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: 6:45 p.m. Tape(s): HFC 99 - 86, Side 1 HFC 99 - 86, Side 2 HFC 99 - 87, Side 1 PRESENT: X Representative G. Davis X Co-Chair Therriault X Representative Foster X Co-Chair Mulder X Representative Grussendorf X Representative Austerman X Representative Kohring X Representative Bunde Representative Moses X Representative J. Davies X Representative Williams ALSO PRESENT: REPRESENTATIVE ETHAN BERKOWITZ; REPRESENTATIVE SHARON CISSNA; REPRESENTATIVE TOM BRICE; KENNETH BOYD, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES; ROBERT STORER, CHIEF INVESTMENT OFFICIER, DEPARTMENT OF REVENUE; CHRIS PHILLIPS, INVESTMENT OFFICIER, DEPARTMENT OF REVENUE. LOG SPEAKER DISCUSSION TAPE HFC 99 - 86, Side 1 000 CO-CHAIR MULDER Convened the House Finance Committee meeting at 6:45 p.m. 050 KENNETH BOYD, DIVISION OF OIL AND GAS, DEPT. OF NATURAL RESOURCES, OIL AND GAS PRODUCTION Rolled out a map on the Committee room floor showing all the leased maps in the State. He spoke to the "oil watch". Mr. Boyd spent time providing background information regarding the floor map. Northern part of the area could be new oil areas. Also in the Arctic National Wildlife Refuge and the new resource estimate done last year. 331 MR. BOYD Spoke to the Reserve Report previously presented in the Senate Finance Committee. Reserves are fields that are pretty closely known. That report 1999 version has been presented to the Committee members. 440 MR. BOYD The projection is looking at resources and reserves. A copy of that report was sent out April 7tth. 573 MR. BOYD Adding a resource presented a bump in the system. The information is not fact at this time. 672 Mr. Boyd Spoke of the three places that will be available for oil. ANWAR, Chuck e SEE which is a huge basin. 714 Mr. Boyd Reserves are what is counted in the report and they are recoverable. The gas is considered a resource and is not able to be developed currently. These are technical recoverable resources. 764 Mr. Boyd The economically recoverable resources. Those numbers get smaller. 800 Mr. Boyd Spoke to the handout. 806 Vice-Chair Bunde Difference between resources and reserves. 824 Mr. Boyd Resources can be defined. 860 Representative Grussendorf Questioned the reliability of the information. 886 Mr. Boyd This is a zen like exercise and perhaps unrealistic. There are other assumptions. This could be a puzzle. This is from data provided by other govt. agencies. There is time built in for the discovery of the resource. 961 Mr. Boyd Reference Table 1. Discovered on shore resources. 987 Mr. Boyd This is new additional oil, Pt. Thompson, Sourdough and Prudoe Bay. 1013 Mr. Boyd In response to Co-Chair Mulder, he explained what the State owns and from 3- 6 miles states get 27%. There are other benefits to keeping the development. Senator Murkowski's bill would extent. 1116 Representative Grussendorf How likely is that to happen. 1130 Mr. Boyd Does not know. Enough states will benefit that could make it happen. 1163 Co-Chair Mulder Would it go to 20%. 1173 Mr. Boyd 3-6 miles the state would get 28% and the Murkowski bill would extend that amount. 1208 Mr. Boyd Explained the NPRA and the State's share. 1228 Co-Chair Mulder Clarified that within the 50-50%; through the royalty, corporate tax and the rent and the bonus. 1262 Mr. Boyd Royalty, rent and bonus. 1290 Mr. Boyd Back to the map; the more interesting geological area is north. The minimum bid is $25 dollars an acre. The higher value land is to the north. 1356 Representative Grussendorf How competitive will the bids be. 1367 Mr. Boyd BP and ARCO will be the most aggressive bidders. He believed that those companies would be very interested in the property. There are other companies that are interested. The area has been looked at before. 1445 Mr. Boyd It took 3-D sizing to get a good look at the sand. 1471 Mr. Boyd Spoke to Table 3: Undiscovered Onshore Resources. He pointed out that the Foothills in the Brooks range. He provided a little history of that information. 1558 Mr. Boyd He spoke to the new GS report of a young formation and has a lot of good sand in it. There are a lot of interesting things going on. 1611 Mr. Boyd Spoke to Table 4: Undiscovered offshore resources i.e. Beaufort and Chukchi Sea. 1654 Mr. Boyd Also included in the handout are graphs of existing data and decline curves. Sourdough, Pt. Thompson, Umiat,Kuvium, Gwydyr Bay, Sandpiper; technically these are potential oil fields. 1718 Co-Chair Mulder Asked about Kuvium 1735 Mr. Boyd ARCO discovered it and dug 3 bad wells. ARCO sold that field after a series of sales. When ARCO bought UTV, it was back in that business. Those are available to be leased again. They were released, formed and shuffled around. That acreage is now available for someone to lease. There is some deferral areas now there. 1822 Mr. Boyd Explained a deferral area. 1862 Mr. Boyd He stated that they had taken some publicly available information and provided charts for the Committee's pursue. 1908 Co-Chair Mulder Intent of this testimony and the estimate of testimony from Friday. The intent is to build in assumptions and reasonable to expect in the out years. Looking at the projection in the out years of 2010 and 2020. 1978 Mr. Boyd Spoke to the recharging oil field in Mexico. There was a lot of salt in the base. Oil migration is generally very slow. He stated that the State should not count on that. 2020 Representative G. Davis Gas line model. 2029 Mr. Boyd The gas line is interesting. It is a market. It is being used now. Other gas on the slope; no one has ever looked for gas on the slope. He stated that with a line, that could be a salable resource. There could be a lot of gas and there is potential there. 2089 Representative G. Davis If gas flows would it reduce oil production. 2101 Mr. Boyd Does not know the cross over point. Important to look at entire big picture. The timing looks like not much would be lost. There are many pieces to that answer. 2138 Representative G. Davis Looking for a plan that shows additional revenue. 2147 Representative Austerman Are gas tracked and the demand for oil and gas in the foreign markets? 2166 Mr. Boyd Oil - yes; no - gas. The world is full of gas. There needs to be a market. 2195 Representative Austerman Understood that the demand for oil is slipping and the demand for gas is rising. 2209 Mr. Boyd No detailed info available on that. 2219 Co-Chair Therriault Asked about the Umiat formation on the map. 2235 Mr. Boyd There is an outcrop (shallow) 12 miles long with good sand that was oil stained. It is Prudhoe Bay oil. Those results are preliminary. There should be info available on that info soon. 2270 Mr. Boyd In response to Co-Chair Therriault question, Mr. Boyd stated that some of the seismic data will be taken and ANARCO will take that info and try to generate projects. TAPE CHANGE 86-2 000 ROBERT STORER, CHIEF INVESTMENT OFFICIER, DEPARTMENT OF REVENUE Introduced and provided a handout of model presented by the Department. An interactive model was developed. One model applies to the Alaska Permanent Fund. 107 CHRIS PHILLIPS, INVESTMENT OFFICES, DEPARTTMENT OF REVENUE Spoke to the model regarding the parts of the whole. The general fund, the Constitutional Budget Reserve Fund, and the Alaska Permanent Fund. 207 Vice-Chair Bunde Asked if the Constitutional Budget Reserve was invested on a short-term basis. 271 Mr. Storer That is managed in two ways both conservatively 20% and the 80% is managed a bit more aggressively. Over the past year it has been managed in the broad money market. 340 Vice-Chair Bunde Clarified that Department of Revenue keeping some portion of it liquid makes budget decisions. He thought the article in the Anchorage paper misrepresented what the Leg. Did. 394 Mr. Storer That information was misrepresented and that 10% of that portfolio was liquidated in 1988. 427 Co-Chair Mulder Was that done from the additional draws to balance the budget? 455 Mr. Storer The projected life of the Constitutional Budget Reserve at this time is 3-5 years. 480 Representative J. Davies If the Legislature had made the decision last year, it could have been invested at a higher term and could have earned a lot of money. 519 Mr. Storer That is correct. 532 Ms. Phillips Page 3 - interactive modeling. Keep it simple; make the model change as assumptions change; try to answer everyone's concerns; make reasonable assumptions and keep relationships consistent. 663 Ms. Phillips Spoke to the general fund and the ability to add additional sources. Revenue - adjust oil revenue by price and production; expenditures such as inflation proof expenditures, some expenditures grow with population growth and ability to change the budget. 761 Ms. Phillips Constitutional budget reserves - evaluate cash flow needs; time horizon of the fund defines the asset allocation and rates of return of the fund; timing of receipts and draws are important. 815 Ms. Phillips The Alaska Permanent Fund - original model operates as the fund does today; realized rates of return are important when describing the current dividend calculation; expected total return for the fund is based on capital market assumptions and statutory equity limitation. 910 Ms. Phillips Capital Market Assumptions - Should be consistent across all plans; the same outside consultant provides the capital market assumptions to the Department of Revenue and APFC every year. 954 Ms. Phillips The terms can be confusing, total return, real return, and inflation rate. 1000 Ms. Phillips Additionally, learned is that the small differences in assumptions in FY 99 or FY00 make big differences by FY10; the priority of payments out of the AK PFD matter; timing of receipts/disbursements matter. 1094 Representative Austerman Asked about the outside consultants. 1108 Ms. Phillips They are used once a year because of the cash flow needs. 1128 Mr. Storer These are medium needs and looked beyond that. 1143 Vice-Chair Bunde What if the dividend was capped at $1000 would the pfd Corporation invests differently. 1180 Mr. Storer The PFD takes a long-term time horizon and market allocation is not based on what the dividend would be. A 4% real rate of investment. Funds can be adjusted for other sources. 1226 Vice-Chair Bunde Do you address asset allocation? 1239 Ms. Phillips Currently might use the bond fund but the outlook is for a long period of time and the cash flow horizon. 1270 Representative Austerman Was referring to the realized return. 1287 Mr. Storer Important issue. The model must have the flexibility to see the impact on the fund. 1308 Representative Grussendorf The earnings reserve is an important part of the plan. Concern with inflation proofing the corpus. Is it by statute a revenue flow by statute? The State will need that flow. 1374 Ms. Phillips Referenced page 9. 1482 Co-Chair Mulder Differences and assumptions during the course of the year. Can have a dramatic effect in the long run. 1507 Ms. Phillips Now using a short time horizon. Could have a higher rate of return. That is built into the current model on the internet. 1539 Vice-Chair Bunde Page 9 - priority of payments. 1552 Ms. Phillips The calculation today, that is paid first and then the inflation proofing is done. If inflation proofing were done before the dividend would provide a lower dividend. 1589 Vice-Chair Bunde Inflation proofing lower fund. 1605 Co-Chair Therriault Did you run scenario regarding inflation proof? Is everything inflation proofed or just the earnings reserve. 1632 Ms. Phillips Today, the fund, at the end of the FY, the value of the principle is inflation proofed. Not the earnings reserve. 1660 Ms. Phillips There are two basic types of plans. 1685 Mr. Storer Things to look at when evaluating a plan. Initial lump sum transfer from the PFD to a separate fund or annual withdrawals. 1715 Mr. Storer Continued, menu regarding the investment structure and asset allocation and the two different types of approaches. 1740 Mr. Storer Spoke to Page 12, transfer mechanics and the effect on the dividend. Multiple approaches intransferring assets. 1765 Mr. Storer Important to recognize that little differences represent a lot. Important to remember about inflation proofing. Need flexibility in the model. 1812 Mr. Storer Page 14 - systematic pay out of the permanent fund. Amount distributed from the Separate Fund and the amount distributed from the Permanent Fund. 1848 Mr. Storer Options Menu Page 15 prioritizes permanent fund distribution among dividends inflation proofing and public services. 1875 Mr. Storer In response to Co-Chair Mulder, he spoke to inflation proofing the principle. 1900 Mr. Storer Page 16, additional revenue. Broad based general tax; motor fuel tax; per capita school tax; rental car tax; increase business license tax; miracle. 1939 Mr. Storer The model allows interactive decision- making. It will show inflection points where additional action must be taken; linear forecasting tool, the future is not line linear. The model that the Department of Revenue has provided have developed does not address changes in the law that may be required or address the economic impact to the state's economy of different decisions. 2028 Representative Foster In 1989, ELF courts settlement. Is there any court decisions on the horizon? 2051 Mr. Storer The magnitude of the miracle has become more important. The model shows that the significant price increase in oil will not handle the problem. 2077 Representative Austerman Has the Administration come up with assumptions that everyone is comfortable with? 2094 Ms. Phillips The current model operates with just about every piece that is available today. As plans come up, Department of Revenue will model it. Staying with the status quo. 2136 Representative Austerman 0 growth rate. Has the growth factor been included? 2152 Ms. Phillips Model is set up for a five-year plan with lower expenditures. 2165 Mr. Storer That issue has been addressed in the flexibility of the model. There are other factors. Try to use known information and build a model with flexibility with that info. 2192 Representative Austerman There must be some realistic info that must be included. 2206 Ms. Phillips The school budget is increased for anticipated enrollment. If remaining operating budget is increased that will show in the model. 2245 Representative Grussendorf $1.8 billion dollars into the corpus and then that was needed to be inflation proofed. 2270 Ms. Phillips Once the money moved into inflation proofed then it is inflation proofed. TAPE CHANGE 99-87-1 000 Ms. Phillips K-12 is built into a 1.5% increase. 100 Vice-Chair Bunde Flat funding or formula change. 149 Ms. Phillips K-12 is currently funded at 1.5% increase and would stay constant in the three additional years in the five-year plan. 200 Representative Grussendorf That money is for enrollment; it is flat funding. 221 Representative Foster Page 7, Page 3, are they consistent on target. 261 Mr. Storer It is evaluated and were hired since the mid `80's and have been used since 1992. 300 Mr. Storer Did not know the cost of that service. That is bid out every three years and was last January. 333 Co-Chair Mulder Supplemental budget $4 million dollars. 358 Representative Austerman Concern about taking money out of the Constitutional Budget Reserve to balance the budget. He spoke to the endowment idea. 400 Mr. Storer Evaluated all the plans; there are ways that have merit however, the details must be evaluated. 445 Representative Austerman Will reserves be gone in a few years? 465 Mr. Storer It is his opinion, the more choices and loosing a resource by spending it. 492 Co-Chair Mulder How is Department of Revenue rate of return compared to PFD? 510 Mr. Storer Retirement system over the four prior years, more favorably; however, last year, the PFD had a higher than the retirement system. 566 Co-Chair Mulder Spoke of the weekly schedule. 616 Representative Austerman Asked who would present the governor's plan and wanted to draw upon the resource that Department of Revenue offers. 676 Representative J. Davies Will the Committee attempt to agree on some common numbers before the Governor's plan proposal? Otherwise it will be apples and oranges. 717 Co-Chair Mulder Will try. 725 Representative J. Davies Need longer time horizon than has been supplied to date. 780 Co-Chair Mulder Adjourned meeting at 8:30 p.m. HOUSE FINANCE COMMITTEE LOG NOTES April 19, 1999 H.F.C. 3 4/19/99