Legislature(2017 - 2018)

2018-02-05 Senate Journal

Full Journal pdf

2018-02-05                     Senate Journal                      Page 1928
SB 176                                                                                                                        
SENATE BILL NO. 176 BY THE SENATE RULES COMMITTEE                                                                               
BY REQUEST OF THE GOVERNOR, entitled:                                                                                           
          "An Act establishing the Alaska Tax Credit                                                                            
          Certificate Bond Corporation; relating to purchases                                                                   
          of tax credit certificates; relating to overriding royalty                                                            
          interest agreements; and providing for an effective                                                                   
was read the first time and referred to the Resources and Finance                                                               
The following fiscal information was published today:                                                                           
 Fiscal Note No. 1, zero, Department of Natural Resources                                                                       
Governor's transmittal letter dated February 2:                                                                                 
Dear President Kelly:                                                                                                           
Under the authority of Article III, Section 18, of the Alaska                                                                   
Constitution, I am transmitting a bill to create a State corporation                                                            
authorized to issue bonds for the purpose of purchasing oil and gas                                                             
exploration tax credits.                                                                                                        
The passage of legislation last year, HB 111 (CH. 3, SSSLA 17),                                                                 
signaled the end of the State's program to purchase oil and gas tax                                                             
credits. These credits were earned by small producers and explorers;                                                            
major producers have always been ineligible to participate. Since the                                                           
beginning of this program in 2007, Alaska has purchased over $3.5                                                               
billion in these credits, with about $800 million currently in company                                                          
hands awaiting payment. Another $200 million are expected before the                                                            
program is fully terminated. Just as we value our large producers, we                                                           
value these small producers. Some of the most exciting new                                                                      
developments in the past few years are the result of the efforts of these                                                       
new small producers.                                                                                                            
After the downturn in oil prices and the State's budget challenges, the                                                         
State was no longer able to purchase these credits as quickly as they                                                           
were submitted. Since 2016, the State has appropriated funds based on                                                           

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a statutory formula, resulting in the large accrued balances. The                                                               
payment delay has resulted in significant uncertainty for Alaska's                                                              
small producers, some of whom have had a difficult time borrowing                                                               
additional money to complete their projects. Last year's legislation to                                                         
end the program was an important step towards restoring the State to a                                                          
more stable fiscal foundation. This bill would allow the State to take                                                          
the next vital step in resolving the State's oil and gas tax credit                                                             
The bill would establish an Alaska Tax Credit Certificate Bond                                                                  
Corporation that would be authorized to issue up to $1 billion in bonds                                                         
to finance purchases of oil and gas tax credits at a discount from face                                                         
value. This discount offered to these small producers would then be                                                             
used to pay the cost of financing the bonds.  In short, the State would                                                         
not bear the cost of financing the bonds, but rather that would be paid                                                         
by the small producers. The bonds would not constitute a general                                                                
obligation of the State. The corporation's authority to issue bonds                                                             
would expire on December 31, 2021.                                                                                              
This bill would provide authority for the Department of Revenue to                                                              
negotiate the purchase of tax credits at less than full value when bond                                                         
proceeds are used for those purchases. Under the bill, applicants that                                                          
have requested purchase of tax credits from the oil and gas tax credit                                                          
fund would notify the Department of Revenue of interest in purchase                                                             
of tax credits from bond proceeds at a discounted amount. Those                                                                 
applicants would need to include all tax credits requested for purchase                                                         
from the fund in the notice of interest. A purchase offer amount by the                                                         
Department of Revenue from bond proceeds would be determined by                                                                 
discounting the face amount of such tax credits based on the assumed                                                            
payment schedule of the tax credits if the Department of Revenue had                                                            
purchased the tax credits through the oil and gas tax credit fund over a                                                        
number of years.                                                                                                                
The face amount of the tax credits would be discounted each year by                                                             
10 percent. A lower discount could apply for an applicant that agrees                                                           
to one or more conditions that provide additional value to the State.                                                           
These conditions include agreements for overriding royalty interests,                                                           
waivers of confidentiality for early release of seismic data, and                                                               
commitments to make future qualified capital expenditures in the state.                                                         
The lower discount rate would apply automatically to purchases of                                                               

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certain corporate income tax credits for gas storage facilities and in-                                                         
state oil refineries. The lower discount rate will be based on the State's                                                      
true interest cost plus 1.5 percent, which we currently estimate will be                                                        
about 5.5 percent. The corporation would not issue bonds unless it                                                              
found that the discount rate applied in the Department of Revenue's                                                             
purchase of the tax credits would exceed the State's true interest cost                                                         
on the bonds by at least 1.5 percent per year.                                                                                  
The Department of Natural Resources would handle the agreements                                                                 
for overriding royalty interests and waivers of confidentiality for early                                                       
release of seismic data. The bill would have an immediate effective                                                             
date. The immediate effective date would allow the new Alaska Tax                                                               
Credit Certificate Bond Corporation, the Department of Revenue, the                                                             
Department of Natural Resources, and those requesting purchase from                                                             
the oil and gas tax credit fund the ability to start work right away to                                                         
address these tax credits.                                                                                                      
I am proposing this bill to achieve a fair resolution to the oil and gas                                                        
tax credit purchase program, and to free up capital for the small                                                               
companies impacted by the program to resume investing in future oil                                                             
production. Passage of this bill would allow the state to move past the                                                         
uncertainty on these tax credits and focus on growing Alaska.                                                                   
I urge your prompt and favorable action on this measure.                                                                        
Bill Walker