Legislature(2011 - 2012)HOUSE FINANCE 519

03/21/2012 09:00 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSHB 115(TRA) Out of Committee
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 361                                                                                                            
     "An  Act relating  to the  Alaska  Land Act,  including                                                                    
     certain lease,  sale, and other disposal  of state land                                                                    
     and  materials; relating  to production  royalties from                                                                    
     miners;  relating to  rights to  use  state water;  and                                                                    
     providing for an effective date."                                                                                          
Co-Chair  Stoltze  indicated  that  the  administration  had                                                                    
noted some technical errors which  needed to be addressed in                                                                    
committee substitute.                                                                                                           
WYN MENEFEE, CHIEF OF OPERATIONS,  DIVISION OF MINING, LAND,                                                                    
AND WATER,  DEPARTMENT OF  NATURAL RESOURCES  commented that                                                                    
the intent of  the bill was to make some  changes in statute                                                                    
that will  move toward  permanent efficiencies. A  work plan                                                                    
had been  developed on  what needs  to be  accomplished. The                                                                    
changes  are  meant  to   provide  better  timeliness,  more                                                                    
certainty, less  litigation risks, reduced time  and cost to                                                                    
the applicant, and freeing up staff time.                                                                                       
Co-Chair Stoltze  remarked that  Mr. Menefee should  hit the                                                                    
high points of the bill  and identify some of the corrective                                                                    
language that needs addressing.                                                                                                 
Mr. Menefee  cited that  he would be  working off  the paper                                                                    
titled  "CSHB  361  (RED):   Disposals  of  State  Resources                                                                    
Briefing Paper,  March 21,  2012" (copy  on file).  The bill                                                                    
covers many  topics, none of  which make a  huge difference,                                                                    
but    incrementally    makes   slight    differences    and                                                                    
efficiencies. The  first item is  to move more  leases under                                                                    
the negotiated  lease process rather than  competitive lease                                                                    
process.  When going  through a  competitive lease  process,                                                                    
there are  many necessary  procedures. Often though,  no one                                                                    
is interested outside  of the applicant. The idea  is to ask                                                                    
the  public  if  there  is a  competitive  interest  in  the                                                                    
parcel, and  then if there  is no competitive  interest; not                                                                    
go  through the  competitive  process.  The leasing  statues                                                                    
were last revised  in 1984 and a cap was  put in that allows                                                                    
the  division to  go directly  to negotiating  without going                                                                    
competitive if  the lease value  is below $5000 or  the time                                                                    
is less than 10 years.                                                                                                          
Co-Chair   Stoltze  observed   that   "disposals  of   state                                                                    
resources" in  an inadequate short  title. It is  a misnomer                                                                    
that the state  is just divesting itself  of resources since                                                                    
most of the discussion has been about leases.                                                                                   
Mr. Menefee  remarked that disposals of  leases or disposals                                                                    
of  land  are  required  to  go  through  a  "best  interest                                                                    
decision."  He  returned  to  the  threshold  at  $5000  and                                                                    
commented that  with costs going  up the threshold  has been                                                                    
raised to  $10,000. Leases can  range all  the way up  to 55                                                                    
years, but there are different  terms depending on what will                                                                    
be put  on the  land. When  the lease comes  to an  end, the                                                                    
current statutes  require the  leaser to  go through  a full                                                                    
competitive process.  In section  (2) the  division's choice                                                                    
would  be  if  someone  is  in good  standing  and  has  put                                                                    
infrastructure in  place, the department would  first see if                                                                    
there is  any competitive  interest, but  if not,  then just                                                                    
renew the lease.                                                                                                                
Mr.  Menefee  continued that  in  section  (3) the  division                                                                    
would  like  to  separate  out   the  respective  rules  and                                                                    
procedures  for timber  sales and  material  sales. The  two                                                                    
resources  have  been intertwined  and  the  proposal is  to                                                                    
separate them. There is also  a modification of how material                                                                    
sales are  prepared. At present, a  "best interest" decision                                                                    
is  needed  on  every  sale.  The  division  would  like  to                                                                    
designate a  site, sell  all the material  out of  the site,                                                                    
tell the  public and address  any issues. The  process would                                                                    
save  applicants  and the  division  time  and costs,  since                                                                    
appraisals are expensive. If the  division offers sales they                                                                    
would  like to  do  it under  representative regional  sales                                                                    
prices. The price  can be determined by an  inventory of the                                                                    
costs of  materials in  a region. If  an applicant  wants to                                                                    
challenge  the price  and procure  their own  appraisal that                                                                    
comes in  lower, the division  will sell the parcel  for the                                                                    
lower price.                                                                                                                    
Mr.  Menefee referenced  Section  18, page  12  of the  bill                                                                    
which  talks  of  conveying materials  for  less  than  fair                                                                    
market  value.  Some materials  coming  down  the river  are                                                                    
causing flooding  and the  division would  like to  sell the                                                                    
material locally for less than  fair market value. The state                                                                    
has to  do emergency  response and repair  whenever flooding                                                                    
occurs. Co-Chair Stoltze asked  if extraction of Knick River                                                                    
would be a good example.                                                                                                        
Mr.  Menefee  mentioned  that  a  better  example  would  be                                                                    
Seward. He noted  that an excess deposit of  gravel from the                                                                    
mountains fills up  the river which then  overflows onto the                                                                    
land.  Valdez  is  also  a good  example.  The  flooding  is                                                                    
different  from  the  flooding caused  by  general  erosion.                                                                    
There would need  to be a plan to determine  if it should be                                                                    
sold at  less than  fair market value.  He referred  back to                                                                    
the briefing  paper and section  (4). The  section clarified                                                                    
that temporary water  use permits may be  renewed. The water                                                                    
is  used  in  construction  projects, mining,  oil  and  gas                                                                    
industry, and  building a lodge.  Temporary permits  are for                                                                    
five years, but he indicated  that many projects last longer                                                                    
than five years. If the same  amount of water is being taken                                                                    
from  the source  for the  same purpose,  then the  division                                                                    
would like  to renew the permit  and not have to  go through                                                                    
all  the former  re-permitting  effort.  The division  would                                                                    
make sure there were no other demands on the water.                                                                             
9:42:33 AM                                                                                                                    
Mr. Menefee  moved to section  (5) of briefing  paper noting                                                                    
that  there were  several sections  where the  Department of                                                                    
Law found a  few corrections were needed.  The section deals                                                                    
with  public  auction  versus  sealed  bid.  The  land  sale                                                                    
program uses  sealed bids  all the time,  but over  time the                                                                    
process  has been  written  as sealed  bid  or sometimes  as                                                                    
public  auction  and  sealed  bid.  The  Department  of  Law                                                                    
suggested that the process should  be consistent and to only                                                                    
use the term sealed bid.  He continued with section (6) that                                                                    
refers to  notices. At present  when there is a  disposal of                                                                    
interest,  the  public  needs  to  be  notified  using  many                                                                    
methods. The division is now  trying to transition to inform                                                                    
people that the online public  notice is the key location of                                                                    
where  the  information  will   be  posted.  Newspapers  and                                                                    
notices  in post  office will  still be  available, but  the                                                                    
emphasis  is on  online  public notices.  He  noted that  84                                                                    
percent of Alaskans have access to the internet.                                                                                
Co-Chair  Stoltze  asked  what  the  Mat-Su  newspaper,  The                                                                    
Frontiersman, has  in paid subscriptions  in a  community of                                                                    
90,000.  Mr. Menefee  replied The  Frontiersman has  a 7,000                                                                    
distribution. Co-Chair  Stoltze commented  they must  give a                                                                    
lot of the newspapers away.                                                                                                     
Mr. Menefee remarked that the  top five newspapers in Alaska                                                                    
reach 14 percent of the population.                                                                                             
He moved on to section (7),  Section 13 of the bill, dealing                                                                    
with  mining royalties.  He announced  that very  few miners                                                                    
are paying  production royalties.  Alaska law refers  to net                                                                    
profit  royalties. A  miner  can exempt  out  the amount  of                                                                    
money spent  to produce the  gold. In  the end, they  do not                                                                    
pay royalties  because their costs  are so  high. Statistics                                                                    
show  that only  two miners  paid any  royalties since  they                                                                    
were the  only ones who  had a gross production  of $10,000.                                                                    
He believed  staff time  could be saved  by just  giving the                                                                    
miners under $10,000 an exemption.                                                                                              
9:48:01 AM                                                                                                                    
Mr. Menefee  continued to section  (8) on Royalty  Law. When                                                                    
people file  royalty payments, the federal  income tax gives                                                                    
the option  of filing by  calendar year or fiscal  year. The                                                                    
Mining Tax  managed by the  Department of Revenue  gives the                                                                    
individual a choice. He expressed  that the choice should be                                                                    
either calendar  or fiscal  to be in  sync with  the federal                                                                    
code.  In section  (9), Submerged  Mining Leases,  occurs at                                                                    
present only in  Nome. People have to invest a  lot of money                                                                    
to produce the offshore mining  leases. He disclosed that as                                                                    
long as someone stays in  production then at the twenty year                                                                    
mark, the  law already says  the lease will be  extended one                                                                    
year.  He declared  that is  not good  for a  business which                                                                    
needs more certainty  so the department would  like to renew                                                                    
the lease  for another twenty  years. If the lease  does not                                                                    
produce, the department can pull out of the lease.                                                                              
9:50:45 AM                                                                                                                    
Representative  Guttenberg referred  to page  9, Section  e,                                                                    
line 2, where it states there  is a limit of personal use to                                                                    
two cubic yards.  He wondered if there had  been any comment                                                                    
or feedback on  the section. Mr. Menefee  remarked that over                                                                    
the  years there  have been  no provisions  in statutes  for                                                                    
small quantities where there were  no exemptions. There have                                                                    
been  people who  have called  and  wanted to  take a  small                                                                    
amount or  quantity out and  have been told that  they would                                                                    
have to  go through the long  process. He noted that  if the                                                                    
amount is less than two  cubic yards per calendar year, then                                                                    
they would not have to use  the long process. There has been                                                                    
a  concern  of the  cumulative  effect,  but for  the  small                                                                    
amount to let them have it.                                                                                                     
Co-Chair  Stoltze   noted  that  Alan  Dick   mentioned  the                                                                    
situation   in  House   Resources   with   regard  to   peat                                                                    
extraction. Mr.  Menefee replied  that the section  does not                                                                    
deal  with  peat.  The  entire  part  of  (f)  is  for  peat                                                                    
extraction to create a market for peat production.                                                                              
9:54:45 AM                                                                                                                    
Representative  Neuman asked  if the  first section  regards                                                                    
the disposal  of land. He wanted  to know how it  would work                                                                    
to purchase land  from the state. Mr.  Menefee remarked that                                                                    
when purchasing  versus leasing land  from the  state, sales                                                                    
are within the Land  Sale Program, Remote Recreational Cabin                                                                    
Site  Program, Subdivision  Sale  Program, and  Agricultural                                                                    
Land Sale  Program. People nominate  areas for sale  and the                                                                    
division decides if they are  going to dispose of the areas.                                                                    
If the  state decides  to dispose  of the  land, then  it is                                                                    
offered in a  public auction. The land size  varies from one                                                                    
to twenty acres.                                                                                                                
Representative Neuman  asked if  someone wanted  to purchase                                                                    
state  land Section  1  the bill  modifies  the process.  He                                                                    
wondered if  the person could  contact one of  the divisions                                                                    
of  the  Department  of Natural  Resources  to  individually                                                                    
negotiate the sale with the division.                                                                                           
Mr. Menefee  indicated that by  the statute they  would have                                                                    
the capability  of doing  that, but the  practice is  not to                                                                    
entertain the sale of state  land outside of the normal land                                                                    
disposal procedures. If someone  indicates they would like a                                                                    
certain  parcel  of  land,   the  division  would  entertain                                                                    
leasing  the  land.  If  a person  with  a  long-term  lease                                                                    
invests enough in  the land, that person could  come under a                                                                    
preference right  for the sale  of the land after  the lease                                                                    
time is complete.                                                                                                               
Representative  Neuman  remarked  that in  streamlining  the                                                                    
public process, he  wanted to make sure  that all interested                                                                    
parties had  a chance. He  voiced his concern in  Section 23                                                                    
over  the  temporary  use  of water.  Under  the  bill,  the                                                                    
department  is   being  given  a  lot   more  authority  and                                                                    
discretion  then currently  exists. He  wondered where  that                                                                    
would stop and  how would they deal with every  use of water                                                                    
in  the state.  He believed  that every  lease needed  to be                                                                    
looked at every five years  instead of just streamlining the                                                                    
process. He did  not believe streamlining was  always a good                                                                    
10:00:57 AM                                                                                                                   
Mr.  Menefee responded  that the  department looks  at those                                                                    
concerns  regarding  what  other   uses  might  occur  since                                                                    
authorization and  who might be impacted.  The difference is                                                                    
not  undergoing  as  formal  a  decision  process,  but  the                                                                    
department  would be  looking at  other  public interest  or                                                                    
concerns. He  gave an  example of the  North Slope  where an                                                                    
ice road  comes into play to  a well. He assured  that there                                                                    
were  all sorts  of monitoring  going on  to understand  how                                                                    
much  water  was being  used.  He  also indicated  that  the                                                                    
Department  of  Fish  and  Game   would  be  monitoring  the                                                                    
situation.  He  noted a  lot  of  information is  constantly                                                                    
being gathered. He  agreed that before renewing  a lease the                                                                    
division would look at what  might have changed or potential                                                                    
impacts  on  the  surrounding  area.  Representative  Neuman                                                                    
remarked  that an  issue continues  to  develop where  local                                                                    
police  are stopping  individuals on  state land  asking for                                                                    
permits  on  vehicles  over  10,000   pounds.  He  had  real                                                                    
concerns about the department not  looking more closely into                                                                    
all lease situations.                                                                                                           
10:05:16 AM                                                                                                                   
Mr.  Menefee  asserted  that it  was  not  the  department's                                                                    
intent in expediting to put  less of a concern on protecting                                                                    
the  resources. There  are generally  allowed uses  that can                                                                    
happen  without a  permit. Throughout  the state,  there are                                                                    
many  people using  state land  without  permits where  they                                                                    
should have  permits. The department  does not  enough staff                                                                    
to  monitor   everything  that  happens  in   the  state.  A                                                                    
situation where someone exceeds  the generally allowed usage                                                                    
does  not come  to the  attention of  the department  unless                                                                    
something goes wrong. At the point  it goes wrong then it is                                                                    
Co-Chair  Thomas noted  that  Vice-chair  Fairclough had  to                                                                    
leave and she has questions as  well as there will be public                                                                    
testimony,  therefore,  the  bill   will  not  move  out  of                                                                    
committee  today.  The  committee  was also  waiting  for  a                                                                    
committee substitute on the bill.                                                                                               
Representative  Gara remarked  on two  concerns. He  did not                                                                    
want people gaming  the system on taxes.  The department has                                                                    
indicated  that people  can choose  between  fiscal year  or                                                                    
calendar year  tax payments. He  asked if the  company could                                                                    
switch back and forth.                                                                                                          
Mr.  Menefee responded  that  in a  given  year the  company                                                                    
would only be able to  pick between fiscal and calendar year                                                                    
payments.  Typically once  a  company  makes that  decision;                                                                    
there  is  no reason  to  change.  But,  for example,  if  a                                                                    
company  is sold  and the  new company  wants to  change the                                                                    
method  of tax  payments, then  they could  make the  change                                                                    
with the  department. Representative  Gara argued  that some                                                                    
companies might want  to change depending on  how much money                                                                    
they were  making in  any given  year, and  he did  not want                                                                    
that. He  believed that there  should only be one  choice as                                                                    
there could be gaming of the system.                                                                                            
Co-Chair Thomas interjected that  the company would lose six                                                                    
months if switching from  fiscal to calendar. Representative                                                                    
Gara agreed then they would be reporting less income.                                                                           
Mr.  Menefee remarked  that he  was not  an accountant,  but                                                                    
would talk  with the royalty  accountant involved  and bring                                                                    
the information back to the  committee. The intent is not to                                                                    
let gaps occur so there are unreported periods.                                                                                 
Representative Gara signified that  he was not worried about                                                                    
gaps,  but  people switching  back  and  forth depending  on                                                                    
which one lets them report  less income. He also agreed with                                                                    
Co-Chair  Thomas  on  how the  transition  would  work.  Mr.                                                                    
Menefee  expressed his  need to  get back  to the  committee                                                                    
with the information. Representative  Gara expressed that he                                                                    
was uncomfortable  with the  exemption of  small operations.                                                                    
He requested a definition of "small operations."                                                                                
Mr.  Menefee responded  there  is not  a  definition in  the                                                                    
bill. A  preliminary review states  that those  earning less                                                                    
than  $10,000   gross  product   incomes,  are   not  paying                                                                    
royalties  since they  can  exempt the  amount  it takes  to                                                                    
produce.  The  threshold  would  be  set  in  regulation  at                                                                    
somewhere in  the $10,000  area. Representative  Gara opined                                                                    
that if people  were being exempted from  paying taxes, then                                                                    
the  legislature  should  make   those  decisions,  not  the                                                                    
department. He would like to  see the exemption level stated                                                                    
in the bill.  Mr. Menefee responded that  an amendment could                                                                    
be made stating that.                                                                                                           
10:12:26 AM                                                                                                                   
Representative Doogan  referred to a previous  comment of "a                                                                    
lot of times there is no  interest in sales." He asked for a                                                                    
better  understanding  of  "a lot  of  times."  Mr.  Menefee                                                                    
signified that it would be  difficult to give an exact term.                                                                    
He  said  that most  times  it  concerned remote  areas.  He                                                                    
estimated  that only  one or  two times  over several  years                                                                    
would  the  lease   be  competitive.  Representative  Doogan                                                                    
indicated he  would like  an actual  figure before  the bill                                                                    
goes out.  He noted the governor's  recommendations were "to                                                                    
allow  the  Department  of   Natural  Resources  sealed  bid                                                                    
procedures if appropriate" He asked  for a definition of "if                                                                    
Mr. Menefee  explained that the decision  process would look                                                                    
at maximizing  revenues and  if two or  more people  were in                                                                    
room bidding against each other  and that would provide more                                                                    
money;  the   department  would  take  the   auction  route.                                                                    
Historically sealed bids usually  provide more money because                                                                    
if  someone really  wants  the lease  they  would bid  hirer                                                                    
under a sealed bid  process. Representative Doogan asked for                                                                    
some figures. Mr. Menefee remarked  they he did not know how                                                                    
to provide figures on that question.                                                                                            
Representative   Doogan   noted   section  (3)   gives   the                                                                    
Department of Natural Resources  more flexibility in issuing                                                                    
negotiated  land  leases.  He requested  the  definition  of                                                                    
"more  flexibility." Mr.  Menefee  responded that  situation                                                                    
exists when it  has been determined there  is no competitive                                                                    
interest and  the department  would not  have to  go through                                                                    
the option procedure.                                                                                                           
Representative   Doogan   asked   what  are   the   "certain                                                                    
conditions" when  the department  would be allowed  to renew                                                                    
mineral  and   land  leases.  Mr.  Menefee   asked  for  the                                                                    
reference.  Representative Doogan  responded to  the section                                                                    
(4). Mr.  Menefee replied that  the conditions are  the good                                                                    
standing conditions. He gave the  example if someone has not                                                                    
been making  their payments or  violated their  lease; those                                                                    
would be  conditions where the  lease would not  be renewed.                                                                    
When everything  is the  same and  nothing has  changed that                                                                    
would constitute "good standing."                                                                                               
Representative  Doogan asked  if there  was any  opportunity                                                                    
for  someone  else  to  try  lease  the  land.  Mr.  Menefee                                                                    
responded  that  if  someone else  expressed  a  competitive                                                                    
interest, then  the department would  go through  the longer                                                                    
process. The interested party would  also have to understand                                                                    
that they  would have to reimburse  the original leaseholder                                                                    
for  all  the  improvements  and  investments  made  to  the                                                                    
property.   Often   the   competition   walks   after   that                                                                    
Representative  Doogan  noted   that  when  exempting  small                                                                    
mining operations how  long would that be  for and requested                                                                    
a  definition  of "small."  Mr.  Menefee  replied that  when                                                                    
dealing  with  mining  royalties  "small"  refers  to  small                                                                    
production  under  $10,000  gross  income. There  is  not  a                                                                    
definition in  statute. If conditions changes,  such as gold                                                                    
prices,  then  the dollar  mark  might  be adjusted.  It  is                                                                    
easier to  do in regulation then  in statute. Representative                                                                    
Doogan wanted some idea of the  time and cost savings if the                                                                    
bill is passed.                                                                                                                 
Co-Chair Thomas OPENED and CLOSED public testimony.                                                                             
Representative Joule  asked if the information  requested by                                                                    
Representative  Doogan would  be  available  for the  entire                                                                    
Co-Chair Thomas  replied that he hoped  the department would                                                                    
have the answers by the afternoon.                                                                                              

Document Name Date/Time Subjects
CSHB 115(TRA) Support.pdf HFIN 3/21/2012 9:00:00 AM
HB 115
CSHB 115(TRA) Sponsor Statement.pdf HFIN 3/21/2012 9:00:00 AM
HB 115
CSHB 115(TRA) Google Map.pdf HFIN 3/21/2012 9:00:00 AM
HB 115
CSHB 115(TRA) Explanation of Changes.pdf HFIN 3/21/2012 9:00:00 AM
HB 115
HB 361 Transmittal Letter to Speaker Chenault.pdf HFIN 3/21/2012 9:00:00 AM
HB 361
CSHB361(RES) Summary of Changes.pdf HFIN 3/21/2012 9:00:00 AM
HB 361
CSHB361 Sectional Analysis.pdf HFIN 3/21/2012 9:00:00 AM
HB 361
CSHB361 Leasing Actions.pdf HFIN 3/21/2012 9:00:00 AM
HB 361
CSHB361 Briefing Paper.pdf HFIN 3/21/2012 9:00:00 AM
HB 361
HB361 HF followup questions 3-21-12.pdf HFIN 3/21/2012 9:00:00 AM
HB 361