GENERAL SUBJECT(S): LONG TERM FISCAL GAP DISCUSSION The following overview was taken in log note format. Tapes and handouts will be on file with the House Finance Committee through the 21st Legislative Session, contact 465-2156. After the 21st Legislative Session they will be available through the Legislative Library at 465- 3808. Time Meeting Convened: 1:45 P.M. Tape HFC 99 - 83, Side 1. Tape HFC 99 - 83, Side 2. Tape HFC 99 - 84, Side 1. PRESENT: X Representative G. Davis Co-Chair Therriault Representative Foster X Co-Chair Mulder X Representative Grussendorf X Representative Austerman X Representative Kohring X Representative Bunde Representative Moses Representative J. Davies Representative Williams ALSO PRESENT: DAVID TEAL, DIRECTOR, DIVISION OF LEGISLATIVE FINANCE; REPRESENTATIVE ETHAN BERKOWITZ; REPRESENTATIVE SHARON CISSNA; PHIL OKESON, LEGISLATIVE ANALYST, DIVISION OF LEGISLATIVE FINANCE; WILSON CONDON, (TESTIFIED VIA TELECONFERENCE), COMMISSIONER, DEPARTMENT OF REVENUE; CHARLES LOGSDON, (TESTIFIED VIA TELECONFERENCE), CHIEF PETROLEUM ECONOMIST, OIL AND GAS DIVISION, DEPARTMENT OF REVENUE; GREG WILLIAMS, DEPARTMENT OF LABOR. LOG SPEAKER DISCUSSION TAPE CHANGE 83-1 000 Co-Chair Mulder Convened the HFC meeting at 1:45 p.m. 079 PHIL OKESON, LEGISLATIVE ANALYST, DIVISION OF LEGISLATIVE FINANCE Spoke to the measurable goals of a long- term plan. The intent would be to identify the goals. He distributed a handout for the Committee. [copy on file] 149 Phil Okeson Highlighted long term issues and the current situation and how that would affect long term budgeting in the State. 201 Phil Okeson The second situation illuminates high oil prices. He spoke to the graph illustrating historical state revenues. He pointed out the volatility of oil prices and problems with production. 283 Phil Okeson Future projections do not change. These lines are slopping downward. The difference between the lines continue to grow closer together. 348 Phil Okeson Stressed that assumptions would be the key to the problem. The first assumption is a 3% inflation. That is about the same as the CPI. He questioned the growth rate in government. The second item is population growth which is projected to be 1.5%. A 2% projected population growth would be used for the dividend only. 479 Phil Okeson Continued, another scenario would indicate a permanent fund total return of 7.75%. 539 Phil Okeson Constitutional Budget Reserve total return of 5%. 5% if less than $3B and 8.1% if greater than $3B. 594 REPRESENTATIVE BERKOWITZ He asked the difference between the PFD and revenue stream. Are restrictions placed on the PFD 3/10%. 653 Phil Okeson Referenced the current situation revenues and expenditures (graph) . The deficit will grow significantly in the years to come. 716 Representative Grussendorf Asked if there was a slide that indicates the earnings off the permanent dividend? 742 Phil Okeson Stated that he looks for spikes which indicates that things are going bad for the unrealized gains. Under this assumption, there will continue to be revenues being placed into that fund. 804 Phil Okeson Spoke to the graph, which indicates various savings accounts which the State owns. The Permanent Fund corpus continues to grow. The first thing that will go will be the Constitutional Budget Reserve. How to fund the deficit will begin with spending the Constitutional Budget Reserve. The State can not touch the Permanent fund corpus by constitutional law. He projected that by 2005, the earnings reserve will be gone. Then the State will hit a wall 907 Phil Okeson Referenced that the graph showing the purchasing power of the current assets. To stay even with the rate of inflation, the purchasing power must stay the same. Deficit is growing each year. He asked how much could be funded through the savings account. At some point all that will be left is Permanent fund dividend corpus. 1012 Phil Okeson In out years, the State will continue to be paying out from the dividend. 1035 Phil Okeson Stated that the technical graph warns of coming problems. This graph indicates the unrealized gains realized. The dividend structure exasperates the problems. The realization of gains causes the dividend to rise. 1121 Co-Chair Mulder Asked about the 21% of realized gains of the unrealized structure. 1140 Phil Okeson Stated that it would vary according to what the market was doing. He recommended a prudent investor rule. 1163 Phil Okeson Spoke to high oil prices. What oil price would it take to bail us out of the situation? If oil went to $34/bbl and in fact rose to $61/bbl, although that would not be too possible. He believed that if oil revenue did jump, the deficit would start to come back. It is difficult to reach the production curve. 1259 Phil Okeson He outlined a graph at $34/bbl. A savings fund would be reasonable, however the Constitutional Budget Reserve would also start to go away. There is a production problem. 1321 Phil Okeson In order to maintain constant purchasing power, the actual projected savings begins to sloop downward. 1390 Phil Okeson This shows that the model is a structural problem. It will haunt the state year in and year out. There needs to be a long- term plan. There no longer will be a big savings and the State must tackle how the deficit can be attacked. 1456 Phil Okeson Cut costs; raise revenues; systematically use the State's savings accounts. 1481 Phil Okeson Goals of long term plan would be sustainability. State must solve the problem for a long time. Must decide what is fair today and would continue to work tomorrow. There needs to be stability. We need a plan that provides more stability. 1550 Phil Okeson Predictability of assumptions that can be used. Will the plan be able to fund the pfd's and the deficit? These are the goals to be addressed. 1580 Phil Okeson Sustainability has been addressed in the past has been inflation proofed. A calculation has caused over inflation proofing. What the State is trying to do is to protect the purchasing power of the assets. He asked what the time would be for sustainability. No other state in the union has assets like Alaska. There are other models that Alaska might consider. 1690 Phil Okeson The key is establishing a system that will allow the ride during the down time. Intergenerational equity is closely related to sustainability. All generations are held equal. Many ways to provide intergenerational equity. i.e. infrastructure will leave the next generation a sense of economy. Alaska has the ability to wipe out the salmon runs. Unique about AK is taking a non-renewal resource and turn it into renewal resources. 1865 Phil Okeson Decision tree. Does the State wish to maintain the purchasing power of the State financial assets. How much can be spent each year? What will the state do when the assets run out? To invest in infrastructure. There is the potential of messing it up. It is difficult to pick an infrastructure to do. That would be a policy call. The amount that can be spent each year is about $1.4 billion dollars in today $$. 2000 Phil Okeson It is important to remember that Alaska has lived in a great bull market. Now it is time to create a responsible portfolio realizing that it is important to save during the good years. Consider the inflation rate. It is important to inflation proof the assets. 2078 Phil Okeson The question is what are we going to do in the future. A reasonable amount to pull out of the fund would be 5% each year. Can the state live within that constraint. At this time, the state is short. How to make it work if it is sustainable. 2128 Phil Okeson Market volatility: There are mechanisms that will help smooth that out and bring stability. Important to make worse case scenarios. How does the plan stack up in the worse case scenario? Some plans will do better in a revenue flow. 2180 Phil Okeson Volatility of the market. A plan would provide the ability to reduce the State's revenue. 2207 Phil Okeson Spoke to the predictability of the market. Standard revenue assumptions. 2268 Phil Okeson What is the realistic rate of growth in the expenditure assumption? TAPE CHANGE 83-2 056 Co-Chair Mulder Intent is have the Committee consider the assumptions in order to develop a common set of assumptions. Voiced appreciation on the work done regarding the modeling and key assumption development. 213 WILSON CONDON, (TESTIFIED VIA TELECONFERENCE), COMMISSIONER, DEPARTMENT OF REVENUE Provided handouts to the Committee. He provided an overview of that handout. [copy on file] 349 Co-Chair Mulder Assumptions in any model are production and price. Can the Legislature consider reasonable expectation of these two assumptions? He stressed the importance of these points. 417 Commissioner Condon Spoke to pages 2 and 3 of the handout. He addressed the big picture and the State's revenue and the unrestricted revenues. The State can assume that it will have available $3.4 billion a year. That will come from oil and money in pfd and taxes and fees. Roughly $3.4 billion dollars will be paid for operating budget and for inflation proofing the pfd. 579 Commissioner Condon Page 3 annualizes the $1 per barrel impact on the general fund unrestricted revenue. He pointed out that $1 dollar change means $140 million dollars. In the next decade, it will mean a different amount given the situation that the State faces. 698 DR. CHUCK LOGSDON, (TESTIFIED VIA TELECONFERENCE), CHIEF PETROLEUM ECONOMIST, DEPARTMENT OF REVENUE Provided information accessable on the web site forecast. Page 4 indicates the ANS oil prices will average their lowest since FY79. ANS production is lowest since FY79 and the State revenues are the lowest since FY79. He acknowledged that this is a bad year. 847 Dr. Logsdon Oil prices remain low but will recover to $16/bbl in FY2003. New fields on-line in FY2001 and 2003 keep production above 1.03 million barrels per day through FY 2005. 916 Dr. Logsdon Projects needing to go into the Constitutional Budget Reserve with the current situation. He provided a historical perspective speaking to a chart which shows prices since 1985. The chart dramatically illustrates how far the prices have fell. 996 Dr. Logsdon Thinks that OPEC will stay the course making modest cuts; however, OPEC production creeps up; he provided the low- price scenario. He did not address that scenario. 1058 Dr. Logsdon Spoke to what is happening in OPEC at this time. Recent news has stressed that Iran will be prorating. Total OPEC has agreed to cut barrels per day. These announcements show prices are moving up. Alaska forecast is adjusted to the risk that they are not cut. He spoke in more detail between the arrangement between Saudi Arabia and Iran. The cuts left all countries with a 7.3%. The key non-OPEC countries have agreed to also take a cut. 1234 Dr. Logsdon Reference case and production forecast providing the low oil prices in FY99 delay company development plans; Alpine production starts in FY 2001; Northstar and Liberty come on line in FY2003-2004. 1344 Dr. Logsdon FY 2000-2005 summary general fund unrestricted revenues. Oil revenues are projected to average about $900 million dollars per year. Oil prices will average $15.40/bbl. Non oil revenues will average about $475 million per year. Investment earnings will be about $2000 million dollars per year. Total unrestricted revenue will average about $375 million dollars per year. 1440 Co-Chair Mulder Asked if the Department had focused on the production side. Any other than Northstar and Alpine? 1466 Dr. Logsdon There is hope that by FY2004 - 05 the State will be producing out of West Sack and satellite fields will begin producing now 3,000 barrel per day and will increase to 50 thousand barrels per day by 2005. There are other sources of new oil. 1523 Co-Chair Mulder Cook inlet? 1529 Dr. Logsdon Absolutely. 16000 barrels per day by 2005. 1549 Co-Chair Mulder 2006 - 2010 drops in production? 1564 Dr. Logsdon 2010 - 70,000 barrels per day. Less than what is produced in 2005. No speculative discoveries at this time figured into the price. 1620 Vice-Chair Bunde NPRA speculation? 1642 Dr. Logsdon Not until discovered. 1657 Co-Chair Mulder Why? 1662 Dr. Logsdon Habitat situation. 1674 Vice-Chair Bunde Federal regulations. 1682 Representative G. Davis Assessment of infrastructure for NPRA? 1694 Dr. Logsdon Have not however, field opening in 2001 1731 Co-Chair Mulder NPRA hold opportunity for the State. Would the State receive 50-50 share? 1752 Dr. Logsdon 50% federal revenue and the State could severance tax the revenue. Those numbers are not available at this time. Could generate 20 - 30 million barrels a year. Not a giant revenue source for the State. 1804 Co-Chair Mulder Asked for more info on the NPRA fund. 1819 Dr. Logdson That fund was created as a compromised with the fed govt. to assure that local communities receive some of the monies. That is a federal statute. It would be subject to Legislative appropriation. 1858 Representative Austerman Assume when price drops down, is there increased production. Is that calculated? 1878 Dr. Logsdon Replied about heavy oil development. Also made strategic decisions and that are taken into consideration. 1927 Representative Austerman Is there a slow down in the amount of oil being pumped? 1941 Dr. Logsdon The oil companies need cash flow and they pump as much as they can. There has not been a close correlation between today's caps. 1985 Co-Chair Mulder Forecast is conservative based on no reserves and probability of no new reserves soon. 2008 Commissioner Condon Unlikely that the State will see more than what is proposed in the forecast. 2058 GREG WILLIAMS, DEPARTMENT OF LABOR Provided a handout that indicates the population projections. Distinguish between economic migrations. Series reflects base line terms for mortality and fluctuations that occur over time. Indicates the mid series projection. 2161 Mr. Williams Spoke to the handout and the Alaska middle series population projection by age and male/female, 2005. The baby boom in their most productive years of employment. The echo boom in high school; fewer elementary age children. 2236 Mr. Williams The two key trends are that the population over 65 will be a large increase over the next 20 years. The second trend will look at flat school age growth in the next 10 years. 2314 Mr. Williams Will continue to see the spill over effect in Anchorage which will not stop. That trend is more volatile depending on the up and downs in the year. 2372 Vice-Chair Bunde Referenced the chart and Mat valley trend. TAPE CHANGE 84-1 043 Mr. Williams Continued addressing the impacts of the trends. Projections could be a little optimistic. 096 Representative Austerman 1% growth for the next 10 years. What were the last 10 years? 136 Mr. Williams Approximately the same as what is projected to come. 168 Co-Chair Mulder Referenced the graph regarding the 65 years and older will be increased by 182%. 5-7 year olds 12.9% growth. There is a decrease in the 30-45-age bracket. 274 Mr. Williams In population overview often indicates the ages and the number of those that will need to be supported. 329 Vice-Chair Bunde Alaska has the highest percentage of growth of those over 85. He referenced the last chart in the handout. 381 Mr. Williams Those people are not a significant part of that trot. 415 Representative Austerman Is the age 65 and older population growing? Mr. Williams He noted that Alaska has been a young state. The state's population is aging. 535 Co-Chair Mulder Discussed growth in the 65 and older category. He observed that there would be a continued trend of increasing Medicare expenditures. 603 Vice-Chair Bunde Noted that the legislature has encouraged the elderly population to stay in the state. 737 Co-Chair Mulder ADJOURNMENT The meeting adjourned at 3:42 p.m. HOUSE FINANCE COMMITTEE LOG NOTES H.F.C. 8 4/16/99 p.m.