-term
comprehensive Fiscal Plan
Diversification of State Revenues
• Only 24.7% of revenues is based on oil and gas
• 15.1% of revenues is based on diverse world-wide
income
Mr. Limani discussed the carbon credit and utilization
proposals. He mentioned that the state had a third-party do
an assessment of the states alternative energy transition
picture for the following 30 years. He noted that the GRIP
project listed on the slide required a 100 percent match.
He noted that the POMV draw had helped diversify the
states revenue.
Senator Kiehl thought the POMV draw was materially more
than 15 percent of state revenues.
Mr. Limani did not have the forecast numbers but thought
the amount would be close to $3.5 billion for the following
few years.
Co-Chair Stedman clarified that Senator Kiehl was referring
to the last bullet on the slide that indicated 15.1 percent
of income was based on diverse world-wide income.
Mr. Limani explained that the figure was based on revenue
forecast numbers from the economic research group that
included oil and gas and investments.
Senator Kiehl thought there was a wide variety of outlook
items on the slide, some of which were similar to a "vision
board" rather than something that could be taken to a bank.
He asked how bond raters and analysts looked at the more
speculative items.
Mr. Limani relayed that ratings usually considered imminent
projects on the books such as the Willow project. Rating
agencies also liked to look forward to state actions
related to the economy and diversification.
9:33:23 AM
Senator Bishop was curious as to the commitment from the
administration regarding a long-term comprehensive fiscal
plan. He wanted his question to be directed at the
commissioner.
Mr. Limani deferred the question. He commented that the
POMV had provided stability over the period it had been in
effect. He continued that agencies wanted to see stability
in oil and gas forecasts and budget policies.
Co-Chair Stedman asked Mr. Limani to discuss the volatility
he mentioned.
Mr. Limani relayed that rating agencies understood that no
one could predict the oil price with a high degree of
certainty. However, he pondered what tools the state had to
mitigate volatility. He mentioned the concept of using a
smoothing effect for oil prices over a 5-year period.
Co-Chair Stedman understood that the department would be
bringing the concept forward for consideration after
further analysis.
Senator Wilson followed up on Senator Kiehl's question
regarding projects on the horizon. He asked about the $41
million spent on the Alaskas Liquid Natural Gas (AK LNG)
Project. He thought it was disappointing to continue to see
the potential project when it was not likely to happen.
Mr. Limani explained that the scope of the project had
changed from considering geopolitics and the need and
demand for natural gas, coupled with a loan guarantee
program from the federal government. He thought there had
been a lot of interest for the project to move forward,
which was why the project was included on the slide and why
it had been monitored by rating agencies.
Senator Wilson asked what project Mr. Limani was referring
to specifically. He asked about support from the federal
government.
Co-Chair Stedman relayed that the federal government had
offered to back loans from default risk for the AK LNG
Project.
9:38:09 AM
Co-Chair Hoffman had similarly grave concerns about the
prospect of the AK LNG line going forward. He thought the
project came forward every five or ten years. He referenced
multiple governors that had backed the project and noted
that the legislature had spent multiple months reviewing
the project. He knew the world was looking at natural gas
and thought the potential for the utilization of natural
gas as a long-term energy solution was more plausible, but
cautioned that in-state use would not mean billions of
dollars in projected state revenues. He thought the project
would resolve the question of energy for the Railbelt and
could considerably lower energy costs for the state.
Co-Chair Hoffman thought it seemed as though the companies
had done very little to bring the gas to market. He echoed
Senator Wilson's concerns and thought the state needed to
move in a different direction.
Senator Bishop suggested that the $41 billion listed on the
slide for the AK LNG Project be risk-adjusted for cost
overruns.
Mr. Limani advanced to slide 11, "Credit Rating and Market
Feedback
Initial Rating Agency Feedback
•The transfer from the Permanent Fund has been defined
through a Percent of Market Value statutory structure
and has been in place since FY2019
•Recent budgetary surplus and deposits to state
savings accounts, including the Constitutional Budget
Reserve Fund
•Significant reduction in state general fund spending
since 2013
•Improved oil price environment and significant
available natural resources under development
•Well Funded Pension Obligations including low debt
service outstanding
•Improved Alaska's Economic Demographics
Market Feedback on Recent Transaction
•Institutional investors "love" Alaskan paper, very
high-quality credit, highly secured
•More frequency in the market and larger bond
issuances
Mr. Limani mentioned the Willow and Pikka Projects in
reference to projects under development that were viewed
positively by rating agencies. He mentioned the POMV split
and a comprehensive long-term fiscal plan for the state. He
referenced a bond issuance for $33.5 million and feedback
from the institutional investors. He thought that the state
was viewed favorably anytime it issued bonds.
9:43:19 AM
Co-Chair Hoffman asked how much weight was given to the
fact that the governor, for the previous six years, had
proposed a full Permanent Fund Dividend (PFD) that was in
excess of $2 billion. He asked if the proposal played a
factor in the states credit ratings.
Mr. Limani thought that rating agencies looked at proposed
budgets and recognized that there was a deliberation
process before the final budget was put forward. He thought
agencies considered historical trends of budget values. He
commented on the budget growth since 2019, which had only
been 8 percent to 9 percent.
Co-Chair Hoffman pondered concerns about the administration
picking and choosing areas in which to follow the statutes.
He mentioned the Community Assistance Program (CAP), which
was not funded in the budget according to statute. He
considered that the legislature had trimmed the amount for
the PFD, but had included an additional $30 million for the
CAP. He did not think that the administration strictly
followed the law.
9:46:22 AM
Senator Bishop referenced the APFC board having discussed
the idea of collapsing the Earnings Reserve Account (ERA)
into the corpus of the Permanent Fund. He asked if the
rating agencies were aware of the topic and if the change
would create a higher credit rating.
Mr. Limani noted that Commissioner Crum had spoken on the
topic to the rating agencies the previous January. He
thought it was difficult to get an assessment from rating
agencies about hypothetical situations, but the agencies
had indicated that the change would engender a favorable
review.
Senator Kiehl asked Mr. Limani to address the bullet
"Improved Alaska's Economic Demographics." He referenced
population loss and migration.
Mr. Limani cited 2 percent job growth in the previous year,
which was higher than the U.S. average of 1.9 percent. The
state's unemployment rate was at 4.3 percent, which was
just slightly higher than the national average. He noted
that the state was tracking with the national average over
the previous decade. He cited wage growth at 6.5 percent
compared to 5.5 percent for the national average. There was
growth in the state's GDP, 4.6 percent. He considered an
increase in jobs of a little over 2.2 percent growth in the
previous year. The state was returning to pre-pandemic
numbers. He thought the economic numbers were making a
compelling case, particularly for Moodys.
Senator Kiehl acknowledged that the numbers were positive.
He pondered long-term debt obligations and the need for
progress.
9:50:03 AM
Co-Chair Stedman thought there had been a difference in the
governor's submitted budget and the budget that was
supported and passed by the finance committees. He recalled
that there had been some discomfort with many of the
reductions. He considered that if the legislature had
supported and adopted the submitted budgets, there would be
a different conversation taking place and the states
finances would be illiquid. He expected the legislature
would endeavor to pass a balanced budget, although with the
expectation of some uncomfortable decisions. He pondered
future options and going to the debt market to build
infrastructure. He mentioned having the time and ability to
respond to downward oil prices. He lauded the committee for
its fiscal restraint over the years.
Senator Merrick referenced Mr. Limani's several mentions of
credit agencies concern with the POMV split between the
PFD and state services. She asked what split the
administration would support.
Mr. Limani deferred the question to the governors office.
Co-Chair Stedman expressed understanding.
Mr. Limani wanted to comment about the budget from the
rating agencies perspective. He explained that rating
agencies recognized the budget process and made rating
decisions based on the final budget.
9:54:01 AM
Mr. Williams looked at slide 12, "Current Municipal Market
Update," which provided a market snapshot of current
interest rates. He noted that the slide data was from
December 15, 2023. He highlighted the chart on the lower
left of the slide, which showed the spread between
different rated credits. He noted that the market rates
were fairly compressed, but there was a difference of about
30 to 50 basis points between the different rating
categories.
Mr. Williams showed slide 13, "State's Debt Profile
Authorization Process
• All forms of State Debt are authorized first by law
May be a one-time issuance amount or a not-to-exceed
issuance limit in statute
General obligation bonds must then also be approved by a
majority of voters
o General obligation bonds are the only debt
secured by full faith credit and taxing authority
• All State Debt must be structured and authorized by
the State Bond Committee
Includes general obligation bonds, subject to
appropriation issues, & state revenue bonds
• The State Bond Committee determines method and timing
of debt issues to best utilize the state's credit and
debt capacity while meeting the authorized project's
cash flow needs
• The State has established other debt obligations
Reimbursement Programs
• The School Debt Reimbursement Program (SDRP) or HB
528 reimbursement, administered by the Department of
Education and the Department of Transportation,
respectively
o SDRP: Not currently authorized for new debt and
periodically funded (was most recently
partially funded in 2017, 2020 and 2022, and no
appropriation in 2021; however, supplemental
budget appropriations offset prior year
reductions)
Retirement Systems
• Unfunded actuarially assumed liability (UAAL) for
defined benefit employees is guaranteed by the
Constitution
• Annual payments on the UAAL of other employers is
reflected as State debt in the ACFR
• Some flexibility in how payments are made
9:57:24 AM
Senator Kiehl did not recall HB 528 and asked for more
detail.
Mr. Williams believed that the bill was listed in the
Alaska Public Debt book as the Capital Project
Reimbursement Program. He furthered that HB 528 became law
in 2002 or 2003 and included six municipalities, the
University, and one electric association. The program was
administered by Department of Transportation and Public
Facilities (DOT).
Co-Chair Stedman asked Mr. Williams to get back to the
committee with further detail on the program.
Mr. Williams referenced slide 14, "State's Debt Profile
Types of Alaska Public Debt
• State Debt
• State Guaranteed Debt
• State Supported Debt
• Unfunded Actuarial Accrued Liability (UAAL)
• State Supported Municipal Debt - Eligible for State
Reimbursement
• State Moral Obligation Debt
• State and University Revenue Debt
• State Agency Debt
• State Agency Collateralized or Insured Debt
• Municipal Debt
Mr. Williams explained that if one were to look at the
slide from a security profile, the items would go in order.
He explained that the state guaranteed debt was the
collateralized veterans mortgage program bonds issued
through AHFC with the states guarantee as a backing. He
noted that lease revenue debt and certificates of
participation were examples of state supported debt. He
noted that he would go over each item on the slide in
greater detail throughout the presentation.
Mr. Williams turned to slide 15, "State's Debt Profile
and noted that he had isolated the direct state debt as a
General Fund commitment, including GO bonds in the amount
of $577.24 million outstanding as of June 30. He cited that
subject-to-appropriation debt was lease revenue including
Goose Creek Prison and Certificates of Participation
(COPs). Lease debt also included a parking garage. The
total outstanding combined debt was $741.2 million, which
was a fairly aggressive paydown of state GO debt of about
77 percent over a ten-year period. The chart on the lower
right showed the principal and interest payments per year
through final maturity.
Co-Chair Stedman asked COPs.
Mr. Williams defined that COP signified certificates of
participation. In 2014 the state issued COPs for the
housing facility and sky bridge co-located with the Alaska
Native Medical Center to improve access for patients.
Co-Chair Stedman asked Mr. Williams to get back to the
committee with more information about COPs.
10:01:27 AM
Mr. Williams considered slide 16, "State's Debt Profile
which listed different types of Alaska public debt. There
was $41.3 million in the collateralized Veteran's Mortgage
Program bonds outstanding, which had an underlying state
guarantee. He highlighted state supported debt in COPs and
lease revenue bonds with state credit pledge and payment.
He looked at state supported municipal debt and the school
debt service program. Of the $650 million outstanding,
$433.6 million was associated with the state share. The
Capital project program had about $13.6 million
outstanding. The pension system had $3.52 billion
outstanding in actuarily accrued liability. State moral
obligation debt included the Alaska Bond Bank with a little
over $1 billion outstanding and the Alaska Energy Authority
with $204 million for a total of $1.22 billion. He cited
$237.7 million in outstanding debt for International
Airports Revenue Bonds. He noted that three years
previously there was a complete restructuring of the
airport system, which increased the strength of the debt
profile.
Co-Chair Stedman asked for Mr. Williams to get back to the
committee with more details on the pension liability which
he thought was about $6.5 billion. He thought some of the
items appeared different. He wanted the items on the slide
ranked by monetary value.
Mr. Williams displayed slide 17, "State's Debt Profile
which showed a table that was a continuation of revenue
debt. He pointed out that state University of Alaska debt
was $241.4 million, with a total of $479 million in state
revenue and University debt. He cited state agency debt,
which included AHFC, capital project bonds, Alaska
Railroad, Alaska Bond Bank, and Tobacco Settlement Asset
bonds outstanding. There was also state agency
collateralized or insured debt, which was also AHFCs
various mortgage revenue bonds.
10:04:54 AM
Mr. Williams highlighted slide 18, "State's Debt Profile
• General Fund (GF) Payment peaked in 2018 at
approximately $229 million
• FY2023 GF Debt service payments include
approximately $95.9 million in State General
Obligation (GO) and State Supported debt, and
approximately $81.2 million for State Supported
municipal debt
• $776.1 million in remaining debt service to maturity
of outstanding GO debt (principal + interest)
Mr. Williams reiterated that the state was on a fairly
aggressive payment schedule for GO bonds. The 2023 GF debt
service commitment was about $95.9 million for all state
supported debt, while the 2024 figure was $90.1 million. He
pointed out the chart on the bottom of the slide, which
compared GF supported debt to the statutory payment to PERS
and TRS. He pointed out that the payment totally eclipsed
the other forms of state debt payments.
Co-Chair Stedman noted that the committee had asked the
department to provide more information regarding the amount
of extra payments the state had to address the unfunded
liability. The committee had not yet received the numerics,
which were being calculated by the actuary. He pondered the
amount of support under the 22 percent to communities.
Mr. Williams looked at slide 19, "State's Debt Capacity
Debt Affordability Analysis
• Annual analysis required by AS 37.07.045 to be
delivered by January 31
• Discusses credit ratings, current debt levels,
history and projections
• Relies upon debt ratios, limit of 4% for directly
paid state debt, and 7% when combined with municipal
debt that the state supports
• Identifies currently authorized, but unissued debt
• Establishes refinancing parameters
• Determines a long-term debt capacity at current
rating level
• Discusses, but doesn't define, a capacity for short-
term debt
• The 2023-2024 analysis determined that the State had
a debt capacity of $1,400 million
Adjustments made to base analysis to account for
recognition of a percent of market value split for
PFDs vs state budget, special funding for PERS/TRS
and future budget uncertainty and volatility in the
State's revenue sources
10:08:25 AM
Co-Chair Stedman explained that the debt capacity of $1.4
billion did not signify that the state could afford to
spend a great deal more.
10:08:54 AM
Senator Wilson wondered if the administration planned to
have a conversation related to issuing bonds.
Mr. Limani shared that there had been some conversation
between DOR, the Office of Management and Budget (OMB), and
the governors office. The administration was looking at
energy-related projects, but nothing had been specifically
identified.
Co-Chair Stedman thought the obvious concern was that
increasing the debt burdened the operating budget going
forward.
Co-Chair Hoffman asked if the energy discussions Mr. Limani
referenced were statewide.
Mr. Limani answered "yes."
Mr. Limani showed slide 20, " Questions?
Contact:
Fadil Limani, DOR Deputy Commissioner
[email protected]
Ryan Williams, DOR Debt Manager
[email protected]
Co-Chair Stedman commented that the committee would most
likely invite the testifiers back before the end of the
legislative session. He mentioned upward pressure on the
states bond rating. He referenced the smoothing concept
mentioned earlier, and relayed that it was a topic of
interest for the committee.
Co-Chair Stedman thanked Mr. Limani and Mr. Williams.
10:11:41 AM
AT EASE
10:13:07 AM
RECONVENED
Co-Chair Stedman relayed that the committee would consider
a presentation from the Chief Economist for the Department
of Revenue.
^ADMINISTRATION RESPONSE TO PRIOR MEETINGS: DEPARTMENT OF
REVENUE
10:13:42 AM
DAN STICKEL, CHIEF ECONOMIST, DEPARTMENT OF REVENUE, spoke
to a presentation entitled Senate Finance Responses to
Follow Up Questions from January 18, 2024 Revenue Forecast
Presentation, and noted that the slides would address six
follow-up questions from the committee after the previous
presentation on January 18. He noted that the department
had provided a written response. He showed slide 2, which
showed the first follow-up question:
1. Provide an analysis showing revenue sensitivity to
oil prices over the next several years
Mr. Stickel showed slide 3, "Estimated Unrestricted Revenue
at Various Oil Prices," and noted that he had provided a
document with a range of oil prices from $20/bbl up to
$150/bbl over the ten-year forecast period. The document
looked at what the Unrestricted General Fund (UGF) revenue
would be if everything else was held the same as the fall
revenue forecast.
Co-Chair Stedman asked Mr. Stickel to discuss the effects
of an oil price of $60/bbl and the expectations for FY 25.
Mr. Stickel suggested moving on to slide 4 to address the
question. He explained that slide 3 was a screenshot of the
document that was provided to the committee. He noted that
the public could see the entire document as well as a
breakout of royalty and production tax revenue under a
range of oil prices.
Mr. Stickel showed slide 4, "Petroleum Detail: UGF Relative
to Price per Barrel (without POMV): FY 2025," which showed
how UGF for FY 25 would change with different oil prices.
He noted that the slide was a repeat of the slide that was
in the January 18 presentation. He cited that starting with
the forecast price of $76/bbl, forecast revenue was $2.65
billion of UGF before the POMV draw. He observed a bend in
the curve around $65/bbl, below which would have most
companies paid at the minimum tax floor. Once above the
$65/bbl range, there was progressively more state revenue
for each $1 increase in oil price.
10:17:28 AM
Mr. Stickel showed slide 5:
2. Provide an updated version of slide 18 that
contains correct dates
Mr. Stickel showed slide 6, "Petroleum Detail: Nominal
Brent Forecasts Comparison as of January 17, 2024," which
showed a corrected version of one of the slides shown in
the previous presentation. He noted that there had been a
typo in the slide. He clarified that the data in the slide
was updated, but the header had listed an incorrect date.
The correct date was shown on the current slide, which
showed a line graph depicting different oil price forecasts
over time. He commented that with updated data, the slide
would look much the same. The forecast was very similar to
what the futures market outlook would say.
Co-Chair Stedman explained that on roughly the 15th of
February, the committee would receive an update on the oil
price and revenue projections.
Mr. Stickel clarified that the department was targeting the
15th of March for the forecast update.
Mr. Stickel showed slide 7:
3. Provide a list of allowable capital expenditure
deductions for purposes of the oil and gas production
tax
Mr. Stickel showed slide 8, "Allowable Capital
Expenditures":
• Alaska's oil and gas production tax for North Slope
oil is based on a tax on production tax value (similar
to net profits) with a minimum tax floor.
• All allowable expenditures may be deducted in
calculating PTV in the year incurred. Excess lease
expenditures may be carried forward.
• In general, any direct costs of oil and gas
exploration and production
• Statutes specify exemptions/ exclusions - AS
43.55.165(e).
• Regulations further define allowable - 15 AAC
55.250 and 15 AAC 55.260.
• Capital expenditures: represent investments into
long term tangible assets
• In general, Alaska follows IRS guidelines in
determining what is considered a capital
expenditure.
• Examples: building facilities, buying equipment
with an expected life over one year, geological
or geophysical exploration, and some drilling
costs.
• Operating expenditures: any allowable lease
expenditures other than capital expenditures.
Mr. Stickel explained that the written response to the
committee had more detail than the bullets shown on the
slide.
10:20:47 AM
Mr. Stickel showed slide 9:
4. How much of the decline between the Spring 2023 and
Fall 2023 production forecasts for FY 2024 and FY 2025
was attributable to Prudhoe Bay?
Mr. Stickel turned to slide 10, "Comparison of Forecast
Production," which showed a table of ANS oil production
forecasts compared by area. The table had taken the data in
appendix C2 of the Revenue Sources Book (RSB) and compared
the information between the fall forecast and previous
spring forecast. He noted that the Prudhoe Bay portion of
the table was included in the first three categories. He
pointed out that the total decline in forecast production
in the initial production area of Prudhoe Bay. The decline
was partly offset by increases in the Prudhoe Bay
satellites and Greater Point McIntyre Area (GPMA). Within
the two units operated by Hilcorp, there was some ability
to shift around drilling plans. He pointed out the total
production decline from FY 24 to FY 25, while other large
contributors were in the National Petroleum Reserve in
Alaska (NPRA) and the Point Thomson area. The primary
reason for all of the declines, according to DNR, was a
reevaluation of the expected productivity and decline
trends for new and existing wells. He pondered new activity
and DNRs evaluations for future drilling.
Co-Chair Stedman asked Mr. Stickel to elaborate on NPR-A
and the drop from the spring forecast.
Mr. Stickel noted that he would defer the details to the
experts at DNR that produced the forecast. He commented
that the biggest part of the decline was the Greater
Mooses Tooth (GMT) Unit, and thought production had not
come in as strongly as previously predicted. He considered
previous iterations of the forecast that showed strong
performance on some wells and some of the production that
had since fallen.
10:24:29 AM
Mr. Stickel showed slide 11, "Comparison of Forecast
Production," which showed a table that took the information
from slide 10 and summarized it by grouping different units
together. He noted that for FY 25 the central group
(including Prudhoe Bay) was a relatively small component of
the change to the forecast. The bigger components of the
change were in the West group, which included GMT, Colville
River, and Point Thomson fields.
Mr. Stickel turned to slide 12:
5. How much did the State of Alaska pay out for
purchase of tax credits over the life of the program?
Mr. Stickel noted that as mentioned in the January
presentation, all outstanding tax credits for state
purchase had now been retired. He had indicated he would
come back with more information about the total credits
purchased over the life of the program, which was shown on
the following slide.
Mr. Stickel advanced to slide 13, "Total Oil and Gas
Credits Purchased," which showed a table with credits
purchased by the state for the North Slope and non-North
Slope areas. The total credits purchased were just under
$4.1 billion over the life of the program. There was an
estimated distribution of about $2.5 billion for activity
on the North Slope and about $1.5 billion for non-North
Slope activity, which was primarily Cook Inlet and a small
part in Middle Earth.
Co-Chair Stedman asked if the slide covered all the credits
or just purchased credits.
Mr. Stickel answered that the table included all the
credits that were purchased by the state.
Co-Chair Stedman asked if there were other credits.
Mr. Stickel affirmed that there were also credits against
liability, and there were some credits that were earned and
transferred to other companies. The credits could have been
available for purchase but were ultimately applied against
a different companys tax liability.
Co-Chair Stedman observed that the credits listed were but
a portion of the total credits.
Mr. Stickel agreed.
Mr. Stickel noted that the information on slide 13 came
from Table 8.4 of the Revenue Sources Book (copy on file).
He explained that it would not be an arduous task to create
the same slide using data for the credits against liability
if it would be helpful to the committee.
10:27:37 AM
Mr. Stickel showed slide 14:
6. Provide and estimated North Slope production
eligible for Gross Value Reduction (GVR) and non-GVR
production for each year in the 10-year forecast.
Further, provide a breakout of that production by
landowner and the associated state royalty revenue
Mr. Stickel spoke to slide 15, "ANS GVR and Non-GVR
Production by Land Ownership," which showed a table. He
explained that the Gross Value Reduction (GVR) was an
element of the production tax that allowed for a tax
benefit for new production and for the first three to seven
years of production from the field (depending upon oil
prices). He looked at the table and noted that the
information was in a table in the RSB, but the slide broke
down the information by land type. He noted that the
federal land included both the NPR-A as well as other
federal land including offshore production in the North
Star field. Privately held leases on the North Slope were
primarily Native corporation lands, whether in the NPR-A or
the states land.
Mr. Stickel observed that the general trend was that
beginning in FY 25 and FY 26 one could see the GVR-eligible
fields started to decline as some of the fields started to
graduate after having three to seven years of benefit
before starting to pay under the regular production tax.
Towards the end of the 10-year time horizon, the GVR number
picked up quite a bit with new fields coming online in
particular Pikka and Willow. The two major fields were
reflected in all three land types.
10:30:08 AM
Senator Kiehl looked at the production ramping up on the
GVR-eligible oil and observed that it was on federal land.
He asked if the state was giving a bigger production tax
benefit on federal land where the funds could not be
recouped in royalty.
Co-Chair Stedman asked for Mr. Stickel to give a brief
explanation of land ownership to provide more clarity to
the public while addressing Senator Kiehl's question.
Mr. Stickel explained that the state had several ways to
benefit from oil and gas. State production tax, corporate
tax, and property tax applied regardless of the landowner.
For royalty on state land, the state received the full
amount. For royalty on federal land, the state received a
share. Within the NPR-A in particular, the states royalty
was 50 percent and was required to be used for the benefit
of impacted communities. For private land, the state did
not receive a royalty directly but levied a tax as part of
the production tax in the amount of 5 percent of the
royalty interest. He noted that there was a slide in the
original presentation from January 18, which included
royalty provisions for each land type.
Mr. Stickel explained that the GVR provisions (as part of
the production tax) were the same regardless of whether the
production came from state or federal land. He continued
that as Senator Kiehl noted, the GVR-eligible oil predicted
for federal land was the largest component towards the end
of the ten-year forecast. The increase had to do with the
large size of the Willow Project, which was the largest
component.
Senator Kiehl thought if the state was going to provide a
sweetener, the state should benefit.
10:33:19 AM
Mr. Stickel showed slide 16, "ANS GVR and Non-GVR
Production by Land Ownership," which showed a table that
assigned revenue numbers to the streams of production
presented in the previous slide. The royalty on state land,
including UGF share as well as royalty that went to the
Permanent Fund and School Fund. Federal land shared royalty
was included, most of which was in the NPR-A and had
restrictions related to providing the funds to impacted
communities. There was a small portion which was
unrestricted. For illustrative purposes, the table showed
estimated revenue the state received from private
royalties.
Co-Chair Stedman commented on the nuance and complexity of
the states oil and gas tax system.
Co-Chair Stedman discussed the agenda for the following
day.
ADJOURNMENT
10:35:50 AM
The meeting was adjourned at 10:35 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 020624 2023---2024-Alaska-Public-Debt.pdf |
SFIN 2/6/2024 9:00:00 AM |
|
| 020624 S.FIN Credit Outlook and Debt Summary 02.06.24.pdf |
SFIN 2/6/2024 9:00:00 AM |
|
| 020224 DOR Response to SFIN Fall 2023 RSB Presentation 01.30.24.pdf |
SFIN 2/6/2024 9:00:00 AM |
|
| 020224 DOR Slides to SFIN Fall 2023 RSB 02.02.24.pdf |
SFIN 2/6/2024 9:00:00 AM |
SB 2 |