Legislature(2015 - 2016)HOUSE FINANCE 519

01/26/2016 01:30 PM House FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
01:33:54 PM Start
01:34:35 PM Fall 2015 Revenue Forecast by Commissioner Randall Hoffbeck and Chief Economist John Tichotsky
03:25:43 PM Fy17 Budget Overview: Dept. of Revenue
03:54:01 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ FY 2017 Budget Overview by Pat Pitney, Director, TELECONFERENCED
Office of Management & Budget
<Above Item Removed from Agenda>
+ Fall 2015 Revenue Forecast by Commissioner TELECONFERENCED
Randall Hoffbeck & Chief Economist John Tichotsky
Scheduled but Not Heard
Scheduled but Not Heard
Scheduled but Not Heard
+ FY17 Budget Overview: TELECONFERENCED
Dept. of Revenue
                  HOUSE FINANCE COMMITTEE                                                                                       
                     January 26, 2016                                                                                           
                         1:33 p.m.                                                                                              
1:33:54 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Neuman called the House Finance Committee meeting                                                                      
to order at 1:33 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Mark Neuman, Co-Chair                                                                                            
Representative Steve Thompson, Co-Chair                                                                                         
Representative Dan Saddler, Vice-Chair                                                                                          
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lynn Gattis                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Lance Pruitt                                                                                                     
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Randall Hoffbeck, Commissioner,  Department of Revenue; John                                                                    
Tichotsky,  Chief  Economist,  Tax Division,  Department  of                                                                    
Revenue;    Dan    DeBartolo,    Director,    Division    of                                                                    
Administrative Services, Department of Revenue.                                                                                 
HB 256    APPROP: OPERATING BUDGET/LOANS/FUNDS                                                                                  
          HB 256 was SCHEDULED but not HEARD.                                                                                   
HB 257    APPROP: MENTAL HEALTH BUDGET                                                                                          
          HB 257 was SCHEDULED but not HEARD.                                                                                   
HB 255    BUDGET: CAPITAL                                                                                                       
          HB 255 was SCHEDULED but not HEARD.                                                                                   
FALL 2015 REVENUE FORECAST  BY COMMISSIONER RANDALL HOFFBECK                                                                    
AND CHIEF ECONOMIST JOHN TICHOTSKY                                                                                              
FY17 BUDGET OVERVIEW: DEPT. OF REVENUE                                                                                          
Co-Chair  Thompson  reviewed  the  agenda  for  the  current                                                                    
meeting.  He  acknowledged   that  Representative  Gara  had                                                                    
joined the meeting.                                                                                                             
^FALL   2015  REVENUE   FORECAST  BY   COMMISSIONER  RANDALL                                                                  
HOFFBECK AND CHIEF ECONOMIST JOHN TICHOTSKY                                                                                   
1:34:35 PM                                                                                                                    
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
introduced the  PowerPoint presentation: "Fall  2015 Revenue                                                                    
Forecast Presentation."  He relayed he would  be making some                                                                    
opening statements and turning  the presentation over to Dr.                                                                    
Co-Chair Thompson  indicated that Representative  Gattis and                                                                    
Co-Chair Neuman had joined members at the table.                                                                                
Commissioner  Hoffbeck began  with  slide  3: "Structure  of                                                                    
Revenue FY  2013, FY 2014,  FY 2015". He mentioned  that the                                                                    
department  had never  included  the chart  in its  previous                                                                    
presentations.  He pointed  out that  it showed  two things:                                                                    
unrestricted revenues,  and the total  value of the  pie. He                                                                    
pointed out  that in  FY 13  the unrestricted  revenues were                                                                    
about  44 percent  of all  revenues  in the  amount of  $6.9                                                                    
billion. By  FY 14 the  unrestricted revenues had  shrunk to                                                                    
31 percent  with a total revenue  of $5.4 billion. In  FY 15                                                                    
unrestricted  revenues  declined  to   26  percent  or  $2.3                                                                    
billion.  Based  on  discussions   with  Mr.  Tichotsky  and                                                                    
looking  at  long-term  forecasts  the new  status  quo  for                                                                    
unrestricted revenue would fall  between the numbers from FY                                                                    
14  and FY  15 [31  percent to  26 percent]  rather than  50                                                                    
percent  of   total  revenue  -  the   previous  status  quo                                                                    
Commissioner Hoffbeck  turned to slide 5:  "Methods: What Do                                                                    
We Forecast at DOR?":                                                                                                           
     Mostly Petroleum and Non-petroleum Revenue                                                                                 
   · We directly forecast Petroleum Revenue                                                                                     
        · The largest component, accounting for 75% of                                                                          
          state unrestricted revenue in FY 2015                                                                                 
        · "Petroleum Revenue" includes severance taxes,                                                                         
          royalties, corporate income tax, and all other                                                                        
          revenue from oil companies                                                                                            
   · We directly forecast Non-petroleum Revenue                                                                                 
  · We use someone else's forecast for Investment Revenue                                                                       
   · We use the Federal Revenue authorized for spending as                                                                      
     the forecast                                                                                                               
        · It is typically 20%-30% more than actually gets                                                                       
   · DOR compiles all different revenue streams and                                                                             
     compiles them in the annual Revenue Sources Book                                                                           
Commissioner Hoffbeck  explained that the state  was heavily                                                                    
dependent upon oil revenues within  the forecast. He relayed                                                                    
that  non-petroleum   revenues  included   corporate  income                                                                    
taxes,  fees,   and  other  taxes.  He   reported  that  the                                                                    
department  used Callan  Associates  to forecast  investment                                                                    
revenue. He  relayed that the  state spent 20 percent  to 30                                                                    
percent  less  of  authorized federal  revenue  due  to  not                                                                    
completing all eligible projects in any given year.                                                                             
Co-Chair  Neuman  wondered  if  there  was  an  increase  of                                                                    
federal  funds coming  to the  state. Commissioner  Hoffbeck                                                                    
responded that they were about the same.                                                                                        
Co-Chair Neuman  commented that there had  been efforts made                                                                    
by  the prior  administration  to be  more  accurate in  its                                                                    
forecast  and wondered  about  the current  administration's                                                                    
accuracy. He  thought the  forecast was  considerably higher                                                                    
than  the state's  actual revenues.  He wondered  about what                                                                    
policies  the Commissioner  had  implemented  to ensure  the                                                                    
precision  of the  revenue  forecast. Commissioner  Hoffbeck                                                                    
responded  that  the  issue was  discussed  in  the  revenue                                                                    
forecast  but  opined that  it  was  important to  know  the                                                                    
state's   total  authorization   of  federal   revenue.  The                                                                    
authorizations  generally fell  into the  restricted revenue                                                                    
category which did  not impact what was  available for state                                                                    
spending. He  happily offered to present  the information in                                                                    
a different form if the committee wanted him to do so.                                                                          
Co-Chair Neuman  was looking at  how the department  came up                                                                    
with its forecast.                                                                                                              
1:39:11 PM                                                                                                                    
Representative  Edgmon  commented   that  regarding  federal                                                                    
funds,  it  was  his  impression   that  Alaska's  take  was                                                                    
significantly more  under the  5-year federal  highway bill.                                                                    
He had also  heard in the previous day that  money for water                                                                    
and sewer was  greater. He was wondering if  the state would                                                                    
be receiving more federal revenue in the future.                                                                                
JOHN  TICHOTSKY, CHIEF  ECONOMIST, TAX  DIVISION, DEPARTMENT                                                                    
OF REVENUE,  responded that in  terms of  forecasted numbers                                                                    
it had not moved the needle.                                                                                                    
Commissioner  Hoffbeck  turned  to  slide  6:  "Oil  Revenue                                                                    
     Three Factors for Production Tax Revenue Forecast                                                                          
     REVENUE = (Net value * Tax Rate) - Credits taken                                                                           
     against liability                                                                                                          
     Net value = (Price*Production) - Costs                                                                                     
     1. Price                                                                                                                   
     2. Production                                                                                                              
     3. Costs                                                                                                                   
          1. Capital expenditures                                                                                               
          2. Operating expenditures                                                                                             
          3. Transportation cost                                                                                                
Commissioner  Hoffbeck explained  that the  three components                                                                    
that determined  how much the  state collected  in petroleum                                                                    
property tax was price, production, and cost.                                                                                   
Co-Chair  Neuman   thought  there  had  been   a  discussion                                                                    
previously about  net value. He remembered  the commissioner                                                                    
talking  about  how changes  in  gross  value might  make  a                                                                    
difference.  He asked  him to  comment. He  did not  want to                                                                    
scare the industry. Commissioner  Hoffbeck responded that in                                                                    
the  past  Alaska  had  a  gross value  tax  under  the  ELF                                                                    
(Economic Limit  Factor) tax system,  which came  before the                                                                    
PPT (Petroleum  Production Tax) tax structure.  If the state                                                                    
was  on  a  gross  tax  system  the  calculations  would  be                                                                    
simplified  dramatically. However,  the state  was currently                                                                    
operating on a net tax system.                                                                                                  
Co-Chair  Neuman   remarked  that  with  a   gross  tax  the                                                                    
calculations would be simplified  because there would not be                                                                    
a need to  go through all of the deductions.  He wondered if                                                                    
ultimately the  money the state  took in would be  the same.                                                                    
Commissioner  Hoffbeck  stated that  it  depended  on how  a                                                                    
gross  tax  was  structured.  He  suggested  that  it  could                                                                    
certainly  be  structured  so  that it  would  result  in  a                                                                    
similar revenue stream. Co-Chair  Neuman remarked, "That was                                                                    
the point I was trying to make."                                                                                                
Representative Kawasaki  reported that at an  Alaska Oil and                                                                    
Gas  Association (AOGA)  lunch he  had heard  that over  the                                                                    
last 15-year time  span that costs for  production had risen                                                                    
90   percent.   He  wondered,   in   terms   of  net   value                                                                    
calculations,  if  the  audits   under  Alaska's  Clear  and                                                                    
Equitable Share  (ACES) had been  completed. He  wondered at                                                                    
what point the  finance committee would get  to review them.                                                                    
Commissioner  Hoffbeck  responded  that  the  Department  of                                                                    
Revenue  (DOR) was  currently doing  the 2009  audits, which                                                                    
was  the beginning  of the  ACES audits.  He added  that the                                                                    
first audits had to be out by the middle of March.                                                                              
Representative Guttenberg asked  about transportation costs.                                                                    
He wondered  if the court cases  concerning the Trans-Alaska                                                                    
Pipeline  System (TAPS)  evaluation affected  the well  head                                                                    
price. Commissioner Hoffbeck answered  that the recent court                                                                    
case that  disallowed some of the  strategic reconfiguration                                                                    
costs was requiring  the state to go back  in to recalculate                                                                    
the  related audits  - part  of the  reason the  audits were                                                                    
currently  delayed. It  impacted  the  amount of  deductible                                                                    
transportation costs.                                                                                                           
1:43:25 PM                                                                                                                    
Representative Guttenberg  asked how  they were  expected to                                                                    
impact  future  projections.  He  suggested  moving  forward                                                                    
rather  than backwards.  He wondered  if it  was solidifying                                                                    
the  transportation   deductions  off   of  the   well  head                                                                    
evaluation. Commissioner Hoffbeck  answered that he believed                                                                    
the  court  case  referenced 2009  through  2011.  It  would                                                                    
obviously  impact the  amount  of deductible  transportation                                                                    
costs for those years.                                                                                                          
Commissioner  Hoffbeck  advanced  to  slide  7:  "Fall  2015                                                                    
   · Input changes relative to the 2015 Spring Forecast.                                                                        
        · Oil price forecasts have been reduced for all                                                                         
          years in the forecast.                                                                                                
             · Long term prices now expected to settle                                                                          
               around $50 - $70 real.                                                                                           
        · Capital expenditures forecasts have been reduced                                                                      
          for all years in the forecast.                                                                                        
        · Oil production forecasts have been reduced for                                                                        
          all years in the forecast.                                                                                            
        · Correspondingly, unrestricted revenues have been                                                                      
          revised downward.                                                                                                     
   · Revenue impacts largely due to change in oil price                                                                         
   · Lease expenditure (or investment) in the oil fields                                                                        
     expected to decline, which will lead to less expected                                                                      
     "new" production in the future.                                                                                            
        · Many projects have been deferred until oil prices                                                                     
Commissioner Hoffbeck  relayed that  long-term meant  over 3                                                                    
Vice-Chair  Saddler mentioned  that for  many years  the oil                                                                    
price and  oil revenue forecasts  were erroring on  the side                                                                    
of  the   generous.  It  was   always  necessary   with  the                                                                    
legislature  to calculate  less money  than was  expected to                                                                    
come  in.  The previous  administration  had  never felt  it                                                                    
necessary to  true-up the past couple  of revenue forecasts.                                                                    
He wondered if any changes  had been made to the calculation                                                                    
method that  the commissioner had inherited  that would give                                                                    
the  legislature any  greater  or lesser  confidence in  the                                                                    
accuracy of the forecasts.                                                                                                      
Commissioner  Hoffbeck stated  that the  method the  current                                                                    
administration used was  very similar to what  had been used                                                                    
in the past.  In the prior year the  administration had done                                                                    
a  true-up (in  November or  December of  2015). The  spring                                                                    
forecast was  adjusted again and  the current  fall forecast                                                                    
was  changed. Every  time the  administration  had made  the                                                                    
adjustments it  seemed pessimistic. However, oil  prices had                                                                    
continued to drive downwards. The  administration had a bias                                                                    
to  be  on  the   conservative  side,  particularly  on  the                                                                    
production  side. Even  with the  administration's bias  the                                                                    
state had  not been  able to  keep up with  the drop  in oil                                                                    
Representative Gara  mentioned some people had  talked about                                                                    
cutting the  small producer tax  credits. He wanted  to know                                                                    
how  much  the state  was  spending  in terms  of  deduction                                                                    
allowances.  He  relayed  that   there  were  2  classes  of                                                                    
existing producers under  SB 21; producers of  the post 2002                                                                    
fields who paid  a lower tax rate, and the  producers of the                                                                    
pre  2002 fields  who paid  a higher  tax rate.  He reported                                                                    
that the tax rate at $100  per barrel for the big fields was                                                                    
about 20 percent and the  small fields was about 13 percent.                                                                    
He suggested that  the lower tax rate fields  and the higher                                                                    
tax rate fields received a  35 percent deduction for capital                                                                    
expenditures and a 35 percent  deduction for their operating                                                                    
expenditures.  He wanted  to know  how  much the  deductions                                                                    
were  costing the  state in  revenue. He  supposed that  not                                                                    
many  tax payers  received  a  deduction rate  significantly                                                                    
higher  that their  tax rate.  Nor  did they  get to  deduct                                                                    
everything  in the  first year,  they usually  amortized. He                                                                    
asked  for an  estimate from  the most  recent taxable  year                                                                    
regarding how  much the state  had paid for the  two classes                                                                    
of  fields in  terms  of capital  and operating  deductions.                                                                    
Commissioner  Hoffbeck responded  that he  would provide  as                                                                    
much information  as possible  without disclosing  tax payer                                                                    
confidential information. Representative  Gara conveyed that                                                                    
an estimate would be fine.                                                                                                      
1:48:29 PM                                                                                                                    
Co-Chair   Neuman   suggested   including   the   additional                                                                    
production of oil and gas that it created in revenue.                                                                           
Representative Gattis  thought the question was  whether the                                                                    
incentives produced  the results  the state was  hoping for.                                                                    
It was really  a financial question. She  thought both sides                                                                    
should be presented.                                                                                                            
Co-Chair Neuman  indicated that a  more in-depth  look would                                                                    
occur when examining the Governor's legislation.                                                                                
Mr.  Tichotsky  stated  that  he  would  be  looking  at  an                                                                    
overview of the  production forecast. In order  to produce a                                                                    
revenue  forecast the  elements  of  production, price,  and                                                                    
cost  were  necessary. He  turned  to  slide 9:  "Production                                                                    
History  and Forecast."  He noted  the long-term  trend from                                                                    
1977. Production  was upwards  of 2  million barrels  of oil                                                                    
per  day early  on. Five  years  into the  future from  2016                                                                    
showed a plateau  of about 500 thousand barrels  per day and                                                                    
the natural curve reducing.                                                                                                     
Mr.  Tichotsky  continued  to   slide  10:  "ANS  Production                                                                    
Forecast  Comparison." He  explained that  the graph  showed                                                                    
the revisions of  the forecast between spring  2015 and fall                                                                    
2015  strictly  driven by  price.  He  highlighted that  the                                                                    
production was  about the  same, but  it shifted  from near-                                                                    
term to slightly farther out.                                                                                                   
Co-Chair  Neuman commented  that  the information  currently                                                                    
being presented was  not the same as the  information he had                                                                    
received  from Alaska  Oil and  Gas  Association (AOGA).  He                                                                    
thought  the state  had seen  a consistent  leveling off  of                                                                    
production.  He wondered  why there  was  such a  difference                                                                    
between  the red  line and  the blue  line in  2017 and  the                                                                    
spring and  fall forecast of  outgoing years. He  also asked                                                                    
about  the rapid  reduction in  the production  of oil.  Mr.                                                                    
Tichotsky  responded  that the  scale  was  not very  large.                                                                    
Currently,  when looking  at the  production for  FY 16  the                                                                    
state seemed to  be hitting the new fall  forecast figure. A                                                                    
decline could be seen just  past 2019. He explained that the                                                                    
department  ran   the  production  forecast  such   that  it                                                                    
interviewed the producers to find  out their short and long-                                                                    
term  plans   and  integrated   the  information   into  the                                                                    
production   forecast.  Typically   the   state  had   solid                                                                    
information  going   out  5  years,   the  horizon   of  the                                                                    
producers. Following the  5-year period production generally                                                                    
declined with uncertainty. In  the short-term the difference                                                                    
between the red line and the  blue line was price driven and                                                                    
driven by  the information  collected in September  2015 and                                                                    
October 2015.                                                                                                                   
1:53:13 PM                                                                                                                    
Representative Pruitt assumed that  the new field discovered                                                                    
by Armstrong Oil and Gas and  Repsol was not included in the                                                                    
numbers Mr.  Tichotsky used. Mr.  Tichotsky was not  able to                                                                    
comment  on a  company-specific field  because of  issues of                                                                    
confidentiality.  He  transitioned  to slide  11:  "ANS  Oil                                                                    
Production Forecast."  He explained that generally  when the                                                                    
department did  a production forecast  it took  into account                                                                    
the volumes  from developed  reserves currently  producing -                                                                    
fields without major investment.  They were not adjusted for                                                                    
risk  at all.  The department  also looked  at volumes  from                                                                    
undeveloped  reserves and  additional accelerated  developed                                                                    
reserves - oil from projects  that would add incremental oil                                                                    
to existing fields or bring  new fields into production. The                                                                    
fields  had   to  have  senior  management   approval,  have                                                                    
allocated funds,  and be within  the budget.  The department                                                                    
risk-adjusted these fields because  there were two levels of                                                                    
risk  that  occasionally  occurred: either  producers  over-                                                                    
estimated the  number of  barrels per day  or they  ran into                                                                    
timing issues. Often price was  a huge driver. Additionally,                                                                    
the department  looked at volume from  contingent resources,                                                                    
projects likely  to occur  in the future  that did  not meet                                                                    
the current requirements. Other  projects were discussed but                                                                    
were not  included in  the department's  production forecast                                                                    
because of not meeting certain criteria.                                                                                        
Representative  Pruitt clarified  that the  state needed  to                                                                    
make sure  that a project  was at  a certain point  prior to                                                                    
incorporating it  into the state's forecast.  He wondered if                                                                    
he   understood    correctly.   Mr.    Tichotsky   responded                                                                    
affirmatively. He added that the  state would be booking the                                                                    
likelihood  of  the  investment being  made  and  oil  being                                                                    
Representative Pruitt commented that  there were projects on                                                                    
the  horizon  that   the  state  held  off   on  that  could                                                                    
eventually  be  seen in  a  future  forecast. Mr.  Tichotsky                                                                    
remarked that Representative Pruitt  had an excellent point.                                                                    
The state  created rules in  order to have certainty  in the                                                                    
production forecast.  There were things the  state was aware                                                                    
of  that were  not included  because they  did not  pass the                                                                    
state's certainty threshold.                                                                                                    
Mr. Tichotsky  thought slide  12: "ANS  Production Forecast"                                                                    
spoke to  Representative Pruitt's  point. He  drew attention                                                                    
to  the two  plus  signs showing  production that  occurred.                                                                    
Beginning in 2016 the production  forecast that was used was                                                                    
represented  by   the  dark  line,  the   adjusted  expected                                                                    
investment case.  He noted  that if there  was little  or no                                                                    
investment occurring  in the reserves  then the  state would                                                                    
get  the  low investment  case  (basically  taking what  was                                                                    
currently  being produced  and  taking it  down the  decline                                                                    
line).  There was  also the  unrisked investment  case which                                                                    
showed the  oil that could  be produced if all  the projects                                                                    
that  were   talked  about   came  online.   The  department                                                                    
considered the  upper bound  of what  was likely  to happen,                                                                    
the lower bound of what could,  and then drew a line between                                                                    
the two,  which became the  basis of the  state's production                                                                    
1:58:03 PM                                                                                                                    
Co-Chair Neuman pointed to the  top dotted line on the chart                                                                    
labeled "Unrisked  Investment Case." He noted  that the line                                                                    
increased out  past 2020. He  wondered if it was  a possible                                                                    
scenario. Mr. Tichotsky answered, "Correct."                                                                                    
Co-Chair Neuman asked  if it would be closer  to the state's                                                                    
anticipated  forecast.  Mr.  Tichotsky  explained  that  the                                                                    
department  used the  risked forecast  because  it tried  to                                                                    
take into account  things that might not  occur. For example                                                                    
there might  be an  issue where a  producer drilled  and did                                                                    
not get as  many barrels as anticipated, or  the project was                                                                    
pushed out because of timing. Co-Chair Neuman understood.                                                                       
Mr. Tichotsky  discussed looking at the  upside potential of                                                                    
production  on  slide  14:   "ANS  Production  Forecast"  He                                                                    
explained that  the dark blue  skin represented  the volumes                                                                    
of  developed reserves,  the currently  producing line.  The                                                                    
next  skin   (red  area)  represented  what   was  past  the                                                                    
threshold   where  senior   management   was  committed   to                                                                    
investing the  money. The third skin  represented the volume                                                                    
from  contingent resources.  There were  further skins  that                                                                    
represented  upside potential  for undeveloped  reserves and                                                                    
contingent resources.                                                                                                           
Vice-Chair Saddler referred to slide  14. He asked about the                                                                    
upside potential  and wondered if  it assumed all  oil taxes                                                                    
and credits were held steady.  He wondered about the state's                                                                    
underlying   assumptions  on   the  upside.   Mr.  Tichotsky                                                                    
responded, "Correct."  He furthered that all  of the state's                                                                    
assumptions were based in the current tax structure.                                                                            
Vice-Chair   Saddler  asked   if  the   upsides  could   not                                                                    
materialize  if  the  state raised  or  diminished  the  tax                                                                    
credits. Mr. Tichotsky  remarked that it could  be a logical                                                                    
conclusion based on market economics.                                                                                           
Mr.  Tichotsky continued  to slide  16: "Alaska  North Slope                                                                    
Crude  West  Coast  Price."  He  explained  that  the  chart                                                                    
reflected  the price  of  oil  in June  2014  at  a high  of                                                                    
$113.17. The current day's price was around $26.23.                                                                             
Mr. Tichotsky  explained slide 17: "Alaska  North Slope West                                                                    
Coast, West  Texas Intermediate and Brent  Crude Prices 2009                                                                    
through 2016."  There were three different  oil markers. The                                                                    
first was Alaska North Slope  Crude (ANS) which was Alaska's                                                                    
marker selling primarily to the  West Coast and occasionally                                                                    
to Asia. The  second oil marker was  West Texas Intermediate                                                                    
(WTI) which was  the marker for midland  America. During the                                                                    
period of 2011 through 2014  the crude marker was much lower                                                                    
priced than ANS  or Brent. Brent was the  British water born                                                                    
crude. He reported that the  economic research group noticed                                                                    
that ANS  tracked Brent crude  quite well during  the period                                                                    
of  2009  through the  present.  Whereas,  WTI did  not.  He                                                                    
pointed out  that in the  lower price environment  all three                                                                    
markers converged.                                                                                                              
2:03:06 PM                                                                                                                    
Mr. Tichotsky turned to slide 18: "Key Oil Price Drivers":                                                                      
   · Supply & Demand                                                                                                            
        · There are two main factors to monitor                                                                                 
             · Global spare capacity, since it is both a                                                                        
               reflection  of supply  and  demand. In  other                                                                    
               words,   the    Organization   of   Petroleum                                                                    
               Exporting  Countries  (OPEC)  spare  capacity                                                                    
               (flipping a switch) is key.                                                                                      
        · Cost of developing new oil supply.                                                                                    
   · Current Events                                                                                                             
        · Weak global demand.                                                                                                   
        · Cost of supplying the marginal barrel has                                                                             
          decreased dramatically.                                                                                               
        · OPEC (Saudi Arabia) maintains market share and                                                                        
          accepts lower prices.                                                                                                 
        · Cost of supply has fallen as new sources have                                                                         
          been defined and developed.                                                                                           
             · Oil shale is a prime example.                                                                                    
Mr. Tichotsky  flipped to slide  19: "OPEC's view  of supply                                                                    
and demand…" He explained that  OPEC's theory was that North                                                                    
American  production of  shale  oil would  collapse at  $80,                                                                    
then  it  changed  to  $60,  and  to  an  even  lower  price                                                                    
currently with  adequate supplies  available on  the market.                                                                    
However,  looking  at OPEC's  recent  report  their view  of                                                                    
supply  relative to  their crude  production  was one  where                                                                    
they saw a recovery of demand  in the third quarter of 2016.                                                                    
He was  uncertain whether it  would materialize. One  of his                                                                    
economists  was interested  in the  issue of  spare capacity                                                                    
and pointed out that in the  80's there was about 20 percent                                                                    
to 30  percent spare  capacity and  the world  was consuming                                                                    
less that than  50 million barrels per day.   Currently, the                                                                    
world consumed  over 90 million  barrels per day.  The spare                                                                    
capacity was no  more than 2.5 million barrels  per day. The                                                                    
conclusion that  could be  made, especially  looking forward                                                                    
with  the  U.S.   Energy  Information  Administration  (EIA)                                                                    
forecast was  that even  though currently  in a  world where                                                                    
consumption lacked production, it  could easily turn around.                                                                    
The department's general consensus  was that it provided the                                                                    
opportunity and possibility of price volatility.                                                                                
Vice-Chair  Saddler   asked  about  the   disparity  between                                                                    
production and consumption and whether  it had distorted the                                                                    
market share. He understood that  Saudi Arabia was trying to                                                                    
hold onto its  market share. With the disparity  and the low                                                                    
prices  as  they   were  he  wondered  if   there  were  any                                                                    
fundamental changes  in where nations were  buying their oil                                                                    
around the world. Mr. Tichotsky  advanced to slide 20: "It's                                                                    
about  spare capacity…"  and explained  that there  were two                                                                    
major issues.  The first was  that Saudi Arabia was  a swing                                                                    
producer and at  high prices it could take  advantage of the                                                                    
basic concept  of spare capacity. However,  high prices also                                                                    
promoted  unconventional oil  development in  North America.                                                                    
What  was currently  viewed as  conventional shale  plays in                                                                    
mid  America  really  turned  around.   He  would  not  have                                                                    
anticipated oversupply  due to North American  production of                                                                    
shale fifteen years  ago. However, it was  what had affected                                                                    
the  current markets  creating  low  price environments  and                                                                    
volatility going forward.                                                                                                       
2:07:24 PM                                                                                                                    
Vice-Chair Saddler  was concerned whether Alaska  would find                                                                    
its  market  intact if  the  price  went up.  Mr.  Tichotsky                                                                    
remarked that  Vice-Chair Saddler had a  great question. The                                                                    
department had  started looking at  that question in  a high                                                                    
oil price environment when there  was a threat of Bakken oil                                                                    
reaching West Coast markets and  crowding ANS crude from the                                                                    
market. The  North American West  Coast market  was designed                                                                    
to  process  ANS  crude.  Prudhoe   Bay  went  to  feed  the                                                                    
California and  West Coast markets. Other  crudes were close                                                                    
mimics. The crude market depended  on having a crude similar                                                                    
to maintain  refinery efficiencies.  What he found  was that                                                                    
whatever ANS produced  could be used at the  market price on                                                                    
the West Coast.                                                                                                                 
Mr.  Tichotsky  discussed  slide 21:  "Base  Price  Forecast                                                                    
   · Price Forecasting Session                                                                                                  
        · Held a day long oil price forecasting session on                                                                      
          October 6, 2015.                                                                                                      
        · Speakers provided insight into oil markets,                                                                           
          probability and analysis, modeling, and financial                                                                     
          aspects of commodity markets.                                                                                         
        · 37 participants from state government, academia                                                                       
          and the private sector.                                                                                               
             · DOR, DNR, DOL, OMB, University, Legislative                                                                      
               Finance and outside participants.                                                                                
   · Participants were asked to forecast P10, mean, and P90                                                                     
     real ANS prices out to FY 2025.                                                                                            
             · Real prices were converted to nominal using                                                                      
               a 2.25% inflation assumption.                                                                                    
             · Official forecast is based on probabilistic                                                                      
               outcomes the price forecast session.                                                                             
Mr.  Tichotski reported  that as  part  of the  department's                                                                    
price forecasting  methodology it  held a  price forecasting                                                                    
session  on October  6,  2015.  There was  a  vast range  of                                                                    
speakers that came to discuss  oil price markets. One of the                                                                    
benefits was that because of  the Permanent Fund Corporation                                                                    
and  the Treasury  Department  having  a strong  affiliation                                                                    
with  some of  the investment  houses, the  best commodities                                                                    
people presented during the  session. The participants spent                                                                    
the day  discussing oil  markets, probability  analysis, and                                                                    
other  topics. The  department had  its  own in-house  model                                                                    
based on  what was referred  to as "random walk"  which took                                                                    
into  account the  randomness of  oil prices.  It also  took                                                                    
into account a  jumped diffusion. When oil  prices went from                                                                    
$113 to  $20 it  was a  jump event  or a  destructive event.                                                                    
Between  oil prices  modeling, looking  at oil  markets, and                                                                    
listening to several  conversations, participants were given                                                                    
the opportunity to come before the  group to give a mean and                                                                    
a low and  high probability of oil prices.  Real prices were                                                                    
converted  using a  2.25 percent  inflation  rate which  was                                                                    
generally  used across  the state  for  investments and  the                                                                    
revenue forecast. A probabilistic factor was added as well.                                                                     
Mr. Tichotsky turned  to slide 22: "Consensus  view that the                                                                    
distribution  is   wide."  He  added  that   the  department                                                                    
considered  what other  folks reported.  The slide  conveyed                                                                    
that  Alaska's  view  from  the  October  forecast  was  not                                                                    
unusual. Most  other forecasts  did not  go low  enough. The                                                                    
department  had  not  expected prices  to  collapse  to  the                                                                    
extent  they   did.  In  general  people   were  looking  at                                                                    
volatility and how  it extended out between  the present and                                                                    
2019. Alaska's  view was a  standard view of what  was going                                                                    
on in the oil markets.                                                                                                          
2:12:13 PM                                                                                                                    
Mr. Tichotsky advanced  to slide 23: "Fall  2015 ANS Revenue                                                                    
Forecast  Prices." He  explained what  it meant  to look  at                                                                    
things probabilistically.  What the department did  with the                                                                    
current forecast  was to look  at the average. As  the price                                                                    
forecast  moved  forward,  because the  department  did  its                                                                    
price  forecasting session  in  October and  the report  was                                                                    
published  in December  in  the previous  year  there was  a                                                                    
large  price  difference.   To  compensate,  the  department                                                                    
tended to  look at  what was closer  to the  "P10's", prices                                                                    
that the department could anchor  off from what was actually                                                                    
going  on in  the  current markets.  For  the long-term  the                                                                    
department adjusted  back depending  on the how  the current                                                                    
market looked.  The department looked  at the "P50"  for the                                                                    
current  year because  of the  range of  possibilities, what                                                                    
was in  the revenue  sources book,  and what  the department                                                                    
had currently.                                                                                                                  
Vice-Chair Saddler  referred to  the chart  on slide  23. He                                                                    
wondered if  it included all of  the probabilistic estimates                                                                    
of  the  reserves  and the  likelihood  of  investments.  He                                                                    
wondered if it  was an extension of the  forecast prices for                                                                    
a  couple  of  years   based  on  inflation.  Mr.  Tichotsky                                                                    
responded that  the chart was  only looking at  the forecast                                                                    
of prices. It did not reflect the revenue forecast.                                                                             
Vice-Chair Saddler relayed that  he had received information                                                                    
from  First  National  Bank of  Alaska.  They  projected  an                                                                    
inflation rate  of 1 percent  to 1.25 percent in  Alaska. He                                                                    
wondered  about  the inflation  rate  of  2.25 percent.  Mr.                                                                    
Tichotsky complimented  Vice-Chair Saddler on  his excellent                                                                    
question.  He  responded  that  given  that  the  state  had                                                                    
optionality it  tended to use the  Callan inflation forecast                                                                    
that was  used for  investment revenue.  It gave  Alaska the                                                                    
advantage  of  having   an  apples-to-apples  comparison  of                                                                    
revenue.  It was  an  open  question. If  the  state had  an                                                                    
inflationary period  it could make  a difference in  some of                                                                    
the state's decision  making. He thought it was  a very good                                                                    
Mr. Tichotsky  pointed out the  chart on slide 24:  "What if                                                                    
the  oil  price is…"  for  the  remainder  of FY  2016."  He                                                                    
indicated that  it reflected one  of the  favorite questions                                                                    
that the department  was asked several years  prior. He came                                                                    
up  with the  chart  after the  question  was asked  several                                                                    
times.  If someone  thought the  following six  months would                                                                    
bring $20 per  barrel of oil then the average  ANS price for                                                                    
FY 2016 would  be approximately $33. If  someone thought the                                                                    
price of  oil would  go to  $60 per barrel  of oil  then the                                                                    
forecast price would  be about $54 per  barrel. Often times,                                                                    
people looked  at the current  day's price of $26  which did                                                                    
not reflect the  budget price, as six months  of pricing was                                                                    
already known.  In some years  often times when there  was a                                                                    
high oil price  environment and a low  oil price environment                                                                    
in the  same fiscal  year an average  was taken  between the                                                                    
two.  In the  current year  the  state had  not seen  prices                                                                    
above $50.                                                                                                                      
Mr. Tichotsky  explained the graph on  slide 25: "Historical                                                                    
ANS  West  Coast FY  Oil  Price  Bands: Annual  Average  and                                                                    
Official Spring 2015 Forecast."  He indicated that the green                                                                    
tick was  the deterministic  forecast that  was used  in the                                                                    
revenue model. However, the  department recognized there was                                                                    
a distribution  of prices. In  the past, for  actual prices,                                                                    
it showed the range of prices within one year.                                                                                  
2:17:23 PM                                                                                                                    
Mr. Tichotsky continued  that Alaska was in  the lower range                                                                    
or below the  lower range of what was  expected. However, it                                                                    
appeared  that  there  would  be  some  price  recovery.  He                                                                    
reminded  members  that  the calculations  included  a  2.25                                                                    
percent  inflation rate.  Prices  that were  $70 nominal  in                                                                    
2025 would be equal to about $60 or below in real terms.                                                                        
Co-Chair Neuman asked about the  average price per barrel of                                                                    
oil or  revenue to  the state looking  at the  5-year period                                                                    
from 2015 to 2020. Mr.  Tichotsky responded that the average                                                                    
price for the following year was about $50.                                                                                     
Vice-Chair Saddler asked if it  was fair to assume that when                                                                    
looking at  2025 the top  of the range  was the P10  and the                                                                    
bottom of the  range was the P90 probability,  and the green                                                                    
band   reflected  the   forecasted   price.  Mr.   Tichotsky                                                                    
responded that  the lower price  was the P10 and  the higher                                                                    
price was P90.                                                                                                                  
Vice-Chair  Saddler asked  if  the  price was  significantly                                                                    
more  likely to  be $40  than  $100 in  2016. Mr.  Tichotsky                                                                    
stated that it was most likely to be around $55 or $56.                                                                         
2:19:28 PM                                                                                                                    
Representative  Gara mentioned  the historical  fluctuations                                                                    
of  oil prices.  He  asked if  there was  a  fair amount  of                                                                    
inaccuracy in price forecasting  because it was difficult to                                                                    
do. Mr. Tichotsky stated that  his oil price forecast ranged                                                                    
between $20 and  $100 per barrel. He would  rather be mostly                                                                    
right than  exactly wrong. He  continued that  because there                                                                    
was the  issue of  spare capacity,  no longer  controlled by                                                                    
Oil Producing  and Exporting  Countries (OPEC),  there would                                                                    
likely  be  much more  price  volatility.  Some people  were                                                                    
estimating  between $50  and $70  per barrel  of oil.  There                                                                    
would be events  that would help spike up the  price of oil.                                                                    
When  people asked  one  of his  teachers  about what  might                                                                    
happen  to the  price of  oil,  he responded  that it  would                                                                    
change. There  was a balance  between supply and  demand and                                                                    
trying to anticipate  it. Volatility was more  likely due to                                                                    
the spare capacity issue.                                                                                                       
Co-Chair Neuman  stated that forecasting was  not a laughing                                                                    
matter.  He  emphasized  the state's  financial  issues.  He                                                                    
thought   the  accuracy   in  the   DOR's  forecasting   was                                                                    
absolutely critical  looking out  5 or  10 years.  Trying to                                                                    
get  the  most  accurate  information to  base  the  state's                                                                    
budget was crucial. Mr. Tichotsky  rebutted that there was a                                                                    
lot of volatility in the  market making it very difficult to                                                                    
forecast.  He emphasized  that it  was  a problem.  Co-Chair                                                                    
Neuman was well aware of it.                                                                                                    
Vice-Chair Saddler returned  to slide 24. He  wanted to make                                                                    
sure he was  reading the slide correctly. He  pointed to the                                                                    
oil price  of $40 as  an example. If  the oil price  was $40                                                                    
then the forecast  price would be $43.57. He  wondered if he                                                                    
was correct. Mr.  Tichotsky responded positively. Vice-Chair                                                                    
Saddler  confirmed  that the  information  on  slide 24  was                                                                    
2:24:03 PM                                                                                                                    
Representative Gara  thought the governor was  correct about                                                                    
figuring out a way to have  a more stable revenue stream. He                                                                    
agreed that the budget deficit was not a laughing matter.                                                                       
Mr. Tichotsky turned to slide  28: "Comparison - Spring 2015                                                                    
vs.  Fall 2015  Forecasts."  He conveyed  that  most of  the                                                                    
changes  were  based on  price.  Very  little was  based  on                                                                    
production. Looking  at the  comparison between  spring 2015                                                                    
versus  the fall  2015  for FY  16 there  was  a much  lower                                                                    
price, a  little less production,  and $600 million  less in                                                                    
revenues  than anticipated.  The  state's economists  viewed                                                                    
the difference  of $600 million differently  than the Office                                                                    
of  Management and  Budget.  Generally  with the  percentage                                                                    
differences, it was difficult to make predictions.                                                                              
Mr. Tichotsky  compared fall 2015  against the  forecast for                                                                    
2017 there  was a $30  difference in price accounting  for a                                                                    
35 percent change. There was  a smaller amount of production                                                                    
and  there  was a  difference  of  over  $1 billion  in  the                                                                    
anticipated forecast.                                                                                                           
Representative   Edgmon  referred   to  a   presentation  by                                                                    
Enalytica  in   the  previous  year  about   the  increasing                                                                    
volatility in predicting oil prices  due to OPEC's dominance                                                                    
receding. Also, with  the advent of shale  oil production in                                                                    
the United States  it was difficult to  prepare a break-even                                                                    
analysis for  the various oil  producers. He agreed  that it                                                                    
was more difficult to predict  oil prices than it might have                                                                    
been  when OPEC  was  in the  driver's  seat. Mr.  Tichotsky                                                                    
stated that the  oil prices for 2013 and 2014  were the same                                                                    
to  three significant  digits. An  economist  from his  team                                                                    
supplied him the price for 2014  he asked his team member to                                                                    
recheck the  number. The fellow  did and confirmed  that the                                                                    
price was the same down to the  penny as it was in 2013. The                                                                    
chances  of   the  number  being  the   same  was  extremely                                                                    
unlikely.  What it  told him  as an  economist was  that the                                                                    
commodity  markets were  really stable.  However, there  was                                                                    
enough   of  a   change  in   price  and   the  market   was                                                                    
restructuring  enough that  it was  a different  environment                                                                    
Representative  Edgmon thought  he had  heard Mr.  Tichotsky                                                                    
report   that  he   predicted   there   would  be   volatile                                                                    
circumstances through 2019. He asked  if he was correct. Mr.                                                                    
Tichotsky  explained   that  the  price  forecast   the  DOR                                                                    
provided that  the revenue  forecast was  based on  took the                                                                    
median  rather   than  incorporating  the   volatility.  The                                                                    
volatility was being provided as  a back story. He suggested                                                                    
that  once  volatility  set  in it  was  difficult  to  make                                                                    
accurate predictions.                                                                                                           
Representative  Edgmon   commented  that   if  a   group  of                                                                    
worldwide experts got together  to make predictions and were                                                                    
all wrong  or considerably off  the mark then it  would seem                                                                    
that  the   whole  topic  of  volatility   was  an  abstract                                                                    
conversation. Mr.  Tichotsky thought  it was useful  to know                                                                    
the environment was unpredictable.                                                                                              
2:29:36 PM                                                                                                                    
Representative  Kawasaki commented  that  the forecast  that                                                                    
came  out in  March prior  to  finishing the  budget in  the                                                                    
previous year painted a rosier  picture than anticipated. In                                                                    
looking at the  forecasted number, the price  per barrel was                                                                    
off  significantly. He  wondered if  the administration  was                                                                    
trying to paint a rosier picture  of the budget than what it                                                                    
actually was. From  a budgeting standpoint it  made him very                                                                    
uncomfortable   that  the   forecasts  could   be  extremely                                                                    
inaccurate especially when  doing budgets from year-to-year.                                                                    
He  speculated that  the legislature  would have  to have  a                                                                    
large  supplemental  budget.   Commissioner  Hoffbeck  asked                                                                    
Representative  Kawasaki  to turn  back  to  slide 16  which                                                                    
showed  some of  the dynamic  that contributed  to a  rosier                                                                    
picture than what occurred. He  pointed to January 2015 when                                                                    
the oil  price recovered for  a period  of time and  the DOR                                                                    
was preparing the spring 2015  forecast update. The forecast                                                                    
was a  product of the  data that  was available at  the time                                                                    
the forecast  was being made.  Mr. Tichotsky added  that the                                                                    
department followed a methodology  for calculating the price                                                                    
and production of oil during forecasting sessions.                                                                              
Vice-Chair  Saddler   asked  if   the  department   had  the                                                                    
necessary resources in personnel  to do the forecasting more                                                                    
accurately.  He  wondered  if   there  were  any  structural                                                                    
impediments  in   being  able   to  provide   more  accurate                                                                    
forecasts.   Commissioner   Hoffbeck  responded   that   the                                                                    
economic  research  group  within the  department  had  been                                                                    
stretched fairly  thin in the  current year and  in previous                                                                    
years.  The  demands  on the  economic  team  extended  from                                                                    
revenue   forecasting    to   analyzing    legislation,   to                                                                    
contributing data  to year-end reports. He  would absolutely                                                                    
love to have  a few more people doing  economic research. He                                                                    
complimented the  many talented people  already contributing                                                                    
within the department.                                                                                                          
Vice-Chair Saddler  remarked that he would  appreciate it if                                                                    
the department  would forecast more with  less. Commissioner                                                                    
Hoffbeck responded, "Yes."                                                                                                      
Co-Chair Neuman  commented that  the commissioner  would not                                                                    
be getting more people.                                                                                                         
Representative Kawasaki  reported other states being  in the                                                                    
same predicament of being fairly  dependent on oil including                                                                    
Wyoming  and North  Dakota. He  wondered if  their forecasts                                                                    
were similar to Alaska's.  Mr. Tichotsky answered that there                                                                    
was probably  no other  state that was  so dependent  on oil                                                                    
for revenue and  where the industry played the  role that it                                                                    
did in  Alaska's economy. Alaska  was not  very diversified.                                                                    
The  economies  of Wyoming  and  North  Dakota were  not  as                                                                    
dependent  on oil.  Their economies  developed prior  to any                                                                    
oil booms.  Alaska was the  most oil dependent state  in the                                                                    
nation. He was  unaware of any other state that  relied on a                                                                    
forecast   for  revenue   based  on   oil  prices   and  oil                                                                    
2:34:53 PM                                                                                                                    
Representative  Pruitt   asked  about  the   performance  of                                                                    
Alaska's   economists    compared   to    other   economists                                                                    
historically.  Mr.  Tichotsky  responded  that  three  years                                                                    
prior, when  he became  the chief economist,  the department                                                                    
revisited  the  way  production  forecasting  was  done  and                                                                    
revised the  system. It  was clear  that the  department was                                                                    
over-forecasting production.  He did  not believe  the state                                                                    
had an  apples-to-apples comparison over the  time period to                                                                    
look at  times when the  forecast was fairly accurate.  In a                                                                    
stable oil price environment it  was very easy from year-to-                                                                    
year to make  a good prediction. In terms  of production, it                                                                    
was very  easy to make  a good  prediction one year  out. It                                                                    
was a very difficult task  to make a prediction for multiple                                                                    
years  out when  mixing production  and price.  It was  also                                                                    
difficult, even daunting, to compare  how well the state did                                                                    
in an analysis.                                                                                                                 
Representative Pruitt asked if there  had been things in the                                                                    
past that the legislature  required of the economists within                                                                    
the department to do that  should be taken off their plates.                                                                    
Commissioner  Hoffbeck   suggested  changing  some   of  the                                                                    
release dates  for certain reports because,  currently, most                                                                    
of them  were released around  the same time.  He understood                                                                    
the  importance of  providing current  information. However,                                                                    
it would be helpful if release dates could be staggered.                                                                        
Representative  Pruitt  wondered   if  the  legislature  had                                                                    
imposed   unreasonable  demands   that   limited  the   best                                                                    
utilization of the  state's economists. If so,  he wanted to                                                                    
help   make  adjustments.   Commissioner  Hoffbeck   thanked                                                                    
Representative Pruitt for his  consideration. He referred to                                                                    
slide 22. The  forecast was prepared by  another entity. The                                                                    
ranges  were  not  that  much   different  than  the  ranges                                                                    
prepared by staff.                                                                                                              
2:38:28 PM                                                                                                                    
Representative  Wilson  mentioned  the  tax  division  being                                                                    
behind with  audits for the  tax years under  Alaska's Clear                                                                    
and Equitable  Share (ACES). She  wondered about  the impact                                                                    
of the  audit workload  on forecasting  and vice  versa. She                                                                    
wondered  if  they  worked together.  Commissioner  Hoffbeck                                                                    
answered that there were two  different teams within the Tax                                                                    
Division of the DOR that ran independently.                                                                                     
Representative Wilson  noted that the legislature  looked to                                                                    
the revenue  forecast when budgeting.  She wondered  how the                                                                    
audits fit in  with the forecasts and money  for the budget.                                                                    
Commissioner   Hoffbeck   replied    that   the   department                                                                    
forecasted credits which were  embedded within the forecast.                                                                    
The long-term  impact of  development was  forecasted within                                                                    
the  productions.   The  state  worked  directly   with  the                                                                    
industry concerning investment plans.                                                                                           
Representative  Wilson mentioned  legislation  having to  do                                                                    
with  additional taxes.  She  expressed  her concerns  about                                                                    
people leaving  which would affect the  economy further. She                                                                    
wondered  if different  taxes would  be  less volatile.  She                                                                    
thought  additional slides  would  be helpful.  Commissioner                                                                    
Hoffbeck replied that they  were dramatically less volatile.                                                                    
Mining  might be  an exception  because of  being driven  by                                                                    
commodity  prices.  He  spoke to  the  impacts  of  changing                                                                    
rates. He asked folks  from the Resource Development Council                                                                    
(RDC)  to include  factual data  in  their testimonies  when                                                                    
they testified on bills.                                                                                                        
2:42:38 PM                                                                                                                    
Representative  Gara  followed up  on  a  question asked  by                                                                    
Representative  Pruitt.  He  discussed  when  he  had  first                                                                    
started  in  the  legislature. He  wondered  if  there  were                                                                    
missions  and measures  that had  been  established in  past                                                                    
years  for  the DOR  that  were  not  the  best use  of  the                                                                    
department's time.  Commissioner Hoffbeck answered  that Co-                                                                    
Chair Neuman and Co-Chair Thompson  had asked the department                                                                    
to look at  the issue the prior summer. He  noted that there                                                                    
were some  missions and measures that  potentially fell into                                                                    
the category  mentioned by Representative Gara,  but the DOR                                                                    
had fewer than in other departments.                                                                                            
Representative Pruitt  wondered if a savings  could be found                                                                    
by consolidating or  sharing economists amongst departments.                                                                    
He  asked   if  the  state  was   utilizing  its  economists                                                                    
efficiently.  Commissioner Hoffbeck  answered that  he could                                                                    
not  speak for  other  departments, but  the DOR  economists                                                                    
were all working hard. He could  look into the issue, but he                                                                    
did  not believe  there  would  be significant  efficiencies                                                                    
because of how much the team had already been tasked with.                                                                      
2:46:12 PM                                                                                                                    
Mr.  Tichotsky continued  with  slide  29: "Contributors  of                                                                    
Change  in  FY2016 Revenue  Forecast."  He  shared that  the                                                                    
major contributors  of change in the  two forecasts included                                                                    
price,  a  small  difference  in  ANS  production,  a  large                                                                    
difference  in price,  and a  smaller  amount of  deductible                                                                    
lease expenditures.  Transportation costs were close  to the                                                                    
same with a slight increase in the fall forecast.                                                                               
Mr. Tichotsky moved to slide  30: "Contributors of Change in                                                                    
FY2017  Revenue  Forecast." There  was  a  larger change  in                                                                    
price in 2017. He thought  the production profile was pushed                                                                    
out but maintained the plateau  of over 500 thousand barrels                                                                    
per  day.  He  noted  the   $1  billion  decrease  in  lease                                                                    
expenditures  and  reported  an increase  in  transportation                                                                    
Mr.  Tichotsky  turned to  slide  31:  "North Slope  Capital                                                                    
Expenditure  Forecast  Change."   He  reported  the  capital                                                                    
expenditure forecast  change was strongly price  driven. The                                                                    
change  equated to  a decrease  of  investment between  $500                                                                    
million to $1 billion.                                                                                                          
Mr.  Tichotsky turned  to slide  32: "North  Slope Operating                                                                    
Expenditure Forecast  Change." He relayed that  the decrease                                                                    
in operating  expenditures were also price  driven. He spoke                                                                    
to the curve  changing a little because  of costs escalating                                                                    
in the future.                                                                                                                  
Commissioner  Hoffbeck  advanced  to   slide  34:  "Net  Tax                                                                    
Credits vs.  Production Tax." He  mentioned a  similar slide                                                                    
being presented  in the previous  year's presentation  - the                                                                    
impact of credits against production tax.                                                                                       
Commissioner Hoffbeck  reviewed slide 35:  "Unrestricted Oil                                                                    
Revenue* and  Tax Credits" He  explained that the  slide had                                                                    
been  requested  the prior  year.  The  slide reflected  the                                                                    
impact of credits against total  revenues being generated by                                                                    
the oil and  gas industry. The two slides  were included for                                                                    
information purposes.                                                                                                           
Mr.  Tichotsky  proceeded  to slide  37:  "Fall  2015  Total                                                                    
Revenue   Forecast."   He   explained  that   the   division                                                                    
forecasted stable  revenues - the average  likely revenues -                                                                    
rather   than   incorporating    volatility.   However,   he                                                                    
emphasized that when looking at  the total revenue forecast,                                                                    
both  petroleum  and   investment  revenues  were  extremely                                                                    
volatile.  Federal revenue  had  been relatively  consistent                                                                    
from FY 11 when the state  had between $2.4 and $2.5 billion                                                                    
coming in. He furthered that  when the forecast reached $3.3                                                                    
billion, the expected revenue, the  state only received cash                                                                    
of  about $2.5  billion. He  spoke of  non-petroleum revenue                                                                    
totaling  about $1  billion for  the unrestricted  fund. The                                                                    
state had  a consistent non-petroleum revenue  of about $500                                                                    
2:51:12 PM                                                                                                                    
Co-Chair  Neuman asked  if the  dotted line  represented the                                                                    
present. Mr.  Tichotsky responded affirmatively.  He relayed                                                                    
that the  history column already occurred  including half of                                                                    
2016.  The  forecasting  portion  represented  2015  through                                                                    
Co-Chair  Neuman asked  about  the  differences between  the                                                                    
current chart  on slide 37  and the  charts on slide  31 and                                                                    
32. He  wanted to  know if those  charts only  addressed the                                                                    
North Slope. He noticed on  the current chart that the level                                                                    
of  the various  revenues were  staying flat  or increasing.                                                                    
Mr. Tichotsky answered that Co-Chair  Neuman was correct. He                                                                    
pointed  out that  the chart  on slide  37 showed  the total                                                                    
revenue forecast rather than just the unrestricted portion.                                                                     
Co-Chair Neuman  wondered if the projection  included all of                                                                    
the  governor's  proposals  on   new  revenue  streams.  Mr.                                                                    
Tichotsky answered  that it was  under the  state's existing                                                                    
taxes.  Co-Chair Neuman  was confused.  He  wondered if  the                                                                    
state was  going up  or down.  Mr. Tichotsky  explained that                                                                    
the forecast  showed a steady revenue  stream from royalties                                                                    
through 2025.                                                                                                                   
Co-Chair Neuman noted  that it was not matching  up with Mr.                                                                    
Tichotsky's prior  charts. Mr. Tichotsky agreed.  He thanked                                                                    
the chairman  for catching his  mistake. He would  come back                                                                    
to the question at a later time.                                                                                                
Representative   Gara  wanted   to  better   understand  the                                                                    
confusion.  He pointed  to the  green  bar representing  oil                                                                    
revenue  which  indicated  a  rebound   in  oil  prices.  He                                                                    
wondered if that was the  reason the green band got slightly                                                                    
bigger and stayed stable. Mr.  Tichotsky remembered that the                                                                    
combination   of  having   the  price   rebound  even   with                                                                    
production falling they cancelled  each other out over time.                                                                    
The  chart looked  at the  total  revenue and  not just  the                                                                    
general fund revenue which tended to dive more.                                                                                 
2:54:39 PM                                                                                                                    
Co-Chair  Neuman  stated  that  he was  still  confused  and                                                                    
wanted accuracy.  He noted  the dramatic  drop on  the chart                                                                    
depicting  the  North  Slope  capital  expenditure  forecast                                                                    
change on  slide 31. He  surmised from the chart  that long-                                                                    
term low  oil prices were  expected well into the  future if                                                                    
the industry  was not reinvesting in  operations or capital.                                                                    
Mr. Tichotsky  would recheck the information  on the charts.                                                                    
The  picture  was  supposed  to be  schematic  to  show  how                                                                    
volatile  the  revenues  were. However,  when  the  division                                                                    
forecasted  them they  did  not  forecast volatility.  There                                                                    
were  certain interacting  issues  including the  volatility                                                                    
and  depending on  pricing which  would create  dependencies                                                                    
between costs.                                                                                                                  
Co-Chair Neuman interrupted to say  that the bottom line was                                                                    
that  no one  was  going to  forecast  that accurately.  Mr.                                                                    
Tichotsky  supposed  that  the  other issue  was  that  when                                                                    
forecasting if a  low number was chosen  and increased, then                                                                    
more  capital   expenditures  would  be  reflected   in  the                                                                    
forecast. The opposite was true  in an environment where the                                                                    
price  was decreasing  which might  result  in less  capital                                                                    
expenditures.  It   would  hit  production  in   the  future                                                                    
depending on more or less investment.                                                                                           
Commissioner  Hoffbeck  stated  that  the  department  would                                                                    
recheck the numbers.                                                                                                            
Co-Chair Neuman  thought it was  safe to say that  the state                                                                    
should budget  to the  low end, or  the conservative  end of                                                                    
the forecast to avoid additional debt.                                                                                          
2:56:54 PM                                                                                                                    
Mr. Tichotsky  scrolled to slide  38: "FY 2017  General Fund                                                                    
Unrestricted  Revenue, with  Price  Sensitivity." He  talked                                                                    
about the change in price  and price sensitivity. Because of                                                                    
the way the taxation system  worked there were certain areas                                                                    
where the change in oil  prices changed revenues less. In an                                                                    
oil environment where prices ranged  between $25 and $50 per                                                                    
barrel  (Alaska's current  environment) it  was likely  that                                                                    
the state's petroleum unrestricted  revenue would be between                                                                    
$1 billion and  less than $2 billion. In  an oil environment                                                                    
where prices were above $80  per barrel the price difference                                                                    
yielded a more  dramatic revenue effect. He  relayed that in                                                                    
the back  of the DOR  Revenue Sources Book there  were pages                                                                    
that indexed the price of oil to UGF revenue.                                                                                   
Representative  Guttenberg suggested  that the  chart showed                                                                    
UGF revenue with price sensitivity.  He wondered whether the                                                                    
chart    reflected    revenues    after    deductions    for                                                                    
transportation  and production.  Mr.  Tichotsky stated  that                                                                    
the chart  showed that revenue  equaled price  multiplied by                                                                    
production minus costs.                                                                                                         
Representative   Guttenberg  wondered   if  production   and                                                                    
transportation  costs would  appear  as a  straight line  if                                                                    
they were  added in the  chart or whether  price sensitivity                                                                    
would have  to be added.  Mr. Tichotsky explained  that some                                                                    
elements  were  price  sensitive  such as  items  that  were                                                                    
volume  oriented.   For  example  if   production  decreased                                                                    
producing  less barrels  running  through  the pipeline  the                                                                    
tariff would  increase. However, the more  barrels that were                                                                    
produced,  the greater  the  economy of  scale  would be  in                                                                    
terms of transportation costs.                                                                                                  
Vice-Chair Saddler referred to slide  39. He asked about the                                                                    
line  for  investment  revenue. He  asked  what  the  figure                                                                    
included.  Commissioner  Hoffbeck  responded that  it  would                                                                    
include  the Constitutional  Budget  Reserve  (CBR) and  the                                                                    
Permanent Fund.  He did not  believe it included  the Alaska                                                                    
Retirement Management (ARM) Board earnings.                                                                                     
Vice-Chair Saddler  voiced that  it looked like  the figures                                                                    
3:00:37 PM                                                                                                                    
Representative Gara  returned to the  chart on slide  38. He                                                                    
offered  that constitution  stated  that 25  percent of  all                                                                    
royalties  went into  the Permanent  Fund. He  provided some                                                                    
historical  information   about  the  royalty   changes  for                                                                    
certain  fields over  time. He  asked the  commissioner what                                                                    
the financial impact  would be to the budget  if the royalty                                                                    
percentage   for   all   fields    was   returned   to   the                                                                    
constitutional 25 percent.  Commissioner Hoffbeck had looked                                                                    
at the information and would provide it to the committee.                                                                       
Co-Chair  Neuman  added that  it  be  done on  the  proposed                                                                    
budget as well. Commissioner  Hoffbeck stated that the quick                                                                    
rule of  thumb was that  the average royalty  percentage was                                                                    
about 30 percent.  He would provide members  with the actual                                                                    
Representative  Gara asked  if  it was  equal  to about  $50                                                                    
million at  current prices. Commissioner  Hoffbeck responded                                                                    
that Representative Gara was close.                                                                                             
Mr.  Tichotsky advanced  to the  table on  slide 39:  "Total                                                                    
Revenue Forecast - FY 2015 &  2016." He pointed to the major                                                                    
heading.  There  were   4  totals  for  FY   15.  The  total                                                                    
unrestricted general fund (UGF)  revenue was $2.3 billion in                                                                    
FY 15 and  $1.6 billion was forecasted for FY  16. The total                                                                    
designated general fund (DGF) in  FY 15 was $331 million and                                                                    
over $300 million in FY  16. The totals for other restricted                                                                    
revenues  reflected  a  slight or  significant  increase  in                                                                    
investment revenues  in FY 16 up  from FY 15. He  noted that                                                                    
the federal revenue total, although  reflected in the amount                                                                    
of $3.2  billion in  FY 16  would likely  shake out  to $2.5                                                                    
billion. He pointed  to the total state revenue  from FY 15.                                                                    
It  appeared to  be a  relatively stable  situation but  was                                                                    
clearly different within the structure of the state.                                                                            
Mr. Tichotsky discussed  slide 40: "A New  View of Revenue."                                                                    
He mentioned credit  ratings and whether the  glass was half                                                                    
empty or  half full.  In terms of  talking to  credit rating                                                                    
agencies,  when   a  person  reviewed  revenue   subject  to                                                                    
appropriation  and given  the  categories  the numbers  were                                                                    
higher than  in the past  for UGF.  The actual number  FY 15                                                                    
was about $6 billion and in  FY 16 it was estimated at about                                                                    
$5.4 billion.                                                                                                                   
3:05:18 PM                                                                                                                    
Vice-Chair  Saddler  asked  Mr.  Tichotsky  to  clarify  the                                                                    
difference between slides  39 and 40 and define  "A New View                                                                    
of Revenue."  Commissioner Hoffbeck explained that  slide 39                                                                    
reflected total revenue.  In the past in  looking at revenue                                                                    
available for  use some  of the  earnings was  not included.                                                                    
The  new view  of revenue  was breaking  out the  investment                                                                    
revenues available for appropriation.                                                                                           
Vice-Chair   Saddler   asked   what   slide   40   excluded.                                                                    
Commissioner  Hoffbeck  responded  that in  the  past  there                                                                    
would not have  been a line for Permanent  Fund Earnings. It                                                                    
would not have appeared as  available as a UGF revenue. What                                                                    
was  not   included  in  the  slide   were  the  substantial                                                                    
investments for trust funds  and other restricted investment                                                                    
revenues. The  take-away was that  the realized  earnings of                                                                    
the permanent  fund was available  for appropriation  in the                                                                    
current year.                                                                                                                   
Mr.   Tichotsky  advanced   to  slide   41:  "General   Fund                                                                    
unrestricted    Revenues    Non-petroleum."   He    reported                                                                    
generating  around  $500  million   per  year  in  UGF  non-                                                                    
petroleum revenues. A  breakdown of the type  of taxes could                                                                    
be  seen on  the  slide  including: Non-petroleum  corporate                                                                    
income  tax,  mining  license tax,  insurance  premium  tax,                                                                    
tobacco tax, motor fuel tax, and other taxes.                                                                                   
Commissioner Hoffbeck reemphasized that  the numbers did not                                                                    
represent any tax changes but were status quo numbers.                                                                          
Representative Gattis  asked for clarity regarding  the "New                                                                    
View" of  revenue. Commissioner Hoffbeck responded  that the                                                                    
"new" was  driven by  the administration's  discussions with                                                                    
the rating agencies. The  administration's position was that                                                                    
the state was not truly running  at a deficit because of its                                                                    
investment earnings. However,  the rating agencies disagreed                                                                    
because  the investment  earnings were  not included  in the                                                                    
Revenue   Sources    Book.   In   their    discussions   the                                                                    
administration  had to  argue  why  the investment  earnings                                                                    
were not in  the book. In the current year  the DOR included                                                                    
all  of the  available investment  revenues, hence  the "New                                                                    
View." It provided  a fuller view of how much  the state had                                                                    
available to spend.                                                                                                             
Co-Chair  Thompson pointed  to  the motor  fuel  tax on  the                                                                    
chart  on slide  41. In  the previous  year the  legislature                                                                    
looked  at  how  to  increase state  revenues.  It  was  his                                                                    
understanding that  the previous  year's motor fuel  tax was                                                                    
$80  million  but  the  DOR's chart  was  showing  only  $42                                                                    
million for  2015. He  wondered about  the discrepancy.   He                                                                    
also  pointed  out that  the  mining  license tax  showed  a                                                                    
substantial reduction from  years 2015 to 2016  to 2017, yet                                                                    
some large mines were scheduled  to come online. He wondered                                                                    
why reductions  were shown for  the mining license  tax. Mr.                                                                    
Tichotsky  explained that  for the  mining license  tax that                                                                    
the  numbers   were  based  on  the   department's  view  of                                                                    
commodity  prices.  The  Department of  Revenue  anticipated                                                                    
that the commodity price would  be lower and would result in                                                                    
lower  mining  license  taxes. Commissioner  Hoffbeck  added                                                                    
that it was  unrestricted revenues and a share  of what fell                                                                    
under   motor  fuel   -  aviation   fuel  taxes   that  were                                                                    
3:10:33 PM                                                                                                                    
Representative  Wilson  wondered  why  the  motor  fuel  tax                                                                    
increased from  $42 million to  $51 million. She  also noted                                                                    
the decrease  in the non-petroleum  taxes from  $136 million                                                                    
to  $105  million  and  stabilizing in  2017  at  $105.  Mr.                                                                    
Tichotsky  responded  in  answer   to  her  motor  fuel  tax                                                                    
question. He  explained that although  the department  had a                                                                    
naive  forecast,   it  tried  to  get   the  best  available                                                                    
information possible to put  together a forecast. Typically,                                                                    
an  adjustment  was  done  every year  to  the  forecast  to                                                                    
reflect  what  was actually  happening.  However,  it was  a                                                                    
moving  target.   Some  of   the  analysis   the  department                                                                    
conducted included  looking at the  price of motor  fuel. If                                                                    
fuel prices dropped, utilization  increased. For every tax a                                                                    
department   economist  went   through   and  completed   an                                                                    
individual forecast.  The difference of $51  million and $42                                                                    
million had  to do  with margins of  error when  running the                                                                    
Commissioner  Hoffbeck stated  that  the  difference in  the                                                                    
motor fuel tax was actually a  result of the increase - just                                                                    
short of a penny - adopted in the prior year.                                                                                   
Representative  Wilson  asked  for an  explanation  for  the                                                                    
decrease  in the  non-petroleum corporate  income from  $136                                                                    
million to  $105 million. Mr.  Tichotsky reported it  had to                                                                    
do with  the estimations of  the global economy. He  did not                                                                    
know  the particulars  about  the higher  take  in 2015.  He                                                                    
recalled the  estimate to be  between $100 million  and $120                                                                    
million. The actual number was $136 million for 2015.                                                                           
Representative Wilson  wondered about the  original estimate                                                                    
even though  he was reporting  actual numbers for  2015. Mr.                                                                    
Tichotsky stated that as the  chief economist when he looked                                                                    
at  the  non-petroleum  revenues  he looked  at  them  as  a                                                                    
portfolio.  Even  though  the individual  items  within  the                                                                    
portfolio bounced around occasionally,  they averaged out at                                                                    
around half of $1 million.  Although there were changes from                                                                    
year-to-year the  total number  was a fairly  stable revenue                                                                    
3:14:43 PM                                                                                                                    
Co-Chair  Neuman asked  Mr. Tichotsky,  the chief  economist                                                                    
for  several  years, if  it  was  possible  to look  at  the                                                                    
forecasts from  a few  years prior. His  point was  that, as                                                                    
uncomfortable as  it was  to bring  up, he  thought politics                                                                    
were becoming  part of the discussions  around the forecast.                                                                    
He suggested that perhaps if  someone who had an interest in                                                                    
trying to show that the deficits  to the state were going to                                                                    
be greater,  the forecast would  need to look lower.  He was                                                                    
not saying  that it had  occurred, but  he thought it  was a                                                                    
possibility. He  wanted a comparison  since the  same person                                                                    
had  been  doing the  revenue  forecasting  for many  years.                                                                    
Commissioner  Hoffbeck would  provide the  data and  assured                                                                    
Co-Chair Neuman  that politics were  not a  factor. Co-Chair                                                                    
Neuman replied, "Let's make sure."                                                                                              
Mr. Tichotsky responded that  over all non-petroleum revenue                                                                    
was a relatively  stable source of revenue  from an economic                                                                    
point of view.                                                                                                                  
Representative  Munoz referred  to slide  29. In  looking at                                                                    
the deductible  lease expenditures for Spring  2015 forecast                                                                    
for $6.7 billion and Fall  2015 forecast for $5.7 billion it                                                                    
appeared that there  was a correlation between  the price of                                                                    
oil and the amount  companies spent. Conversely, when prices                                                                    
were higher a  few years prior, she wondered  if the capital                                                                    
expenditures  were significantly  higher or  similar to  the                                                                    
forecast numbers on the slide.  Mr. Tichotsky responded that                                                                    
they   were  significantly   higher   in   a  higher   price                                                                    
Representative  Munoz  asked  him   to  walk  the  committee                                                                    
through what  qualified lease expenditures included  and how                                                                    
the  credits were  calculated. Mr.  Tichotsky conveyed  that                                                                    
the numbers  for the overall forecast  equaled the aggregate                                                                    
across  the  entire industry.  Using  the  DOR's model,  the                                                                    
department worked with the companies  to complete a detailed                                                                    
questionnaire. The  companies were  also asked to  provide a                                                                    
forecast  of   their  lease  expenditures.   The  department                                                                    
referenced  the  history  of  what  was  actually  done.  An                                                                    
aggregate number  was derived by taking  the information the                                                                    
companies  provided as  well as  the historical  information                                                                    
and   applying    the   department's   knowledge    of   the                                                                    
responsiveness of lease expenditures  to prices. The numbers                                                                    
were added together  by company and an  aggregate number was                                                                    
defined.  The department  then ran  the tax  calculation and                                                                    
based on the lease  expenditures, production, and price, the                                                                    
overall revenue forecast was derived.                                                                                           
3:19:07 PM                                                                                                                    
Representative  Munoz  stated  that the  information  helped                                                                    
with the  forecasting. However, she wanted  the commissioner                                                                    
to  walk  through  how they  were  calculated  and  applied.                                                                    
Commissioner Hoffbeck would provide the information.                                                                            
Representative  Guttenberg  reiterated  that  he  had  asked                                                                    
about  the general  fund  price  sensitivity and  deductible                                                                    
lease expenditures.  He wondered  if the  department tracked                                                                    
what projects were being worked  on to help with forecasting                                                                    
into the future. He understood  that in the short turn there                                                                    
might not be significant  changes in project schedules based                                                                    
on price.  However, he wondered if  the production forecasts                                                                    
factored  in potential  project development  changes due  to                                                                    
future  oil   prices.  Mr.  Tichotsky  explained   that  the                                                                    
department did  the interview process with  the companies in                                                                    
September of each  year.  The department looked  at both the                                                                    
spring actuals  and the  data from  the companies  to create                                                                    
the  following  spring  forecast.   Depending  on  what  the                                                                    
department  thought was  happening,  there  was a  follow-up                                                                    
opportunity  to  have  discussions  with  the  industry.  He                                                                    
reiterated that  the near-term  forecast was  typically spot                                                                    
on.  However, uncertainty  crept  in beyond  a  year due  to                                                                    
price uncertainty  and other uncertainties. The  farther out                                                                    
the forecast, the more uncertain the numbers were.                                                                              
Co-Chair Neuman  asked the  commissioner to  move on  to the                                                                    
next presentation on the budget overview.                                                                                       
Co-Chair Thompson  asked members to submit  any questions on                                                                    
the  revenue  forecasts  to Co-Chair  Neuman  and  he  would                                                                    
obtain and distribute written responses.                                                                                        
3:23:24 PM                                                                                                                    
^FY17 BUDGET OVERVIEW: DEPT. OF REVENUE                                                                                       
Commissioner  Hoffbeck  turned  the   meeting  over  to  Mr.                                                                    
DAN   DEBARTOLO,   DIRECTOR,  DIVISION   OF   ADMINISTRATIVE                                                                    
SERVICES, DEPARTMENT  OF REVENUE, introduced  the PowerPoint                                                                    
presentation:  "State  of   Alaska:  Department  of  Revenue                                                                    
Budget Overview."                                                                                                               
Mr.  DeBartolo began  with slide  2:  "Alaska Department  of                                                                    
   · Core Programs                                                                                                              
   · Treasury Division - Invest                                                                                                 
   · Tax Division - Collect                                                                                                     
   · Permanent Fund Dividend Division - Distribute                                                                              
   · Child Support Services Division - Collect and                                                                              
        · Authorities, Corporations, and Boards                                                                                 
   · Alaska Housing Finance Corporation (AHFC) - Invest and                                                                     
   · Alaska Permanent Fund Corporation (APFC) - Invest                                                                          
   · Alaska Retirement Management Board (ARMB) - Invest                                                                         
   · Alaska Mental Health Trust Authority (AMHTA) -                                                                             
   · Alaska Municipal Bond Bank Authority (AMBBA) -                                                                             
Mr. DeBartolo relayed the mission of the DOR was to                                                                             
collect, distribute, and invest funds for public purposes.                                                                      
He indicated the department had had questions as to why the                                                                     
Child Support Services Division fell within the DOR. He                                                                         
explained that a money stream had to be collected and                                                                           
distributed. He continued to read the slide.                                                                                    
Mr. DeBartolo  explained the  structure of  DOR on  slide 3:                                                                    
"Alaska   Department  of   Revenue."   He   read  from   the                                                                    
organizational  chart. (Copy  on  File). He  noted that  the                                                                    
Alaska Liquefied Natural  Gas (AKLNG) fell under  the DOR as                                                                    
well. He  clarified that  the component  within the  DOR was                                                                    
called Natural  Gas Commercialization, a very  small portion                                                                    
of the overall AKLNG project.                                                                                                   
3:25:43 PM                                                                                                                    
Mr.  DeBartolo  read  from slide  4:  Alaska  Department  of                                                                    
Revenue: FY 17 Department Snapshot of Programs":                                                                                
   · Treasury Division                                                                                                          
       · Mission - To Manage and Invest State Funds                                                                             
        · Positions - 42 Full Time                                                                                              
        · Programs under the Treasury umbrella - $83,851.8                                                                      
          (20.83% of DOR Budget)                                                                                                
             · Treasury Operations - $10,225.6 (2.54% of                                                                        
               DOR Budget)                                                                                                      
             · Alaska Retirement Management Board -                                                                             
               $72,039.8 (17.89% of DOR Budget)                                                                                 
             · Alaska Municipal Bond Bank - $1004.7 (.25%                                                                       
               of DOR Budget)                                                                                                   
             · Unclaimed Property - $581.7 (.14% of DOR                                                                         
   · Tax Division                                                                                                               
       · Mission - Collect Taxes, Forecast & Report                                                                             
          Revenues, and Regulate Gaming                                                                                         
        · Positions - 110 Full Time, 1 Part Time                                                                                
        · Tax Operations - $15,142.8 (3.76% of DOR Budget)                                                                      
   · PFD Division                                                                                                               
       · Mission - Distribute Timely Annual Dividend                                                                            
          Payments to Eligible Alaskans                                                                                         
        · Positions - 72 Full Time, 9 Part Time                                                                                 
        · PFD - Operations - $8,754.2 (2.17% of DOR Budget)                                                                     
Mr.   DeBartolo  read   directly  from   slide  5:   "Alaska                                                                    
Department  of   Revenue:  FY  17  Department   Snapshot  of                                                                    
   · Child Support Services Division                                                                                            
        · Mission - To Collect and Distribute Child Support                                                                     
          Payments to Custodial Parents                                                                                         
        · Positions - 224 Full Time                                                                                             
        · Child Support Operations- $27,531.2 (6.84% of DOR                                                                     
   · Administration and Support                                                                                                 
        · Positions - 24 Full Time                                                                                              
        · Programs under the Administration umbrella -                                                                          
          $4,049.9 (1.0% of DOR Budget)                                                                                         
             · Commissioner's Office                                                                                            
            · Administrative Services Division                                                                                  
             · Criminal Investigation Unit                                                                                      
             · Natural Gas Commercialization - AKLNG                                                                            
   · Permanent Fund Corporation                                                                                                 
        · Mission - To Maximize the Value of The Permanent                                                                      
          Fund Within Return Objectives                                                                                         
        · Positions - 48 Full Time, 2 Part Time                                                                                 
        · APFC Operations and Management Fees - $160,300.8                                                                      
          (39.82% of DOR Budget)                                                                                                
3:29:09 PM                                                                                                                    
Vice-Chair  Saddler asked  if operational  expenses for  the                                                                    
ARM Board  equaled $72  million. He  wondered if  it counted                                                                    
money  under  management.  He  also  asked  about  the  $160                                                                    
million  figure  for  management   and  operations  for  the                                                                    
Permanent Fund Corporation. Mr.  DeBartolo explained that it                                                                    
was  a   combination  of   their  operational   budgets  and                                                                    
management  fees.  The  actual operational  budget  for  the                                                                    
Alaska  Permanent Fund  Corporation (APFC)  was between  $10                                                                    
million to  $12 million.  The ARM Board  was managed  by the                                                                    
investment officers  within the  treasury umbrella.  The ARM                                                                    
Board's  budget  was  comprised  of  mostly  fees  and  some                                                                    
budgeting components  for investment officer  positions that                                                                    
were exclusively  allocated to a particular  job. Vice-Chair                                                                    
Saddler asserted the information was helpful.                                                                                   
Mr.  DeBartolo  turned to  slide  6:  "Alaska Department  of                                                                    
Revenue:  FY 17  Department Snapshot  of Programs."  He read                                                                    
from the slide:                                                                                                                 
   · Alaska Housing Finance Corporation                                                                                         
        · Mission - To Provide Alaskans Access to Safe,                                                                         
          Quality and Affordable Housing                                                                                        
        · Positions - 313 Full Time, 37 Part Time and Non-                                                                      
        · AHFC Operations- $96,075.7 (23.87% of DOR Budget)                                                                     
   · Alaska Mental Health Trust Authority                                                                                       
        · Mission - To Administer the AMHTA as a Perpetual                                                                      
          Trust and to Ensure a Comprehensive and                                                                               
          Integrated Program to Improve the Lives of                                                                            
        · Positions -  16 Full Time                                                                                             
        · AMHTA and LTCO Operations - $4,998.6 (1.24% of                                                                        
          DOR Budget)                                                                                                           
Mr.  DeBartolo  moved  to slide  7:  "Alaska  Department  of                                                                    
Revenue:  Summary of  UGF and  Position Reductions  - FY  15                                                                    
Management Plan  to FY  17 Governor." He  provided a  bit of                                                                    
context on  the slide. He explained  that it was not  just a                                                                    
change  slide  from  last  year's  management  plan  to  the                                                                    
current  year's  governor's  budget. He  wanted  to  provide                                                                    
information about what the DOR  was doing to reduce the size                                                                    
of its  operations, in terms  of the  budget as a  whole. He                                                                    
read directly from the slide:                                                                                                   
  · Since the start of FY15, the Department has cut $5.9                                                                        
     million (-19.1%) in UGF spending. The Tax Division has                                                                     
     felt the greatest impact as $2.65 million (15.5%) of                                                                       
     its total budget has been reduced during that period.                                                                      
   · The Treasury Division reduced $1.75 million (35.8%) in                                                                     
     UGF spending primarily due to management fee                                                                               
     reductions and cost allocation changes.                                                                                    
   · The Child Support Services Division reduced $1.1                                                                           
     million (10.1%) in UGF spending via staff reductions                                                                       
     and programmatic changes.                                                                                                  
   · During this period the Department will have eliminated                                                                     
     48 positions:                                                                                                              
        · Tax - 29                                                                                                              
        · Child Support - 6                                                                                                     
        · AHFC - 3                                                                                                              
        · Treasury - 3                                                                                                          
        · PFD - 2                                                                                                               
        · Admin Services - 2                                                                                                    
        · Commissioner - 2                                                                                                      
        · Criminal Investigations - 1                                                                                           
Mr. DeBartolo  highlighted that  the reduction  in positions                                                                    
was  not  a  net  of  new  positions  requested.  They  were                                                                    
positions that  had been eliminated. Largely  the reductions                                                                    
had  come   from  general  administrative  duties   such  as                                                                    
accounting and  other administrative  positions. Information                                                                    
Technology  positions  had  been  reduced as  well  as  some                                                                    
analysts  positions. He  offered  to provide  the detail  to                                                                    
Co-Chair Neuman asked for the information.                                                                                      
Representative  Gattis queried  about  the term  "positions"                                                                    
and whether  that word meant  human beings. She asked  if 48                                                                    
human  beings  no  longer   worked  within  the  departments                                                                    
listed. Mr.  DeBartolo responded that  it did not  mean that                                                                    
48 people  had lost  their jobs. The  department had  made a                                                                    
concerted  effort   to  hold  positions  open   rather  than                                                                    
bringing  in new  people. The  department was  aware of  the                                                                    
likelihood of  potential cuts and  made sure to hold  off on                                                                    
filling vacant positions. It had  the same budgetary impact.                                                                    
The Department  of Revenue's goal was  not to try to  put as                                                                    
many people  out of work  as possible, but rather  to reduce                                                                    
the overall  personal services operating budget.  He thought                                                                    
the department  could show that it  had done that. In  a few                                                                    
instances  the  department   had  added  investment  officer                                                                    
positions  trying to  bring more  investments in-house.  The                                                                    
department  had  found  that there  was  definitely  a  cost                                                                    
savings  in  doing  the  investments  in-house  rather  than                                                                    
paying out management fees to outside entities.                                                                                 
3:35:06 PM                                                                                                                    
Representative  Gattis  asked  how many  Alaskans  had  lost                                                                    
their jobs  and asked  how many  had been  put to  work. Mr.                                                                    
DeBartolo  reported that  he did  not know  what the  actual                                                                    
layoff  number would  be for  FY 17  if the  budget remained                                                                    
intact.  He  was  aware  that some  of  the  positions  were                                                                    
filled.  It  was unclear  about  what  would happen  to  the                                                                    
positions  if the  employees  moved on.  He  relayed that  9                                                                    
Alaskans were laid  off or put out of positions  as a result                                                                    
of  last year's  budget. There  were new  investment officer                                                                    
positions that  had not all  been filled. The  Department of                                                                    
Revenue had filled 3  investment officer positions recently,                                                                    
2 of  which were  within the treasury  division. He  did not                                                                    
know  how many  of  the  4 positions  within  the APFC  were                                                                    
filled but would get the answer.                                                                                                
Representative Gattis  wanted to  be clear  that eliminating                                                                    
positions   sometimes  meant   that  the   state  was   just                                                                    
eliminating the opportunity  for the state to  hire a person                                                                    
into a position rather than letting go of an actual person.                                                                     
Co-Chair  Neuman thought  the department  needed to  provide                                                                    
the number  of positions  eliminated and how  many personnel                                                                    
were let go.                                                                                                                    
Commissioner  Hoffbeck noted  the only  caveat he  would add                                                                    
was  that the  DOR had  made a  concerted effort  to refrain                                                                    
from hiring  personnel. The department  had had  an informal                                                                    
hiring  freeze  for  some  time.  His  instructions  to  his                                                                    
directors was  not to  hire a  position unless  they thought                                                                    
they  were  more valuable  than  someone  already on  staff.                                                                    
People  were going  to have  to be  laid off.  Typically the                                                                    
vacant  positions would  have  had bodies  in  them but  the                                                                    
department knew people would have to be laid off.                                                                               
3:38:22 PM                                                                                                                    
Mr. DeBartolo  reviewed the  pie chart  on slide  8: "Alaska                                                                    
Department of  Revenue: FY 17  Governor's Budget  by Program                                                                    
Including  Unallocated Reduction  (See Handout)."  The chart                                                                    
showed the  department's entire budget.  He pointed  out the                                                                    
largest  slices,  representing  80 percent  of  the  overall                                                                    
budget,  were investment  areas: The  Alaska Permanent  Fund                                                                    
Corporation,  The Alaska  Housing  Finance Corporation,  and                                                                    
the Alaska  Retirement Management Board. There  had not been                                                                    
any substantial  cuts in any  of the three  entities because                                                                    
they were investment areas. It  was imperative the state was                                                                    
making as  much money as  possible. The remaining  small pie                                                                    
pieces made  up about 20 percent  of the budget and  was the                                                                    
area  of  focus  in  terms   of  cuts  to  the  budget.  The                                                                    
department was  making sure its  IT staff could  work across                                                                    
division  boundaries because  of position  reductions. Silos                                                                    
of work were being  eliminated. The department's next course                                                                    
of   action  would   be  to   look   at  centralizing   some                                                                    
administrative positions, such  as accounting and accounting                                                                    
support  positions, that  were  currently doing  duplicative                                                                    
work  within different  divisions. The  department continued                                                                    
to examine how to trim excesses throughout divisions.                                                                           
Co-Chair  Neuman  commented  that,  to  his  knowledge,  the                                                                    
Alaska  Permanent  Fund  Corporation had  never  encountered                                                                    
cuts to its  budget. He opined that  APFC's budget mattered,                                                                    
especially in  the governor's new proposed  budget where the                                                                    
Permanent Fund  Dividend (PFD) would be  funding government.                                                                    
He  suggested for  the  DOR  to consult  with  the APFC.  He                                                                    
thought  if there  were reductions  to APFC  there would  be                                                                    
more  money available  for the  PFD. He  concluded that  the                                                                    
investment  areas should  be reduced  as well.  Commissioner                                                                    
Hoffbeck relayed  that one of  the easiest ways  to increase                                                                    
returns was  to bring  more management in-house  rather than                                                                    
paying  higher outside  management fees.  Although it  would                                                                    
increase the  employee budget,  it would  also substantially                                                                    
increase the state's net revenue.                                                                                               
Co-Chair Neuman made  a comment about hiring  10 more people                                                                    
and  making significantly  more money.  He did  not want  to                                                                    
discuss the issue further.                                                                                                      
Representative  Wilson   suggesting  contracting  management                                                                    
rather than  hiring full  time employees.  She asked  if the                                                                    
slide  reflected unrestricted  revenue funds  or all  funds.                                                                    
Mr.   DeBartolo  responded   that   he   would  supply   the                                                                    
Representative Wilson  wanted to see a  pie chart reflecting                                                                    
only UGF. Mr. DeBartolo responded in the affirmative.                                                                           
Representative Pruitt's asked if  the management people were                                                                    
paid   from  the   permanent  fund.   Commissioner  Hoffbeck                                                                    
responded, "That is correct."                                                                                                   
Representative  Pruitt thought  investing  in people  within                                                                    
the APFC was a wise idea  and noted that it would ultimately                                                                    
pay  for itself.  He requested  that the  DOR highlight  the                                                                    
individuals paid for  by UGF versus individuals  paid for by                                                                    
the   Permanent  Fund   (PF).   He   would  oppose   cutting                                                                    
individuals within the APFC that  were paying for themselves                                                                    
with the work  they did. Mr. DeBartolo relayed  that when he                                                                    
was reviewing the slide and  pointed out the differentiation                                                                    
he  was  not looking  for  additional  cuts but  rather  was                                                                    
highlighting where the concentration of cuts had been.                                                                          
3:43:17 PM                                                                                                                    
Mr.  DeBartolo  moved  to slide  9:  "Alaska  Department  of                                                                    
Revenue:  FY 17  Governor's  Budget  Key Changes  (Including                                                                    
Unallocated Reduction)":                                                                                                        
     Key Reductions                                                                                                             
     Tax Division - ($757.9) UGF and 8 full time positions                                                                      
     Treasury Division - ($324.1) UGF/Other and 3 full time                                                                     
     Child Support Services Division - ($789.9) UGF/Fed and                                                                     
     6 full time positions                                                                                                      
     Key Increment Requests                                                                                                     
     Treasury Division - $711.5 - Add two investment                                                                            
     officers and one support position                                                                                          
     Treasury Division - $857.8 - Move investment officer                                                                       
     salaries to market level                                                                                                   
     Natural Gas Commercialization (AKLNG) - $1,876.7                                                                           
          Consulting and Legal Services - $1,700.0                                                                              
          Non-Permanent Project Coordination Position -                                                                         
          Travel and Support Costs - $65.0                                                                                      
Mr. DeBartolo  mentioned the reduction  of 2  positions from                                                                    
the unallocated reduction within  the Treasury Division. The                                                                    
state had given  $190 thousand to the Tax  Division. He also                                                                    
noted that  the APFC  had reduced  $3 million  in management                                                                    
fees with certain changes.                                                                                                      
Co-Chair Thompson  asked if  the requests  were in  UGF. Mr.                                                                    
DeBartolo  indicated  that  the  request  for  the  Treasury                                                                    
Division  would  not  be  in   UGF  because  they  would  be                                                                    
allocated to the ARM Board.                                                                                                     
Vice-Chair Saddler  thought he  heard Mr.  DeBartolo mention                                                                    
the  figures  included  unallocated reductions.  It  sounded                                                                    
like Mr. DeBartolo had allocated  them to certain positions.                                                                    
He noted that  it was unusual to  have unallocated reduction                                                                    
as early  in the  process. Mr.  DeBartolo explained  that he                                                                    
had allocated  $190 thousand  to the  Tax Division,  $190 to                                                                    
the Treasury Division, and $134  in UGF to the Child Support                                                                    
Division of  the state's  $518 thousand that  was a  part of                                                                    
the  state's unallocated  reduction.  He hoped  to have  the                                                                    
unallocated reductions in the governor's amended scenario.                                                                      
Mr.  DeBartolo   continued  reading   from  the   slide.  He                                                                    
mentioned  that  the request  for  $857.8  thousand for  the                                                                    
Treasury  Division  would  allow  the state  to  offer  more                                                                    
competitive  salaries to  investment officers.  A study  had                                                                    
been  done  confirming that  the  state  needed to  be  more                                                                    
competitive in the market.                                                                                                      
Representative  Gattis asked  about  salaries  having to  be                                                                    
bumped  up in  order to  attract people  to Juneau  from the                                                                    
Lower 48.  She opined that  some of  the work could  be done                                                                    
from the Lower 48. She  wondered whether salaries would have                                                                    
to be  bumped up if  they were working somewhere  else where                                                                    
the  work  was  typically  done, such  as  on  Wall  Street.                                                                    
Commissioner  Hoffbeck answered  that  in  order to  attract                                                                    
people from  other places salaries  had to  be substantially                                                                    
higher that  what the department had  asked for particularly                                                                    
for the  ARM Board.  The department  had attempted  to bring                                                                    
people in  and train them.  Some of the funding  request was                                                                    
to provide  salary increases for  people that had  been with                                                                    
the  state  for  several  years and  were  now  full-fledged                                                                    
investment  officers.  He  admitted  that  the  DOR  offered                                                                    
substantially  less than  the APFC  for some  positions. The                                                                    
funding request was, at least  in part, to avoid losing some                                                                    
existing  state  employees.  He added  that  the  department                                                                    
hired locally whenever possible.                                                                                                
Representative Gattis wondered  whether the state's salaries                                                                    
compared to those elsewhere in  the established industry, or                                                                    
would the department have to  bump them up to attract people                                                                    
to   Juneau.  Commissioner   Hoffbeck  indicated   that  the                                                                    
industry  standard  was  higher  than  what  the  state  was                                                                    
currently offering.                                                                                                             
Mr.   DeBartolo   continued    reading   the   natural   gas                                                                    
commercialization section on slide 9.                                                                                           
3:48:07 PM                                                                                                                    
Representative Wilson  asked if the legislature  had already                                                                    
paid  the  costs  Mr.  DeBartolo  had  just  mentioned.  She                                                                    
thought the expenses  had been addressed in  the most recent                                                                    
special  session. Commissioner  Hoffbeck explained  that the                                                                    
request was for  a specific DOR position and  for support in                                                                    
order  to  get  through  FY 17  focusing  on  the  pre-feed.                                                                    
Unlike, the  Department of Natural Resources  (DNR), the DOR                                                                    
had  one  deputy  commissioner basically  dedicated  to  the                                                                    
AKLNG  project,  2  audit masters  working  on  the  project                                                                    
rather than  doing audits, and two  analysts already working                                                                    
on the  project that needed  to be focusing on  their normal                                                                    
work. He  admitted that  the DOR could  not properly  do its                                                                    
job without additional people hired.                                                                                            
Representative Wilson asked if he  had known about the staff                                                                    
shortfall during  special session.  She was  questioning the                                                                    
timing.  Commissioner Hoffbeck  did not  know the  answer to                                                                    
her question.                                                                                                                   
Representative  Wilson wanted  to point  out that  there was                                                                    
already   additional   costs   on  certain   projects.   The                                                                    
legislature should have been made  aware of additional costs                                                                    
prior to approval of moving to the next steps.                                                                                  
Co-Chair Neuman  did not understand  why the funds  were not                                                                    
coming out of the AKLNG fund.                                                                                                   
Representative Wilson agreed.                                                                                                   
Commissioner  Hoffbeck  explained  that   in  the  past  the                                                                    
department had had difficulty getting  the money returned to                                                                    
the department  for the  work it  had done  for AKLNG  via a                                                                    
reimbursable services agreement (RSA).                                                                                          
Co-Chair Neuman  would ask  the committee  to look  into the                                                                    
issue further.                                                                                                                  
Representative Pruitt  added that the discussion  applied to                                                                    
the end  of the current  fiscal year in special  session. He                                                                    
felt  the current  discussion was  for the  following fiscal                                                                    
year.  He  thought he  answered  the  current question.  The                                                                    
state's  money   that  was  appropriated  in   the  previous                                                                    
November was only for the current fiscal year.                                                                                  
Representative   Wilson  responded   that  she   wanted  the                                                                    
department to respond.                                                                                                          
Mr. DeBartolo  advanced to slide  10: "Alaska  Department of                                                                    
Revenue:  FY  17  Governor's Budget  Key  Changes  -  Alaska                                                                    
Permanent Fund Corporation Requests":                                                                                           
     Rules based stock portfolio                                                                                                
          Staff:    3 investment, 1 risk, 1 IT                                                                                  
          Annual salary cost:      $882,000                                                                                     
          Annual fee savings:      $3.2 million                                                                                 
     Special opportunities                                                                                                      
          Staff:    Investment analyst                                                                                          
          Annual salary cost: $145,000                                                                                          
          Savings: $44 M over the life of one investment                                                                        
     $216,000 for staff retention adjustments                                                                                   
     It is important that the APFC be able to retain                                                                            
     experienced, skilled professionals that are critical                                                                       
     to managing and growing the Permanent Fund.                                                                                
Mr. DeBartolo noted the anticipated savings with both                                                                           
clusters of additions.                                                                                                          
3:52:08 PM                                                                                                                    
Mr. DeBartolo scrolled to slide 11: "Alaska Department of                                                                       
Revenue: FY 17 Capital Budget Requests - Governor":                                                                             
        · Child Support Services Database Replatforming                                                                         
             · Capital Funding - 1,700.0 UGF Match/3,000                                                                        
          These  funds  will  be  used   to  move  the  case                                                                    
          management  system  off  the aging  and  expensive                                                                    
          mainframe, and  keep them compliant with  the Feds                                                                    
          for at least the next fifteen years.                                                                                  
       · Alaska Housing Finance Corporation Multiple                                                                            
             · Capital Funding - 15,950.0 UGF/                                                                                  
               3,900.0 Other/1,500.0 DGF/16,500.0 Fed                                                                           
        · General Fund Detail (UGF/DGF)                                                                                         
             · $6.85 million  Homeless Assistance Program                                                                       
             · $3.0 million        Supplemental Housing                                                                         
               Development Program                                                                                              
             · $1.85 million  Federal and Other Competitive                                                                     
             · $1.5 million        Beneficiary and Special                                                                      
               Needs Housing                                                                                                    
             · $1.5 million        Rental Assistance for                                                                        
               Victims (ECHP)                                                                                                   
             · $1.0 million        Teacher, Health, &                                                                           
               Public Safety Professionals Housing                                                                              
             · $1.0 million        Cold Climate Housing                                                                         
               Research Center (CCHRC)                                                                                          
             · $750,000       HUD Federal HOME Grant                                                                            
Co-Chair Neuman mentioned that AFHC would be coming before                                                                      
the committee at which time questions could be addresses.                                                                       
Co-Chair Thompson reviewed the agenda for the following                                                                         
3:54:01 PM                                                                                                                    
The meeting was adjourned at 3:54 p.m.