Legislature(2007 - 2008)CAPITOL 106
02/06/2007 08:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB21 | |
| HB48 | |
| HB75 | |
| Subcommittee on Ethics: Report | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 21 | TELECONFERENCED | |
| *+ | HB 48 | TELECONFERENCED | |
| *+ | HB 75 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 48-RETIREMENT BOARD PURCHASE PPT CREDITS 8:13:32 AM CHAIR LYNN announced that the next order of business was HOUSE BILL NO. 48, "An Act amending the powers of the board of trustees of the Alaska Retirement Management Board to authorize purchase and sale of transferable tax credit certificates issued in conjunction with the production tax on oil and gas; and providing for an effective date." 8:13:47 AM REPRESENTATIVE PAUL SEATON, Alaska State Legislature, presented HB 48, as joint prime sponsor. First, the bill would allow the Alaska Retirement Management (ARM) Board to purchase the transferable tax credit allowed under the Petroleum Profits Tax (PPT) passed last year. He reviewed some of the history of the Public Employees' Retirement System (PERS) and the Teachers' Retirement System (TRS) and the unfunded liability that has resulted from those systems. He said the proposed legislation offers ways of decreasing that unfunded liability; one of those ways is to increase the return on the investments made by the ARM Board. CHAIR SEATON reviewed that the duty of the ARM Board is to invest the money and be the fiduciary responsible for all the assets of both PERS and TRS. He indicated that the proposed legislation would authorize the ARM Board to "act like an oil company" - purchasing transferable credits earned by another oil company and reimbursing them from the State of Alaska. He emphasized, "This is absolutely neutral as far as the cost to the State of Alaska." 8:16:37 AM REPRESENTATIVE SEATON directed attention to a handout in the committee packet, entitled, "Tradable Capital Investment Tax Credits - 43.55.023(a)-(h)." He said, for example, a new company or company with no current production of oil, would not owe PPT taxes. If that company were to invest $100 million in capital, that money would create $20 million of capital credit - an incentive to get people to develop. However, until oil is flowing, the company would not be able to do anything with those credits. He indicated that the bill would allow that company to apply for a certificate "that makes those tradable." The tradable tax credits, he said, could then be bought by one of the four big [oil] producers in the state. Those producers would write that $20 million off against their tax bill, as long as the amount did not exceed 20 percent of their total tax bill for the year. REPRESENTATIVE SEATON said the bill also provides a plan for a net operating loss tax credit. If a company has a net operating loss - not enough production to offset the credits earned by operations - that can also be made a tradable tax credit to be bought by another oil company to write off against its tax credit, he said. REPRESENTATIVE SEATON continued: There was a lot of concern that the oil company that you're selling this to might say, "Gee, well we'll give you 70 cents on the dollar, and then we'll turn them in and make - as somebody that didn't do the exploration, that didn't do the investment - ... 30 percent of the tax credit, without doing any of the work." Well, the big thing is that it reduces their incentive and their refund on their exploration. So, [the] ... PPT ... generated another thing that you could do with these tax credits: ... If you had $100 million of combined net operating loss and capital, ... at 20 percent, you would generate $20 million, and you could go to the Department of Revenue, they would give you the certificate, and you'd say, "I want to cash this in." And, under the provision of PPT, up to $25 million per company, the state would directly reimburse them the full face value. 8:21:12 AM And it's important to remember that whether they have it reimbursed or they sell these to another company and the other company reimburses it, the State of Alaska always pays 100 percent of the full face value of the certificate. So, what this bill does: it lets the retirement board act like a purchasing oil company - like one of the big three or four - and say, "We will offer you 92 percent of the face value of the tax credit," and then it allows them to get reimbursed from the Department of Revenue for the full face value, making 8 percent. We wanted to make sure that we did not have the state in a bad financial position and get boxed into making these reimbursements. So, there is a condition on this bill that says the commissioner of [the Department of] Revenue has to certify that the state's financial position is such that he will reimburse it. So, first of all, this bill allows the ARM Board to do it, and it also allows the commissioner of [the Department of] Revenue to say, "Now's not the time, don't buy that." Now, we would think there'd have to be some coordination, but I want you to remember that the commissioner of [the Department of] Revenue ... [has] a designated seat on the ARM Board. So, before the ARM Board makes this [decision], one of their members basically has to certify - and that's the commissioner of [the Department of] Revenue - that the state is in a position where they would do this. Now, 8 percent is ... basically what the ARM Board tries to make as their target for investment, but that's on an annual basis. So, if you make 8 percent, you buy it at 92 percent - and we're fixing that in the statute so they're not getting into a bidding war and all those kinds of things - if you buy it at 92 percent you get it for 100 percent, it's 8 percent. Of course, if you did that at the beginning of the month and got the return at the end of the month, that's 12 times 8 percent, or a 96 percent return. Now, of course, if you're doing it in an overnight or a two-day transaction, that increases tremendously. So, that's how this investment can increase the percentage that the ARM Board will make on its investment. It's totally going to be dependent on how much exploration we get; it's totally going to be dependent on how much credit we get; but remember that right now ... we're just doing oil. If ... there's a gas line that comes on line, and we get this massive exploration, we could be looking at a lot of money that could be turning over in these tax credits, as long as the commissioner of [the Department of] Revenue certifies that ... we have ample tax revenue coming in to offset this .... Because remember, it's offset against that Petroleum Profits Tax that the companies are paying, and this is a credit against that amount of taxes that are coming in. It could be significant and it could help reduce the unfunded liability. So, that's the entire purpose of this bill, and that's the mechanism at work. I know it's pretty hard to explain the unfunded liability and the PPT and all those things in a short time, and I'd be perfectly happy to answer questions, and the Department of Revenue is here, as well, if you have other questions that I can't answer. 8:24:37 AM REPRESENTATIVE SEATON said the Department of Revenue has pointed out that the bill omitted exploration tax credits, which he said had been in place for many years and were extended through the year 2016 in the PPT legislation; therefore, [language for] a conceptual amendment is available in the committee packet to include those credits. REPRESENTATIVE SEATON said the bill would also help "the small guys" by establishing a floor related to expected reimbursement. The floor is 92 percent of the investment tax credit. 8:26:51 AM REPRESENTATIVE DOLL said 92 percent seems rather generous, and she asked Representative Seaton how he arrived at that amount. REPRESENTATIVE SEATON responded that 92 percent seemed like a fairly good number, because 8 or 8.25 percent is the target percentage rate used by the ARM Board in bargaining. He said, "... We don't want to get into a bidding war, but we want to establish a good floor, and we want to make something that has the potential for reducing the unfunded liability." He reiterated that the commissioner has control and the state "is still on the hook ... for the Department of Revenue, for offsetting oil taxes at 100 percent of the face value of the tax credit." 8:30:15 AM REPRESENTATIVE SEATON, in response to a request from Representative Roses, reiterated his explanation of the compounding effect. REPRESENTATIVE ROSES stated: My understanding is you aren't going to sell this every month. You're going to buy these credits, which is an annual credit. Is that correct? So, ... if you had $20 million, you buy that at 92 percent. That means that you're gaining 8 percent, which would be $1.6 million. And so, the only thing the ARM Board is going to do with that additional $1.6 million is invest it into what they already have, which is gaining 8.25 percent a year. So, you're only going to get 8 percent on the $1.6 million, because you had to spend the other $18.4 million in order to get that $1.6 [million]. So, you've withdrawn $20 million out of your investments to buy the credit, for which you're getting an additional $1.6 [million] return. So, you're really only going to get 8 percent on the 8 percent, which would be .64 percent. So, ... you're not going to get 96 percent. I mean, if we did that, we could cure our unfunded liability in two years. REPRESENTATIVE ROSES said, as a former member of the ARM Board, he supports [HB 48], because one of the strategies that the board looks for is additional ways to make investments. He concluded, "It's not going to be a huge cash cow, but it certainly is another way to leverage and make the target investment slightly above the 8 percent." 8:32:25 AM REPRESENTATIVE SEATON said both the ARM Board and a former commissioner of the Department of Revenue have informed him that "they have cash coming in all the time from the deposit," and thus would not be "taking any investments out." He said the transactions will be one-day or perhaps overnight. He said, "... If it turns out as a gas line goes forward that there's $3 or $4 million, and you make 8 percent on $3 or $4 million overnight, that's a pretty good return; that really can help your investment." He emphasized that if the state can marginally increase its return on investment, it will help the outlying years considerably. He offered further details. 8:35:26 AM REPRESENTATIVE COGHILL asked why this plan would be more attractive than "other market forces." 8:36:03 AM REPRESENTATIVE SEATON, in response to a question from Representative Coghill, offered an explanation of the market dynamics. He said, "What we're doing is saying [to] those small guys, 'If our economic situation is good, we'll guarantee you that ... you, as the person that made the investment, can get 92 percent of the face value of the tax credit.'" He added: So, only oil companies ... can use this, and only oil companies that are making a profit in Alaska, and they can only use them to 20 percent of their tax liability. So, with such a small group of players you can see how the market dynamics could be that people would say, "Yeah, we'll buy them from you, but ... we want to make a higher return on that." And so, we could be rewarding not the people that are making the investment, but just people that have petroleum product status. 8:39:00 AM REPRESENTATIVE COGHILL asked how fast the credit can be passed around that it would remain valuable, especially if a high value is going to be set on the credit and then be passed off. REPRESENTATIVE SEATON explained that a "small player" would make an investment and then apply to the Department of Revenue for a credit certificate. He said, "Now, no other small player is going to buy that, because they've got nothing to do with it; they've got nothing to write it off again. The only [person] that can use that is somebody that's paying petroleum profits tax or the $25 million cash refund from the state - and that's limited to $25 million per year." He said the small player could hold the money, but most companies want to get the cash so that they can reinvest it. He added, "Anyone can buy these - that's the law - but it can only be written off against the petroleum profits tax." 8:41:55 AM REPRESENTATIVE SEATON, in response to a question from Representative Coghill, said the state is the buyer. In response to a follow-up question from Representative Coghill, he offered his understanding that there are 14 small companies operating in Alaska, and those companies currently could be generating net operating losses. He said a company with a net operating loss less than $25 million will "go for the 100 percent." The company with net operating loss and capital credits totaling more than $25 million has two choices: hold it or sell it to another company. He said, "If I sell it, I'm going to take whatever they're going to give me for it. And in the past, that's been somewhere around 90 percent - some have been less." He mentioned an amendment that would allow exploration tax credit. He said, "The reason I say ... it establishes a floor [is] because we just say you can buy it at 92 percent. We're not getting into the bidding war with [ExxonMobil Corporation] and [ConocoPhillips Alaska, Inc.] ...; we don't want to make the ARM Board negotiate or anything else." 8:44:56 AM REPRESENTATIVE COGHILL asked, "Would the 92 percent ever be a real market buyout?" 8:45:49 AM REPRESENTATIVE SEATON stated: Our information is that ... they have been willing to buy these credits for ... 90 percent and keep 10 percent .... Or, because now somebody has an option. If ExxonMobil Corporation will only give them 80 percent, they can come to the ARM Board and, if the Commissioner of Revenue agrees, the ARM Board could purchase it at 92 percent, the unfunded liability gets reduced somewhat, and we also direct at least 92 percent of the money to the people that made the investment. REPRESENTATIVE COGHILL asked, "Why would anybody ever do it at 92 percent if the market flow was at 88 percent, for example?" CHAIR SEATON responded that the reason is money. He explained as follows: You've spent $100 million, and you've got $20 million dollars-worth of credit. And you want as much of that $20 million back in your pocket as you can. If you sell it to the ARM Board, you get 92 percent; if you sell it to [ExxonMobil Corporation], you only get 88 ... or 85 percent. So, you, as small explorer, you're not going to sell it to another explorer, because they won't pay you anything for it - they can't use it. All they can do is resell it to somebody else. Now, you have the possibility that one small company would be there, would get a tax credit certificate, would sell it to another one for 50 percent, and the other guys would sell it to the ARM Board for 92 percent. I mean, nobody's preventing anything like that, but ... the marketability of these is for cash and to reimburse you for ... expenses that you have incurred. And you ... want ... the most of that money you can [get] back. That's why I say when we raised the direct credit back up to ... $25 million, it took away some of the usefulness of this tool for the normal exploration amounts that are going on with a lot of these small companies now, because it's less than the $25 million. And, I mean, if I was a small company, there's no way I would sell it to the ARM Board for 92 percent if I can just turn it in to the Department of Revenue for 100 percent. I mean, you want the money in your pocket. 8:49:05 AM REPRESENTATIVE COGHILL remarked, "I know you're not going to be able to see this in a vacuum because of various different agreements that oil companies would have on exploration or operation." REPRESENTATIVE SEATON reiterated that the language of the bill is totally permissive. 8:51:31 AM REPRESENTATIVE COGHILL said he is attempting to figure out the benefit to the state. 8:52:04 AM CHAIR LYNN asked what the worst-case scenario would be in passing the proposed legislation. REPRESENTATIVE SEATON proffered: The only down-side to this is if you were one of the large producers that had a large tax bill, you would not be able to leverage small companies that were investing to sell you their tax credit at a very reduced rate. So, if you were a large company that had a lot of PPT, you might not want there to be ... an effective floor on what you would offer these small companies. CHAIR LYNN commented that the bill gives "the small guy" choice. 8:53:09 AM REPRESENTATIVE DOLL said she understands the advantages the bill would bring to the small company, and she stated her support of HB 48. REPRESENTATIVE COGHILL said he would like to know if the legislation would change the dynamics to investment incentive. 8:53:58 AM REPRESENTATIVE SEATON responded that the bill would increase the investment incentive for small operators, because they would know that "above the $25 million, they can at least get 92 percent of their credits back." He offered further details. In response to a comment from Chair Lynn, he confirmed that the legislation expands the market, but without costing the State of Alaska one dime. He highlighted the zero fiscal note. REPRESENTATIVE SEATON, in response to a concern expressed by Representative Coghill, said he wants to ensure that the credits are only applied against the PPT, in case "something goes bad for us for a year or two." He concluded that HB 48 is a method of making tax credits valuable to the person who makes the investment in Alaska and tries to get back the most amount of money, while creating a reasonable return for the state, [which could have a positive effect on the unfunded liability]. 8:58:30 AM JERRY BURNETT, Legislative Liaison/Director, Division of Administrative Services, Department of Revenue, offered the department's take on HB 48. He said the sponsor effectively and accurately portrayed the bill and the effects it would have on the state and the ARM Board. He stated the department's belief that the bill has merit as a vehicle to increase the revenue to the ARM Board, with little cost to the state's general fund. Furthermore, he recognized that the bill would provide a floor for investment credits, which could enhance small oil producers' abilities to utilize exploration credits, which would in turn enhance exploration and production in Alaska. 9:00:03 AM MR. BURNETT, in response to a question from Representative Johansen, explained that the fiscal note is zero for operating costs and the revenue effects are indeterminate. He said there may be a cost related to a timing issue, wherein the department could make a payment to the ARM Board more quickly than it was getting reduction in revenue from an oil company as a result of the use of a tax credit. In that scenario, he explained, there would be a difference in investment results from the general fund relative to the ARM Board investment results. 9:01:03 AM REPRESENTATIVE ROSES opined that timing is the issue, because the ARM Board has caps on the dollar amount that can be invested at any one particular investment group, and it must shift dollars into liquid assets until such time as it can find a better investment. At that point, the money invested takes some time to build. He said, "But with this type of a purchase option, you get an instant return on your money, as opposed to waiting for that investment to start to grow." He said that's why he likes "this option." MR. BURNETT told Representative Roses that the department sees the transaction as being "fairly, nearly, instantaneous." 9:02:44 AM CHAIR LYNN closed public testimony. 9:02:52 AM REPRESENTATIVE ROSES [moved to adopt] Conceptual Amendment 1, which read as follows [original punctuation provided]: Page 2, line 4: after "43.55.023" insert "and 43.55.025" Page 2, line 5: after "43.55.023(f)" insert "and 43.55.025" 9:03:32 AM REPRESENTATIVE SEATON said Amendment 1 would allow exploration tax credits, which was a suggestion from the Department of Revenue. 9:03:48 AM CHAIR LYNN asked if there was any objection to [Amendment 1]. There being none, it was so ordered. 9:03:59 AM REPRESENTATIVE COGHILL moved to report HB 48, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 48(STA) was reported out of the House State Affairs Standing Committee.
| Document Name | Date/Time | Subjects |
|---|