Legislature(2017 - 2018)ADAMS ROOM 519

05/02/2018 09:00 AM 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
09:29:00 AM Start
09:29:51 AM HB331
11:40:20 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 9:20 am --
+= HB 331 TAX CREDIT CERT. BOND CORP; ROYALTIES TELECONFERENCED
Moved CSHB 331(FIN) Out of Committee
+ 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."                                                                          
                                                                                                                                
9:29:51 AM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton  MOVED  to   RECIND  action  on  Conceptual                                                                    
Amendment 11 [The amendment was  considered during the April                                                                    
27, 2018 meeting.]                                                                                                              
                                                                                                                                
Representative Pruitt OBJECTED.                                                                                                 
                                                                                                                                
Co-Chair  Seaton explained  his  motion. He  noted that  the                                                                    
sunset  date  changes  conflicted  with  the  "028"  credits                                                                    
[AS.43.55.028.  Statute  containing credit  provisions]  and                                                                    
the timing in  relation to the bond issue. He  voiced that a                                                                    
future legislature could consider the action.                                                                                   
                                                                                                                                
Co-Chair Foster indicated  Representative Charise Millet had                                                                    
joined the meeting.                                                                                                             
                                                                                                                                
Representative Pruitt WITHDREW his OBJECTION                                                                                    
                                                                                                                                
There being NO OBJECTION, it was so ordered.                                                                                    
                                                                                                                                
Co-Chair Seaton WITHDREW Conceptual Amendment 11.                                                                               
                                                                                                                                
Co-Chair   Seaton   MOVED   to  ADOPT   proposed   committee                                                                    
substitute  for  HB  331  (FIN),  Work  Draft  (30-GH2863\O,                                                                    
Nauman, 5/1/18).                                                                                                                
                                                                                                                                
Representative Wilson OBJECTED for discussion.                                                                                  
                                                                                                                                
Co-Chair Foster invited Ms. Pierson  to the table to explain                                                                    
the changes in the committee substitute (CS).                                                                                   
                                                                                                                                
9:32:52 AM                                                                                                                    
                                                                                                                                
JANE  PIERSON, STAFF,  REPRESENTATIVE NEAL  FOSTER, reviewed                                                                    
the  changes  to  the  bill   by  reading  from  a  prepared                                                                    
statement:                                                                                                                      
                                                                                                                                
     Page  1. Lines  1-5 Title  The  title in  version O  is                                                                    
     amended to include  language acknowledging the issuance                                                                    
     of bonds,  the payments and refunds  of unused portions                                                                    
     of certain tax  credits issued under AS  43.20, and the                                                                    
     changes to  the oil  and gas tax  credit fund  added by                                                                    
     amendment #3.                                                                                                              
                                                                                                                                
     Page  1,  Line  13     Page 2,  Line  11  AS  37.18.010                                                                    
     Technical and conforming changes were made.                                                                                
                                                                                                                                
     Page 2,  Lines 17    25 AS 37.18.030(a) "powers  of the                                                                    
     corporation"  was   added  to  the   subsection  title.                                                                    
     Purchases  or  payments   was  changed  to  "purchases,                                                                    
     refunds  and payments".  "Transferred"  was changed  to                                                                    
     "disbursed" consistent  with the rest of  the bill. The                                                                    
     restriction  on bonding  in the  last sentenced  before                                                                    
     December 31,  2021, now  excludes refunding  bonds from                                                                    
     this subsection.                                                                                                           
                                                                                                                                
Representative Wilson referenced line  21 and wondered about                                                                    
the  change from  "shall" to  "may."  Ms. Pierson  responded                                                                    
that  the change  occurred when  Legislative Legal  Services                                                                    
(LAA)  was  drafting  the  bill  and  making  technical  and                                                                    
conforming  changes.   She  deferred  to  LAA   for  further                                                                    
clarification.                                                                                                                  
                                                                                                                                
9:35:03 AM                                                                                                                    
                                                                                                                                
EMILY    NAUMAN,    LEGISLATIVE    LEGAL    SERVICES    (via                                                                    
teleconference), explained  that in the  "A" version  of the                                                                    
bill the sentence mandated that  all proceeds from the bonds                                                                    
were disbursed  to the  commissioner {Department  of Revenue                                                                    
(DOR)]  for purchases  of  tax  credits under  AS.43.55.028.                                                                    
However, on page 3, lines  15 through 18 the section allowed                                                                    
the  proceeds to  be deposited  into the  reserve fund.  She                                                                    
reasoned that the word "shall"  conflicted with both options                                                                    
and  she  changed  the  word  to "may"  to  conform  to  the                                                                    
language on  page 3. Representative Wilson  deduced that the                                                                    
word  "may"  was not  implying  an  option  to not  pay  the                                                                    
credits. Ms.  Nauman responded affirmatively and  added that                                                                    
"may"  allowed  some  proceeds  to  be  deposited  into  the                                                                    
reserve fund.                                                                                                                   
                                                                                                                                
Ms. Pierson continued reading from her prepared statement:                                                                      
                                                                                                                                
     Page  2, Lines  26    29 AS  37.18.030(b) Language  was                                                                    
     changed  to   parallel  the  bond   approval  structure                                                                    
     language in art. IX, sec.  8, Constitution of the State                                                                    
     of Alaska.                                                                                                                 
                                                                                                                                
     Page 3,  Lines 15-23 AS 37.18.040(a)(2)  This paragraph                                                                    
     was broken into subparagraphs for clarity.                                                                                 
                                                                                                                                
     Page 3, Lines  24   Page 4, Line 2  AS 37.18.040(b) The                                                                    
     reference  to subsection  (h)  was removed,  consistent                                                                    
     with the removal of subsection (h).                                                                                        
                                                                                                                                
     Page  4,  Lines  3-7  AS 27.18.040(c)  The  phrase  "as                                                                    
     defined in  (b) of this section"  was problematic since                                                                    
     "required  debt service  reserve"  was  not defined  in                                                                    
     (b). (defined in AS 26.67.290(b))  Reference to (h) was                                                                    
     also   removed,   consistent   with  the   removal   of                                                                    
     subsection (h).                                                                                                            
                                                                                                                                
     Former  subsection  AS  37.18.040(h)  was  removed.  It                                                                    
     appears that  the former subsection (h)  was a holdover                                                                    
     from    drafting    the   pension    obligation    bond                                                                    
     authorization and per legislative  legal, it appears to                                                                    
     serve no purpose in this bill.                                                                                             
                                                                                                                                
     Page 6,  Lines 11-17 AS 37.18.050(d)  A cross reference                                                                    
     was added  to (b) in  addition to the reference  to (a)                                                                    
     since some of those actions happen under (b).                                                                              
                                                                                                                                
     Page  6, Lines  23-24 AS  37.18.060 Language  was added                                                                    
     stating  the corporation  shall publish  notice of  the                                                                    
     adopted resolution.                                                                                                        
                                                                                                                                
Representative Wilson asked where the notice would appear.                                                                      
Ms. Pierson deferred the answer to DOR.                                                                                         
                                                                                                                                
9:40:02 AM                                                                                                                    
                                                                                                                                
MIKE BARNHILL,  DEPUTY COMMISSIONER, DEPARTMENT  OF REVENUE,                                                                    
responded  that  legal  notices   were  often  published  in                                                                    
publications  that  were   distributed  statewide  like  the                                                                    
"Alaska Journal  of Commerce." The  statute did  not specify                                                                    
where  the  legal  notices were  to  appear.  Representative                                                                    
Wilson  asked whether  legal  notices  were common  practice                                                                    
with  bonds. Mr.  Barnhill responded  that the  legal notice                                                                    
was  placed by  the  bond corporation  to  broadcast that  a                                                                    
resolution was  published. He indicated that  the statute of                                                                    
limitations was  45 days; the public  had 45 days to  file a                                                                    
lawsuit.                                                                                                                        
                                                                                                                                
Ms. Pierson continued with the summary.                                                                                         
                                                                                                                                
     Page  7,  Lines  3-6  AS  37.18.080  This  section  was                                                                    
     changed  to  Purposes;  limitation  on  issuances  from                                                                    
     Purposes  and sufficiency  of revenue.  There does  not                                                                    
     appear  to be  a  sufficiency of  revenue provision  in                                                                    
     this bill.                                                                                                                 
                                                                                                                                
     Page 7, Lines 12    18 AS 37.18.090(b) Changes language                                                                    
     to  parallel the  bond approval  structure language  in                                                                    
     art. IX, sec. 8, Constitution of the state of Alaska.                                                                      
                                                                                                                                
     Page 8,  Line 4    AS 37.18.090(e)  was added to  the O                                                                    
     version.  "The  corporation   is  authorized  to  incur                                                                    
     expenses to carry out this section."                                                                                       
                                                                                                                                
     Page  8,  Lines 11-18     AS  37.18.110 Limitations  on                                                                    
     Judicial Action was added per Amendment #2.                                                                                
                                                                                                                                
     Page  8, Line  29     Page 9,  Line  4 AS  37.18.190(4)                                                                    
     Drafting  correction deleting  "means and  includes" to                                                                    
     conform with the legislative drafting manual.                                                                              
                                                                                                                                
     Former Sec. AS 37.18.900(5)  was removed the definition                                                                    
     of "department" is not used in this chapter.                                                                               
                                                                                                                                
9:43:05 AM                                                                                                                    
                                                                                                                                
Representative Wilson asked  to return to page  8, lines 19-                                                                    
23. She wondered  why the section numbers  were changed. Ms.                                                                    
Pierson deferred to LAA.                                                                                                        
                                                                                                                                
Ms. Nauman  explained that renumbered  sections were  due to                                                                    
drafting decisions.  The numbering  change occurred  so that                                                                    
the  entire "numbering  set"  of the  chapter  would not  be                                                                    
used.                                                                                                                           
                                                                                                                                
Representative Neuman  referred to page 8,  lines 11 through                                                                    
18, Section AS.37.18.11 that pertained  to the limitation on                                                                    
judicial  action. He  wondered if  the language  was "boiler                                                                    
plate" type policy or if the language was something new.                                                                        
                                                                                                                                
9:44:59 AM                                                                                                                    
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
acknowledged  that the  legality of  the bond  issue was  in                                                                    
question.   He    indicated   that   if    challenged,   the                                                                    
administration  wanted  a  quick  resolution  to  prevent  a                                                                    
lawsuit   after   the   bonds   were   already   sold.   The                                                                    
administration  felt  that  dealing  with  legal  challenges                                                                    
"sooner rather than later" enabled  the plan to move forward                                                                    
faster.  He  furthered  that  a  fair  amount  of  precedent                                                                    
regarding limitations  on judicial action existed.  He noted                                                                    
that similar  language was placed in  legislation related to                                                                    
the Stranded Gas Act, Alaska  Gasline Inducement Act (AGIA),                                                                    
and the Alaska Gasline Development Corporation (AGDC).                                                                          
                                                                                                                                
Representative Neuman  asked if  the language had  been used                                                                    
before. Mr.  Barnhill indicated that  he had never  seen the                                                                    
provision used  regarding bonds.  However, it had  been used                                                                    
in conjunction with  other state statutes in  the context of                                                                    
gas  development.  Representative   Neuman  interpreted  the                                                                    
language in  a manner that  he thought dictated  to industry                                                                    
that the state had the absolute  authority on how to use the                                                                    
bonds. He  voiced that the "bottom  line" interpretation and                                                                    
message  to industry  was that  "the state  was going  to be                                                                    
correct no matter what the  dispute is." Mr. Barnhill stated                                                                    
that the  provision was in  direct response to  the conflict                                                                    
in legal opinion  between LAA and the Department  of Law. He                                                                    
reported that  the likelihood  of litigation  was plausible,                                                                    
and the department  wanted to engage in the  process as soon                                                                    
as  possible. He  indicated that  the proposal  was not  the                                                                    
only  situation  where  a state  entity  issued  subject  to                                                                    
appropriation  debt  and thought  it  was  necessary to  get                                                                    
through the  litigation quickly to  remove the  "cloud" from                                                                    
the concept of subject to appropriation debt.                                                                                   
                                                                                                                                
9:48:14 AM                                                                                                                    
                                                                                                                                
Representative Neuman  relayed his experience with  Knik Arm                                                                    
Bridge and Toll Authority  (KABATA) employing a revenue bond                                                                    
proposal to repay  the state. He commented  that the revenue                                                                    
bonds needed a  known revenue source. He  indicated that the                                                                    
current  bond  proposal;  issuing revenue  bonds  without  a                                                                    
revenue source  was the  reason for  the legal  question. He                                                                    
characterized the scenario as  "unique" and concluded that a                                                                    
"unique  judicial  action plan"  was  necessary  in case  of                                                                    
legal   challenges.   He    maintained   that   there   were                                                                    
"significant  differences"  between  DOL   and  LAA  and  he                                                                    
thought  "it was  a  huge  red flag."  He  wondered why  the                                                                    
language  was necessary.  Mr.  Barnhill  explained that  the                                                                    
department did  not view the  bill's structure as  a revenue                                                                    
bond per  say. The  bond was  structured to  be issued  by a                                                                    
state  corporate  entity  that   did  not  receive  revenue,                                                                    
therefore used  a subject to  appropriation tool,  which was                                                                    
at the  center of  the legal dispute.  He declared  that the                                                                    
method was "unusual",  but the point of the  language was to                                                                    
move it along the legal  process and gain "clarity" from the                                                                    
state    Supreme   Court    "as   quickly    as   possible."                                                                    
Representative   Neuman  asked   whether  the   state  could                                                                    
accomplish the  same goal without  the legal  challenges "by                                                                    
simply stating that the legislature  could appropriate up to                                                                    
$180 million  per year for  5 years to  pay off oil  and gas                                                                    
tax  credits out  of the  general fund  (GF)." Mr.  Barnhill                                                                    
asked whether he meant that  the security for the bonds used                                                                    
legislative  appropriation "upfront."  Representative Neuman                                                                    
replied that the  proposal "was still a  moral obligation of                                                                    
the state." The bill  specified the payment schedule without                                                                    
knowing  the interest  rates, the  amount of  debt, and  the                                                                    
purchase  price  of the  bonds.  He  thought that  the  same                                                                    
result   could  be   accomplished   by   granting  DOR   the                                                                    
appropriation  authority or  create a  corporation with  the                                                                    
authority to comply  with the payment schedule  in the bill;                                                                    
$180 million  per year for 5  years up to $800  million. Mr.                                                                    
Barnhill responded  that he "wished" a  resolution was "that                                                                    
easy."  He  deduced  that Representative  Neuman's  scenario                                                                    
"would suffer from the  same problem." Representative Neuman                                                                    
asked whether the reason was  that the scenario still relied                                                                    
on legislative  appropriation. Mr. Barnhill answered  in the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
9:52:08 AM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  surmised that the  bond issuance  would not                                                                    
proceed  without an  opinion from  the attorney  general and                                                                    
the  legislature would  receive a  letter from  the National                                                                    
Bond  Council  who would  issue  an  opinion after  a  legal                                                                    
review.  Mr.  Barnhill  replied  that  Vice-Chair  Gara  was                                                                    
correct. Vice-Chair  Gara voiced  that the  process provided                                                                    
him with the assurance he needed regarding the legislation.                                                                     
                                                                                                                                
Ms. Pierson continued to read from her prepared statement:                                                                      
                                                                                                                                
     Page 9, Lines 7- 16  AS 43.20.046(e) Language was added                                                                    
     regarding subject  to appropriation by  the legislature                                                                    
     Language  was also  added to  allow  the Department  of                                                                    
     Revenue  to make  a refund  using the  oil and  gas tax                                                                    
     credit fund, from money  disbursed to the commissioner,                                                                    
     or both.                                                                                                                   
                                                                                                                                
     Page  9, Lines  17    26 AS  43.20.047(e) Language  was                                                                    
     also added to  allow the Department of  Revenue to make                                                                    
     a refund  using the oil  and gas tax credit  fund, from                                                                    
     money disbursed to the commissioner, or both.                                                                              
                                                                                                                                
     Page  9, Line  27    Page  10, Line  5 AS  43.20.053(e)                                                                    
     Language  was also  added to  allow  the Department  of                                                                    
     Revenue  to make  a refund  using the  oil and  gas tax                                                                    
     credit fund, from money  disbursed to the commissioner,                                                                    
     or both.                                                                                                                   
                                                                                                                                
     Page 10, Lines 6-13  AS 43.55.028(b) New language added                                                                    
     by amendment #1. The balance  of the amendment is found                                                                    
     in (r)of this section.                                                                                                     
                                                                                                                                
     Page 10,  Line 14    Page 11, Line 11.  AS 43.55.028(e)                                                                    
     Language  was  added  to  allow  the  purchase  of  tax                                                                    
     credits with money in the  oil and gas tax credit fund,                                                                    
     money disbursed to the  commissioner, or both. Language                                                                    
     was also added  on line 24   27  that reflect amendment                                                                    
     #3.                                                                                                                        
                                                                                                                                
     Page 12,  Lines 4-12  AS 43.55.028(i) This  section was                                                                    
     rearranged to be in alphabetical  order, as is standard                                                                    
     for  definitions sections.  "For the  purchase in  this                                                                    
     section"  was  removed  from the  definition  of  "true                                                                    
     interest  cost." Because  the bonds  will be  purchased                                                                    
     under AS  43.55.028, the  language was  unnecessary and                                                                    
     confusing.                                                                                                                 
                                                                                                                                
     Page 12,  Line 30- Page  14, Line 8 AS  43.55.028(k) In                                                                    
     an effort for clarity,  some of the repetitive language                                                                    
     was removed regarding notice  and ties other provisions                                                                    
     to the 10-day notice of acceptance.                                                                                        
                                                                                                                                
     Page  14,   Lines  9-  26  AS   43.55.028(l)  Proration                                                                    
     language has  been moved into subparagraphs  to provide                                                                    
     clarity.                                                                                                                   
     Page  14, Line  27    Page 16,  Line 8  AS 43.55.028(m)                                                                    
     This draft  the phrase  "each year" in  multiple places                                                                    
     in this subsection, since  the first sentence specifies                                                                    
     that  the discount  rate applies  each  year after  the                                                                    
     first  year. Amendment  # 4  is included  in subsection                                                                    
     (m) and (n).                                                                                                               
                                                                                                                                
     Page 16, Lines 9-15  AS 43.55.028(n) Language was added                                                                    
     to state that penalties do  not occur, if the applicant                                                                    
     could  not  incur  the   expenditures  due  to  natural                                                                    
     disaster, injunction or other court order.                                                                                 
                                                                                                                                
     Page 16,  Lines 29    Page 17,  Line 2  AS 43.55.028(r)                                                                    
     New  language relating  to amendment  #1 on  the double                                                                    
     draw.                                                                                                                      
     Page  17,  Lines  10-12  AS  44.37.230(a)  expands  the                                                                    
     requirements  for the  Department of  Natural Resources                                                                    
    to assist the Department of Revenue were expanded.                                                                          
                                                                                                                                
9:56:36 AM                                                                                                                    
                                                                                                                                
Ms. Pierson continued reading from a prepared statement:                                                                        
                                                                                                                                
     Page   19,  Lines   1-4  AS   44.37.230(g)  gives   the                                                                    
     Department  authority to  request  information from  an                                                                    
     applicant  and  to  require the  applicant  to  provide                                                                    
     additional information.                                                                                                    
                                                                                                                                
     Page 19, Line  18. Sec 13 Repealer  section. Section 13                                                                    
     repeals specific sections of HB111.                                                                                        
                                                                                                                                
     The most  important section being repealed  is Sec. 31,                                                                    
     which is  itself a repealer  of a bunch of  sections of                                                                    
     law  including  all of  43.55.028.  It  also repeals  a                                                                    
     number  of  sections  specific  to  purchasing  credits                                                                    
     through the  .028 fund  (for example  43.20.053(e). The                                                                    
     rest of 053 is the refinery  credit. The (e) is how the                                                                    
     .028 fund is used to purchase them.                                                                                        
                                                                                                                                
     Most of the other repealed  sections from HB111 are all                                                                    
     conforming, the  change language  to adapt to  the fact                                                                    
     that  certain statutes  are no  longer repealed.  Since                                                                    
     they're  not   being  repealed,   we  don't   need  the                                                                    
     conforming amendments. All of  this together is in Sec.                                                                    
     13 of HB331.                                                                                                               
                                                                                                                                
     The last  item listed in  Sec. 13 is repealing  Sec. 43                                                                    
     of HB111. This  one is the condition  that triggers the                                                                    
     repealer: the  commissioner of  revenue says  there are                                                                    
     no more credits to buy.                                                                                                    
                                                                                                                                
Representative Wilson asked whether  all the information was                                                                    
confidential.  Mr.  Alper  replied that  the  Department  of                                                                    
Natural  Resources   (DNR)  might  want  to   weigh  in.  He                                                                    
responded   that   whatever   revenue   DOR   received   was                                                                    
confidential tax payer information.  He thought that DNR had                                                                    
a   similar  confidential   taxpayer  relationship   through                                                                    
royalty payments and would act similarly with HB 331.                                                                           
                                                                                                                                
9:57:41 AM                                                                                                                    
                                                                                                                                
JIM  BECKHAM,  DEPUTY DIRECTOR,  DIVISION  OF  OIL AND  GAS,                                                                    
DEPARTMENT   OF  NATURAL   RESOURCES,   answered  that   any                                                                    
additional  information the  department  would request  were                                                                    
financial  statements, reserve  reports, and  geological and                                                                    
geophysical  engineering information  that  would likely  be                                                                    
held confidential after the analysis was completed.                                                                             
                                                                                                                                
Ms. Pierson continued  with Page 19, Line 18,  Section 13 of                                                                    
the legislation  related to repealers.  She deferred  to DOR                                                                    
and LAA to explain the changes.                                                                                                 
                                                                                                                                
Mr.  Alper delineated  that  HB 111  (Oil  & Gas  Production                                                                    
Tax;Payments;Credits) [CHAPTER 3 SSSLA  17 - 07/27/2017] was                                                                    
adopted the previous session, contained  a contingent set of                                                                    
repealers. Once the  last tax credit was paid  off a process                                                                    
was  triggered   that  eliminated  the  028   fund  and  all                                                                    
corresponding statutes  would be  repealed. The  problem was                                                                    
that there were many sections  in the CS that referenced the                                                                    
fund  and  the  process   "would  be  orphaned  without  the                                                                    
language   that   was   being   repealed."   The   way   the                                                                    
administration  chose to  resolve the  issue without  adding                                                                    
many pages of additional language  to the bill was to simply                                                                    
"eliminate the  future contingent repealer."  Therefore, the                                                                    
language provided that "once the  credits were paid the fund                                                                    
statutes  would   be  left  in  place,"   which  enabled  an                                                                    
expedient  way  for  the  CS   to  contain  a  simpler  bill                                                                    
structure. The  section repealed the future  effective dates                                                                    
and  the actual  repealer section  in HB  111. He  indicated                                                                    
that  when  the  credits  were paid  off  the  credits  were                                                                    
eliminated but the statues remained in place.                                                                                   
                                                                                                                                
Co-Chair Foster invited Ms. Nauman to comment.                                                                                  
Ms. Nauman concurred with Mr. Alpers statements.                                                                                
                                                                                                                                
Ms. Pierson continued:                                                                                                          
                                                                                                                                
     Page 19,  Line 19    Page 20, Line  11   Notice  to the                                                                    
     Revisor   of  Statutes.   Provides  language   for  the                                                                    
     Commissioner  of  Revenue  to provide  the  revisor  of                                                                    
     statutes  information when  bonds and  the oil  and gas                                                                    
     tax credit fund are no longer being used.                                                                                  
                                                                                                                                
Co-Chair  Seaton informed  the committee  that the  repealer                                                                    
section in  the CS accomplished the  provisions contained in                                                                    
the  withdrawn  amendment.  He   added  that  the  provision                                                                    
alerted  a future  legislature to  repeal the  statutes that                                                                    
were no longer in effect.                                                                                                       
                                                                                                                                
Mr. Alper  interjected that similar language  was in Section                                                                    
43 of  HB 111 and was  the conditional trigger that  set the                                                                    
repeals  in motion.  The language  in Section  14 of  the CS                                                                    
merely notified a  future legislature of the  need to repeal                                                                    
the statues.                                                                                                                    
                                                                                                                                
10:03:22 AM                                                                                                                   
                                                                                                                                
Ms. Pierson relayed the changes on Page 20:                                                                                     
                                                                                                                                
     Page 20, Line 24 Repeals Section 46, ch. 3, SSSLA 2017                                                                     
     which is the delayed effective date.                                                                                       
                                                                                                                                
Mr. Alper explained that Section  13 of HB 111 contained the                                                                    
substantive repealers and Section  46 was the effective date                                                                    
section related to the repealers.  He concluded that Section                                                                    
16 of the  CS was functionally an effective  date section in                                                                    
another bill.                                                                                                                   
                                                                                                                                
Co-Chair Foster noted that  Representative Lora Reinbold and                                                                    
Representative George Raucher were in the audience.                                                                             
                                                                                                                                
10:04:40 AM                                                                                                                   
                                                                                                                                
Representative  Ortiz asked  for  a general  summary of  the                                                                    
changes  between  the  original  version  and  the  CS.  Mr.                                                                    
Barnhill responded that the CS  contained the amendments the                                                                    
committee adopted in the previous  meeting. In addition, the                                                                    
CS attempted to  align the differences in  the bill drafting                                                                    
preferences  between   DOL,  LAA,   and  the   bond  council                                                                    
according to LAA preferences.  Representative Ortiz asked if                                                                    
the  effect  of  any  of  the changes  made  the  bill  more                                                                    
resistant  to legal  challenges. Mr.  Barnhill believed  the                                                                    
drafting   changes    provided   more   clarity    but   not                                                                    
"immunization against legal attack."                                                                                            
                                                                                                                                
Representative  Ortiz  cited   Ms.  Nauman's  legal  opinion                                                                    
previously submitted  [refer to  4/21/2018 meeting  (copy on                                                                    
file)].  He asked  if  her opinion  remained  the same.  Ms.                                                                    
Nauman responded in  the affirmative and added  that none of                                                                    
the changes in  the CS resolved any of the  legal issues she                                                                    
identified in her legal memo.  However, the bill did address                                                                    
one  of  the  constitutional   issues  she  identified.  She                                                                    
explained  that originally  money was  transferred from  the                                                                    
bonds  to  the  corporation  to the  commissioner  who  then                                                                    
purchased  tax  credits.  The process  was  not  subject  to                                                                    
legislative  appropriation and  she  believed  that all  the                                                                    
transfers of  funds moving  in and out  of the  general fund                                                                    
was subject to  appropriation. The new CS  provided that the                                                                    
legislature must  appropriate the  money that would  be used                                                                    
to  purchase the  tax credits  and  included the  conforming                                                                    
changes necessary throughout the bill.                                                                                          
                                                                                                                                
10:08:10 AM                                                                                                                   
                                                                                                                                
Representative  Wilson referenced  page  14, subsection  (l)                                                                    
and  asked  why  the  subsection was  rewritten.  Mr.  Alper                                                                    
replied  that  the  subsection   was  written  and  included                                                                    
(c)(1),  (2),  and, (3)  to  describe  the sequence  of  the                                                                    
calculation and  how it was  calculated and  prioritized. He                                                                    
noted  the  change  was  stylistic  and  was  previously  in                                                                    
paragraph   format  and   included   the  words   "proration                                                                    
methodology"  versus  "proration  amount"  in  the  CS.  The                                                                    
underlying  logic   was  identical  to  provisions   in  the                                                                    
original   bill.  He   delineated   that   all  holders   of                                                                    
certificates that requested money  in the earliest years had                                                                    
priority over later years' requests,  and equal priority was                                                                    
granted within the same year;  all the 2016 credits would be                                                                    
paid first,  subsequently the  2017 and  2018 would  be paid                                                                    
sequentially. He pointed to the  language in Section 18 that                                                                    
defined  the statutory  appropriation based  on the  current                                                                    
revenue forecast before the application  of tax credits. The                                                                    
specificity  eliminated  any   potential  dispute  over  the                                                                    
appropriation  formula.  Therefore, subsection  (l)  enabled                                                                    
DOR to  calculate the  schedule of  payments for  any credit                                                                    
holders to  which the discount  rate was  applied, contained                                                                    
in subsection (m).                                                                                                              
                                                                                                                                
Representative Wilson cited that  page 18, line 11 contained                                                                    
the phrase "an overriding  interest agreement." She reported                                                                    
that the  words "overriding interest" was  removed and asked                                                                    
why. Mr.  Alper thought the section  described an overriding                                                                    
royalty  contract agreement  and the  word agreement  in the                                                                    
bill   referred   to   the  overriding   royalty   contract.                                                                    
Representative Wilson  noted that  on lines  23, 25,  and 27                                                                    
[page 18] the words "or  leases" were removed and questioned                                                                    
why.                                                                                                                            
                                                                                                                                
10:11:19 AM                                                                                                                   
                                                                                                                                
Mr.  Beckham  deferred  to  Ms.  Nauman  regarding  why  the                                                                    
stylistic change was  made. He noted that  "lease or leases"                                                                    
was not  that critical and  any lease that was  proposed for                                                                    
an overriding royalty agreement would be considered.                                                                            
                                                                                                                                
Ms.   Nauman  stated   that  she   could   answer  both   of                                                                    
Representative  Wilson's  previous questions.  She  believed                                                                    
that the phrase "overriding  royalty interest agreement" was                                                                    
cumbersome    therefore,    removed   "overriding    royalty                                                                    
interest," left the word  "agreement," and defined agreement                                                                    
as  an overriding  royalty interest  agreement  on page  19,                                                                    
line  14. She  remarked  on  the singular  use  of the  word                                                                    
"lease." She  clarified that on  page 17, line 26  and lines                                                                    
29 and 30 the language  was "lease or leases" to acknowledge                                                                    
that a  proposed agreement could possibly  include more than                                                                    
one  lease. She  pointed to  page  18, lines  16 through  31                                                                    
related to  information collected on the  lease and detailed                                                                    
that  the singular  implied that  the  information would  be                                                                    
derived  from  any  lease  subject   to  the  agreement.  In                                                                    
addition, use  of the singular  conformed to  LAA's drafting                                                                    
manual that preferred use of the singular.                                                                                      
                                                                                                                                
Representative  Wilson appreciated  the  letter Mr.  Beckham                                                                    
sent  in response  to her  previous questions  regarding the                                                                    
overriding royalty  interest (ORRI) agreements HB  331 would                                                                    
authorize  (copy  on  file) but  wanted  more  clarity.  She                                                                    
offered  her interpretation  of what  the agreement  was and                                                                    
inquired whether she was correct.                                                                                               
                                                                                                                                
10:14:17 AM                                                                                                                   
                                                                                                                                
Mr.  Beckham  did  not  understand  Representative  Wilson's                                                                    
question.  Representative Wilson  was  trying to  understand                                                                    
"what the  agreement would look  like." She asked  whether a                                                                    
company  that chose  to enter  the ORRI  agreement versus  a                                                                    
capital  expenditure would  need  a field  that was  already                                                                    
producing oil, if so, would  the agreement grant the state a                                                                    
percentage  of the  oil "as  their [the  company's] donation                                                                    
versus doing  a capital  project." She wondered  whether she                                                                    
was  "completely wrong."  Mr. Beckham  thought her  question                                                                    
centered  around the  lease  and whether  the  field was  in                                                                    
production. He answered  that the lease was  not required to                                                                    
be  in production  at  the  time of  the  ORRI request.  The                                                                    
department  would have  to access  the potential  production                                                                    
and timing  of production  to assist  in accessing  the risk                                                                    
and  whether the  ORRI  met the  requirements  of the  bill.                                                                    
Representative  Wilson wondered  what  would  happen if  the                                                                    
state  decided to  take  the risk,  but  the production  was                                                                    
under the estimates. She asked  whether the company would be                                                                    
penalized or if  the state accepted the  losses. Mr. Beckham                                                                    
understood that there was no  such recourse provision in the                                                                    
CS, which was typical for an  ORRI and the reason why it was                                                                    
rarely used and  the least preferred of  the funding options                                                                    
for projects. He  detailed that an entity  offered a company                                                                    
money  in exchange  for  an  ORRI when  the  project was  in                                                                    
production  and   the  investor  was  repaid   first  before                                                                    
expenses  or  taxes  were  deducted  from  the  project.  He                                                                    
reiterated  that that  was  the  nature of  an  ORRI and  no                                                                    
recovery clause was included in  the bill should a field not                                                                    
go into production.                                                                                                             
                                                                                                                                
10:17:41 AM                                                                                                                   
                                                                                                                                
Representative  Wilson asked  about  the  interest rates  on                                                                    
bonds and  whether they were  set or flexible.  She wondered                                                                    
if the  state was  "held harmless" against  raising interest                                                                    
rates. Mr. Barnhill indicated that  the bonds were priced by                                                                    
the market.  He communicated that  if the bonds  were issued                                                                    
on  a  fixed  rate  basis, which  was  the  administration's                                                                    
intent,  the interest  would  be set,  and  the coupon  rate                                                                    
would not change.                                                                                                               
                                                                                                                                
10:18:31 AM                                                                                                                   
                                                                                                                                
Co-Chair  Seaton  referred  to  page 14,  lines  27  and  28                                                                    
dealing with subsection  (m). He read the  following: "? the                                                                    
department shall  discount the  assumed payment  amount each                                                                    
year after the  first year by a discount rate."  He moved to                                                                    
page 15 and pointed to lines 5 through 9 and read:                                                                              
                                                                                                                                
     the discount rate is the true interest cost plus 1.5                                                                       
     percent but may not exceed 10 percent. For a purchase                                                                      
     of a  transferable tax credit certificate  issued under                                                                    
     AS  43.55.023 or  a production  tax credit  certificate                                                                    
     issued  under AS  43.55.025, the  discount rate  is the                                                                    
     true  interest  cost  plus 1.5  percent,  but  may  not                                                                    
     exceed 10 percent, in total,                                                                                               
                                                                                                                                
Co-Chair Seaton pointed  out that net present  value was not                                                                    
mentioned,  and he  wanted assurance  that  the words  "each                                                                    
year" implied  that the  calculations were  cumulative based                                                                    
on the net  present value and the 1.5  percent not exceeding                                                                    
10 percent related to the  discount rate did not assume that                                                                    
amount was the  total discount on the  repurchase of credits                                                                    
3  years into  the  future. Ms.  Nauman  concurred with  his                                                                    
conclusions  regarding   cumulative  calculations.  Co-Chair                                                                    
Seaton concluded that considering  the meaning of cumulative                                                                    
and the  10 percent in total  could not be interpreted  as a                                                                    
10  percent total  discount rate.  He asked  whether he  was                                                                    
correct. Ms. Nauman replied that  the neither version of the                                                                    
bill specified  whether the discount rate  was cumulative or                                                                    
compounding and  there was no  change between  the versions.                                                                    
She  did  not believe  the  change  to  "may not  exceed  10                                                                    
percent"  modified the  understanding and  was analogous  to                                                                    
the  previous  language.  Co-Chair   Seaton  was  trying  to                                                                    
determine  whether the  language  in the  prior version  was                                                                    
problematic. He  wanted to  clarify on  the record  that the                                                                    
calculation  was based  on  the net  present  value and  the                                                                    
interest rate was cumulative each year.                                                                                         
                                                                                                                                
Mr. Barnhill  emphasized that Co-Chair  Seaton's conclusions                                                                    
were  the absolute  intention  of DOR  and  he reminded  the                                                                    
committee  he   included  the  calculation  in   a  previous                                                                    
presentation {provided  on April  21, 2018 (copy  on file)].                                                                    
regarding HB 331.                                                                                                               
                                                                                                                                
Co-Chair Seaton wanted  to ensure that the intent  of the CS                                                                    
repealed sections of session law  enacted in HB 111 from the                                                                    
prior session. He  emphasized that it was not  the intent of                                                                    
the repeals in Sections 13 or  16 to extend the ability of a                                                                    
person  to earn  a purchasable  tax credit  certificate. The                                                                    
ability to  transfer tax credit  certificates ended  on July                                                                    
1,  2017 with  the passage  of  HB 111.  He maintained  that                                                                    
"nothing in the bill was intended to change that."                                                                              
                                                                                                                                
10:24:24 AM                                                                                                                   
                                                                                                                                
Representative Guttenberg  pointed to  page 20, line  20 and                                                                    
noted the  term "expressly  designate." He wondered  why the                                                                    
word  expressly  was  included.  Mr.  Alper  explained  that                                                                    
Section  15 of  the CS  broadly stated  that if  regulations                                                                    
were still  being drafted  after the  effective date  of the                                                                    
bill  the intent  of the  CS allowed  the regulations  to be                                                                    
retroactive  to the  effective date.  He  believed that  the                                                                    
word  expressly noted  the intent  that regulations  applied                                                                    
retroactively.  However, the  department  could not  presume                                                                    
retroactivity  applied;  the  department had  to  state  the                                                                    
intent.                                                                                                                         
                                                                                                                                
Mr.  Barnhill explained  that  with  respect to  retroactive                                                                    
statutes  the law  required that  retrospective applications                                                                    
were  made explicit.  He  assumed the  law  also applied  to                                                                    
regulations.                                                                                                                    
                                                                                                                                
Co-Chair Foster  wanted to  finish the  motion to  adopt the                                                                    
CS.                                                                                                                             
                                                                                                                                
Representative Wilson WITHDREW her OBJECTION.                                                                                   
                                                                                                                                
There being  NO OBJECTION,  the committee substitute  for HB                                                                    
331 (FIN) was adopted.                                                                                                          
                                                                                                                                
10:27:10 AM                                                                                                                   
                                                                                                                                
Representative  Neuman  asked  whether the  ORRI  provisions                                                                    
were included  because of prior  agreements at the  time the                                                                    
credits  were  offered  and  if  the  new  agreements  would                                                                    
override  the prior  agreements.  Ms. Nauman  was unable  to                                                                    
answer  the  question  and  deferred   the  answer  to  DNR.                                                                    
Representative  Neuman asked  whether Cook  Inlet agreements                                                                    
were made with  different companies at the  time the credits                                                                    
were offered. Ms.  Nauman would have to do  some research to                                                                    
answer that question.                                                                                                           
                                                                                                                                
Representative  Neuman was  concerned  that the  legislature                                                                    
did not know what agreements  the credits were issued under.                                                                    
He wondered  how the previous agreements,  that were offered                                                                    
to  incentivize exploration,  would  be  impacted. He  noted                                                                    
that  the  various companies  had  different  needs and  the                                                                    
legislature  granted the  department  "leeway" to  negotiate                                                                    
agreements. He  wondered whether  the ORRI  provisions would                                                                    
override prior agreements.                                                                                                      
                                                                                                                                
10:30:04 AM                                                                                                                   
                                                                                                                                
Mr. Barnhill  explained the roll  of the  overriding royalty                                                                    
agreements  served  in  the CS.  He  communicated  that  the                                                                    
purpose was  for the  companies to  access a  lower discount                                                                    
rate.  The  bill set  a  discount  rate  of 10  percent  for                                                                    
repurchased tax credits, but if  they wanted to get more for                                                                    
the credits they could offer  an overriding royalty. Nothing                                                                    
in  the bill  impacted  existing  overriding royalties.  The                                                                    
bill  established an  application process  for a  tax credit                                                                    
holder to submit an offer  for an overriding royalty to DNR.                                                                    
The department evaluated the value  of the agreement's worth                                                                    
to determine  whether the  offer equaled  the amount  of the                                                                    
increment  received  through  the lower  discount  rate.  He                                                                    
added that any other  previous overriding royalty agreements                                                                    
remained in effect.                                                                                                             
                                                                                                                                
Representative  Neuman reiterated  his  question. Mr.  Alper                                                                    
wanted  to  clarify  the difference  between  an  overriding                                                                    
royalty agreement  and a royalty.  He detailed that  a large                                                                    
portion of oil  and gas production in Alaska  was located on                                                                    
state land. The  state, as the landowner signed  a lease and                                                                    
received a royalty, which was  a percentage of the amount of                                                                    
production and  a portion was  deposited into  the permanent                                                                    
fund.  An overriding  royalty agreement  did not  change the                                                                    
royalty.  He characterized  the  agreement as  a "side  deal                                                                    
separate and distinct from the  land use royalty agreement."                                                                    
An overriding royalty was not  limited to state land and did                                                                    
not  supersede   any  previous  contracts   with  producers.                                                                    
Representative  Neuman inquired  whether the  issued credits                                                                    
were considered a  moral obligation to the  state. Mr. Alper                                                                    
responded that the state never  signed a contract related to                                                                    
credits; credits  were written in statute  and offered based                                                                    
on   certain  exploration   activities   performed  by   the                                                                    
producers.  He   furthered  that   the  credits   had  value                                                                    
"statutorily."  The  producers  could  use  the  credits  to                                                                    
offset taxes or  were traded or sold to  other companies and                                                                    
subject to appropriation or could  be sold back to the state                                                                    
for cash.  The state  never committed to  full reimbursement                                                                    
of the credits,  however the state paid the  credits in full                                                                    
for 8 years in a row, but  the state was not obligated to do                                                                    
so.                                                                                                                             
                                                                                                                                
10:35:21 AM                                                                                                                   
                                                                                                                                
Representative Kawasaki  referred to DNR's  letter regarding                                                                    
ORRI agreements. He read the following from the letter:                                                                         
                                                                                                                                
     Subsection  (f) requires  DNR to  evaluate a  company's                                                                    
     proposed agreement based on  several factors. This will                                                                    
     likely   require   DNR   to  consider   sensitive   and                                                                    
     proprietary information  about the  company's finances,                                                                    
     development   plans,    geological,   geophysical   and                                                                    
     engineering   information  and   resources  under   its                                                                    
     leases.                                                                                                                    
                                                                                                                                
Representative  Kawasaki asked  how the  department factored                                                                    
in risk of  failure over the life of an  ORRI agreement. Mr.                                                                    
Beckham  replied  that the  risk  assessment  was a  complex                                                                    
process that  DNR's commercial analyst would  go through. He                                                                    
noted  that   the  modeling  process  was   similar  to  the                                                                    
production  forecast. He  could not  explain the  details of                                                                    
the risk  calculations. Representative Kawasaki  referred to                                                                    
an example provided in the letter:                                                                                              
                                                                                                                                
     DNR would  consider the criteria in  AS 44.37.230(f) to                                                                    
     determine whether the anticipated  net present value of                                                                    
     OilCo's proposed  ORRI agreement  would meet  or exceed                                                                    
     the $9  million-dollar difference between  the purchase                                                                    
     amount of  the certificate  at the lower  discount rate                                                                    
     with  the ORRI  agreement  and the  high discount  rate                                                                    
     without the ORRI agreement. The  30 barrel per day ORRI                                                                    
     is nearly 11,000  barrels annually for the  life of the                                                                    
     lease.  At  $50  per   barrel,  that  is  approximately                                                                    
     $550,000 per year.                                                                                                         
                                                                                                                                
Representative  Kawasaki deduced  that DNR  would accept  an                                                                    
ORRI  agreement  like the  one  exemplified.  He asked  what                                                                    
happened if the amount of  production was lower or the price                                                                    
per  barrel  was lower  than  the  amount predicted  in  the                                                                    
agreement. Mr.  Beckham explained that the  payment would be                                                                    
different  than what  was calculated;  higher or  lower. The                                                                    
example was simplistic and was  designed to show the type of                                                                    
agreement  the  department   would  consider  an  acceptable                                                                    
agreement  and  was anticipating  receiving.  Representative                                                                    
Kawasaki  restated his  question regarding  failure; if  the                                                                    
price of oil or production  dropped below what was specified                                                                    
in the  agreement. Mr. Beckham  noted that he  was uncertain                                                                    
about what Representative Kawasaki  considered a failure. He                                                                    
delineated that  the percentage calculated for  the ORRI was                                                                    
described in the  bill and was a straight  percentage on the                                                                    
total production  without deduction for taxes  and expenses,                                                                    
if the production or price  decreased the ORRI payment would                                                                    
be less.                                                                                                                        
                                                                                                                                
10:39:43 AM                                                                                                                   
                                                                                                                                
Representative Kawasaki asked  whether other ORRI agreements                                                                    
carried a statutory  penalty if the producer  failed to meet                                                                    
the  obligation  and goals  of  the  agreement. Mr.  Beckham                                                                    
responded  that there  were no  penalty  provisions in  ORRI                                                                    
agreements. He clarified  that an ORRI was  an investment by                                                                    
an investor  into a  project with  a promise  to be  paid on                                                                    
total production  before any expenses. The  risk was whether                                                                    
the project  came into production.  The investor  lost money                                                                    
in the event  production never happened and  had no recourse                                                                    
to recover the funds. He  furthered that regarding the ORRI,                                                                    
if  the project  happened  with a  lower  production rate  a                                                                    
temporary built-in  royalty modification was paid  until the                                                                    
project  could  "stand  on  its   own  without  the  royalty                                                                    
modification and the original  lease provision rate applied.                                                                    
Representative  Kawasaki   asked  if  he   anticipated  many                                                                    
companies holding  tax credits  would take advantage  of the                                                                    
ORRI  provisions. Mr.  Barnhill thought  the likelihood  was                                                                    
difficult  to predict.  Presently,  the  department had  not                                                                    
received "any expressions of interest."                                                                                         
                                                                                                                                
10:42:00 AM                                                                                                                   
                                                                                                                                
Representative Grenn noted that the  bill referred to "a tax                                                                    
credit certificate."  He asked whether each  certificate was                                                                    
considered  separately  in the  case  of  a company  holding                                                                    
multiple   certificates.   Mr.  Alper   reported   receiving                                                                    
questions from  industry regarding whether credits  could be                                                                    
split. He referred  to the matter as  the "splitting issue."                                                                    
He  pointed  out that  in  general,  companies were  holding                                                                    
multiple  tax credit  certificates  for  multiple years  and                                                                    
projects  for different  types of  activities  such as  well                                                                    
lease expenditure  credit, exploration credit,  or operating                                                                    
loss credits.  He announced that DOR  would accept splitting                                                                    
at the individual certificate level.  He exemplified that if                                                                    
a company had  four seismic certificates and  only wanted to                                                                    
waive its  confidentiality on two, receive  a lower discount                                                                    
rate,  and   use  the  discount   rate  on  the   other  two                                                                    
certificates  such  actions  were acceptable.  He  qualified                                                                    
that  the only  caveat was  that  a company  must offer  all                                                                    
their credits.                                                                                                                  
                                                                                                                                
10:44:28 AM                                                                                                                   
                                                                                                                                
Vice-Chair Gara  opined that the bill  contained "pluses and                                                                    
minuses" and  that the bill  avoided $300 million  in credit                                                                    
payments for several consecutive  years that the state could                                                                    
not  afford.  He  defined that  currently  the  law  allowed                                                                    
companies to  deduct the  credits against  oil taxes  in any                                                                    
year they  desired, and it  was beyond the  state's control.                                                                    
He asked for  an estimate of what the price  of oil would be                                                                    
if companies could  deduct $200 million to  $300 million off                                                                    
their production  taxes. Mr. Alper replied  that the ability                                                                    
to  purchase tax  credits to  offset  taxes was  constrained                                                                    
over  the last  several years  because of  the low  price of                                                                    
oil.  He  explained  that  the  producers  had  been  paying                                                                    
production tax  based on the  minimum tax; 4  percent floor.                                                                    
Regulations  specified that  a company  was prohibited  from                                                                    
using  purchased credits  to decrease  its  taxes below  the                                                                    
minimum tax.  The price of  oil had  to support a  tax above                                                                    
the minimum  called the "crossover"  for an entire  tax year                                                                    
in order  for companies to  use their per barrel  credits to                                                                    
lower  their  production  tax. The  crossover  point  varied                                                                    
among  companies, but  an average  estimate was  $65/bbl. He                                                                    
added that  in the  scenario when  the price  varies between                                                                    
prices  above and  below the  minimum floor  it created  the                                                                    
concern  over  "migrating  credits." The  $8.00  per  barrel                                                                    
credit earned over several months  in one year could be used                                                                    
to offset  taxes in the  "true up"  to "drag" taxes  down to                                                                    
the floor during a year  of migrating credits. He delineated                                                                    
that if  the price  of oil  remained in  the "mid-seventies"                                                                    
per barrel  of oil for  one year the production  taxes would                                                                    
be $300 or  $400 million above the minimum  tax revenue; the                                                                    
price that  allowed producers to  purchase credits  and "buy                                                                    
themselves back  down" to the  minimum tax.  Vice-Chair Gara                                                                    
asked whether  in the  future, without  the bill,  could the                                                                    
state  lose   between  $200  million  to   $300  million  in                                                                    
production  taxes  at a  full  year  of $75/bbl.  Mr.  Alper                                                                    
responded  in the  affirmative. He  deduced that  the longer                                                                    
the state  made credit  payments the larger  the probability                                                                    
that the credit holders would  sell the credits at "whatever                                                                    
price they  could get." Conversely, if  demand increased due                                                                    
to higher  oil prices  he foresaw scenarios  where companies                                                                    
purchased hundreds  of millions  in credits to  reduce their                                                                    
taxes. He concurred that the  administration wanted to avoid                                                                    
the scenario through the legislation.                                                                                           
                                                                                                                                
10:49:38 AM                                                                                                                   
                                                                                                                                
Representative Wilson  asked if the state  owed the credits.                                                                    
Mr. Alper  responded in the  affirmative. She  asked whether                                                                    
the previous  discussion related  to how the  credit holders                                                                    
could  utilize  their credits  was  in  current statute  and                                                                    
whether nothing  new was  being created  in the  bill beside                                                                    
the bond package.  Mr. Alper replied in  the affirmative. He                                                                    
elaborated that  the credits  were worth  "100 cents  on the                                                                    
dollar." He believed that  Vice-Chair Gara's concern related                                                                    
to a  hardship situation  where a  credit holder  sold their                                                                    
certificate  for 50  cents on  the dollar  and received  100                                                                    
percent benefit  offset against its own  taxes. The original                                                                    
benefit  was  intended  for  the  small  explorers  and  was                                                                    
diluted when passes on to the major producers.                                                                                  
                                                                                                                                
Representative Wilson  heard negative criticism of  the bill                                                                    
related  to the  payment  scheduled. She  asked whether  the                                                                    
state would  be able to meet  the bond obligation and  if it                                                                    
placed "the retirement issue in  more jeopardy" with passage                                                                    
of  the  legislation.  Mr.   Barnhill  answered  that  under                                                                    
current  cash flow  projections published  by the  Office of                                                                    
Management  and  Budget  (OMB) the  administration  did  not                                                                    
share the  concerns. Representative Wilson had  met with the                                                                    
department and   discovered that the state  "could make more                                                                    
money  off of  our  money" through  the  bond proposal  than                                                                    
through paying a  specified amount each year.  The state was                                                                    
controlling its  liability. She wanted to  ensure the public                                                                    
that the  state was not jeopardizing  the state's retirement                                                                    
obligation. She cited the presentation  on April 21, 2018 on                                                                    
slide 18  ["State of  Alaska Department  of Revenue  HB 331:                                                                    
Oil and Gas  Tax Credit Bond Proposal" (copy  on file)] that                                                                    
showed  the state's  debt capacity  and  credit rating.  She                                                                    
relayed  that the  way the  state was  paying its  debt, the                                                                    
state, in  the end, should  have a better credit  rating and                                                                    
less debt.                                                                                                                      
                                                                                                                                
10:53:00 AM                                                                                                                   
                                                                                                                                
Representative  Neuman  observed  that  the  state  recently                                                                    
received $275 million  from 2011 tax returns.  He noted that                                                                    
the money  was typically  deposited into  the Constitutional                                                                    
Budget Reserve (CBR),  but the deposit was  not mandated via                                                                    
statute. He asked  whether the payment could be  used to pay                                                                    
the  credits. He  mentioned that  a bill  was passed  in the                                                                    
prior  week that  allowed other  use of  the tax  funds. Mr.                                                                    
Alper thought that  he was referring to  a newspaper article                                                                    
that reported the  $275 million was the total  of the audits                                                                    
that the tax division had  completed in the last year, which                                                                    
was requested to  be paid before the  statute of limitations                                                                    
went into effect.  The money had not been paid  but had been                                                                    
requested  in a  "Notice and  Demand" letter.  The companies                                                                    
could appeal through  a long process; often  the amount paid                                                                    
was  reached through  a settlement.  He  emphasized that  he                                                                    
money  received  through  tax  audits  was  "absolutely  the                                                                    
property of the CBR" under Article  9, 17 (a). He added that                                                                    
Representative Neuman  was referring to changes  made in the                                                                    
prior  year that  related to  retroactivity to  offset prior                                                                    
year taxes, so long as there  was not a burden placed on the                                                                    
CBR and  issues related to the  Trans-Alaska Pipeline System                                                                    
(TAPS)  settlement.  A  legal opinion  sought  by  DOR  that                                                                    
stated  that the  TAPS issue  was related  to transportation                                                                    
and any tax  settlement was not subject to Article  9 of the                                                                    
constitution   requiring   the   deposit   into   the   CBR.                                                                    
Representative Neuman  contended that the  legislature "made                                                                    
the rules"  and knew  money was  "used otherwise."  He asked                                                                    
whether  regarding the  legislation, the  typical investment                                                                    
strategies  were  being  considered.  Mr.  Barnhill  thought                                                                    
Representative Neuman  was referring  to whether  the Alaska                                                                    
Permanent Fund or other investment  funds of the state could                                                                    
purchase the bonds issued under  the bill. He explained that                                                                    
there   was  nothing   in  the   bill  that   encouraged  or                                                                    
discouraged any state investment  fund to purchase the bonds                                                                    
and was simply not  addressed. Representative Neuman deduced                                                                    
that the  risk to  industry increased  if the  companies did                                                                    
not know  the value of  the bonds, which equaled  more cost.                                                                    
He  reiterated that  DOR had  basic standards  for investing                                                                    
and   wondered   whether   the   proposal   considered   the                                                                    
guidelines.  Mr.  Barnhill  responded  that  when  the  bond                                                                    
corporation issued the  bonds the coupon price  would be set                                                                    
by  the market  estimated in  the range  of 3.6  percent and                                                                    
instruments subject  to appropriation. The market  would add                                                                    
a  premium to  the coupon  to compensate  for the  risk. The                                                                    
risk premium was not anticipated  to be significant based on                                                                    
the  state's "excellent  credit history."  Any purchaser  of                                                                    
the bonds  would be  aware of  the subject  to appropriation                                                                    
nature of the bonds and would know the coupon rate.                                                                             
                                                                                                                                
10:58:56 AM                                                                                                                   
                                                                                                                                
Co-Chair Foster asked  Mr. Teal to review  the fiscal notes.                                                                    
He also noted Representative Dan Saddler in the audience.                                                                       
                                                                                                                                
10:59:14 AM                                                                                                                   
                                                                                                                                
DAVID   TEAL,   DIRECTOR,  LEGISLATIVE   FINANCE   DIVISION,                                                                    
reviewed the fiscal  notes for HB 331. He  reported that the                                                                    
previously  published DNR,  Division of  Oil and  Gas fiscal                                                                    
note FN1 (DNR), was zero.  He remarked that DNR could absorb                                                                    
the costs  of commercial analyses of  any overriding royalty                                                                    
interest   agreement   applications   if   the   number   of                                                                    
applications  were   low.  He   turned  to   the  previously                                                                    
published DOR  zero fiscal note  FN3 (REV),  appropriated to                                                                    
Taxation and  Treasury for FY  2019 that included a  cost in                                                                    
the outyears  of $2.5 thousand  for a yearly agent  fee that                                                                    
applied  for  the  length  of  the bond.  He  moved  to  the                                                                    
previously  published  DOR  fiscal impact  note  FN4  (REV),                                                                    
appropriated to Administration and  Support in the amount of                                                                    
$737.9  million,  which  authorized  the  use  of  the  bond                                                                    
proceeds to purchase  participating tax credit certificates.                                                                    
He  noted that  currently the  fund source  code 1178  was a                                                                    
temporary code  for undesignated general fund  (UGF) use. In                                                                    
the future, a new fund code  would be created to reflect the                                                                    
subject to appropriation bonds.                                                                                                 
                                                                                                                                
Representative Wilson  asked why  the fiscal  note contained                                                                    
the UGF fund  source versus a designated  general fund (DGF)                                                                    
fund source since the money would  come from the sale of the                                                                    
bonds.  Mr.  Teal  replied   that  the  Legislative  Finance                                                                    
Division (LFD)  used a temporary  fund source  in situations                                                                    
necessitating a new fund source  code because the bill might                                                                    
not pass  into law; therefore,  creating fund codes  with no                                                                    
applications. He confirmed that  the bond sale proceeds were                                                                    
not UGF  and would be  an "other duplicated fund  code." The                                                                    
bonds were  not counted  as an  expenditure, but  the annual                                                                    
appropriation  of  debt service  was,  and  "in theory"  was                                                                    
considered a general fund (GF) cost.                                                                                            
                                                                                                                                
11:03:27 AM                                                                                                                   
                                                                                                                                
Mr. Teal  moved to the  new Debt Service fiscal  impact note                                                                    
appropriated  to Oil  &  Gas Tax  Credits  Financing in  the                                                                    
amount of $27 million in FY  19. He noted that in the future                                                                    
the  appropriation was  anticipated to  increase to  roughly                                                                    
$123  million  but  the   future  years  were  indeterminate                                                                    
because the  amount required  to pay  the bonds  depended on                                                                    
the bond financing and other variables.                                                                                         
                                                                                                                                
Mr. Alper  drew attention to a  table on the second  page of                                                                    
the previous  two fiscal notes  that contained  the expected                                                                    
bond  payments through  FY 28.  He  relayed the  assumptions                                                                    
made  to determine  the figures.  He pointed  to the  $737.9                                                                    
million noted  as the  "amount paid  with discount"  and $27                                                                    
million interest  payment in  FY 19  and explained  that the                                                                    
numbers  assumed  that  all   $807  million  in  outstanding                                                                    
credits were  sold into  the program  and all  would receive                                                                    
the  lower 5.1  percent discount  rate. He  ascertained that                                                                    
the actual  numbers would be  less than the  assumed numbers                                                                    
shown on  the fiscal notes.  He noted that the  chart showed                                                                    
the  anticipated   payment  total   and  the   interest  and                                                                    
principal amounts.                                                                                                              
                                                                                                                                
11:06:04 AM                                                                                                                   
                                                                                                                                
Representative  Wilson  asked  what   would  happen  if  the                                                                    
legislature  did  not  make  the  appropriation.  Mr.  Alper                                                                    
believed    that   the    bond    markets   would    respond                                                                    
disapprovingly, and the  non-payment would negatively impact                                                                    
the state's  bond rating.  Representative Wilson  wanted the                                                                    
consequences  stated   on  the  record.  She   stressed  the                                                                    
importance of keeping to the payment schedule.                                                                                  
                                                                                                                                
Representative Kawasaki  stated that the fiscal  note showed                                                                    
a  10-year  bond period.  He  thought  the time  period  was                                                                    
longer. Mr. Alper answered that  the bill did not specify or                                                                    
codify  bill terms  or the  payment  schedule. He  indicated                                                                    
that the  trustees of  the corporation  would set  them, and                                                                    
the  market would  accept the  terms. Therefore,  the length                                                                    
would  be established  after the  bill  passed. He  reminded                                                                    
committee members that  there would be a  second, third, and                                                                    
fourth round  of smaller issue  bonding for late  coming tax                                                                    
credits  that would  all be  on  their own  10 year  payment                                                                    
schedule.  Representative  Kawasaki  deduced that  the  32nd                                                                    
Legislature would  anticipate an  estimated bond  payment of                                                                    
$113 million. Mr. Alper answered in the affirmative.                                                                            
                                                                                                                                
Mr. Teal pointed  out that the fiscal note did  not show the                                                                    
savings from  the amount that  was currently  deposited into                                                                    
the Oil and  Gas Tax Credit Fund, which  would be eliminated                                                                    
in lieu  of debt service  payments. He noted that  there was                                                                    
not  a fiscal  note because  there was  no way  to determine                                                                    
what the savings  would be or how much the  savings would be                                                                    
compared to the current approach.  He emphasized that in the                                                                    
long run  the debt service payments  should be approximately                                                                    
equal to the  purchases that would be made  without the bill                                                                    
on a  net present  value basis.  The bonding  approach would                                                                    
pay the  credits off immediately  and the  legislature would                                                                    
continue  to  pay, but  as  debt  service rather  than  fund                                                                    
capitalization.                                                                                                                 
                                                                                                                                
11:11:29 AM                                                                                                                   
                                                                                                                                
Representative  Ortiz remarked  that if  HB 331  was adopted                                                                    
the  state  was  obligated  to   purchase  $807  million  in                                                                    
credits.  He  wondered about  credits  that  had yet  to  be                                                                    
applied for, which  he believed were about  $200 million. He                                                                    
inquired   whether  the   bill  addressed   the  outstanding                                                                    
credits.  Mr. Alper  replied that  the  estimated number  of                                                                    
outstanding  credits   was  $150  million,  and   most  were                                                                    
anticipated  the coming  summer from  2017. He  communicated                                                                    
that  the future  issues  were addressed  in  the bill  that                                                                    
authorized the  multiple bond issuances  and the  ability to                                                                    
issue bonds through FY 2021.  He expected issuances once per                                                                    
year for  four years.  The department could  not think  of a                                                                    
way to  build the  information into the  fiscal note  due to                                                                    
many unknowns.  He delineated that the  actual bond payments                                                                    
were anticipated  to increase because of  the second, third,                                                                    
and  fourth  round  of  issuances.  However,  more  than  80                                                                    
percent of  the credits  would be issued  in the  first bond                                                                    
issuance and  the remainder  would be  "remnants of  the sun                                                                    
setting bond program."                                                                                                          
                                                                                                                                
11:13:25 AM                                                                                                                   
                                                                                                                                
Co-Chair  Seaton  MOVED  to  report  CSHB  331(FIN)  out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal notes.                                                                                                      
                                                                                                                                
Representative Wilson OBJECTED for discussion.                                                                                  
                                                                                                                                
Representative Neuman believed the  credits should have been                                                                    
paid a  long time  ago. He was  concerned about  the process                                                                    
due to  the constitutionality  question associated  with the                                                                    
legislation. He  stressed that the bill  added "a tremendous                                                                    
amount   of  risk"   and  increased   debt;  the   risk  was                                                                    
proportionate to  cost. He stated  that the  financial terms                                                                    
were  unknown. He  maintained that  generally,  there was  a                                                                    
letter  of   interest  pertaining  to  revenue   bonds.  The                                                                    
legislature had not yet seen  any interest. He remarked that                                                                    
the legislature  had a  bad "track  record" when  claiming a                                                                    
bill  would  produce  savings. He  asserted  that  the  bill                                                                    
created more rules  telling industry what they had  to do to                                                                    
receive  credits that  they initially  acted  in good  faith                                                                    
obtaining.  He  stated  that the  legislature  continued  to                                                                    
introduce  legislation to  increase  oil and  gas taxes.  He                                                                    
spoke about  the fiduciary responsibility  of the  state. He                                                                    
repeated his concern about increased  risk. He believed that                                                                    
the legislature should have just  paid the debt off within 5                                                                    
years. He  stressed that the  state's economy  was suffering                                                                    
and  contended that  the  bill involved  great  risk to  the                                                                    
state. He had no confidence in the legislation.                                                                                 
11:19:53 AM                                                                                                                   
                                                                                                                                
Representative Wilson  spoke about a refinery  in her region                                                                    
that  received  tax credits  that  were  saving millions  of                                                                    
dollars for  the state. She  was comfortable with  the bill.                                                                    
She  appreciated the  answers  to questions  she asked.  She                                                                    
stated that the bill did not  cost the state more money. The                                                                    
state   would  benefit   from  more   production.  She   was                                                                    
encouraged  by  Representative Guttenberg's  amendment  that                                                                    
encouraged local  hire. She  thought the  bill was  the next                                                                    
best way to  incentivize production on the  North Slope. She                                                                    
hoped the state  learned that it must abide by  the rules it                                                                    
established.  She thought  that  the  market place  provided                                                                    
sufficient checks and balances  to make her comfortable with                                                                    
the bill.                                                                                                                       
                                                                                                                                
Representative Wilson WITHDREW her OBJECTION.                                                                                   
                                                                                                                                
Representative Kawasaki OBJECTED for discussion.                                                                                
                                                                                                                                
Vice-Chair Gara  voiced that he  had "mixed  feelings" about                                                                    
the bill. He  believed the that risk issue  favored the bill                                                                    
because the amount  the state paid for the  credits would be                                                                    
known. He had  not offered amendments because  he thought it                                                                    
would delay the bill's passage.  He supported a "clean" bill                                                                    
moving through  the process.  He did  not believe  the state                                                                    
was doing well in terms  of revenue. He discussed some items                                                                    
he would have wanted included  in HB 331. He favored closing                                                                    
"the corporate  tax loophole" on  oil and gas  companies. He                                                                    
thought the companies  should pay the same  tax whether they                                                                    
were  listed as  C corporations,  S corporations,  or LLC's;                                                                    
not as  they were  listed with  the Securities  and Exchange                                                                    
Commission (SEC) but by activity.  He thought increasing oil                                                                    
taxes would be appropriate, but  he did not believe that the                                                                    
amendment would pass  and further delay the  end of session.                                                                    
He maintained that oil taxation could  be done in a way that                                                                    
encouraged  development   but  was  fairer  to   the  state.                                                                    
Finally, on a  technical point - the risk the  state took by                                                                    
leaving  on the  books the  ability for  other companies  to                                                                    
purchase the  credits at  a discount  was a  "terrible deal"                                                                    
for the state. He provided  a scenario where a company could                                                                    
purchase the credits at a  discount and charge the state the                                                                    
full amount. The state would not  know how much it would owe                                                                    
the following  year for credit repayment.  He cautioned that                                                                    
the bill provided  stability, but the provision  "lurks as a                                                                    
risk" to the state's financial stability.                                                                                       
                                                                                                                                
11:26:47 AM                                                                                                                   
                                                                                                                                
Representative  Kawasaki expressed  concerns with  the bill.                                                                    
He  referred   to  the   legislature's  own   legal  counsel                                                                    
testimony regarding their  issues with Articles 8  and 11 of                                                                    
the  state  Constitution  and the  dedication  of  funds  in                                                                    
Article 9 and  noted that they believed  their concerns were                                                                    
valid.  He  had not  seen  a  legal  opinion signed  by  the                                                                    
attorney  general that  stated otherwise.  He felt  that the                                                                    
committee was not  listening to their own  legal counsel. He                                                                    
added   that   without   hearing   definitively   from   the                                                                    
administration  he  had  trouble  supporting  the  bill.  He                                                                    
reported that the bill authorized  a $1 billion bond without                                                                    
a  vote of  the people  and  he maintained  his concern.  He                                                                    
commented  that  the  state  could  not  currently  pay  its                                                                    
obligations   for  schools,   public   safety,  roads,   and                                                                    
maintenance.  He believed  that the  state should  have paid                                                                    
the statutory amount for Permanent  Fund Dividends. He noted                                                                    
that  the subject  to appropriation  aspect  "gave him  very                                                                    
little comfort"  because it was  imperative to pay  the bond                                                                    
debt.   He  worried   that   the   bill  encumbered   future                                                                    
legislatures.  He did  not believe  the bill  was ready  for                                                                    
passage.                                                                                                                        
                                                                                                                                
11:30:52 AM                                                                                                                   
                                                                                                                                
Representative  Pruitt  thanked  DOR for  its  work  towards                                                                    
analyzing  a  mechanism  that  would   repay  the  debt.  He                                                                    
appreciated LAA  expressing its  concerns. He  believed that                                                                    
the effect the  bill had in determining  whether bonding was                                                                    
a  mechanism   that  could  continue  to   be  utilized  was                                                                    
appropriate  to define.  He clarified  there was  an opinion                                                                    
from  the  Attorney  General Lindemuth  that  had  come  out                                                                    
earlier  in  the  morning.  He pointed  out  that  the  memo                                                                    
highlighted  the   conversation  that  took  place   at  the                                                                    
constitutional convention. He read from the opinion:                                                                            
                                                                                                                                
     B.  Neither  the  text  of  the  constitution  nor  the                                                                    
     deliberations  of the  delegates to  the constitutional                                                                    
     convention reveals  the intent to prohibit  issuance of                                                                    
     bonds subject to appropriation.                                                                                            
                                                                                                                                
Representative Pruitt  opined that there was  not an attempt                                                                    
to   prohibit  the   types  of   subject  to   appropriation                                                                    
issuances.  In addition,  the  constitution recognized  that                                                                    
public  corporation  bond  payments  would  be  financed  by                                                                    
legislative  appropriation  and  was a  framework  that  was                                                                    
being  established.  He  highlighted  the  long  history  of                                                                    
subject  to  appropriation  use by  municipalities  and  the                                                                    
long-standing precedence that existed.  He reported that the                                                                    
Supreme  Court had  also looked  at "the  plain meaning  and                                                                    
purpose of the [constitutional]  provision and the intent of                                                                    
the  framers" in  the recent  case  of   Wielekowski v.  the                                                                    
State.  He  believed  that by  analyzing  what  the  thought                                                                    
process  was when  the constitution  was established  placed                                                                    
"the bill  on good footing."  He thought the efforts  of DOR                                                                    
and Representative Guttenberg ensured  that the "money would                                                                    
be  put back  into the  state" and  "intended to  put people                                                                    
back to work and put more  oil down the pipeline." He stated                                                                    
that King Economics determined that  the bill would save the                                                                    
state money  when compared to  paying through  the statutory                                                                    
formula and  by leaving it  in the Earnings  Reserve Account                                                                    
(ERA) the  bonding enabled the  state to make more  money in                                                                    
interest. He thought the bill  had been well thought out and                                                                    
was well discussed. He thought  it was a positive effort for                                                                    
the state.  He asked for  members' support. He  thanked both                                                                    
Co-Chairs for allowing the process to unfold.                                                                                   
                                                                                                                                
11:38:19 AM                                                                                                                   
                                                                                                                                
Representative   Ortiz    appreciated   the    comments   of                                                                    
Representative Pruitt.  He had  concerns about the  bill and                                                                    
wanted   to  associate   himself   with   the  comments   of                                                                    
Representative Kawasaki.                                                                                                        
                                                                                                                                
Co-Chair Seaton  noted that the  DOL legal opinion  had been                                                                    
distributed  to   committee  members   [the  memo   was  not                                                                    
distributed during the meeting and was not on file.]                                                                            
                                                                                                                                
Representative Kawasaki WITHDREW his objection.                                                                                 
                                                                                                                                
There being NO further OBJECTION, it was so ordered.                                                                            
                                                                                                                                
CSHB  331 (FIN)  was REPORTED  out of  committee with  a "do                                                                    
pass" recommendation  and with  three new fiscal  notes: two                                                                    
indeterminate  fiscal notes  and one  fiscal impact  note by                                                                    
the  Department of  Revenue;  and  one previously  published                                                                    
zero note: FN1(DNR).                                                                                                            
                                                                                                                                
Co-Chair Foster indicated the committee would be recessed                                                                       
[note: the meeting never reconvened].                                                                                           
                                                                                                                                

Document Name Date/Time Subjects
HB 331 BIll version O.pdf HFIN 5/2/2018 9:00:00 AM
HB 331
HB 331 A to O comparison document.pdf HFIN 5/2/2018 9:00:00 AM
HB 331
HB 331 (FIN) Sectional HFIN CS-O.pdf HFIN 5/2/2018 9:00:00 AM
HB 331