HOUSE FINANCE COMMITTEE January 20, 1995 1:30 P.M. TAPE HFC 95-1, Side 2, #000 - end. TAPE HFC 95-2, Side 1, #000 - 110. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:32 P.M. PRESENT Co-Chair Hanley Representative Kohring Co-Chair Foster Representative Martin Representative Mulder Representative Navarre Representative Brown Representative Parnell Representative Grussendorf Representative Therriault Representative Kelly ALSO PRESENT Representative Cynthia Toohey; Representative Joe Green; Representative Alan Austerman; Representative John Davies; Representative David Finkelstein; Representative Kim Elton; Mike Greany, Director, Legislative Finance Division; Mike Greany, Director, Legislative Finance Division; Wilson Condon, Commissioner, Department of Revenue; Dr. Charles Logsdon, Chief Petroleum Economist, Department of Revenue; Fred Fisher, Fiscal Analyst, Legislative Finance Division; Susan Taylor, Fiscal Analyst, Legislative Finance Division; Jetta Whittaker, Fiscal Analyst, Legislative Finance Division; Dana LaTour, Fiscal Analyst, Legislative Finance Division; Kathryn Daughhetee, Fiscal Analyst, Legislative Finance Division; Virgina Stonkus, Fiscal Analyst, Legislative Finance Division. SUMMARY LEGISLATIVE FINANCE DIVISION STAFF INTRODUCTIONS/OVERVIEW OF FY95 REVENUE AND EXPENDITURES DEPARTMENT OF REVENUE DISCUSSION FALL FORECAST AND UPDATE LEGISLATIVE FINANCE DIVISION - FY95 REVENUE AND EXPENDITURES MIKE GREANY, DIRECTOR, LEGISLATIVE FINANCE DIVISION 1 introduced the Legislative Finance Division fiscal analysts. He reviewed the areas of expertise for each analyst: * Virgina Stonkus - operating budget & statewide coordination, Department of Environmental Conservation and Department of Fish and Game; * Jetta Whittaker - Department of Revenue, Department of Commerce and Economic Development and Permanent Fund; * Kathryn Daughhetee - Department of Public Safety, Department of Corrections, Department of Law and Alaska Court System; * Dana LaTour - University of Alaska, Department of Labor, Department of Community and Regional Affairs and Department of Education; * Susan Taylor - Department of Administration, Department of Health & Social Services and Mental Health Trust Income Account; and * Fred Fisher - Department of Transportation and Public Facilities, Department of Natural Resources, Department of Military and Veterans Affairs, capital budget, Constitutional Budget Reserve, and spending plan. Mr. Greany provided members with a summary of the FY 95 Legislative Spending Plan (Attachment 1). He reviewed Attachment 1: * Page 1 of Attachment 1 compares the FY 95 adjournment plan with FY 95 actuarials; * Page two of Attachment 1 contains a brief description of the differences between the adjournment plan and the current spending level; * Page three contains an analysis of projected balances for the Constitutional Budget Reserve; and * Page four lists state of Alaska fund balances. Mr. Greany noted that the adjournment plan estimations were based on the spring revenue forecast which projected the price of oil to be below $14.00 dollars a barrel. He observed that the average spot oil price has been $16.40 a barrel. He concluded that increases in the price of oil, over last year's spring revenue forecast, will reduced the amount needed from the Constitutional Budget Reserve to fund the FY 95 operating budget shortfall. The current projected draw down from the Constitutional Budget Reserve is $120.0 million dollars. He projected a "healthy" increase in the balance of the Constitutional Budget Reserve for FY 95. FRED FISHER, FISCAL ANALYST, LEGISLATIVE DIVISION noted that updated January numbers, used to calculate the current 2 spending level, have not been audited and may change. He observed that adjustments were made based on settlements which were received and deposited into the Constitutional Budget Reserve during FY 95, the latest unrestricted revenue forecast from the Department of Revenue, actual values involved in the capitalization of the new Mental Health Trust Fund and recalculations based on the fall forecast by the Department of Revenue. Mr. Greany commented that the amount needed for FY 95 supplementals is unknown. He observed that supplemental appropriations have averaged $84.0 million dollars over the past six years. He expounded that potential supplemental requests total $78.0 million dollars. He pointed out that Governor Knowles estimated that $80.0 to $90.0 million dollars will be needed in supplementals for FY 95. He interjected that slightly under $60.0 million dollars will be needed to fund supplemental requests for flood disaster, Department of Corrections, fire suppression and oil and gas litigation. Co-Chair Hanley provided members with a memorandum from Mr. Greany detailing the potential FY 95 supplemental appropriation requests (Attachment 2). In response to a question by Representative Brown, Mr. Fisher explained that the spending plan was based on expenditures from the General Fund and the Mental Health Trust Income Account. He observed that capitalization of the new Mental Health Trust Fund from these sources are identified. Portions of the capitalization from the Constitutional Budget Reserve and the amount previously held in the Trust were not indicated. Mr. Greany pointed out that the mental health settlement has resulted in the elimination of the Mental Health Trust Income Account which was generated from 6 percent of the state's general fund revenues. Under the settlement, 6 percent of the state's general fund revenues will no longer be earmarked into the Mental Health Trust Income Account for mental health programs. State funds for mental health programs will be appropriated directly from the General Fund. Representative Martin expressed concern with supplemental requests from the Department of Law for oil and gas litigation and the Department of Natural Resources for fire suppression. He asked what could be done to monitor spending for flood relief. Mr. Greany replied that the Attorney General converted some of the Department of Law's contractual oil and gas 3 litigation effort to 10 in-house attorney positions. He noted that the Legislature is briefed in executive session by the Attorney General on matters concerning oil and gas litigation. Mr. Greany agreed to supply Representative Martin with the Department of Law's oil and gas supplemental requests over the past six years. Representative Navarre noted that the legislature has pointedly approved half year appropriations for the Department of Law, oil and gas litigation. He pointed out that the $1.3 billion dollar year to date settlement and the estimated $700.0 million dollar anticipated BP settlement over the next two years are the result of oil and gas litigation. DEPARTMENT OF REVENUE - DISCUSSION FALL FORECAST AND UPDATE WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE introduced Dr. Charles Logsdon, Chief Petroleum Economist, Department of Revenue. CHARLES LOGSDON, DR., CHIEF PETROLEUM ECONOMIST, DEPARTMENT OF REVENUE noted that legislators receive the Revenue Sources Book and the FY 1995 Petroleum Revenue Executive Update from the Department of Revenue. Dr. Logsdon referred to a series of charts provided to members of the Committee, by the Department of Revenue (Attachment 3). He reviewed charts of the Department of Revenue's 1994 fall forecast for unrestricted general fund revenues and Alaska oil production and oil prices. He also referred to charts which demonstrate the weekly average Alaska North Slope (ANS) oil production and average daily spot price. He noted the price difference of West Texas Intermediate (WTI) oil and ANS oil. Dr. Logsdon observed that revenue estimations for FY 95 were based on $16.39 bbl. The actual year-to-date average is $16.40 bbl. He predicted the state will have approximately $2.0 billion dollars a year in general fund unrestricted revenues until the year 2000. He warned that the low scenario falls below $2.0 billion dollars. Dr. Logsdon estimated that oil prices will not rise fast enough to offset the decline of Alaska's oil production. He observed that the higher the oil price the more likely that oil companies will invest additional funds in fields that are not currently economic and put more money into development. 4 Dr. Logsdon pointed out that page 3 of Attachment 3 outlines the Department's oil price forecasts over time. He noted that the low case scenario is at a flat $15.00 dollars a barrel of oil through time. In the mid case scenario the price of oil would rise modestly from $15.00 dollars a barrel to reach $20.00 dollars a barrel near the year 2002. He concluded that the mid case scenario is not unrealistic. Dr. Logsdon summarized fundamental points of the world oil market that underline the forecast. He noted that the demand for oil is strong. He interjected that as the world economy grows the demand for oil increases. He recalled that the annual price of oil in 1994 was the worst the state of Alaska has experienced since 1980. He discussed the effect of world upheavals and politics on the price of oil. Dr. Logsdon referred to page 5 of Attachment 3. He noted that the Department estimated the year's out put of oil at 1.595 million barrels a day. The year to date production is 1.566 million barrels a day. He concluded that some of the shortfall may be made up. He concluded that the estimates, based on additional output due to the gas handling expansion at Prudhoe Bay, may have been overly optimistic. Dr. Logsdon reiterated that the FY 95 forecast was based on $16.39 bbl and the actual average price is currently at $16.40 bbl. Dr. Logsdon emphasized that "sweet" WTI oil generally commands a higher price than "sour" ANS oil. He observed that the demand for "sour" ANS oil has increased as refiners have made investments to run lower quality crude oils. Dr. Logsdon reminded members that oil prices have varied from $15.00 and $18.00 dollars a barrel of oil. He cautioned that the low price of $15.00 a barrel of oil should be kept in mind. In response to a question by Representative Martin, Dr. Logsdon noted that ANS oil will eventually be targeted solely for the west coast of the United States. At that time, ANS oil prices will be based on foreign oil prices. He expressed support for lifting the export ban. He observed that if the export ban were lifted the state's oil production would be more valuable. He estimated that there would be excess oil available for sale in 1995. (Tape Change, HFC 95-2, Side 1) Dr. Logsdon explained the difference in price between WTI 5 and ANS oil. He did not think that ANS oil would ever be transported abroad in foreign ships. In response to a question by Representative Therriault, Dr. Logsdon explained that the Department of Revenue bases its forecasts largely on the oil companies' development plans. Representative Hanley noted that oil revenues are not consistent. He emphasized the need for a stable revenue source in order to develop long range planning. ADJOURNMENT The meeting adjourned at 2:22 p.m. 6