Legislature(2017 - 2018)ADAMS ROOM 519

04/24/2018 01:30 PM 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
Download Video part 1. <- Right click and save file as

Audio Topic
01:36:24 PM Start
01:37:12 PM HB331
01:37:43 PM Public Testimony
03:18:00 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
+= HB 331 TAX CREDIT CERT. BOND CORP; ROYALTIES TELECONFERENCED
Heard & Held
-- Public Testimony --
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 331                                                                                                            
                                                                                                                                
     "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 date."                                                                          
                                                                                                                                
1:37:12 PM                                                                                                                    
                                                                                                                                
^PUBLIC TESTIMONY                                                                                                             
                                                                                                                                
1:37:43 PM                                                                                                                    
                                                                                                                                
Co-Chair  Foster  OPENED   public  testimony.  He  announced                                                                    
public  testimony  would be  limited  to  three minutes  per                                                                    
testifier.                                                                                                                      
                                                                                                                                
JACK  MCGEE, SELF/ATTORNEY,  JUNEAU,  spoke  about the  Carr                                                                    
Gottstein  case,  which  was relevant  to  the  question  of                                                                    
whether HB 331  created a state debt. He  read from prepared                                                                    
remarks:                                                                                                                        
                                                                                                                                
     The governor  and the administration take  the position                                                                    
     that the  language in Section 37.18.030(b)  removes all                                                                    
     doubt whether  a bond issue issued  by the corporation,                                                                    
     creates  a state  debt. We're  told that  this language                                                                    
     clearly means that  it does not. I don't  think that is                                                                    
     accurate and  it's not accurate because  of the supreme                                                                    
     court decision in Carr Gottstein.  This case involves a                                                                    
     lease purchase agreement and the  court held it did not                                                                    
     create a state debt. What's  important is the reason it                                                                    
     gave. The reason  it gave was this,  because the lease:                                                                    
     1) contains  a non-appropriation  clause; 2)  it limits                                                                    
     recourse to  the leased  property; and  3) it  does not                                                                    
     create   a   long-term    obligation   binding   future                                                                    
     generations or  legislatures. In order to  satisfy this                                                                    
     ruling, absent such language in  a bond offering or the                                                                    
     bonds  themselves,  I think  it  will  likely find  the                                                                    
     corporation created  a state debt (an  obligation) that                                                                    
     has  to  be  ratified  by  the  majority  of  qualified                                                                    
     voters.                                                                                                                    
                                                                                                                                
     I   don't  think   it's  sufficient   simply  including                                                                    
     language in  the legislation such as  that that's found                                                                    
     in AS  37.18.030(b) unless the corporation  is required                                                                    
     by statue to include  non-appropriation language in the                                                                    
     bond  offering and  in the  language itself.  The issue                                                                    
     comes  down  to  full   disclosure  to  potential  bond                                                                    
     purchasers.                                                                                                                
                                                                                                                                
Representative Ortiz  asked Mr.  McGee to  elaborate further                                                                    
on   the  Carr   Gottstein   case  that   included  a   non-                                                                    
appropriation  clause  in  the  lease. He  asked  about  the                                                                    
impact of the non-appropriation clause.                                                                                         
                                                                                                                                
Mr. McGee referenced page 2,  subsection (b) of the bill and                                                                    
read:                                                                                                                           
                                                                                                                                
     The  bonds do  not constitute  a general  obligation of                                                                    
     the state and are not  state debt within the meaning of                                                                    
     art. IX, sec.  8, Constitution of the  State of Alaska.                                                                    
     Authorization  by  the  voters  of  the  state  or  the                                                                    
     legislature is not required.                                                                                               
                                                                                                                                
Mr. McGee elaborated that "if  that's all you have, and it's                                                                    
not in  the bond offering  or issue,  you have a  problem of                                                                    
full  disclosure." He  believed if  the bill  was contested,                                                                    
the court would find it created  a state debt and a majority                                                                    
vote was needed.                                                                                                                
                                                                                                                                
Representative  Ortiz asked  if  Mr. McGee  believed HB  331                                                                    
would need  to include  a non-appropriation clause  in order                                                                    
to avoid non-disclosure.                                                                                                        
                                                                                                                                
Mr. McGee answered that the clause  in the bill would not be                                                                    
sufficient  to  get  past  the  Carr  Gottstein  ruling.  He                                                                    
detailed it should be included  in the document in order for                                                                    
a party that was thinking of  buying the bonds to go in with                                                                    
open eyes.                                                                                                                      
                                                                                                                                
1:43:11 PM                                                                                                                    
                                                                                                                                
Co-Chair Foster noted that  Representative Pruitt had joined                                                                    
the meeting.                                                                                                                    
                                                                                                                                
Representative  Wilson  asked   for  verification  that  the                                                                    
language  would  have  to  be  on  the  bond  in  order  for                                                                    
potential  purchasers to  know whether  or not  it would  be                                                                    
coming back.                                                                                                                    
                                                                                                                                
Mr. McGee  answered in the  affirmative. He added  the issue                                                                    
documents should contain the information as well.                                                                               
                                                                                                                                
Vice-Chair Gara asked if including  the language in the bond                                                                    
would resolve  the constitutional  issue. Mr.  McGee replied                                                                    
that the  language he had read  could probably use a  bit of                                                                    
clarity. He stressed the importance of clear language.                                                                          
                                                                                                                                
Vice-Chair Gara  hoped the administration would  take a look                                                                    
at Mr. McGee's suggestion.                                                                                                      
                                                                                                                                
Representative   Guttenberg  explained   that  the   state's                                                                    
outside  bond  counsel had  been  online  during the  recent                                                                    
Saturday  meeting.  He  recalled  that  the  individual  had                                                                    
disagreed  with the  legislature's  attorneys regarding  the                                                                    
constitutional  issue.  He  recalled the  counsel  had  been                                                                    
secure   in   his   interpretation   that   the   bill   was                                                                    
constitutional  as   written.  He  wondered  if   Mr.  McGee                                                                    
believed part of the  counsel's interpretation was including                                                                    
or excluding the language.                                                                                                      
                                                                                                                                
Mr.  McGee responded  that if  it was  included it  would be                                                                    
included in the bill section  on bond terms; however, it was                                                                    
not included  there. He believed  the counsel  was operating                                                                    
under  the  assumption  that  putting   the  detail  in  the                                                                    
legislation  would be  sufficient.  He  disagreed with  that                                                                    
opinion.                                                                                                                        
                                                                                                                                
1:45:34 PM                                                                                                                    
                                                                                                                                
JOSEPH  GELDHOF, SELF/ATTORNEY,  JUNEAU,  spoke against  the                                                                    
bill. He  provided detail about  his professional  career as                                                                    
an attorney. He  asked if it really had come  to not meeting                                                                    
the state's obligations and needing  to borrow a substantial                                                                    
sum of money  to pay off tax credits. He  discussed that for                                                                    
30 years  the state had  been wrestling with tax  policy and                                                                    
spending.   He  believed   there  were   some  huge   issues                                                                    
remaining. He pointed  out that the concept  of borrowing to                                                                    
meet  past obligations  was  a new  discussion.  He did  not                                                                    
think  there  was  any  question  they  were  talking  about                                                                    
floating a debt  instrument. He remarked it  was possible to                                                                    
include  language  specifying  the borrowing  would  not  be                                                                    
debt, but  he believed  that was a  conclusion that  was not                                                                    
supported  by  critical  analysis. He  elaborated  that  the                                                                    
state's constitution  required votes for  general obligation                                                                    
debt  instruments.  He   believed  someone  was  desperately                                                                    
trying to find a workaround.                                                                                                    
                                                                                                                                
Mr. Geldhof remarked  that there was frequent  debate in the                                                                    
legislature  that it  was not  possible  to cut  or tax  the                                                                    
state's way  into a sound  fiscal situation.  He underscored                                                                    
that it  was not possible to  borrow the state's way  into a                                                                    
financial  situation. He  characterized the  bill's proposal                                                                    
as a clever  workaround. He wondered if the  state was going                                                                    
to start  borrowing finances like  Illinois or  treating its                                                                    
finances like  Venezuela. He believed  the bill  measure was                                                                    
unconstitutional  as proposed.  He  asked  the committee  to                                                                    
take its own  attorneys into account. He  believed the press                                                                    
release  from  the Office  of  the  Attorney General  was  a                                                                    
"whistling past the graveyard opinion  that says it's okay."                                                                    
He  thought the  bill would  put the  state's finances  into                                                                    
deeper trouble.                                                                                                                 
                                                                                                                                
1:49:26 PM                                                                                                                    
                                                                                                                                
CHAD  SCHAEFER, SELF,  SOLDOTNA (via  teleconference), spoke                                                                    
in support of  the bill. He believed the  bill would provide                                                                    
certainty for the state with  payments that were not tied to                                                                    
oil  price or  production.  He encouraged  the committee  to                                                                    
pass the bill to get more Alaskans working.                                                                                     
                                                                                                                                
Representative Ortiz  asked for Mr.  Schaefer's affiliation.                                                                    
Mr. Schaefer replied he is an Alaska resident.                                                                                  
                                                                                                                                
1:51:07 PM                                                                                                                    
                                                                                                                                
GEORGE   PIERCE,   SELF,   KASILOF   (via   teleconference),                                                                    
testified against  the bill.  He did  not believe  there was                                                                    
need  for a  bond debt  on  Alaskans. He  stressed that  the                                                                    
state was  in deficit. He  supported cuts to the  budget. He                                                                    
stated that since the passage of  SB 21 the oil industry had                                                                    
received  $1.6  billion in  per  barrel  tax deductions.  He                                                                    
believed Alaskans had been  short-changed. He discussed that                                                                    
new  oil discoveries  not on  the books  meant nothing.  The                                                                    
state had every right to  pay the minimum credit obligation.                                                                    
He believed  paying credits in-full with  bonds would reward                                                                    
oil companies for not living  up to their obligations to the                                                                    
state.  He believed  the real  crime  was the  legislature's                                                                    
mismanagement  of Alaska's  finances. He  stated that  North                                                                    
Dakota  and Texas  did not  have to  sell bonds  to pay  for                                                                    
their  debt. He  believed those  states taxed  oil companies                                                                    
two to  three times  more than Alaska.  He thought  the bill                                                                    
represented major oil companies  and not Alaskans. He stated                                                                    
that [as a  resident] he owned the resources  and there were                                                                    
no taxes  on his  resources. He believed  a $1  billion bond                                                                    
should be  voted on  by Alaskans  - the  people who  own the                                                                    
resources.  He  believed  the  legislature  needed  to  quit                                                                    
catering to oil companies and begin working for Alaskans.                                                                       
                                                                                                                                
1:53:45 PM                                                                                                                    
                                                                                                                                
DON  BULLOCK,  SELF,  JUNEAU,  shared   that  he  had  prior                                                                    
experience and  contact with the  laws underlying  the bill.                                                                    
He  detailed  that  he  had heard  the  testimony  from  the                                                                    
Department  of Law  and by  Legislative  Legal Services.  He                                                                    
believed that  Emily Nauman's letter from  Legislative Legal                                                                    
Services written to  Co-Chair Seaton was much  closer to the                                                                    
truth  than information  provided by  the Department  of Law                                                                    
(DOL). He  referenced Article IX,  Sections 8 and 11  of the                                                                    
state constitution  and noted  that general  obligation debt                                                                    
had  to be  generally for  capital projects  and required  a                                                                    
vote of the  people. Section XI talked  about revenue bonds.                                                                    
For example,  if the Knik  Arm bridge was built  and bonded,                                                                    
there would be  a revenue flow from the project  - the tolls                                                                    
could be available for appropriation to pay for the bonds.                                                                      
                                                                                                                                
Mr. Bullock stated  that the problem with the  bill was that                                                                    
the   repayment   of  the   bonds   was   based  on   future                                                                    
appropriations. The  only asset  the corporation  created by                                                                    
the bill would  have was what was  appropriated. He reasoned                                                                    
that  in a  way the  state  would not  really gain  anything                                                                    
because under AS 43.55.028, the  statute creating the credit                                                                    
fund consisted  of appropriations as well.  Additionally, AS                                                                    
43.55.028 clearly stated  that the section did  not create a                                                                    
dedicated fund. Almost every designated  fund in the General                                                                    
Fund (GF) that  was not dedicated would  have that language.                                                                    
He  believed the  structure of  the  bonds was  questionably                                                                    
constitutional.                                                                                                                 
                                                                                                                                
Mr. Bullock  spoke to  an additional  issue. He  stated that                                                                    
under AS 43.55.028 the legislature  appropriated the money -                                                                    
when  the  money was  appropriated  to  buy the  tax  credit                                                                    
certificates it was an appropriation  that was not dedicated                                                                    
(it  may be  designated)  and as  money  became tighter  and                                                                    
tighter  in  the GF  those  type  of appropriations  had  to                                                                    
compete with other things like  schools, the University, and                                                                    
public safety. As  long as an appropriation was  for a valid                                                                    
public purpose,  appropriations from the GF  were allowable.                                                                    
He addressed a scenario where the  state sold a bond that it                                                                    
promised to  pay back  in the future  with interest.  In the                                                                    
future, the  state would have a  discretionary appropriation                                                                    
and  the  pressure of  the  bond  contract. The  contractual                                                                    
relationship  with the  bond  holders  would add  additional                                                                    
pressure  and  possibly  additional litigation  between  the                                                                    
bond holders and state.                                                                                                         
                                                                                                                                
Mr. Bullock noted that committee  had recently been told the                                                                    
court system could order the  legislature to appropriate the                                                                    
money to  pay any  kind of litigation  like that.  The state                                                                    
had a separation  of powers - the legislature  had the power                                                                    
to  appropriate money  (the court  could not  do it  and the                                                                    
governor  had   to  request  the  legislature   to  make  an                                                                    
appropriation). He  stated that the  issue had been  seen in                                                                    
the Kasayulie case pertaining to  education funding in rural                                                                    
areas. He  detailed that the legislature  had basically been                                                                    
signaled  to appropriate  more money  to bring  some of  the                                                                    
standards up.  He cited another case  involving overcrowding                                                                    
in  prisons.  The  court  had   found  that  prisoners  were                                                                    
overcrowded,  and  more  money  had to  be  appropriated  to                                                                    
create more  places to house  prisoners. He  reiterated that                                                                    
the  court could  not appropriate  the money.  The Kasayulie                                                                    
case   had   been   settled    when   the   former   Parnell                                                                    
Administration agreed  to put requests  into the  budget for                                                                    
additional   school  funding.   In  the   case  of   general                                                                    
obligation  bonds, which  were  not used  in  HB 331,  there                                                                    
could  perhaps be  a court  order to  liquidate some  assets                                                                    
because those type of bonds had the full faith in credit.                                                                       
                                                                                                                                
Mr. Bullock  believed the best  opinion the  legislature had                                                                    
was the non-partial opinion  by legislature's own attorneys.                                                                    
The   question  of   constitutionality  raised   a  possible                                                                    
challenge to the  bill. He was also  concerned about another                                                                    
sense of entitlement based on the contract against the GF.                                                                      
                                                                                                                                
1:59:45 PM                                                                                                                    
                                                                                                                                
Mr. Bullock  believed the foundation  of the bill  was built                                                                    
on  sand.  He stated  that  AS  43.55.023 and  AS  43.55.025                                                                    
create the  opportunity for  tax credits.  Statutes directed                                                                    
companies to apply to the state  to receive a tax credit. He                                                                    
stated there were three ways  the tax credits could be used.                                                                    
He likened  credits to  an income  tax return  where credits                                                                    
could be  taken to  reduce tax  liability dollar-for-dollar.                                                                    
He noted  it was different  than a deduction because  it was                                                                    
an  actual reduction  in  tax. The  credits  were issued  in                                                                    
return for  the desired activity or  investment taking place                                                                    
- the person holding the  credits could hold them until they                                                                    
could use  them, they could  sell them to  another taxpayer,                                                                    
or they could  be presented to the state  for payment. There                                                                    
was  no dedicated  fund to  pay  those taxes.  A source  was                                                                    
identified;  a certain  percentage of  the production  taxes                                                                    
were received.  He stated that  when things were  good there                                                                    
were higher  production taxes whatever percentage  went into                                                                    
the fund would be higher. At  the same time, there were lean                                                                    
times  - when  production  taxes went  down  there was  less                                                                    
available from the identifiable fund source.                                                                                    
                                                                                                                                
Mr.  Bullock underscored  there was  no requirement  for the                                                                    
taxes  to  be put  into  a  credit  fund  - the  funds  were                                                                    
discretionary. The discretion to  appropriate money would be                                                                    
the same  as the discretion if  the bill passed to  fund the                                                                    
bonds.  He thought  the bill  had been  characterized as  an                                                                    
obligation of the  state to pay the bonds.  He stressed that                                                                    
at  best  it was  discretionary.  He  clarified he  was  not                                                                    
saying there  were not  any impacts or  that people  did not                                                                    
expect to be  paid. He remarked that when the  state had the                                                                    
money it bought everything on the  shelf; in the past it had                                                                    
paid  the full  amount  to companies.  However,  it did  not                                                                    
amend the law that reasonable  expectation would be that the                                                                    
state  would   always  buy  "them"  because   there  was  no                                                                    
dedicated fund or requirement.                                                                                                  
                                                                                                                                
Mr.  Bullock continued  that  tax  credit certificates  were                                                                    
issued  with a  face value  that  did not  gain interest  or                                                                    
grow. He shared that he had  a zero-interest loan on his car                                                                    
and  had  no  incentive  to   prepay.  The  credits  were  a                                                                    
liability  to the  state, which  was something  necessary to                                                                    
consider  - potentially  every  credit  issued would  reduce                                                                    
future tax payments to the  state. He added that the credits                                                                    
did not expire. He  equated it to the risk of  a gift card -                                                                    
some people  never used  them and  others did.  He explained                                                                    
that  credits could  be sold  to  a company  that could  use                                                                    
them.  For example,  a company  could discount  the sale  of                                                                    
credits to  a taxpayer -  there were limitations on  how the                                                                    
credits  could be  applied -  and  there would  be a  future                                                                    
reduction in  tax. He  continued that if  the state  had the                                                                    
money and  could negotiate the outstanding  credits, perhaps                                                                    
it could  bid against the  other taxpayers. For  example, if                                                                    
another buyer was  going to offer less for  the credits, the                                                                    
state would  be ahead if  it could  offer 80 percent  of the                                                                    
value of the credit because  the treasury would not lose the                                                                    
money.  The trouble  was,  if  the state  did  not have  the                                                                    
money, it  would have to wait.  He did not believe  the bill                                                                    
was the  way to go. The  liability for payment on  the bonds                                                                    
and  future appropriations  was  worse than  looking at  the                                                                    
credits owed now.                                                                                                               
                                                                                                                                
2:04:51 PM                                                                                                                    
                                                                                                                                
Representative   Wilson  asked   if   the   bill  would   be                                                                    
constitutional if it included  putting language on the bonds                                                                    
that read "good luck, we hope you get paid."                                                                                    
                                                                                                                                
Mr.  Bullock did  not believe  putting the  language on  the                                                                    
bonds mattered. He  elaborated that the laws  would still be                                                                    
on  the books  if the  language was  not on  the bonds.  The                                                                    
current law  had discretionary language  and did  not always                                                                    
allow bills to include the  terms "must" and "shall" instead                                                                    
of "may." Part of the problem  with the credits was they had                                                                    
been  assigned with  the expectation  the legislature  would                                                                    
appropriate the assignments, which  was where the concern of                                                                    
financial  lenders  resided.  He  stated  that  whether  the                                                                    
credits would be purchased was  based on the state's ability                                                                    
to purchase the credits.                                                                                                        
                                                                                                                                
Representative Wilson spoke to a  proposal that in order for                                                                    
the state  to pay the  credits there  would be some  sort of                                                                    
requirement  for   increased  development.  She   asked  Mr.                                                                    
Bullock whether  he did not  believe it was a  good tradeoff                                                                    
to  potentially   help  the  state's  economy   versus  less                                                                    
development.                                                                                                                    
                                                                                                                                
Mr. Bullock answered  that any kind of state  money into the                                                                    
economy  was always  beneficial;  however, the  law did  not                                                                    
allow for  that. The law  provided the credit and  perhaps a                                                                    
purchase by  the state based  on available money.  He stated                                                                    
it was  always good to spread  the money, which was  part of                                                                    
the issue of  the Permanent Fund Dividend  where state money                                                                    
went out  to help  the economy.  The state's  major industry                                                                    
was in  oil and  gas -  the state  took a  balanced approach                                                                    
between what  it gave  up and  what it  could expect  in the                                                                    
future. He  had testified  in the past  that when  the state                                                                    
decided to an act of  deduction or credit it was effectively                                                                    
making  an   investment  of  state  money.   He  recommended                                                                    
identifying what the state expected  in conjunction with the                                                                    
credit  and  whether it  was  a  good outlay.  Especially  a                                                                    
targeted credit  going towards incentivizing  production. He                                                                    
added that some of the  credits were received for dry holes,                                                                    
but at least that meant companies were out exploring.                                                                           
                                                                                                                                
Representative  Wilson  asked  if there  would  be  legality                                                                    
issues  attaching certain  work  being done  on money  being                                                                    
paid  to  companies,  especially  when  they  had  completed                                                                    
projects.                                                                                                                       
                                                                                                                                
Mr. Bullock answered that the  expectation of qualifying for                                                                    
the  credit  was to  receive  a  credit. There  was  nothing                                                                    
binding  saying   they  would   be  paid,  which   would  be                                                                    
dedicating future revenue at some point to buy the credit.                                                                      
                                                                                                                                
Representative Wilson clarified that  she was speaking about                                                                    
a proposal to require companies  to reinvest in order to get                                                                    
the larger amount of money for the credits.                                                                                     
                                                                                                                                
Mr.  Bullock  believed it  would  be  acceptable because  it                                                                    
would be like settling it. The  state did not have the money                                                                    
to  appropriate to  buy the  credit,  but it  would offer  a                                                                    
company  a discount.  The credit  would be  discounted in  a                                                                    
smaller  way  if  the  company made  a  commitment  to  keep                                                                    
working. He  stated it  was like  getting another  credit or                                                                    
another deduction;  it was  an incentive  to go  forward. He                                                                    
liked the  idea of  the overriding  royalty -  another thing                                                                    
that would contribute to the government part of the state.                                                                      
                                                                                                                                
2:09:15 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg thanked  Mr. Bullock  for all  of                                                                    
his work  for the  legislature in the  past. He  stated that                                                                    
the state's current  relationship with the credits  was as a                                                                    
sovereign and a taxpayer. He  believed the bill would change                                                                    
the  structure  to  a commercial  relationship  between  two                                                                    
parties.  He  asked  if  the  state  lost  anything  if  the                                                                    
relationship changed.                                                                                                           
                                                                                                                                
Mr. Bullock asked for clarity on the two parties.                                                                               
                                                                                                                                
Representative Guttenberg explained he  was referring to the                                                                    
state  entering into  a  contractual  relationship with  the                                                                    
industry.                                                                                                                       
                                                                                                                                
Mr. Bullock replied that he  did not believe so. He detailed                                                                    
the state  wore two  hats -  it was  the resource  owner (it                                                                    
received  royalty payments)  and it  was the  tax collector.                                                                    
Those  things would  not change.  He continued  that if  the                                                                    
state got  into the  overriding royalty situation,  it would                                                                    
have an  additional interest in production.  He clarified it                                                                    
was  not  the  same  as  the  royalty  the  state  generally                                                                    
received, which came  off the top as  payment for something.                                                                    
He provided  an example. He  did not believe it  changed the                                                                    
relationship  with the  state -  it would  continue to  be a                                                                    
resource owner and tax entity.                                                                                                  
                                                                                                                                
Co-Chair Foster  recognized Representative  Charisse Millett                                                                    
in the audience.                                                                                                                
                                                                                                                                
Vice-Chair Gara thanked Mr. Bullock  for all of his years of                                                                    
service. He appreciated the testimony.                                                                                          
                                                                                                                                
2:12:05 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton  asked if  the major  problem with  the bill                                                                    
would be  solved if  there was  a revenue  stream associated                                                                    
with the bond.                                                                                                                  
                                                                                                                                
Mr.  Bullock  answered  in  the  affirmative.  The  idea  of                                                                    
revenue  bonds   was  there  was  an   identifiable  source.                                                                    
Conceivably if  there was an  overriding royalty as  part of                                                                    
the  deal,  it could  be  a  revenue source.  He  speculated                                                                    
anything  could  be  bonded  for  a  price  -  as  the  risk                                                                    
increased, the interest  in buying the bonds  would be less,                                                                    
but the  interest the state  would have  to pay to  sell the                                                                    
bonds  would  be  higher.  An  identifiable  revenue  source                                                                    
provided some  comfort to  the bond buyers  - a  buyer could                                                                    
reason  that   it  was  a  good   contract  with  overriding                                                                    
royalties on  known fields that  would continue  to produce.                                                                    
He stated  that revenue bonds were  authorized under Article                                                                    
IX, Section  11 of  the state  constitution; the  bond buyer                                                                    
could look  at the  source. He detailed  that the  state did                                                                    
everything  it  could  to meet  its  legal  obligations.  He                                                                    
mentioned  constraints like  the dedicated  fund. Under  the                                                                    
bill, a  bond buyer  would have  to speculate  about whether                                                                    
there would  be money  for future  appropriations. Depending                                                                    
on the  extent of the  revenue shortage, the buyers  may not                                                                    
get paid.                                                                                                                       
                                                                                                                                
Co-Chair Seaton  asked an overriding  royalty would  have to                                                                    
be designated  to the [AS  43.55] .028 fund. He  wondered if                                                                    
it would  present dedication  problems. He  wondered whether                                                                    
revenue would have  to generate to the corporation  or GF as                                                                    
long as revenue was being generated.                                                                                            
                                                                                                                                
Mr.  Bullock   affirmed  that  it  would   raise  dedication                                                                    
problems. He elaborated that the  state's revenue was sacred                                                                    
apart from for specific exceptions  in Article IX, Section 7                                                                    
regarding dedicated  funds. There  were several  cases about                                                                    
limitations  and dedication  including the  recent Permanent                                                                    
Fund Dividend case and the  University lands case. He highly                                                                    
recommended reading the latter  case summary regarding anti-                                                                    
dedication  clause  rules. He  spoke  to  the importance  of                                                                    
caution.  He  discussed  that   the  constitution  had  been                                                                    
written in  the 1950s when  the state's population  had been                                                                    
much  smaller. He  continued that  the state  had known  its                                                                    
government  would have  to survive  somehow. He  shared that                                                                    
Alaska  and   Georgia  were  the  only   states  with  anti-                                                                    
dedication  provisions, which  gave the  legislature maximum                                                                    
flexibility.  Some  states  were handicapped  by  dedication                                                                    
after dedication.                                                                                                               
                                                                                                                                
2:16:01 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton provided  a scenario  where the  overriding                                                                    
royalty  was perceived  as a  revenue stream  to the  GF. He                                                                    
asked  if  the  language   specifying  the  revenue  may  be                                                                    
appropriated  to  the [AS  43.55]  .028  fund satisfied  the                                                                    
appropriation power and produced a revenue stream.                                                                              
                                                                                                                                
Mr. Bullock could not comment  on the question. He stated it                                                                    
was a  nontraditional revenue stream.  He reported  the case                                                                    
closest to  the dedicated  fund issue  was Meyers  v. Alaska                                                                    
Housing  Finance  Corporation.  He  detailed  the  case  was                                                                    
related to a tobacco  settlement. Effectively the state sold                                                                    
an asset (the  right to future income that would  be paid by                                                                    
the tobacco companies) and  the legislature appropriated the                                                                    
money from the sale. He  detailed that because the money was                                                                    
to  be received  over  time, it  raised  the dedicated  fund                                                                    
issue;  however,  because  it  was  the  sale  of  an  asset                                                                    
followed  by  an appropriation,  the  court  allowed it.  He                                                                    
noted it had been a close case;  he did not know if the same                                                                    
outcome would occur if the issue arose again.                                                                                   
                                                                                                                                
Representative  Pruitt  asked if  it  was  possible for  the                                                                    
state to sell a share of future royalties to a corporation.                                                                     
                                                                                                                                
Mr.  Bullock  answered  that the  Permanent  Fund  had  been                                                                    
created with a  dedication of royalties that  could not have                                                                    
been done  without a  constitutional amendment.  He detailed                                                                    
that  because  royalties  were  a cash  flow  based  on  the                                                                    
state's  ownership,  it  would violate  the  dedicated  fund                                                                    
prohibition.                                                                                                                    
                                                                                                                                
2:18:40 PM                                                                                                                    
                                                                                                                                
BARBARA    HUFF-TUCKNESS,    DIRECTOR,   GOVERNMENTAL    AND                                                                    
LEGISLATIVE AFFAIRS,  TEAMSTERS LOCAL 959, JUNEAU,  spoke in                                                                    
support of the bill. She spoke  to the amount work the small                                                                    
independent  contractors had  done over  the past  couple of                                                                    
years  during a  time of  reduced work  opportunity and  the                                                                    
backing off  of the credits reimbursement.  The organization                                                                    
believed  there was  a work  opportunity here.  She stressed                                                                    
the  small  independent  contractors  had done  a  good  job                                                                    
working   with  Nanuq   Inc.   and   AFC  [Alaska   Frontier                                                                    
Contractors].   The  independents   included  ENI,   Caelus,                                                                    
Armstrong, Repsol,  and Brooks  Range. Over the  past couple                                                                    
of  years, the  companies  had worked  closely with  Alaskan                                                                    
contractors;  Teamsters members  had  enjoyed  much of  that                                                                    
work  opportunity.  She  added  there  could  be  more  work                                                                    
opportunity.  Unfortunately,  the   opportunity  to  discuss                                                                    
local  hire   was  not  included   in  the  bill,   but  the                                                                    
organization  commended  the   administration  for  what  it                                                                    
believed was an innovative way to  allow for some of the tax                                                                    
credits  through the  bonding process.  She underscored  the                                                                    
importance of  jobs to the  Alaskan economy. She  added that                                                                    
the industry jobs paid good money.                                                                                              
                                                                                                                                
2:21:23 PM                                                                                                                    
                                                                                                                                
DOUG  SMITH,  CEO,  ASRC  ENERGY  SERVICES,  ANCHORAGE  (via                                                                    
teleconference),  testified  in  support  of  the  bill.  He                                                                    
provided  detail  about  the company  that  had  85  percent                                                                    
Alaska  hire. He  remarked on  the confusing  nature of  the                                                                    
issue. He  reported he had  a large meeting that  night with                                                                    
other Alaska businesses  to discuss the issue  and he needed                                                                    
clarification.  He explained  the company's understanding of                                                                    
the oil credit obligation by  the state to oil companies. He                                                                    
wanted to know if he was  obligated as a resident to pay the                                                                    
credits annually  over time. If  so, if the bond  deal would                                                                    
allow the  state to pay the  credits up front at  a discount                                                                    
and  not cost  Alaskans any  more in  the long  run than  it                                                                    
would  eventually   pay  and  hopefully   generate  economic                                                                    
activity in the process, he  needed to understand how it was                                                                    
not good for every Alaskan.                                                                                                     
                                                                                                                                
Mr. Smith clarified  that most of the  oil companies holding                                                                    
the  tax credits  were  not  large. One  of  the tax  credit                                                                    
holders was  the Arctic  Slope Regional  Corporation (ASRC).                                                                    
He provided detail about millions  of dollars in investment.                                                                    
He stressed  that equipment the  company had  spent millions                                                                    
on would  be covered by  the bill and reduced  utility costs                                                                    
in  Interior Alaska  by 30  percent. The  investors did  not                                                                    
only include oil companies -  he listed Ahtna as an example.                                                                    
He  spoke  to  anchored  high   rates  of  Alaska  hire  and                                                                    
employing companies  also experiencing  the tax  problem. He                                                                    
believed the resource belonged to  Alaskans too, but in 1958                                                                    
the state  had $54 million in  its Permanent Fund and  as of                                                                    
Monday  it contained  $64 billion.  He underscored  that the                                                                    
state did not get  there without co-investing and developing                                                                    
by  oil  companies.  The  bottom line  was,  the  state  had                                                                    
benefitted from development of its resources.                                                                                   
                                                                                                                                
Mr.  Smith stated  that under  Alaska's Clear  and Equitable                                                                    
Share (ACES)  the state had  taken more money  from industry                                                                    
and had implemented a credits  system for balance. The state                                                                    
had  enjoyed  many  years  of  extra  money  coming  in.  He                                                                    
referenced  the  past energy  dividend  to  all Alaskans  by                                                                    
former Governor  Sarah Palin. He  stated that the  state had                                                                    
put  its  word  behind  the  obligations.  He  stressed  the                                                                    
state's word had to be  worth something. The state needed to                                                                    
stand behind  the credits  and ensure  it was  getting value                                                                    
for the  deal. He spoke to  the need of getting  people back                                                                    
to work. The  organization's support for the  bill was about                                                                    
Alaskans and  Alaskan paychecks. He asked  for clarification                                                                    
on  whether  the state  would  ever  pay  the debt  with  or                                                                    
without the bill.                                                                                                               
                                                                                                                                
2:26:13 PM                                                                                                                    
                                                                                                                                
CATHY   DUXBURY,  SELF,   ANCHORAGE  (via   teleconference),                                                                    
testified in support of the  bill. She agreed with the prior                                                                    
testifier. She  did not understand the  testimony pertaining                                                                    
to constitutionality. She stressed  that the bottom line was                                                                    
that  the  state owed  the  credits  to oil  companies.  She                                                                    
believed the  liability made Alaska  look unstable.  She did                                                                    
not understand what  made the legislature think  it was okay                                                                    
to not pay the money back. She supported the bill.                                                                              
                                                                                                                                
2:27:57 PM                                                                                                                    
                                                                                                                                
JAMES  SQUYERS, SELF,  RURAL  DELTANA (via  teleconference),                                                                    
spoke in  opposition to the  bill. He referenced all  of the                                                                    
concern about  statutory obligations  regarding oil  and gas                                                                    
credits;  however,  he  saw no  concern  for  the  statutory                                                                    
obligation to  recognize the unpaid Permanent  Fund Dividend                                                                    
(PFD)  in  the  past  few   years.  He  wondered  where  the                                                                    
discussion was  to bond  for the  unpaid PFD  obligation. He                                                                    
asked how  oil and gas  credits became a  preferred creditor                                                                    
over the  PFD debt.  He wanted to  hear whether  the House's                                                                    
proposal for the  statutory minimum on the  credits could be                                                                    
supported   at  $49   million  versus   $184  million   (the                                                                    
difference between  the House and Senate  amounts). He spoke                                                                    
about a  cash flow triage  where the state could  not afford                                                                    
the  statutory  minimum.  He  recommended  bonding  for  the                                                                    
agreed upon  statutory minimum instead of  binding the state                                                                    
to a more  rigid payoff schedule. He stated that  if the dog                                                                    
were  wagging its  tail, the  legislature  would be  working                                                                    
towards a sustainable budget number,  cutting and tucking as                                                                    
necessary. He believed  the tail was wagging the  dog in the                                                                    
legislature. He surmised that if  the legislature decided to                                                                    
bond for  the oil and gas  credits, it should bond  the same                                                                    
amount to pay off the  statutory PFD obligation. He reasoned                                                                    
it would be immediately  injected into the state's depressed                                                                    
economy with a multiplier of 1.4.                                                                                               
                                                                                                                                
2:29:35 PM                                                                                                                    
                                                                                                                                
KEVIN   DURLING,  SELF,   ANCHORAGE  (via   teleconference),                                                                    
testified  in support  of the  bill. He  shared that  he had                                                                    
made a living in the oil  and gas industry. He stressed that                                                                    
the  state  had agreed  to  a  financial commitment  to  oil                                                                    
companies. Subsequently,  the companies  had spent  money in                                                                    
Alaska,  hired Alaskans,  developed  resources, and  located                                                                    
additional resources.  Since the  state had  stopped meeting                                                                    
its  commitment, the  companies could  not go  out to  bring                                                                    
more  resources  to market.  He  believed  that getting  the                                                                    
bonding done on  the front end would result  in $150 million                                                                    
in  interest savings  for the  state.  Companies that  could                                                                    
raise funding  were paying  three times  the market  rate to                                                                    
get  the funds.  He believed  if the  same was  true in  the                                                                    
housing market  it would dry  up. He strongly  supported the                                                                    
bill and meeting the state's obligations.                                                                                       
                                                                                                                                
2:31:30 PM                                                                                                                    
                                                                                                                                
GALEN  NELSON, SELF,  ANCHORAGE (via  teleconference), spoke                                                                    
in favor of  the bill. He shared that in  the past few years                                                                    
he had seen  countless friends and family  members lose jobs                                                                    
or moving to other states  for work. He spoke to constraints                                                                    
put  on  small  companies  that  were in  the  state  to  do                                                                    
business  and employ  Alaskans. He  had seen  the amount  of                                                                    
work that  could be done  with an  influx in capital  in the                                                                    
oil  industry. He  stated that  when money  was not  paid it                                                                    
meant  companies  had  to  lay  people  off  and  shut  down                                                                    
projects. He  thought it  was sad  to think  he may  need to                                                                    
move from Alaska to support his family.                                                                                         
                                                                                                                                
2:33:08 PM                                                                                                                    
                                                                                                                                
VERN   JOHNSON,   SELF,  ANCHORAGE   (via   teleconference),                                                                    
testified in support  of the bill. He  agreed with testimony                                                                    
given  by Mr.  Smith, Mr.  Durling, and  Mr. Nelson.  He had                                                                    
moved  to  Alaska  18  years  earlier to  work  in  the  oil                                                                    
industry.  He  had  seen  a dramatic  shift  over  the  past                                                                    
several years, especially when the  state had pulled support                                                                    
for the  small companies  by shutting  down tax  credits. He                                                                    
supported  turning the  situation around,  which would  help                                                                    
investment and  getting Alaskans  back to work.  He reported                                                                    
that the slowdown  in payment had impacted  him, his family,                                                                    
business associates,  friends, and  other. He had  seen many                                                                    
friends get  laid off  or have  to move to  the Lower  48 to                                                                    
find work in the oil field.                                                                                                     
                                                                                                                                
2:34:30 PM                                                                                                                    
                                                                                                                                
ERIN RENFRO, SELF, ANCHORAGE  (via teleconference), spoke in                                                                    
support of  the bill.  She worked in  the oil  industry. She                                                                    
had  seen  many  friends  lose their  jobs  because  of  the                                                                    
downturn  and   because  the  state  had   pulled  back  its                                                                    
obligation to pay  the credits. She believed  the sooner the                                                                    
credits  were  paid,  investment   would  begin  again,  and                                                                    
Alaskans could get back to work.                                                                                                
                                                                                                                                
2:35:31 PM                                                                                                                    
                                                                                                                                
BEN ANGLEN,  SELF, ANCHORAGE (via teleconference),  spoke in                                                                    
favor of  the bill. He  stressed that  the state had  made a                                                                    
commitment to pay the tax  credits to oil companies that had                                                                    
made  investments in  Alaska. He  elaborated that  companies                                                                    
could  be   cash-poor  and  in   debt  to   large  financial                                                                    
institutions.  He  thought  it was  unbelievable  the  state                                                                    
would  not  pay  what  it   had  committed  to  without  any                                                                    
specified  payment schedule  going  forward.  The issue  was                                                                    
hurting the state's reputation  in the investment community.                                                                    
Paying  the credits  or providing  a payment  schedule would                                                                    
increase  future investment  by the  oil industry  and would                                                                    
increase jobs in the state.                                                                                                     
                                                                                                                                
2:37:24 PM                                                                                                                    
                                                                                                                                
MELONNIE  AMUNDSON,  SELF, ANCHORAGE  (via  teleconference),                                                                    
testified in  support of  the bill. She  worked for  the oil                                                                    
industry. She had  seen many negative impacts  of not paying                                                                    
the tax credits  including job loss and  the postponement of                                                                    
projects. She believed the bill  was a win-win for the state                                                                    
and Alaskans. She wanted to get Alaskans back to work.                                                                          
                                                                                                                                
2:38:15 PM                                                                                                                    
                                                                                                                                
DALE  HOFFMAN, SELF,  ANCHORAGE (via  teleconference), spoke                                                                    
in support of the bill. He  shared that he worked for Caelus                                                                    
Energy Alaska. He had seen  the impacts the situation had at                                                                    
Caelus  - many  people had  lost their  jobs and  there were                                                                    
individuals eager to get back  to work. He believed the bill                                                                    
would get oil investment back on track in Alaska.                                                                               
                                                                                                                                
2:39:01 PM                                                                                                                    
                                                                                                                                
ROGER  DEMOSS,  SELF,   PRUDHOE  BAY  (via  teleconference),                                                                    
testified in favor  of the bill. He had  seen people working                                                                    
in the oil industry get laid  off. He thought the bill was a                                                                    
win-win for the state. He  wanted to see some projects start                                                                    
up.                                                                                                                             
                                                                                                                                
2:39:41 PM                                                                                                                    
                                                                                                                                
JEANIE  PEIRCE, SELF,  KASILOF  (via teleconference),  spoke                                                                    
against the bill. She believed  the issue should be taken to                                                                    
the state residents  for a vote. She  reminded the committee                                                                    
the oil  companies had been  paid handsomely to  extract oil                                                                    
in  the state.  She stated  the  bill was  about paying  the                                                                    
minimum or  the maximum. She  stressed that the  state could                                                                    
not afford  to pay the  credits at  the present and  she did                                                                    
not  believe companies  had lived  up to  their obligations.                                                                    
She remarked that the state  had not been receiving the bang                                                                    
for  its buck  since the  passage of  SB 21.  She emphasized                                                                    
that the  PFD had been  ripped off  from people who  were in                                                                    
bad times. She continued that  the rate of people on welfare                                                                    
had increased and the state  could not afford the credits to                                                                    
save a few jobs. She opined  that the jobs were being thrown                                                                    
away by  companies that wanted  the credits to be  paid. She                                                                    
wondered if the  state was paying for less than  it got. She                                                                    
thought there  was something wrong  when everyone had  to be                                                                    
propped up.                                                                                                                     
                                                                                                                                
Co-Chair Seaton thanked Ms. Peirce for calling.                                                                                 
                                                                                                                                
Co-Chair  Foster CLOSED  public testimony.  He reviewed  the                                                                    
schedule for the remainder of the meeting.                                                                                      
                                                                                                                                
Representative  Wilson asked  if  there  was any  additional                                                                    
written testimony besides two letters in the packets.                                                                           
                                                                                                                                
Co-Chair Foster replied in the negative.                                                                                        
                                                                                                                                
Co-Chair Foster transitioned the  meeting to a discussion on                                                                    
the  overriding  royalty  interest agreement  and  qualified                                                                    
capital  expenditures in  Section 10  of the  bill with  the                                                                    
Department of Natural Resources (DNR).                                                                                          
                                                                                                                                
2:43:33 PM                                                                                                                    
                                                                                                                                
JIM  BECKHAM,  DEPUTY DIRECTOR,  DIVISION  OF  OIL AND  GAS,                                                                    
DEPARTMENT OF NATURAL  RESOURCES (via teleconference), spoke                                                                    
to the overriding  royalty interest portion of  the bill. He                                                                    
explained that  the department would evaluate  an additional                                                                    
agreement  with an  applicant. According  to the  bill there                                                                    
were seven  or eight  provisions that would  have to  be met                                                                    
and considered  by the division  in determining  whether the                                                                    
overriding  royalty  interest  or additional  payment  would                                                                    
meet  the  requirements of  the  lesser  discount rate.  The                                                                    
department  would  probably  exercise the  evaluation  on  a                                                                    
case-by-case basis  because not  all companies,  leases, and                                                                    
production are the  same. The work would be done  by the DNR                                                                    
commercial analyst in the  division's Commercial Section and                                                                    
it  would  work with  the  Department  of Revenue  (DOR)  to                                                                    
determine whether what DNR found  met DOR's requirements for                                                                    
the lesser discount rate.                                                                                                       
                                                                                                                                
Co-Chair  Foster  asked  Mr.   Beckham  to  comment  on  the                                                                    
qualified capital expenditures.                                                                                                 
                                                                                                                                
2:45:23 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:46:06 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Representative Guttenberg asked about  the end of Section 10                                                                    
on  page 14.  He referred  to  language in  the section  and                                                                    
asked  what  the meaning  of  commitment  to the  department                                                                    
meant in the case of the bill.                                                                                                  
                                                                                                                                
Mr. Beckham responded that he  had not had an opportunity to                                                                    
look at what  the commitment to the department  would be. He                                                                    
interpreted the language to mean  the commitment to give the                                                                    
department an  overriding royalty interest in  an amount and                                                                    
form that  met the  requirements of  the eight  criteria DNR                                                                    
was required to evaluate.                                                                                                       
                                                                                                                                
Representative  Guttenberg  asked  Mr.  Beckham  to  provide                                                                    
information regarding the criteria.                                                                                             
                                                                                                                                
Mr. Beckham answered  that the criteria DNR  was supposed to                                                                    
evaluate  for an  offer of  an  overriding royalty  interest                                                                    
included   the    anticipated   cost   for    the   issuance                                                                    
administration  of the  bonds, the  production or  projected                                                                    
production from the lease or  leases subject to the proposed                                                                    
agreement, the value or projected  value of the oil produced                                                                    
from  those  leases,  the timing  of  the  production  (when                                                                    
production would  occur and  what the  rates would  be), and                                                                    
the  likelihood   of  production  from  the   lease  if  not                                                                    
currently  under  production.  The department  also  had  to                                                                    
consider  the existence  and burdens  of other  interests on                                                                    
the lease or leases being  proposed - whether there were any                                                                    
other  overriding  royalty  interests, any  other  expenses,                                                                    
liens, or  claims to the  leases, and any  other information                                                                    
submitted with  the offer or  requested to be  considered by                                                                    
the department.                                                                                                                 
                                                                                                                                
2:48:30 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  asked if there was  any oversight                                                                    
aside from the  executive branch. He wondered if  all of the                                                                    
agreements fell under the umbrella of confidentiality.                                                                          
                                                                                                                                
Mr. Beckham  replied a certain  amount of  information would                                                                    
be subject  to confidentiality agreements (e.g.  a company's                                                                    
financial reports  and any  other internal  information that                                                                    
could  be considered  proprietary).  He  believed after  the                                                                    
evaluation  had been  conducted by  the Commercial  Section,                                                                    
coming out with  a certain percentage or  payment rate based                                                                    
on  the evaluation  (including timing  and amount)  would be                                                                    
public information.                                                                                                             
                                                                                                                                
SHELDON   FISHER,  COMMISSIONER,   DEPARTMENT  OF   REVENUE,                                                                    
highlighted that  within HB 331  the word  "department" when                                                                    
not otherwise defined,  referred to DOR. Section  2, page 14                                                                    
pertaining  to  overriding  royalty  interest,  specifically                                                                    
referred  to  DNR.  Section  3  pertained  to  DOR  and  the                                                                    
commitment where  the credit  holder/applicant would  make a                                                                    
commitment  to DOR  that it  intended to  invest over  a 24-                                                                    
month period, an amount equal  to or greater than the amount                                                                    
they were receiving  in the payment, which  would allow them                                                                    
to qualify for the lower discount rate.                                                                                         
                                                                                                                                
2:51:01 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg remarked  that qualified  capital                                                                    
expenditures were terms of art under  tax law. He spoke to a                                                                    
situation  where  the  commercial interests  of  the  credit                                                                    
holder diverged  from the state's (the  state's interest was                                                                    
in production),  but the credit  holder was  still qualified                                                                    
for qualified  capital expenditures  under the tax  code. He                                                                    
asked how to reconcile something  that may qualify under the                                                                    
tax code but was not in  the state's best interest. He asked                                                                    
if there was a place where the state could challenge it.                                                                        
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
confirmed that  qualified capital expenditure was  a term of                                                                    
art in tax  statute. He stated it was the  origin of the old                                                                    
20   percent  capital   credit  from   the  PPT   [Petroleum                                                                    
Production Tax] and ACES tax  regimes in AS 43.55.023(o). An                                                                    
expense had to  meet two criteria to be  a qualified capital                                                                    
expenditure: 1) it had to  be a lease expenditure (a broader                                                                    
definition meaning an upstream spend  on the oil field), and                                                                    
2) it  was a depreciable expenditure  under certain criteria                                                                    
of the IRS  code (a capital expenditure). As  written it was                                                                    
the  only  restriction  on  what  it may  be  in  the  bill.                                                                    
Previously the  state had said  that for the most  part, the                                                                    
credit  holders  were  oil  companies  that  had  discovered                                                                    
something  and  had intent  of  bringing  the resource  into                                                                    
production.  He   believed  the  capital   expenditures  the                                                                    
companies would be  embarking on would be the  sort of thing                                                                    
he  believed the  legislature would  want  - developing  oil                                                                    
towards production.  It was difficult to  imagine some other                                                                    
cost  the companies  may  pursue that  would  not meet  that                                                                    
criteria; however, it was fair to  say that the bill did not                                                                    
restrict  that from  happening. He  continued that  if there                                                                    
was a  desire to include  some brackets or  limitations, the                                                                    
appropriate place would be on page 14, subsection (m)(3).                                                                       
                                                                                                                                
Representative  Guttenberg remarked  that  when someone  was                                                                    
working on  the North Slope and  it was all upstream  it was                                                                    
hard  to imagine  there would  not be  a difference  at some                                                                    
point.                                                                                                                          
                                                                                                                                
Mr.  Alper answered  that DOR  had an  internal conversation                                                                    
about the  issue. He  explained that if  the bill  was meant                                                                    
for  the  long-term  it  would   be  a  larger  concern.  He                                                                    
elaborated that with the bonding  program, the great bulk of                                                                    
all of the  decisions would be made in the  first few months                                                                    
based on existing expenses and  credits. He agreed that in 5                                                                    
to 10  years there would  be demobilization costs  and late-                                                                    
stage maintenance costs; however,  those issues did not come                                                                    
into  play  for  the  decisions specific  to  the  bill  and                                                                    
repurchase effort.                                                                                                              
                                                                                                                                
2:55:00 PM                                                                                                                    
                                                                                                                                
Representative Wilson  provided a  scenario where  a company                                                                    
already  had a  plan filed  with DNR  that may  have changed                                                                    
because it  did not  have the money  to follow  through. She                                                                    
wondered if the company could  use the existing plan as long                                                                    
as it  fell underneath what  a capital expenditure  would be                                                                    
or  whether they  would  be required  to  rewrite the  plan.                                                                    
Alternatively, she wondered it DOR would require a plan.                                                                        
                                                                                                                                
Commissioner Fisher answered that  the company would present                                                                    
a plan  that would be  a commitment for the  24-month period                                                                    
after the  plan was  submitted. He  detailed that  while DOR                                                                    
and DNR  collected certain information, it  was difficult to                                                                    
define it  as a  baseline. The department's  proposal, which                                                                    
was  reflected  in  the  bill, would  look  forward  to  the                                                                    
commitment  without respect  to what  preexisting plans  may                                                                    
have been in the past.                                                                                                          
                                                                                                                                
Representative Wilson was trying to  figure out what it [the                                                                    
plan]  looked  like.  She  wondered if  it  was  a  one-page                                                                    
document. She  used Petro Star  as an example -  the company                                                                    
was going to  do the asphalt portion, which  would be fairly                                                                    
easy and would have included  plans. She believed a plan was                                                                    
already  required for  leases  to show  when  a company  was                                                                    
going to move forward with development.                                                                                         
                                                                                                                                
Commissioner  Fisher replied  that  the  department had  not                                                                    
prescribed  any particular  document  size.  He imagined  it                                                                    
would  be fairly  detailed  and would  describe  the work  a                                                                    
company intended  to do over  a period of time.  He imagined                                                                    
most  companies would  have the  material already  for their                                                                    
internal work. He continued that  the companies would attach                                                                    
a  cost or  budget as  well. The  department would  look for                                                                    
whether  the  company  had  sources  of  capital  and  could                                                                    
reasonably  make  the  commitment  because  it  had  secured                                                                    
commitments from  lenders or other investors.  Based on that                                                                    
information  the  department  would  allow  the  company  to                                                                    
qualify for the reduced rate.                                                                                                   
                                                                                                                                
2:57:32 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  asked  what   would  happen  if  the                                                                    
weather was  poor or for  some other reason the  company was                                                                    
unable to follow through with its plan.                                                                                         
                                                                                                                                
Commissioner Fisher replied there  had been discussion there                                                                    
would be some  sort of consequence if the  companies did not                                                                    
follow through with  the plan. He believed  an amendment may                                                                    
be drafted  in that  regard. The department  was comfortable                                                                    
with  the notion  that  the  company may  have  to pay  back                                                                    
whatever decrement they did not  invest so that they did not                                                                    
receive  a  benefit.  The department  was  not  looking  for                                                                    
massive  penalties, but  there  would be  a  true-up if  the                                                                    
companies did not spend the expected amount.                                                                                    
                                                                                                                                
Representative Wilson stated the  company would have to earn                                                                    
the benefit  twice. She did  not want the companies  to have                                                                    
to  pay for  something that  was  not their  fault. She  was                                                                    
uneasy about some of the  items being in regulation and what                                                                    
it could possibly look like.                                                                                                    
                                                                                                                                
Co-Chair  Foster asked  the committee  if it  had additional                                                                    
questions for Mr. Beckham.                                                                                                      
                                                                                                                                
Representative  Wilson  did  not understand  the  overriding                                                                    
royalty  interest. She  asked if  the  department could  put                                                                    
something  in  writing  with  a  hypothetical  example.  She                                                                    
understood  they  did  not want  to  give  any  confidential                                                                    
information. She  did not know if  there would be a  loss of                                                                    
funding or whether the state would get more funding.                                                                            
                                                                                                                                
Mr. Beckham would follow up in writing.                                                                                         
                                                                                                                                
Co-Chair  Seaton  asked  for  the  information  to  be  sent                                                                    
through the co-chairs.                                                                                                          
                                                                                                                                
3:00:27 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara thought  the  majority  of the  legislature                                                                    
would like  to find a  way to pay  off the tax  credits more                                                                    
quickly. He believed the bond  bill represented a good faith                                                                    
effort to try to  do that. His mind was not  yet made up. He                                                                    
did  not  think  there  were any  legislators  who  did  not                                                                    
believe  the credits  were a  state obligation.  He did  not                                                                    
think  it helped  the state's  ability  to attract  business                                                                    
when the argument  was given that the state  had not honored                                                                    
its  commitments. He  clarified that  the state  had honored                                                                    
its commitments. He  acknowledged that it may  not have been                                                                    
as  quickly  as some  would  like.  He reiterated  that  the                                                                    
legislature had paid  the statutory due amounts.  He did not                                                                    
believe the discussion  did not help the  state's ability to                                                                    
attract business. He asked the  administration to spread the                                                                    
word that  the state had honored  its statutory commitments.                                                                    
He remarked  that if the  state continued to pay  10 percent                                                                    
of the  revenue it got  from oil production taxes,  it would                                                                    
take  20 years  at $40  million  per year.  He believed  the                                                                    
state needed to do better than  that, but he reasoned it was                                                                    
what people  had signed up  for. The  state would try  to do                                                                    
better  than what  people  had  signed up  for.  He did  not                                                                    
believe it helped the state's business climate.                                                                                 
                                                                                                                                
Commissioner  Fisher believed  the  sentiment  was fair.  He                                                                    
remarked  that he  had probably  been  personally guilty  of                                                                    
making some of  the statements. The attempt of  the bill was                                                                    
to  balance a  number of  perspectives. The  underpinning of                                                                    
the  bill was  based  on  the view  that  the  state had  an                                                                    
obligation over  time and therefore  inviting or  asking the                                                                    
industry  to  take  a  discount  was  a  reasonable  request                                                                    
because it was  an obligation over time.  He speculated that                                                                    
he and Vice-Chair Gara probably  disagreed about some of the                                                                    
differences, but he  appreciated Vice-Chair Gara's comments.                                                                    
He would try to be more mindful about the issue.                                                                                
                                                                                                                                
Co-Chair   Foster  asked   if   there   was  anything   more                                                                    
Commissioner  Fisher  wanted to  put  on  the record  before                                                                    
moving on.                                                                                                                      
                                                                                                                                
Commissioner Fisher referenced statements  that the bill was                                                                    
about debt  and debt had  to follow within  certain criteria                                                                    
within the  constitution. He  referenced the  Carr Gottstein                                                                    
v. State case and spoke  to the distinction between debt and                                                                    
constitutional debt.  He read from the  Alaska Supreme Court                                                                    
case findings:                                                                                                                  
                                                                                                                                
     When  taken   together,  this  court  finds   that  the                                                                    
     foregoing  Alaska  cases and  the  cases  cited by  the                                                                    
     Alaska Supreme  Court define  constitutional debt  as a                                                                    
     term of  art used  to describe an  obligation involving                                                                    
     borrowed money  where there's a promise  to pay whether                                                                    
     funds are available or not.                                                                                                
                                                                                                                                
Commissioner Fisher  stated in other  words that it  was not                                                                    
subject  to appropriation,  which  was the  administration's                                                                    
basic premise. He did not mean  to reopen the debate, but he                                                                    
wanted to highlight  that the Alaska Supreme  Court had made                                                                    
a distinction between constitutional  debt (that had certain                                                                    
requirements and  a process that  had to be approved  by the                                                                    
legislature and  voters and the  consequence of  some fairly                                                                    
strict obligations to  pay) versus other forms  of debt that                                                                    
did not fall into the same bucket.                                                                                              
                                                                                                                                
3:06:22 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  referenced public  testimony  by                                                                    
Mr. McGee about  what would be in the issuance  of the bonds                                                                    
regardless  of the  constitutionality  of  the question.  He                                                                    
looked  at page  4 of  the bill  that specified  "nothing in                                                                    
this section creates  a debt or liability to  the state." He                                                                    
asked  how  it  would  impact someone  looking  to  purchase                                                                    
bonds.                                                                                                                          
                                                                                                                                
Commissioner Fisher  answered that  the bond  obligation and                                                                    
documents would  specify (in multiple places)  the money was                                                                    
subject to  appropriation by  the legislature.  He clarified                                                                    
that   the   language   was   included   not   because   the                                                                    
administration   thought   there    was   a   constitutional                                                                    
requirement to  do so, but  because securities  laws require                                                                    
that all material facts be disclosed.                                                                                           
                                                                                                                                
Representative  Guttenberg   stated  there  was   a  comment                                                                    
earlier that  many of  the things  "that we've  opened here"                                                                    
may  increase the  cost of  the  issuance of  the bonds.  He                                                                    
asked if "this" would be one of them.                                                                                           
                                                                                                                                
Commissioner Fisher  answered that subject  to appropriation                                                                    
debt  was typically  a  bit more  expensive  than a  general                                                                    
obligation  bond,   which  had  been  factored   into  DOR's                                                                    
estimate on the  cost of the debt. The  3.7 percent estimate                                                                    
based  on  current  market conditions  was  for  subject  to                                                                    
appropriation  debt. He  explained  that if  it was  general                                                                    
obligation bond debt it would be less.                                                                                          
                                                                                                                                
Representative  Guttenberg  spoke  about  the  signed  lease                                                                    
agreement the  state had  signed with  the remodeler  of old                                                                    
Legislative  Information Office  [in  Anchorage]. The  state                                                                    
had paid  a premium  in the lease  agreement because  it had                                                                    
been  included in  the lease.  He remarked  that "now  we're                                                                    
going from  $35 or $40 million  to $800 - $900  million." He                                                                    
surmised it  seemed it  would be  a risky  thing in  a state                                                                    
without  a stable  fiscal climate  to enter  into purchasing                                                                    
those bonds.  He was trying  to determine how much  it would                                                                    
cost.                                                                                                                           
                                                                                                                                
3:09:10 PM                                                                                                                    
                                                                                                                                
Commissioner Fisher answered that it  would be less than 0.5                                                                    
percent  increase   in  debt   rate.  The   marketplace  had                                                                    
contemplated that.  He noted that Deven  Mitchell, Executive                                                                    
Director, Alaska  Municipal Bond Bank  Authority, Department                                                                    
of Revenue had testified there  was an appreciation that the                                                                    
bonds  represented  a  commitment  to  the  marketplace.  He                                                                    
believed the administration  was taking the bonds  as a very                                                                    
serious   commitment   and   while   it   was   subject   to                                                                    
appropriation, the administration  expected that money would                                                                    
be appropriated.  He recognized appropriation was  up to the                                                                    
legislature, but there would  be substantial consequences to                                                                    
the   state's   credit  rating   if   the   money  was   not                                                                    
appropriated.                                                                                                                   
                                                                                                                                
Mr. Alper elaborated  it was important to  recognize the 3.6                                                                    
and 3.7  percent [cost of  debt] figures were  estimates. He                                                                    
furthered  that if  the  discussion about  constitutionality                                                                    
had  injected  uncertainty into  the  market  and the  state                                                                    
found it  actually needed to  give 4 percent, it  would find                                                                    
its  way through  the formula  and would  result in  a lower                                                                    
amount paid  to the  companies based  on the  total interest                                                                    
cost  plus 1.5.  The state  was  not really  exposed in  the                                                                    
deal,  but   the  tax  credit   holders  would   receive  an                                                                    
incrementally smaller payment.                                                                                                  
                                                                                                                                
Representative  Ortiz  referenced  the  legal  opinion  from                                                                    
Legislative  Legal  Services  and the  public  testimony  by                                                                    
three  attorneys and  asked whether  it would  be a  leap of                                                                    
faith to pass the bill  because its constitutionality was in                                                                    
question.                                                                                                                       
                                                                                                                                
3:11:58 PM                                                                                                                    
                                                                                                                                
Commissioner Fisher  wanted to be respectful  of the opinion                                                                    
the legislature received, but he  did not believe the bill's                                                                    
constitutionality  was in  question.  He  detailed that  the                                                                    
state had issued  the same kind of debt many  times prior to                                                                    
and after  statehood. He  referenced earlier  testimony that                                                                    
DOL was an advocate for  the governor. He clarified that DOL                                                                    
had   held  the   same  position   for   many  years   under                                                                    
administrations  with  varying   political  persuasions.  He                                                                    
understood  the administration  could  not  get an  attorney                                                                    
general  (AG) opinion  to the  legislature in  the available                                                                    
timeframe  due to  the time  the process  took. He  detailed                                                                    
that  an AG  opinion was  almost quasi-law  in terms  of its                                                                    
standing. He  believed the committee  had heard  the state's                                                                    
bond counsel testify  that counsel needed the  AG opinion in                                                                    
order to issue their opinion.  For the state to issue bonds,                                                                    
it required an opinion from  outside bond counsel (there was                                                                    
a  certain  amount  of  liability  the  counsel  assumed  by                                                                    
providing  the opinion).  Outside  counsel had  communicated                                                                    
they  would require  an AG  opinion. He  reiterated that  he                                                                    
wanted to be respectful, but he  did not believe there was a                                                                    
constitutional issue.                                                                                                           
                                                                                                                                
Vice-Chair  Gara stated  that  if the  AG  and bond  counsel                                                                    
determined the  bill was constitutional,  he was  willing to                                                                    
go with that. He remarked that  it was not relevant that the                                                                    
state had  issued the same  type of debt  in the past  if it                                                                    
had  never  been  challenged.  He   continued  that  it  was                                                                    
relevant  if the  issue had  been challenged  and there  had                                                                    
been a  supreme court ruling.  He reasoned that  issuing the                                                                    
debt  and  not  having  it  be  challenged  did  not  create                                                                    
precedent. He underscored that precedent mattered.                                                                              
                                                                                                                                
Commissioner Fisher  answered that  [the past]  was relevant                                                                    
because it  appeared legislators and administrators  who had                                                                    
been  closer  to  the   constitutional  convention  and  the                                                                    
meaning that the drafters ascribed  to the words, had issued                                                                    
the same  kind of  debt. He agreed  it was  not dispositive,                                                                    
but he believed  it had some persuasive  reasoning if people                                                                    
close to  the drafting of  the constitution believed  it was                                                                    
legal.                                                                                                                          
                                                                                                                                
Vice-Chair Gara  stated that the constitutional  history was                                                                    
fascinating, and he had read  the constitutional minutes. He                                                                    
remarked when  there was  a body of  people who  agreed with                                                                    
something at the convention it  gave significant weight when                                                                    
interpreting the  constitution. There  were also  times when                                                                    
one  person  had said  something  that  was not  necessarily                                                                    
reflective  of the  intent of  others. He  had not  read the                                                                    
constitutional history on the  issue. He was not necessarily                                                                    
convinced by that argument at present.                                                                                          
                                                                                                                                
HB  331  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Foster  clarified that  the amendment  deadline was                                                                    
Wednesday at  5:00 p.m. He  recessed the meeting  [note: the                                                                    
meeting never reconvened].                                                                                                      
                                                                                                                                

Document Name Date/Time Subjects