Legislature(2003 - 2004)

03/12/2003 01:05 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 11-DEPOSITS TO THE PERMANENT FUND                                                                                          
Number 2671                                                                                                                     
CO-CHAIR FATE  announced that the  final order of  business would                                                               
be HOUSE BILL NO. 11, "An  Act relating to deposits to the Alaska                                                               
permanent  fund from  mineral lease  rentals, royalties,  royalty                                                               
sale proceeds, net  profit shares under AS  38.05.180(f) and (g),                                                               
federal mineral  revenue sharing  payments received by  the state                                                               
from  mineral leases,  and  bonuses received  by  the state  from                                                               
mineral leases, and  limiting deposits from those  sources to the                                                               
25 percent required  under art. IX, sec. 15,  Constitution of the                                                               
State of Alaska; and providing for an effective date."                                                                          
Number 2690                                                                                                                     
REPRESENTATIVE   NORMAN  ROKEBERG,   Alaska  State   Legislature,                                                               
speaking as  the sponsor of  HB 11,  told the committee  that the                                                               
bill had been  "around forever" - "past life"  permutations of HB                                                               
96 and  HB 3 had  the previous  distinction of having  passed the                                                               
House on two  occasions, but languished and "died  a quiet death"                                                               
in the  Senate.  He explained  that HB 11 returns  the percentage                                                               
of all  mineral lease  royalties and  bonuses deposited  into the                                                               
permanent fund to  the constitutionally mandated 25  percent.  He                                                               
turned  attention  to  Article  IX,  Section  15,  of  the  state                                                               
constitution, which read:                                                                                                       
      SECTION 15.  Alaska Permanent Fund.  At least twenty-                                                                   
     five per cent of all mineral lease rentals, royalties,                                                                     
     royalty sale proceeds, federal mineral revenue sharing                                                                     
     payments  and bonuses  received by  the State  shall be                                                                    
     placed  in a  permanent  fund, the  principal of  which                                                                    
     shall   be  used   only   for  those   income-producing                                                                    
     investments specifically designated  by law as eligible                                                                    
     for  permanent fund  investments. All  income from  the                                                                    
     permanent fund  shall be deposited in  the general fund                                                                    
     unless otherwise provided by law.                                                                                          
REPRESENTATIVE ROKEBERG said in  1980, the legislature recognized                                                               
the  great benefits  from the  commencement of  transportation of                                                               
oil    through    [Trans-Alaska    Pipeline    System    (TAPS)].                                                               
Representative Rokeberg  explained that  in 1980, when  this bill                                                               
passed, the  general fund budget was  $4.07 billion.  He  said it                                                               
was  an enormous  amount  of  money that  was  available for  the                                                               
general fund.  He said it  was clear to him that the legislature,                                                               
in its wisdom  at this time, made a statutory  change to redirect                                                               
a substantial portion of new leases  entered into after 1980.  He                                                               
said 50 percent  of those were royalties and  proceeds [put] into                                                               
the permanent fund, away from the  general fund.  He suggested it                                                               
was an  extraordinarily prudent idea  for the simple  reason that                                                               
it  kept  politicians'  hands  off  the  money.    Representative                                                               
Rokeberg  said he  liked it  at that  time and  thought it  was a                                                               
brilliant idea, and very prudent financial management.                                                                          
Number 2840                                                                                                                     
REPRESENTATIVE  ROKEBERG  said  that  time has  passed,  and  the                                                               
financial situation of  the [state] today is  much different than                                                               
it was  23 years ago  when this bill  was first implemented.   He                                                               
asked for  the committee's support  in repealing  that particular                                                               
portion  of the  statute.    He referred  to  information in  the                                                               
committee  packet, and  he said  over  the next  seven years,  it                                                               
would average  approximately $43.3 million dollars  that would be                                                               
available to  the general fund.   He told the committee  that the                                                               
very low estimate  of $23.25 [for Alaska North  Slope (ANS), West                                                               
Coast  price] for  FY '04  [fiscal year  2004] would  yield $54.1                                                               
million to  the general fund.   He said what's unique  about this                                                               
situation is that  it calls back the mantra of  "no decline after                                                               
'99,"  and that  the petroleum  industry in  Alaska has  actually                                                               
been able to achieve that in large part.                                                                                        
REPRESENTATIVE ROKEBERG said  currently, [the state's] production                                                               
and throughput  of the  TAPS is  approximately 1  million barrels                                                               
per day.   He  said projections  for the last  two years  and for                                                               
several coming  years are for a  level amount of production.   In                                                               
large part,  he said,  it is because  the petroleum  industry has                                                               
developed a "string  of pearls" or satellite fields  in the North                                                               
Slope  area,  which  had  been able  to  offset  the  substantial                                                               
declines from  the "elephant fields"  of Prudhoe Bay  and Kuparuk                                                               
[River Unit].   He  explained that the  Kuparuk [River  Unit] and                                                               
Prudhoe Bay  contribute 75 percent  of the royalty income  to the                                                               
general fund  and 25 percent  to the  principal or corpus  to the                                                               
permanent fund.   However, he  said, the  new fields that  are on                                                               
line  now and  producing with  an increased  or steady  amount of                                                               
throughput to  the pipeline,  such as  Northstar and  Alpine, are                                                               
contributing 50 percent of their  royalty income to the permanent                                                               
fund and 50 percent to the general fund.                                                                                        
REPRESENTATIVE  ROKEBERG  suggested  [the state]  is  not  really                                                               
replacing the  cash flow  from new  discoveries and  is basically                                                               
saving 25 percent  extra from [the state's]  new discoveries vis-                                                               
à-vis the older  discoveries.  He remarked,  "We're not replacing                                                               
dollar-for-dollar,   barrel-for-barrel   ...."     Representative                                                               
Rokeberg  mentioned  the governor's  desire  to  implement a  new                                                               
direction  in   the  state  with  natural   resource  development                                                               
centered  upon new  lifts of  oil and  gas, and  expanding proven                                                               
reserves  to  help  generate  income.    Representative  Rokeberg                                                               
indicated that if  this law is not changed, it  will restrict the                                                               
state's ability  to try to meet  the cash flow requirements.   He                                                               
suggested this is the reason for the state's fiscal gap.                                                                        
TAPE 03-14, SIDE B                                                                                                            
Number 3004                                                                                                                     
REPRESENTATIVE ROKEBERG  suggested the [state] is  trying to save                                                               
its  way into  poverty,  and  he drew  an  analogy comparing  the                                                               
situation to  personal household finances.   He indicated  that a                                                               
higher  income allows  for more  savings, and  that the  State of                                                               
Alaska had  a higher income in  the 1980s and therefore  was able                                                               
to save more money.                                                                                                             
Number 2986                                                                                                                     
REPRESENTATIVE ROKEBERG  suggested that  this [situation]  is not                                                               
analogous to  the federal government, but  that state governments                                                               
throughout  the  country  have  to balance  their  budgets.    He                                                               
suggested  [the state]  needs to  follow  basic, very  simplistic                                                               
financial management rules  in an endeavor to pay the  bills.  He                                                               
said [the  state] has had  the luxury of the  CBR [Constitutional                                                               
Budget Reserve] for years, but is  running out of that with time.                                                               
He  suggested  that  the [state]  needs  a  prudent,  incremental                                                               
approach to  solving this problem  so it doesn't have  a negative                                                               
impact on  the economy and  that should be the  basic [principle]                                                               
right now  in financial  policy making.   He remarked,  "Let's do                                                               
the least harm to the economy; let  us not run us off a cliff, in                                                               
forced taxes  and substantial takes  on the earnings  reserves or                                                               
any other savings  we might have, which are now  diminished."  He                                                               
suggested those  things shouldn't be  done in such a  manner that                                                               
it creates a death spiral in the economy.                                                                                       
REPRESENTATIVE ROKEBERG suggested doing  things in small steps in                                                               
an effort to reach  a goal that all can agree with.   He said one                                                               
of the  primary critisms  of this  bill is  that it  is tinkering                                                               
with or  taking from the  permanent fund, but he  maintained that                                                               
it's nothing  of the kind.   How can not depositing  something in                                                               
the bank be taking something out of it, he asked.                                                                               
REPRESENTATIVE   ROKEBERG  suggested   that   the  fiscal   notes                                                               
[reflect] that the impacts on  the [permanent fund dividend(PFD)]                                                               
are  very small.   He  said he's  had several  reports done.   He                                                               
directed  attention to  the fiscal  note from  the Department  of                                                               
Revenue (DOR) dated 3/11/03, and he  said page 2 shows the status                                                               
quo and  projections for the [PFD]  at $719 in '05.  He indicated                                                               
that under HB 11  the loss to the '04 dividend  would be zero; in                                                               
'05 it would be  $1; in '06, $2; in '07, $4; in  '08, $7; in '09,                                                               
$10; and  then $14 and $17  and up.   He said 10 years  from now,                                                               
[HB 11]  would have a $20  potential impact.  He  suggested these                                                               
are  relatively optimistic  projections on  returns of  the [PFD]                                                               
and what it  might be, given the [vagaries] of  the market in the                                                               
last couple  years.  He suggested  it would have much  less of an                                                               
impact and  that the biggest fear  about the nature or  amount of                                                               
the [PFD] should be with regard  to what's going to happen in the                                                               
marketplace.      He  said  he  was  proud  to  be  part  of  the                                                               
legislature  when   it  moved  direct  appropriations   from  the                                                               
"earnings reserve  surplus capital"  into the "corpus  percent of                                                               
the fund."   He said almost 50 percent of  those particular funds                                                               
have been because of actions of the legislature.                                                                                
REPRESENTATIVE ROKEBERG said he is  proud [to] be a the protector                                                               
of the  permanent fund.   He suggested that these  statistics and                                                               
the analysis of it show that  this is a cash-management issue and                                                               
will be good for  the State of Alaska.  He said  it does not take                                                               
away from the  economy; it actually takes away  from Wall Street.                                                               
He said a fiscal plan or  fiscal policy that redirects money that                                                               
would otherwise go into portfolio  investments and puts it in the                                                               
pockets of the citizens of Alaska or  into the CBR is a very good                                                               
Number 2717                                                                                                                     
REPRESENTATIVE LYNN  asked if [the  bill] could be  structured so                                                               
deposits to the PFD could be  tied to the yearly average price of                                                               
REPRESENTATIVE ROKEBERG  said that's the current  plan; royalties                                                               
and  other  bonuses  increase  and  decrease  "to  a  percentage"                                                               
because [deposits  to the permanent  fund are] 25 percent  in the                                                               
constitution and  50 percent in  current statute for  new leases,                                                               
which dictates  the phenomenal dollar  deposit.  As the  price of                                                               
oil goes up, he said, deposits will go up.                                                                                      
REPRESENTATIVE LYNN  asked if [the  bill] could be  structured so                                                               
that the percentage changes as conditions change.                                                                               
REPRESENTATIVE  ROKEBERG indicated  another royalty  scheme could                                                               
be created,  but he advised against  it.  He mentioned  HB 28 and                                                               
talked about a formula that  got so complicated that nobody could                                                               
figure out how to  use.  He indicated he would  prefer to keep it                                                               
Number 2633                                                                                                                     
REPRESENTATIVE MASEK  asked what  negative impacts it  would have                                                               
on  permanent fund  earnings if  the  bill were  passed and  [the                                                               
state] were  to revert back  to the  25 percent rent  and royalty                                                               
REPRESENTATIVE  ROKEBERG said  it will  have some  impact because                                                               
the  total  gross  dollars  in   the  corpus  would  be  somewhat                                                               
diminished by  prospective future  deposits, which would  only be                                                               
an impact on the  future growth of the earnings of  the fund.  He                                                               
said it doesn't impact the  "nominal value or the notional value"                                                               
of the fund as it exists today.                                                                                                 
REPRESENTATIVE MASEK  asked what  adverse impacts  this reduction                                                               
would have on the recipients of the PFD.                                                                                        
REPRESENTATIVE ROKEBERG  suggested [the  bill] would  have almost                                                               
no impact whatsoever.  He said  he thinks the biggest fear is the                                                               
impacts  of  the stock  market,  bond  markets, and  the  various                                                               
equity markets on  the performance of the fund.   As shown in the                                                               
fiscal note,  this is really very  small, he suggested.   He said                                                               
he  thought   the  projections  that  are   used  are  relatively                                                               
optimistic  in terms  of returns.   Representative  Rokeberg said                                                               
the [state's] earnings  reserve accounts have been  wiped out and                                                               
[the  state] is  in  deficit  positions this  fiscal  year.   The                                                               
[state] has lost well over  $6 billion in earnings, he suggested.                                                               
He offered his belief that  the Alaska Permanent Fund Corporation                                                               
has done  a wonderful, prudent  job of managing its  money, given                                                               
the market conditions.   He said those types of  impacts are much                                                               
more serious  and much more  volatile than  a very small  lack of                                                               
redirection.  If  the state gets a 1 percent  boost in yield from                                                               
its investment  policies, it would probably  quadruple any impact                                                               
this  bill might  have  on the  corpus of  the  fund, and  that's                                                               
really the issue, he suggested.                                                                                                 
REPRESENTATIVE  MASEK asked  Representative Rokeberg  if he  felt                                                               
the  administration's effort  to reduce  permitting delays  would                                                               
bring  more  oil  down  the pipeline  and  increase  the  royalty                                                               
contributions to the state.                                                                                                     
Number 2474                                                                                                                     
REPRESENTATIVE ROKEBERG  said he  thought that was  the objective                                                               
of the  governor, which he  supported, but he suggested  it would                                                               
take  a substantial  amount  of time  to reach  that  point.   He                                                               
suggested that  permitting is one  small step in  that direction.                                                               
He remarked, "The  relationship between this bill is  that any of                                                               
those  new fields  that are  brought  on line  under the  current                                                               
statutory  situation  would be  what  I  call 50  percent  field,                                                               
instead of  the 75 percent  field."  He  said 25 percent  more of                                                               
them  would have  to  be discovered  just to  get  even with  the                                                               
losses and declines  from Prudhoe Bay.  He remarked,  "We have to                                                               
make 125 percent  or whatever the number would be  to replace 100                                                               
percent of the Prudhoe Bay decline, because of the statutes."                                                                   
Number 2417                                                                                                                     
REPRESENTATIVE MASEK, citing  the administration's current effort                                                               
to  enhance revenues  through  other means,  asked  why the  bill                                                               
should move forward at this time.                                                                                               
REPRESENTATIVE  ROKEBERG  suggested  it   is  an  opportunity  to                                                               
provide   what  the  governor  has called  for,  in  terms of  an                                                               
Alaskan  "Gramm-Rudman"   style  of   financial  planning.     He                                                               
suggested  that if  the [legislature]  doesn't agree  or disagree                                                               
with  some  of  [the  governor's]  reductions,  eliminations,  or                                                               
increases, it can  use this particular vehicle to  offset some of                                                               
those from  the policy-making  basis.  For  example, he  said, if                                                               
[the legislature]  wishes to increase educational  spending, back                                                               
to the current fiscal year's, it  could take half the proceeds of                                                               
this bill and do  so.  He remarked, "I would  say that even given                                                               
the draconian  suggestions of  the governor  under review  now by                                                               
the legislature, that we're only a  [part] of the way there, even                                                               
if we adopted  100 percent of his proposals."   He suggested $400                                                               
million would  be drawn from  the CBR  this year, and  even under                                                               
the  [governor's] best  scenario, the  state would  still have  a                                                               
huge fiscal gap.                                                                                                                
Number 2307                                                                                                                     
REPRESENTATIVE MASEK  noted that the permanent  fund has suffered                                                               
major losses  as a result  of the  market conditions.   She asked                                                               
Representative  Rokeberg   if  he  feels  reducing   the  royalty                                                               
contribution to 25  percent is a prudent thing to  do in light of                                                               
the overall stability of the market.                                                                                            
REPRESENTATIVE ROKEBERG answered in the affirmative.                                                                            
REPRESENTATIVE  WOLF  suggested that  the  decline  in the  stock                                                               
market had  done far  more to  reduce the PFD  than this  plan of                                                               
reducing the deposit from 50 percent  to 25 percent could do over                                                               
10 years.  He asked if he was looking at this correctly.                                                                        
REPRESENTATIVE  ROKEBERG,   in  response,  said   absolutely  and                                                               
deferred the question to Mr. Bartholomew.                                                                                       
Number 2269                                                                                                                     
BOB BARTHOLOMEW,  Chief Operating Officer, Alaska  Permanent Fund                                                               
Corporation (APFC),  Department of  Revenue, testified.   He said                                                               
the  change in  the  oil  revenues is  a  number  that one  could                                                               
determine, as  represented in the bill,  as far as the  amount of                                                               
reduced deposits  that would go  into the permanent fund  and the                                                               
increased  deposits that  would go  into  the general  fund.   He                                                               
explained that the  effect on those is shown in  the dividend and                                                               
starts out  at one dollar a  year and works up.   Mr. Bartholomew                                                               
said  the dividend  or the  amount  of money  available from  the                                                               
permanent  fund is  projected this  year  to be  under a  billion                                                               
dollars.    He  said  one   year  it  had  $2.5  billion  dollars                                                               
available, so the market has extreme variations.                                                                                
REPRESENTATIVE   WOLF  noted   that  the   legislature  had   the                                                               
opportunity to  see the budget  cuts that the  governor proposed.                                                               
He  said as  a freshman  legislator, he  was shocked  to see  173                                                               
programs that had been started in  the last 10 years [being cut],                                                               
and one  of those programs  [being cut] was the  longevity bonus.                                                               
He said  this [bill] seems  like a  fair way to  continue funding                                                               
some of those programs that "we're  never going to be able to get                                                               
cut because there's too many lobbyists that want those."                                                                        
REPRESENTATIVE ROKEBERG said  the bill has been  portrayed in the                                                               
newspapers as  some kind  of a spending  bill, and  that's really                                                               
not what this is; it's a cash-flow  bill, but it could be used to                                                               
offset  some  other  programs in  terms  of  [the  legislature's]                                                               
policy making.   He said he would suspect the  new OMB [Office of                                                               
Management and  Budget] might be  a little more mature  next year                                                               
when  doing  the next  budget  writing  and  will have  a  little                                                               
running start at it, so that  it might be a little bit different.                                                               
He said  his rationale for introducing  this is to close  the gap                                                               
and lighten the load on the CBR, not to spend more money.                                                                       
Number 2053                                                                                                                     
REPRESENTATIVE  GATTO  asked  if   the  [Alaska]  Permanent  Fund                                                               
Corporation (APFC) would still generate  some amount of cash from                                                               
leases  and dividends  if the  stock market  was flat  and didn't                                                               
change in the next 10 years.                                                                                                    
MR.  BARTHOLOMEW said  currently, the  money that  gets deposited                                                               
into  the permanent  fund  is invested  in  three primary  areas:                                                               
both domestic  and international bonds that  pay interest; stocks                                                               
that have  dividend payments, which  is cash coming in,  and then                                                               
it has  the market movement up  and down and the  price of stocks                                                               
goes  up and  down; and  real estate  investments from  which the                                                               
cash flow  or the  rental income, after  expenses, goes  into the                                                               
permanent fund.  He noted that there is an assortment of cash.                                                                  
Number 2004                                                                                                                     
REPRESENTATIVE  GATTO suggested  that  even with  a totally  flat                                                               
market, the permanent fund still makes  earnings.  He said if the                                                               
market  remains flat,  the earnings  available in  Representative                                                               
Rokeberg's plan would probably amount  to how much money would be                                                               
available under  the plan.   He  remarked, "Suggesting  there was                                                               
some number, but would that  number have any influence, depending                                                               
on stocks, to rise."                                                                                                            
MR. BARTHOLOMEW remarked:                                                                                                       
     It's a perspective.  Right  now, the permanent fund has                                                                    
     $22 billion  dollars in  it.  ...  That $22  billion is                                                                    
     invested,  and our  long-term forecasts  say that  that                                                                    
     will earn  8 percent  a year.   We  know some  years we                                                                    
     lose money; some  years we've made 15  percent, but the                                                                    
     long-term average  is 8 percent.   So, we know  we have                                                                    
     $22 billion dollars; if stocks  are going to stay flat,                                                                    
     we're probably not going to  earn 8 percent; it's going                                                                    
     to be a lot less than that.                                                                                                
     When you  ask what's the effect  of this bill on  a 10-                                                                    
     year  projection,  we would  look  at  it, kind  of  in                                                                    
     averages; it's  about ... $43  million dollars  a year;                                                                    
     over 10 years you're going to  lose - and that would go                                                                    
     into  the  general fund  -  you're  going to  lose  the                                                                    
     earnings, whatever that is, whether  it's 8 percent, if                                                                    
     you get your  long-term average or if  stocks are flat,                                                                    
     ...  you're  going  to  earn   less  than  that.    ...                                                                    
     Cumulatively, you're going to lose  8 percent a year on                                                                    
     however much  less you deposit.   So, it's ...  a small                                                                    
     piece of  a big  fund, and  you can  look at  it either                                                                    
     way:  you can say it's  a small piece of a little fund,                                                                    
     or  you can  say a  big fund  was built  with a  lot of                                                                    
     small pieces ....                                                                                                          
Number 1875                                                                                                                     
MR. BARTHOLOMEW, in response to a question from Representative                                                                  
Gatto, remarked:                                                                                                                
     Again, I think  you could just look at  the fiscal note                                                                    
     that Representative  [Rokeberg] spoke  to on  ... these                                                                    
     numbers.  ... If you're  saying that the effect of this                                                                    
     bill ranges from  $1 in the first year  on the dividend                                                                    
     to $20  in 2012,  and you  say that  our earnings   ...                                                                    
     estimate is double what it  should be, we're only going                                                                    
     to earn half of what we  really earned.  You would just                                                                    
     cut all of  these estimates in half and  say instead of                                                                    
     it having  a $20  dollar effect  on the  dividend, it's                                                                    
     going to be $10.  ...                                                                                                      
     We  hate to  just focus  on  the dividend,  so I  would                                                                    
     raise  that up  and say,  when  you look  at the  total                                                                    
     fund,  generally,  the  dividend's  half  of  what  our                                                                    
     earning  stream  is;  that's   what  goes  off  to  the                                                                    
     dividend program.   So, when  you're talking  about the                                                                    
     earnings  potential  of the  fund,  it's  a little  bit                                                                    
     larger than just the effect  on the dividend, but we'll                                                                    
     give you  that mid-case scenario  of 8 percent  a year;                                                                    
     if you think it's going to  be 4 percent, you cut those                                                                    
     projections in half ....                                                                                                   
REPRESENTATIVE ROKEBERG remarked:                                                                                               
     If you want to do a  calculation, you could do a run-up                                                                    
     there  where you  come up  with a  prospective deferred                                                                    
     amount of income to the fund,  but I would posit that -                                                                    
     and I think I could get  the corporation to agree to it                                                                    
     -  whatever  you  came  up with,  ...  that  means  $43                                                                    
     million times  10 years would be  430 [million dollars]                                                                    
     ; give  it a projection of  8 percent; use the  rule of                                                                    
     79; you could almost double  it in that period of time,                                                                    
     but  then  ... I  would  say  that  you  have to  do  a                                                                    
     present-value discount to it,  because you're not going                                                                    
     to  be having  the  funds available  to  spend at  that                                                                    
     time; ... you need to  discount it backwards, so it's a                                                                    
     lot less than that ....                                                                                                    
Number 1749                                                                                                                     
MR. BARTHOLOMEW replied:                                                                                                        
     I  would always  keep  it simple;  in  other words  ...                                                                    
     investments, our  percentages, might be a  little high,                                                                    
     but three  years ago  we were getting  kind of  beat up                                                                    
     because  they  were  too  low.    ...  When  the  stock                                                                    
     market's  running,  we'll be  below  it,  and when  the                                                                    
     stock market's tanking, we'll be  above it ....  That's                                                                    
     why I think  when you're talking out 10  years; I think                                                                    
     it's  dangerous  to get  away  from  ... those  midterm                                                                    
     projections and  ... make assumptions, because  over 10                                                                    
     years you're probably  going to revert to  the mean and                                                                    
     you're going to  be somewhere in the middle.   ... Each                                                                    
     individual can make  their own decision on  how much to                                                                    
     move up or  down those numbers, but 10 years  is a long                                                                    
     time, and  the chances  are, you're  going to  hit your                                                                    
     averages more times than not.                                                                                              
Number 1703                                                                                                                     
CO-CHAIR  FATE  suggested  the public's  major  concern  is  what                                                               
that's going to  do to the dividend.  He  offered his belief that                                                               
the change  in the corpus  will be less  because there is  not as                                                               
much  [money] coming  in and  that it  won't affect  the dividend                                                               
itself, as  a percentage of  that, as much.   He asked if  he was                                                               
MR.  BARTHOLOMEW answered  in  the affirmative,  and  he said  if                                                               
there are less  deposits into the fund, there will  be less money                                                               
earning revenue.   He referred to  page 2 of the  fiscal note for                                                               
that information.                                                                                                               
REPRESENTATIVE  ROKEBERG remarked,  "I  was part  of  a group  of                                                               
folks  that  stopped  this  when we  realized,  after  a  account                                                               
associate's presentation about  six years ago, that  if we didn't                                                               
stop putting  it away  and not leaving  any earnings  reserve, we                                                               
wouldn't have  had enough money  to pay the dividend  last year."                                                               
He said the  press and public do not really  understand, and it's                                                               
a shame  because the  legislature should  be given  a pat  on the                                                               
back for what it's done.   He said the [legislature] has made the                                                               
additional  deposits and  has appropriated  money for  inflation-                                                               
proofing on an annual basis in the budget.                                                                                      
Number 1569                                                                                                                     
REPRESENTATIVE ROKEBERG remarked, "It  passed this very bill that                                                               
we're trying to  repeal when it was  the right thing to  do."  He                                                               
offered his belief that it is  time to change the policy and that                                                               
there's a possibility, given the  nature of the market right now,                                                               
that there would be no money  in the earnings reserve to even pay                                                               
a  dividend  this  year.    The people  in  the  Alaska  need  to                                                               
recognize that, he stated.  He  remarked, "That has nothing to do                                                               
with bills  or notions like  this; it has  to do with  the market                                                               
and what's  happening out there."   Representative  Rokeberg said                                                               
he thought there was a big  story missing and that it's something                                                               
that the newer members of  this committee and legislature need to                                                               
understand.  He remarked, "We've  made some very prudent steps in                                                               
the past, and I think it's time to take another one."                                                                           
Number 1501                                                                                                                     
REPRESENTATIVE MASEK  asked if the  money was going to  come from                                                               
the income or the principal.                                                                                                    
MR. BARTHOLOMEW remarked:                                                                                                       
     The mechanics,  it's two steps:  ... the  deposits that                                                                    
     first  come  in, if  they  come  from mineral  revenue,                                                                    
     which  this  bill is  addressing,  ...  the first  step                                                                    
     would  be,  there  would  be  less  deposits  into  the                                                                    
     principal ....   When you say what's the  effect of the                                                                    
     bill,  there's two  effects:   you  have less  deposits                                                                    
     coming  in,  and  then every  year  after  that,  since                                                                    
     there's less  money being  deposited, there'll  be less                                                                    
     earnings  than  there  would  have   been  if  you  had                                                                    
     deposited it.   So, it  does affect both  the principal                                                                    
     and  the  earnings,  and  anything   you  do  with  the                                                                    
     permanent fund will  have two effects:   it will affect                                                                    
      the principal fund, and then anything that raises or                                                                      
     decreases the size of the fund is going to affect the                                                                      
     size of the earnings.                                                                                                      
REPRESENTATIVE  MASEK turned  attention to  the fiscal  note, and                                                               
she  suggested [the  bill] would  have a  negative impact  on the                                                               
people  who get  [PFD] checks.   She  said if  this bill  were to                                                               
pass, there  would be less  money to invest and  fewer investment                                                               
earnings  to distribute,  so the  permanent fund  would go  down.                                                               
She asked if that was correct.                                                                                                  
Number 1397                                                                                                                     
MR.  BARTHOLOMEW answered  in the  affirmative, and  he explained                                                               
that the  DOR fiscal note  is projecting the financial  effect of                                                               
the dividend payout.                                                                                                            
REPRESENTATIVE  ROKEBERG said  the actual  amount is  very small.                                                               
He suggested  that the  legislature is  going to  have to  take a                                                               
hard look  at the state's budget  this year when it  comes around                                                               
to funding  inflation proofing.   He said  he suspects  that [the                                                               
legislature] may have a tough  decision about whether to put more                                                               
money into the  corpus, and he reminded the  committee about that                                                               
possible pending vote.                                                                                                          
CO-CHAIR  FATE indicated  there would  be no  dividend issued  if                                                               
there is  no surplus to get  a dividend from.   He explained that                                                               
the [dividend]  is dependant on  the market, and if  the market's                                                               
doing  well, then  a dividend  would be  given, but  it might  be                                                               
somewhat less than if the other  25 percent had been put into the                                                               
Number 1248                                                                                                                     
REPRESENTATIVE GATTO  asked if money  had ever been taken  out of                                                               
the permanent fund.                                                                                                             
MR. BARTHOLOMEW responded in the affirmative.                                                                                   
REPRESENTATIVE GATTO asked what the purpose was.                                                                                
MR. BARTHOLOMEW said to pay [PFDs] every year.                                                                                  
REPRESENTATIVE GATTO  offered his understanding that  [PFDs] come                                                               
from the earnings of the permanent fund.                                                                                        
MR. BARTHOLOMEW said  no money is taken out of  the corpus of the                                                               
REPRESENTATIVE GATTO asked if this  bill would take any money out                                                               
of the corpus of the permanent fund.                                                                                            
MR. BARTHOLOMEW answered no.                                                                                                    
Number 1191                                                                                                                     
REPRESENTATIVE KERTTULA,  referring to the bill  packet, said one                                                               
of the  questions that Representative  Rokeberg's staff  posed to                                                               
DOR was  how much oil  would have to  be discovered or  pumped in                                                               
order  to generate  $54.1 million  or  the average  of the  $43.3                                                               
million  over  the  years.    She  said  [Larry  Persily,  Deputy                                                               
Director, Department  of Revenue]  personally responded  and said                                                               
one of  the problems with figuring  that out was, because  of ELF                                                               
[economic limit factor], the production  tax rates are different.                                                               
Representative Kerttula  asked if  changing the  production rates                                                               
had been [considered]  and what would have to be  done to come up                                                               
with the same amount of money that would be gained by the bill.                                                                 
Number 1077                                                                                                                     
CHUCK   LOGSDON,  Chief   Petroleum   Economist,  Tax   Division,                                                               
Department   of   Revenue,   testified.       He   responded   to                                                               
Representative  Kerttula's  question   by  saying  [changing  the                                                               
production rates]  could be done,  but some decisions  would have                                                               
to  be made,  and that  increasing  just tax  rates would  affect                                                               
different  fields differently.   He  told the  committee that  he                                                               
didn't have  that analysis  prepared today  and that  without his                                                               
calculator,  he  would  be  reluctant  to try  to  make  a  quick                                                               
estimate of what would have to  be done even for increasing taxes                                                               
1 percent on the severance tax.   He said the general fund can be                                                               
increased  by  increasing  tax  rates, but  he  didn't  have  the                                                               
volumetric numbers.  The only  volumetric number he did have that                                                               
he  thought the  committee would  be interested  in, he  said, is                                                               
that currently  about roughly  20 percent  of the  barrels coming                                                               
down the  pipeline today are  paying the 50  percent contribution                                                               
to  the   permanent  fund.     He  said  that   simply  underpins                                                               
Representative Rokeberg's  comment that  [the state]  is bringing                                                               
on barrels that  are not contributing the same  amount [of money]                                                               
into  the general  fund, which  was  the case  earlier when  [the                                                               
state] was  relying heavily  on older leases  such as  in Prudhoe                                                               
Bay and Kuparuk [River Unit].                                                                                                   
Number 0932                                                                                                                     
REPRESENTATIVE KERTTULA  asked how many fields  aren't paying any                                                               
production tax.                                                                                                                 
MR. LOGSDON,  in response, said it  was probably in excess  of 10                                                               
fields that probably account for maybe  a little bit more than 15                                                               
percent  of the  total  volume in  the pipeline.    He said  [the                                                               
state] still  relies very heavily  on the bigger fields;  the two                                                               
new fields, Alpine and Northstar,  have very high rates per well,                                                               
and Northstar pays  the highest severance tax rate  on the Slope.                                                               
He told Representative  Kerttula that she was  correct that there                                                               
are a lot  of fields on the  North Slope that pay very  low or no                                                               
severance taxes right now because the  tax rate is designed to go                                                               
down  as fields  deplete  and  to give  a  tax  break to  smaller                                                               
REPRESENTATIVE ROKEBERG  said Representative Kerttula  brought up                                                               
a good  point that there is  about 15 percent of  production that                                                               
pays no  taxes.  He asked  Mr. Logsdon to explain,  as it relates                                                               
to wellhead prices, why that occurs.                                                                                            
MR.  LOGSDON, in  response, said  the  oil production  tax -  the                                                               
severance tax -  has sort of traditionally been one  of the other                                                               
big pieces  of the [state's]  oil fiscal system and  is currently                                                               
designed to provide  a schedule of tax rates,  which is dependent                                                               
on the  size of  the field  and how productive  the wells  in the                                                               
field are.   The way it's set  up, it tends to  provide for close                                                               
to the  highest nominal  rates for  the biggest,  most productive                                                               
fields and  then scale down  to the  very small fields  or fields                                                               
that  have  [low] production.    He  said  if [the  company]  had                                                               
production that was less than around  15,000 barrels a day or had                                                               
wells that  produce less than 300  barrels per day, it  would pay                                                               
no severance  tax at all.   Mr. Logsdon explained that  the price                                                               
of oil is  part of calculating what that tax  rate is applied to,                                                               
but if the  severance tax rate is zero, it  really doesn't matter                                                               
what the value of the oil production is; the tax will be zero.                                                                  
REPRESENTATIVE  ROKEBERG  asked  if  [Badami] paid  any  kind  of                                                               
royalty or  if because of the  low wellhead price it  is excluded                                                               
from that.                                                                                                                      
MR. LOGSDON answered  in the affirmative and he  said Badami will                                                               
pay a royalty.                                                                                                                  
Number 0779                                                                                                                     
MR.  LOGSDON,  in  response to  a  question  from  Representative                                                               
Kerttula, said the  tax base for the production tax  is the value                                                               
or  the  price of  oil  [multiplied]  by  the number  of  barrels                                                               
produced.  If the tax rate  is zero because of the economic limit                                                               
factor, then no severance tax would be paid, he explained.                                                                      
REPRESENTATIVE KERTTULA asked  how much the royalty  rates are on                                                               
the smaller [oil] fields.                                                                                                       
MR.  LOGSDON said  the royalty  rates  depend on  the terms  when                                                               
leases were issued.  He said  although he wouldn't refer to it as                                                               
a small field, the Northstar  field pays 20 percent.  Originally,                                                               
he  said, it  was  a  net-profit-share field,  but  the rate  was                                                               
negotiated up to a fixed 20  percent with an escalator that takes                                                               
that rate  up in excess  of 25 percent in  the event of  high oil                                                               
prices.   Another  example  is the  Alpine  field, he  explained,                                                               
which is  not totally on state  lands, so the royalty  share from                                                               
Alpine is somewhat lower than  what one might expect; it averages                                                               
just under 10  percent.  Those are about  50 percent contributors                                                               
to the  permanent fund, he explained.   Most of the  older leases                                                               
are at 12  1/2 percent.  He  pointed out that many  of the fields                                                               
that are  producing now  are collections of  new and  old leases.                                                               
For instance,  he said, even the  Kuparuk field has at  least one                                                               
lease  in it  that is  a new  lease and  would contribute  to the                                                               
permanent fund at a 50 percent rate.                                                                                            
MR. LOGSDON  said there are only  a few fields that  are composed                                                               
of new  leases.  He  said royalty rates  can vary between  12 1/2                                                               
percent up  to 20  percent.   In fact,  he said,  [royalty rates]                                                               
might be anywhere  in between because one might find  leases in a                                                               
field  that  carry  different  royalty   rates.    Generally,  he                                                               
explained, those  fields with different  royalty rates  often are                                                               
associated with new leases, because  when [the state] issued some                                                               
of those  new leases,  something other than  the standard  12 1/2                                                               
percent that  was sort  of the  going lease term  was used.   Mr.                                                               
Logsdon said  it would  be safe  to say that  most of  leases are                                                               
going out  at 12  1/2 percent  and there  may be  some at  15 2/3                                                               
[percent], but these are probably  questions that would be better                                                               
[answered] by someone with the Department of Natural Resources.                                                                 
Number 0340                                                                                                                     
REPRESENTATIVE GUTTENBERG  said the  hardest thing to  explain to                                                               
people is that the state  has encouraged production in oil fields                                                               
and has a severance tax on  them, but they pay nothing regardless                                                               
of what the price  of oil is.  He said he  had talked with people                                                               
that think [the  state should be making a lot  of money] and they                                                               
don't understand.   He asked  if there  was some tax  regime that                                                               
[the state] should be changing to reflect a better market share.                                                                
MR. LOGSDON said there are other  systems but he was not prepared                                                               
to  recommend any  at this  time.   He  said incorporating  price                                                               
sensitivities  is  one  alternative  for  addressing  the  fiscal                                                               
REPRESENTATIVE  ROKEBERG  referred  to   a  memorandum  from  Mr.                                                               
Persily about  what Representative Kerttula had  brought up about                                                               
the size of  the fields generating $54 million or  the average of                                                               
$43 million that was projected.   He remarked, "He came up with a                                                               
field between  50 and  120 barrels of  daily production  or about                                                               
150  to 200  million barrels  of oil."   Representative  Rokeberg                                                               
asked  if  that  was  consistent  and  would  mean  that  another                                                               
Northstar or  Alpine would  have to  be discovered.   How  do you                                                               
compare that, he asked.                                                                                                         
MR. LOGSDON remarked:                                                                                                           
     It's probably not  so good, depending on  if oil prices                                                                    
     are really high or really  low, but you can often count                                                                    
     on generating -  under the current system  - about $100                                                                    
     million dollars a year for  every 100,000 barrels.  So,                                                                    
     with that  rule of thumb,  it would suggest  you'd need                                                                    
     something  in the  neighborhood of  40,000-plus a  day,                                                                    
     which  -  we're  talking   about  finding  another  ...                                                                    
     Northstar - would  be ... a good example  of what you'd                                                                    
Number 0095                                                                                                                     
REPRESENTATIVE KERTTULA  asked if  that was  at the  current rate                                                               
using ELF and everything [the state] has in place.                                                                              
MR. LOGSDON answered in the affirmative.                                                                                        
REPRESENTATIVE  ROKEBERG asked  how many  barrels have  proven in                                                               
the Northstar [field].                                                                                                          
MR.  LOGSDON  estimated  that  Northstar has  in  excess  of  140                                                               
million barrels.                                                                                                                
REPRESENTATIVE ROKEBERG asked  if that was high  in the hierarchy                                                               
of North American fields.                                                                                                       
MR. LOGSDON said he didn't think  there were any fields like that                                                               
except [in] the deep-water Gulf of Mexico.                                                                                      
TAPE 03-15, SIDE A                                                                                                            
Number 0016                                                                                                                     
TADD  OWENS,  Executive  Director, Resource  Development  Council                                                               
(RDC), testified.  He complimented  Representative Rokeberg for a                                                               
very  eloquent presentation  of the  bill,  and he  said RDC  has                                                               
supported this  bill in its  previous iterations in the  last two                                                               
legislatures.  He said [RDC's] members  believe [HB 11] is a very                                                               
sound  public  resource  policy,  and  he  recommended  that  the                                                               
committee move [the bill] forward.                                                                                              
The committee took an at-ease from 2:40 p.m. to 2:45 p.m.                                                                       
[Due to  a technical difficulty,  a brief portion of  the meeting                                                               
was not recorded.]                                                                                                              
Number 0276                                                                                                                     
CO-CHAIR CHENAULT  moved to  report HB 11  out of  committee with                                                               
individual recommendations and the accompanying fiscal notes.                                                                   
Number 0293                                                                                                                     
REPRESENTATIVE MASEK  objected.   She said  she felt  things were                                                               
shaping up in Juneau and with  the stock market, and that she had                                                               
grave reservations  with the bill.   Representative  Masek stated                                                               
that she didn't  support the bill, but said she  was not going to                                                               
hold it up.                                                                                                                     
Number 0351                                                                                                                     
REPRESENTATIVE MASEK removed her objection.                                                                                     
Number 0369                                                                                                                     
CO-CHAIR FATE asked  if there was any objection.   There being no                                                               
objection, HB 11  was reported from the  House Resources Standing                                                               

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