Legislature(2005 - 2006)SENATE FINANCE 532
01/26/2006 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB 171 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 171 | ||
| * | SB 236 | ||
| * | SB 243 | ||
9:03:23 AM
SENATE BILL NO. 171
"An Act amending the National Petroleum Reserve - Alaska
special revenue fund; and establishing the Special Legislative
Oil and Gas NPR-A Development Impact Review Committee and
defining its powers and duties."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken, sponsor of the bill, moved for adoption of CS SB
171, 24-LS0785\C, as a working document.
9:04:33 AM
Co-Chair Wilken gave a presentation reminding the Committee of the
purpose of this bill and the affect it would have on State
finances. He utilized a handout in which the cover page reads,
"Senate Bill 171, "The duty imposed by the federal government
ultimately falls upon the Alaska Legislature…" Barrow v. State,
Judge Walter Carpeneti, March 18, 1986" [copy on file]. This
handout includes excerpted pages from a slide show presentation
given during the previous hearing on this bill on April 26, 2005
[Copy of the entire presentation also on file.] The pages on the
updated handout are not numbered, although most contain the slide
number from the original presentation and are referenced in this
presentation.
9:05:26 AM
Co-Chair Wilken explained that SB 171 is about "impact" and "impact
on communities". Yet how the communities are impacted must be
evaluated.
9:05:58 AM
Slide 3
National Petroleum Reserve - AK
[Map of the northern portion of Alaska with the National
Petroleum Reserve - Alaska (NPR-A), the Alaska National
Wildlife Reserve, Native lands, Point Barrow, Alpine, Prudhoe
Bay, Point Thomson and other landmarks identified.]
· 23.5 million-acre petroleum reserve (~Indiana)
· NW third of Alaska's arctic between the Brooks Range and
the Arctic Ocean
Co-Chair Wilken spoke to the large area encompassed by the NPR-A;
bordered by the Brooks Range to the South and the Arctic Ocean on
the North. Development of oil resources at Alpine is located next
to the far Northeastern portion of the Reserve.
Co-Chair Wilken reminded that this area was opened for leasing in
1980 by the federal government.
9:06:34 AM
Slide 18
Where are the Communities?
[The locations of four communities are identified within the
NPR-A boundaries with accompanying data about the communities
as follows
City of Barrow
Population - 4,351
Median Household Income - $67,097
City Responsibilities - Bingo, Community Center, Roller
and Ice Rink, Teen & Recreation Center, Housing, City
Hall, Little Dribblers, Taxis, Summer Youth Employment,
Gravel Sales
City of Wainwright
Population - 531
Median Household Income - $54,722
City Responsibilities - None Listed
City of Nuiqsut
Population - 430
Median Household Income - $48,036
City Responsibilities - Community Hall, Dock and Cable TV
City of Atqasuk
Population - 218
Median Household Income - $66,607
City Responsibilities - Bingo, Room Rentals, Community
Center, Recreation and Cable TV
Source: DCCED and Alaska Municipal League - Alaska Municipal
Officials Directory]
Co-Chair Wilken stated that impacts from NPR-A activities would be
to those communities closest to the development. He gave
perspective of the proximity of the communities within NPR-A. The
distance between the City of Wainwright and the City of Nuiqsut is
226 miles. Barrow is approximately 160 miles from the City of
Nuiqsut.
9:07:18 AM
Slide 25
What does the law say?
· Federal Law - 42 U.S.C. 6508
o In allocation of the NPR-A funds, the State shall
give priority to use by subdivisions of the State
most directly or severely impacted by the
development of oil and gas leased in NPR-A.
· Alaska State Law - AS 37.05.530
o A municipality may use the NPR-A funds only for
services to alleviate the impact of oil and gas
development within NPR-A.
· Alaska Regulations - 3AAC 150.050
o Impact means an effect reasonably attributable to
NPR-A oil and gas activities under 42 U.S.C. 6508.
(Emphasis Added)
Co-Chair Wilken read the statutes and regulation into the record.
9:07:57 AM
Co-Chair Wilken explained that the primary impact of the federal
law is that the Alaska Permanent Fund has been "intercepted" by the
communities affected by oil and gas development.
9:08:21 AM
[An unnumbered page in handout is taken from an advertisement
included in recent editions of state newspapers and contains
the following:
Alaska Permanent Fund Corporation 2006
Fund Works - Investing in your future
25% of state's mineral revenues
Income from Fund's Investments
Alaska State Constitution
Article 9, Section 15
At least 25 percent of all mineral leases, rentals,
royalties, royalty sales proceeds, federal mineral
revenue sharing payments and bonuses received by the
State, except those from NPR-A, 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.
The bill sponsor inserted italicized language "except
those from NPR-A".]
Co-Chair Wilken surmised that if 1,000 Alaskans were asked if the
State's share of all revenues generated from oil and gas
development were deposited into the Permanent Fund, all 1,000 would
answer in the affirmative. However, this is untrue. Because of the
1980 law, only the funds generated from the NPR-A that are not
expended for grants to the North Slope Borough and other specific
communities are deposited into the permanent fund.
9:09:27 AM
Co-Chair Wilken reported that if the aforementioned federal law
were not in effect, $7.9 million of the $31.6 million received from
NPR-A last year would have been deposited to the Permanent Fund.
Instead, only $1.7 million was deposited and the Permanent Fund was
"shorted" by approximately 80 percent. He remarked, "That should
trouble all of us … because federal law has effectively taken
monies out of the Permanent Fund that are there for generations
that follow me and those that made that law in 1980."
9:10:22 AM
Co-Chair Wilken stated that this bill attempts to rectify this
situation.
Slide 19
Total Distribution to Date
…and FY 07 projections
[Bar graph showing Amount of the Grant Awards (Dollars
Expressed in 1000s) for the fiscal years 1980-86 and for each
of the fiscal years 1987 through 2007, with notations as
follows.
FY 06 is the requested amount.
FY 07 is the projected amount from the proposed NPR-A
summer lease sales.]
Since 1980, a total of $117,249,388 has been awarded to 4
communities.
(Total includes the FY 06 requested amount of $24,706,500)
(FY 87 and FY 91 include 5 communities)
[Note: a typographical error lists FY 05 twice and omits FY
04. The data indicated for the first FY 05 reference is
actually for FY 04.]
Co-Chair Wilken stated that this "interception of the revenue fund"
is done through the community grant program. The $30 million
designated to the grants for FY 00 was a significant increase over
previous years and brought attention to the issue. Approximately
$25 million was designated in FY 04.
Co-Chair Wilken anticipated that approximately $50 million would be
available for FY 07 because of increased development activity
occurring in the NPR-A and expected lease sales scheduled for the
fall of 2006.
9:11:50 AM
Co-Chair Wilken contended, "This isn't chump change."
9:11:57 AM
Slide 20
A Perspective in Statewide Terms
What if … the FY 06 requested grant amount was computed on a
per person basis, what would that mean for other AK
communities on 7/1/05?
Anchorage
Population - 277,498
$1.2 billion
Fairbanks
Population - 84,979
$379.7 million
NW Arctic Borough
Population - 7,306
$32.6 million
Bethel
Population - 5,888
$26.3 million
Sitka
Population - 8,805
$39.4 million
The FY 06 requested amount, $24,706,539, is divided by the
total population of NPR-A grant recipients, 5,530, for a per
person amount, $4,468.
Co-Chair Wilken asserted that the community of Fairbanks, in which
he resides, would appreciate such an appropriation. The $380
million would cover the budgetary needs.
Co-Chair Wilken cautioned, "We should know that we just can't look
the other way while this diversion takes place unless there are
certain rules under which we follow."
9:13:10 AM
Unnumbered Slide
Now is the Time
To listen to the Alaska Superior Court: (Barrow v. State,
March 18, 1986)
"The duty imposed by the federal government ultimately falls
upon the Alaska Legislature and it includes the duties to
examine the claimed needs of the subdivisions arising from oil
and gas development impacts, to evaluate them and if the
claimed needs are found to exist, to rate them in order of
priority, and to meet them out of NPR-A revenues."
(Emphasis Added)
Co-Chair Wilken read this quote into the record, noting the remarks
were part of Judge Carpeneti's final decision in the Barrow v.
State of Alaska litigation.
9:13:46 AM
Co-Chair Wilken concluded, "Now is the time and Senate Bill 171 is
the bill that attempts to do that."
9:13:58 AM
Co-Chair Wilken reminded that when this legislation was first heard
in this Committee, certain concerns were raised. The proposed
committee substitute addresses these issues.
9:14:10 AM
Co-Chair Wilken outlined the contents of the committee substitute,
Version "C".
Section 1 - specifies the legislative intent.
9:14:25 AM
Section 2 - establishes an Impact Review Committee and
proscribes the rules governing the proposed committee. It
stipulates that the members serving on the committee must
visit the affected areas and specifies a timeframe and
frequency for these visitations.
9:14:53 AM
Section 3 - contains technical changes.
9:14:57 AM
Section 4 - provides rules for the Department of Commerce,
Community and Economic Development to follow in reviewing
applications and reporting its findings to the legislature,
similar to current practice, ranking all the proposed
projects.
9:15:46 AM
Section 5 - outlines the duties of the proposed committee
including the forwarding of its results to the full finance
committees of each body for inclusion in the annual capital
budget appropriation.
9:16:04 AM
Section 6 - stipulates the responsibilities of the
municipalities that receive the grants, the review process of
monitoring the implementation of the grant funding, and the
allowable expenditures for grant funding.
9:16:27 AM
Section 8 - changes the calculation of the income deposited
into the Permanent Fund.
Co-Chair Wilken opined that the provisions in this section are an
"attempt to heal up the wound to the Permanent Fund". Currently, he
explained, income is first expended to fund the grants, then 25
percent of remaining income is deposited into the Permanent Fund
and one-half percent is deposited to the School Trust Fund. Under
the new statute, the grants would still be funded first; however,
the 25 percent calculation would be made on the gross income amount
rather than the net income amount as currently done.
Co-Chair Wilken noted that the ability to deposit the full 25
percent of gross income into the Permanent Fund would not always be
possible. He gave the previous year as an example. However, as
continued income is generated from NPR-A resource development and
with the awarding of "valid" grants to affected communities, he
predicted that full funding would be likely for most years.
Remaining funds would be available for appropriation by the
legislature to the Power Cost Equalization (PCE) Capitalization
Fund or to the general fund.
9:18:36 AM
Section 9 - specifies lapse dates for the grants and how they
are defined and monitored.
Section 10 - contains the effective date.
9:18:49 AM
Senator Bunde referenced language on page 2, line 27 of the
committee substitute that provides that "a member" of the proposed
committee must visit impacted communities. He relayed that Senator
Ralph Seekins had clarified the correct language should read "each
member". All members on the committee would be required to visit
the communities.
9:19:42 AM
Co-Chair Wilken so noted.
9:19:45 AM
Senator Dyson recalled discussion during the previous hearing on
this bill surmising that the real impacts on the communities within
the NPR-A are the results of residents working at Prudhoe Bay.
Therefore the grants are used not to offset impacts from direct
resource development activities, but rather to address social
problems resulting from residents' employment at Prudhoe Bay. He
asked if utilization of the grants in this manner is legal.
9:20:54 AM
Co-Chair Wilken clarified the question of whether it is legal to
use impact grants to address perceived social impacts and answered
it is not.
9:21:47 AM
Senator Hoffman noted the Superior Court ruling that proposed
projects must be evaluated then rated and prioritized. The overview
does not reference the court's direction of the process to be
undertaken after the rating is completed. He asked the requirement
in the event excess funds remained.
9:22:46 AM
Co-Chair Wilken responded that a "clear pecking order" is applied
to claim of the funds. The affected communities receive first
priority, the Permanent Fund and the School Trust Fund equally
share the second priority and the remaining income is available to
appropriation to the PCE Capitalization Fund and the general fund.
This would not be changed by this legislation.
9:23:36 AM
Senator Hoffman clarified that the main intent of the bill is to
establish a committee to determine eligibility of grant
applications. The secondary intent is the change the calculation of
the amount to be deposited to the Permanent Fund after the grants
are funded.
9:24:17 AM
Co-Chair Wilken affirmed the calculation of the amount to be
deposited to the Permanent Fund would be made on the gross income
rather than the net amount.
9:24:24 AM
Senator Olson questioned the need to establish a committee to
"tighten up" regulations that have already been changed. This bill
appears to single out one entity because it has utilized laws and
rules enacted by others outside of the entity. These communities
have been successful at utilizing these laws; however the
appearance is being made that the communities are taking advantage
of the situation and would be penalized.
9:26:21 AM
Senator Olson stressed that the Department of Commerce, Community
and Economic Development has done a "great amount of work" to amend
the regulations to avoid misuse of the grant funding. Putting these
changes into statute is "overkill". The finance committees could
instead assign a subcommittee to ensure that the regulations are
complied with. Other grant programs do not have a special committee
overseeing how others are dispensing funds.
9:27:16 AM
Senator Olson objected to the cumbersome process.
9:27:27 AM
Co-Chair Wilken responded that overtime the process would not be
cumbersome. Such action is necessary because in 1980 "folks" chose
to address this area differently. The resulting grant awards are in
direct contradiction to the Alaska Constitution. He hoped that with
the implementation of this legislation, the committee process would
"build confidence" that the legislature was fulfilling the federal
requirement "nothing more nothing less". Ten years from now this
should be a "non issue". If other grant programs warrant similar
review, they should be addressed separately. He was aware of no
such need. This situation affects the Permanent Fund and is
therefore important.
9:29:54 AM
Senator Olson surmised the allegation is that those who established
the Permanent Fund did not have adequate foresight to address
certain issues occurring 25 years later. He asked if other
committees would be required in the future to oversee impacts to
communities affected by other resource development activities, such
as timber harvesting and fisheries.
9:30:43 AM
Co-Chair Wilken shared that research indicates very little if any
involvement by State agencies in the establishment of this grant
program. The decisions were made at the federal level. He could
find no evidence of State policy makers' involvement. If the
federal government chose to divert income from other resource
activities to certain areas of the State, it would be the
legislature's responsibility to establish oversight for those
programs as well.
9:31:49 AM
Senator Bunde stated that all legislation is a "living document".
As times change and "reality sets in" it is important to be
flexible to change.
9:32:39 AM
Senator Bunde did not view the North Slope residents as doing
anything illegal, but rather using tools available to them.
However, he questioned whether the practices reflect a fair
distribution of the State's resources.
9:33:34 AM
Senator Stedman recalled that when this bill was first heard in
Committee, he was skeptical of the impact to the communities
receiving the grants. Over the summer months however, fish and game
personnel and residents assured him that the oil development
activities did impact the subsistence lifestyle. While the
appropriateness of past grants could be debated, he preferred to
look forward and achieve "middle ground" in which State officials
protect the interests of the entire state.
9:35:13 AM
Senator Stedman supported the concept of calculating the amount for
deposit to the Permanent Fund from the gross income. He suggested
consideration of the cumulative impact on the Permanent Fund in
these calculations. The previous year, sufficient funds were not
available to provide the 25 percent and the shortage should be
carried forward to future calculations. Grants in excess of the
carried-forward percentage would not be issued. The intention is to
make the Permanent Fund "whole". "At end of the day" the
legislature would have complied with obligations to the federal
government as well as obligations to all Alaskans.
9:37:46 AM
Senator Hoffman directed attention to Slide 20 of the presentation,
which provided a perspective of impact grants if awarded on a
statewide basis. He stressed that the amounts listed as allocated
to the selected communities were very hypothetical amounts
calculated on a population basis. If this legislation were passed,
the communities would never receive the amounts shown. To "build up
hopes" otherwise should be avoided unless it was Co-Chair Wilken's
intent to provide such revenue sharing.
9:39:53 AM
Co-Chair Wilken agreed and expressed his intent was not to
appropriate such amounts to communities.
9:40:07 AM
Senator Stedman redirected the conversation to the matter of the
Permanent Fund. After the impact grants are funded and deposits are
made to the Permanent Fund and the School Trust Fund, insignificant
funds would remain for appropriation to the PCE account or the
general fund. Therefore, this legislation would have virtually no
impact to the general fund. Establishing a method to ensure the
Permanent Fund receives a sufficient portion of the earnings while
complying with the federal regulations is the primary issue.
9:41:09 AM
Senator Olson noted that he represents an area with two boroughs
and a large area with no organized local government. The
calculation of the amount of funds distributed per resident is
comparable on a national level to the appropriations made to
Alaska. The per-resident dollar amount received in this State would
be significantly larger if calculated for the population of the
states of New York or California.
9:42:12 AM
Without objection CS SB 171, 24-LS0785\C, was ADOPTED as a working
document.
9:42:38 AM
SUSAN BURKE, Attorney representing the North Slope Borough,
commented on the argument raised by Senator Dyson regarding grants
awarded to offset impacts from Prudhoe Bay. It is not illegal to
utilize NPR-A revenues for any purpose. The provisions dictating
allowable uses of this money are "broad".
9:44:16 AM
Co-Chair Green explained that Senator Dyson commented to the use of
NPR-A funds to address impacts on the community due to residents
leaving that community to work in Prudhoe Bay.
9:44:55 AM
Ms. Burke stressed that such allocations are not illegal.
9:45:01 AM
Senator Dyson agreed that this practice is not prohibited under
criminal law; however use of the funds in a manner different from
the intent of the law is still a problem.
9:45:40 AM
Ms. Burke affirmed that the requirement in federal law that
priority must first be given to impacts from NPR-A development is
not disputed. Once that priority is fulfilled, the remaining funds
could be appropriated in any manner, including addressing impacts
from Prudhoe Bay activity.
9:47:00 AM
Senator Dyson remarked that the funds have been granted for
projects to address issues in which little or no impact is caused
by NPR-A. The grants have been awarded with no restrictions for
their use.
9:47:35 AM
Ms. Burke referred to Senator Stedman's comments that past grants
could be debated infinitely. The issue is how to make the
determination of NPR-A impact.
9:48:51 AM
Senator Bunde asked how the priorities of grant applications were
decided and whether this would be answered in Ms. Burke's
testimony.
Ms. Burke indicated she would address this.
9:49:07 AM
Ms. Burke then provided her testimony on the bill as follows.
Questions and comments were addressed as they arose.
First of all Senator Wilken has already told you what the law
says and it's in the materials that he's provided for you so I
won't repeat that here. But what I would like to provide is
just a little bit of a historical background from a legal
perspective.
As Senator Wilken indicated, the Congress in 1980, adopted
legislation that allowed for development in the NPR-A. And as
part of that legislation, adopted a provision that you're all
now very familiar with, that provides 50 percent of the
revenues that the federal government receives from oil
development on its land within the NPR-A and provides for the
priority to be given to in the use of the funds to the
municipalities that are most directed and severely impacted
from development in the NPR-A.
When the first money came to the State from NPR-A in the early
1980s, the State put 50 percent of it into the Permanent Fund.
That was the statutory deposit to the Permanent Fund at that
time. And just put the rest in the general fund and just spent
it like any other kind of receipt. After the North Slope
Borough tried to persuade the State to take a different
approach, because in our view this was totally contrary to the
requirements of the federal act, we got no response.
So as a result, we were forced to file a lawsuit. In that
lawsuit, we asked the court to determine primarily two things.
Number one, "Was it proper for the State to automatically take
50 percent off the total and put that into the Permanent Fund
- or any percentage of the total right from the get-go - and
put that in the Permanent Fund and then look at what's left
and decide whether communities should receive some of those
funds for mitigating impacts." The second thing we asked the
judge to look at and to decide was that there had to be some
kind of mechanism whereby municipalities could make their
needs known to the State - apply for funding if you will. The
State had to make reasoned judgments about the impact issues.
… To the extent that the needs were found, a requirement that
they be funded first out of the NPR-A money.
Well the court agreed with us and Senator Wilken's materials
from last year provide the primary areas of the judges ruling.
So the decision came down and in our favor. And so we sat down
with the State, the Department of Law and then [Department of]
Community and Regional Affairs and said, "OK, how are we going
to do this?" And so we came up with proposed legislation that
was ultimately enacted and it has remained on the books with
some miner tweaking, to this day.
That's sort of the background.
Last year's bill, the original Senate Bill 171, proposed some
major changes in the existing law and in doing so, raised a
lot of legal issues. Primarily ones that, in our view at
least, were in clear conflict with the federal act. We
communicated those both to the Senate State Affairs Committee
and to Senator Wilken and possibly others. I didn't personally
do [this], but certainly it was done by the Borough.
The proposed CS that you've adopted today cures the problems
that we brought up last year, but it includes some new
provisions that raise some new legal issues and I'd like to
share those with you today.
It also raises some policy issues and I'd like to talk about
those after I get done talking about the legal issues.
9:54:17 AM
Ms. Burke referenced language included in Section 4 of the
committee substitute that amends AS 37.05.530(c) that reads, "…a
municipality may not apply for and the department may not take any
action on an application unless it is accompanied by this
submission…" This language pertains to "evidence or a certificate
that the municipality is current on submission of reports
concerning the expenditure of any grant or appropriation previously
received under this section…"
Ms. Burke's testimony continued.
First of all on page 3, starting at line 24, there's a
provision that says it precludes a municipality even from
applying for impact funds if it's paperwork isn't in order, if
you will, and or up to date.
In my view, this is contrary to the federal law. There's no
requirement in the federal law that only those municipalities
with their paperwork in order have to be given priority for
funding. I mean the law was put in place to benefit the
residents of these communities and to alleviate impacts on
people, not on municipal governments as such.
9:55:00 AM
Ms. Burke:
It seems to me very hard to believe that Congress would have
intended to preclude the residents of a particular community
from obtaining funds to alleviate real impacts - and I'm
[going to] assume here that we're talking real impacts -
because some administrator didn't get a report filed on time.
Now are there sanctions that can be applied for late reporting
and that sort of thing? Of course there are and they should
be. But I believe that a sanction of precluding a municipality
even from applying would be contrary to the federal act.
9:55:33 AM
Ms. Burke:
At page 3, pretty much the same area, there's also a
restriction on the Department's ability to take any action on
such an application or make any recommendation to the
legislature about it. And there's a provision in our State
Constitution that allows the governor, and of course the
departments are simply spokespersons for the governor under
our form of the executive branch, that says he can communicate
anything he wants to, to the legislature.
9:56:16 AM
Ms. Burke:
I think it's a separation of powers problem if you try to
preclude the governor - the legislature tries to preclude the
governor - from making any recommendations he wants to you.
9:56:42 AM
Co-Chair Green inquired to what language in the committee
substitute Ms. Burke referenced.
It was established that the witness' comments were directed to the
same language of Section 4, as earlier described.
9:57:25 AM
Ms. Burke next referenced the language of AS 37.05.530(e)(4) on
page 6, lines 1 through 5, as repealed and reenacted in Section 6
of the committee substitute. The subparagraph reads as follows.
(4) expend the funds only for the use or purpose for
which the grant or appropriation was made; the Department of
Commerce, Community and Economic Development may not otherwise
modify the terms of a grant or appropriation to change the
purpose or objective of the grant or appropriation or the
terms and conditions under which the grant or appropriation
may be expended.
Ms. Burke:
There [is] what appears to me to be a restriction on the
authority of the Department to modify existing grants. In
other words, ones that have already been approved by the grant
agreements have already been signed. If that's the intent, I
think that it's contrary to the provision of the Alaska
Constitution that prohibits legislation that impairs the
obligation of contracts. And these grants - the grants that
are already there in place - are contracts.
If you have a law that attempts to modify those contracts and
impair the rights and obligations of those contracts that
already exist, you run afoul of it's Article I, Section 15 of
the State Constitution.
9:58:19 AM
Co-Chair Green clarified the language Ms. Burke was addressing.
9:58:25 AM
Ms. Burke summarized the subparagraph as providing that the
Department may not modify a grant to change the purpose or
objective or the terms or conditions under which the grant may be
expended. She continued as follows.
Well these contracts have provisions in them that allow for
certain modifications. If you say that they can't do that you
are changing the rights and obligations of the parties to the
contract, mainly the State of Alaska and municipalities, under
and existing contract.
9:59:12 AM
Co-Chair Green asked the provisions that allow the grants to be
used for "xyz and/or a, b or c".
9:59:32 AM
Ms. Burke replied that the current practice does not allow for the
total modification or a total change of use. Her comments pertained
to a complete prohibition on the numerous terms and conditions of
these grants. Some of these conditions do not relate to the
overarching purpose of the grant itself, rather they address other
issues such as timing and insurance.
10:00:17 AM
Co-Chair Green understood that the language in the committee
substitute would apply to existing grants and would therefore be
improper.
10:00:26 AM
Ms. Burke affirmed.
10:00:30 AM
Co-Chair Green asked if amending the provision to only apply to
future grants would be allowable.
10:00:33 AM
Ms. Burke responded that this would be fine.
Ms. Burke noted that committee substitute replaces all reference to
"grant" in existing statute with "appropriation". She assumed that
a distinction would therefore be made in the administration of the
entire program, which she would address later.
10:01:28 AM
Ms. Burke continued her testimony, speaking to the "appropriation
versus grant model".
If you're talking about a grant program, like both the
existing NPR-A grant program or any other grant program, the
legislature appropriates money to a department - a State
department - for the purpose of funding certain grants, and
the department enters into grant agreements and the agreements
take their course. It usually takes several months to get the
actual grant paperwork together. So as a result, they're not
done usually, they're not restricted to expenditure - having
all the money spent by June 30th because by the time you've
got the grant done it's already September, October or
November. You don't have very much time left to spend the
money if you are to spend it by the 30th of June.
And if I understand it correctly, under this appropriation
model, what you'd have is the commissioner of [the Department
of] Administration writing a check to the municipality on the
basis of the appropriation to the municipality. I don't know
when - first of July, second of July, fifth of July, I don't
know.
If I'm correct in my assumption about how - that's how an
appropriation model would work, I'm convinced that you're
[going to] end up with a whole lot less oversight of the
expenditure of this money than you have under a traditional
grant model.
For example, under the current NPR-A grants, no State money -
no municipality gets its hands on a nickel of this grant money
until they've already expended it for a particular line item
if you will, in the grant budget. It's on a cost reimbursement
basis for the most part. There are exceptions in the grant for
certain kinds of direct payments to vendors. But by and large,
the bulk of this money doesn't go out to the municipalities
until they file a report with the Department. The default
reports are monthly, but you can - the Department can provide
for quarterly reports. But you don't get any money until you
file one of these reports and tell them that you've spent the
money and here's what the money's been spent for and now we
want to be reimbursed for it.
That to me provides quite essential pre-grant or pre-
expenditure oversight of these programs. If you have a strict
appropriation model where the commissioner of Administration
writes a check for the whole bunch, you know at the get go,
the legislature isn't in a position to provide that kind of
program oversight that the Department provides.
10:04:59 AM
Ms. Burke
And then there are other provisions that are contained in the
grant agreements that are important. There are a whole host of
things in the NPR-A grants and in other State grants, I assume
as well, that are designed to protect the State's interests as
well as the municipality's interests.
There are escalating levels of sanctions for instance, for
non-compliance with the provisions of the grant ranging from
suspension of grant payments - "you don't get anymore cost
reimbursements until you clean up your act and get your
reports in", to terminating the grant entirely. And if funds
have been misspent, to demand payment and if necessary sue the
municipality to get the money back. Those are provisions that
are contained in these grant agreements. They're contract
provisions that the municipalities have to agree to in order
to get the grant.
There are provisions indemnifying the State from liability for
things that are done in the expenditure and pursuit of the
particular project that the grant is funding.
There are restrictions and oversight on the kind of
subcontracting that can be done with the grant money.
The appropriation model just doesn't lend itself to providing
for these kinds of provisions that really protect the State
primarily, but also protect the municipalities.
I was looking at the grant agreement for one of the most
recent grants from last year's round. There are 15 - 20 pages
of terms and conditions and your appropriation bills are long
already, but I'll tell you they'll be a lot longer if you try
to incorporate these kinds of things in an appropriation bill.
And beyond that - and it depends on the particular language
that's used in what you're trying to accomplish, you're [going
to] end up running afoul of the confinement clause of the
Alaska Constitution, which confines appropriation bill to
appropriations and doesn't allow any substantive law to creep
into them. That's the Knowles versus the Legislative Counsel.
10:07:51 AM
Senator Dyson understood the law does allow for the inclusion of
qualifying language in an appropriation bill.
10:08:09 AM
Ms. Burke affirmed. However, the court decision on the
aforementioned case, states that every appropriation is reviewed on
a "case-by-case" basis. Sweeping judgments are difficult to make.
Ms. Burke next referenced Section 6 on page 5 line 23 through page
6, line five, which repeals and reenacts AS 37.05.530(e) to read as
follows.
(e) A municipality that receives an appropriation under
this section shall
(1) account separately for each grant or
appropriation received;
(2) provide for an independent audit of the separate
accounts maintained for each grant or appropriation, except
that, for a grant or appropriation that is not more than
$300,000, the municipality shall provide for an independent
unaudited review of the accounts maintained for the grant or
appropriation;
(3) submit a copy of the independent audit report or
independent review to the Department of Commerce, Community
and Economic Development; and
(4) expend the funds only for the use or purpose for
which the grant or appropriation was made; the Department of
Commerce, Community and Economic Development may not otherwise
modify the terms of a grant or appropriation to change the
purpose or objective of the grant or appropriation or the
terms and conditions under which the grant or appropriation
may be expended.
Ms. Burke continued:
Another policy issue it seems to me is raised by the
requirement for the audit reports. The bill … provides for an
independent audit of the accounts maintained for the
appropriation for a grant that is $300,000 or more and
requires the municipality to provide for an independent
unaudited review of the accounts if it's less than that
amount.
Existing regulation already requires audited reviews of State
expenditures - grant money - in excess of $300,000 if that
much is expended within any fiscal year. So to that extent, I
don't know that this legislation is required.
My main concern is with smaller grants to the smaller
communities. If you're going to audit a grant, the auditor
comes in and they look at the books and they look at the
financial records - or the reviewer, it doesn't matter if it's
an auditor or reviewer - and they look at the program and "has
the money been spent in accordance with the terms of the
grant."
10:10:08 AM
Ms. Burke:
That kind of review of a small grant is going to be almost as
extensive as the kind of audits that are required on big
grants. I mean you're talking about an independent reviewer,
which is probably [going to] be someone from outside the
community, having to travel to the community, spend I don't
know how many days there [indiscernible]. That's money that's
[going to] come out of the NPR-A off the top, and it's money
that's not [going to] go into the Permanent Fund.
So I guess I would ask you to give serious consideration to
deleting any - maybe just deleting the section. It's not
necessary when you're talking about the larger amounts of
money and I think it's going to be an onerous burden and a
very, very expensive one. And I'm not sure that what you're
going to be getting is worth the money that's going to be
expended.
10:11:00 AM
Ms. Burke:
I think the Department can provide you with all the
information you need about how this money was spent and
whether it was spent on the objects of the grant. They've been
- assuming that you maintain a grant model, you've got the
tools right there in the Department to provide you with that
kind of information.
For larger amounts of money, it makes sense to have a higher
level of scrutiny if you will. And as I say, existing
regulation provides for that.
10:11:55 AM
Co-Chair Wilken clarified Ms. Burke's concern was the review of
grants in amounts less than $300,000.
10:12:09 AM
Ms. Burke affirmed, noting that audits are already required of
grants over $300,000 so additional statutory language is not
necessary.
10:12:23 AM
Ms. Burke:
I want to talk a little bit about the lapse of the funds
provisions. This gives me concern because, as I understand it,
the default, if you will, under the appropriation model, is a
one-year appropriation. In other words, if the money isn't
spent by the 30th of June, it's lapsed. It's a "spend it or
lose it" kind of program. I'm concerned for two reasons about
this.
First of all there are a lot of potential operational kinds of
programs, ones that wouldn't be a traditional capital project
under your general approaches to lapsing, you know would have
a much longer lapse period if they were appropriated in the
capital budget.
But there are a lot of projects that really can't be done.
Legitimate projects that are related to NPR-A impacts that
really can't be completed within one year. A couple of
examples - there's a grant that was awarded this last year to
the North Slope Borough to train and establish local oil
response teams in the communities. That couldn't be done in a
single year. The subsistence studies - the baseline
subsistence studies. You can argue about boat ramps and impact
all you want but I don't think there's too much argument that
baseline subsistence studies measuring what's out there now in
terms of subsistence resources in order to measure both
present and future impact from oil development is a project
directly related to NPR-A impacts. [This] doesn't make any
sense. There also are the projects that are the most expensive
to implement. To me it doesn't really make sense to fund these
kinds of projects on a year-to-year basis. You might start
year one of the project with a one year appropriation and when
it comes time to ask for money for year two, it's one of those
years when we don't get very much NPR-A money and there's
really not enough to go around. There may be other communities
with other impacts that are worthy projects and you end up not
being able to fund the second year and wasting in essence the
money that you spent on the first year. So that's a concern I
have with what seems to be the intent to make these projects
July 1 to June 30th and then the axe falls.
The second problem I see with it, even if you have a grant or
a project that can be finished reasonably within a one-year
period. A "spend it or lose it" kind of construct to me runs
into the danger of getting close to the end of the fiscal year
and the municipality saying "Oh my gosh, it's already the
first of April and we've only got two months left to spend
this money or it lapses and we lose it entirely. We'd better
hurry up and spend it."
10:15:34 AM
It might not be spent in the wisest sort of way. [It] might be
spent within the terms of the grant, but, particularly when
you're dealing with relatively unsophisticated communities - I
don't include the North Slope Borough in that category because
the North Slope Borough is pretty sophisticated - but the
smaller communities by and large are not. The Borough tries to
provide as much assistance as it can in implementing
[indiscernible]. But I worry about that sort of spend it or
lose it is not necessarily going to provide the best kinds of
fiscal decision making as you approach the dooms day date of
June 30th.
10:16:37 AM
Co-Chair Wilken informed that grant has an individual completion
date. The "default" lapse date provision contained in this bill
would allow for the legislature, during the appropriation process,
to assign a lapse date subject to the project under discussion. If
the applicant were incorrect in estimating the completion date of
the project, the Department would continue to have the ability to
extend the lapse date. This provision ensures that money is spent
as intended.
10:18:43 AM
Ms. Burke appreciated the clarification. However, the Department's
ability to extend the lapse date would be limited to "unusual
circumstances beyond the control of the municipality". In the
"spirit" of providing maximum flexibility, the Department could
determine that extensions could not be granted unless in the event
of a "horrible disaster". She requested broader authority be
granted to the Department.
10:19:56 AM
Senator Olson asked the witness' suggestion of alternative
language.
10:20:07 AM
Ms. Burke did not have a recommendation. She could not provide such
advice unless directed to do so by the North Slope Borough, as she
served as their legal counsel.
10:20:26 AM
Ms. Burke continued her testimony.
The bottom line I guess in terms of the Borough's position on
this legislation is that it's largely unnecessary. It seems to
be that there are two aspects, or two concerns, that prompted
the introduction of this legislation. One is the treatment of
- how much money goes into the Permanent Fund after the
municipal grants have been awarded and the needs are met. The
second has to do with how stringent a look you're going to
take at - or how much justification do the municipalities have
to provide to demonstrate impact from NPR-A development.
10:21:56 AM
Ms. Burke:
There's nothing in current law that prevents the finance
committees from forming subcommittees to look at these grants.
Nothing whatsoever. I don't think it's necessary to
institutionalize subcommittee review by statute. I think
that's something you can do right now. As with any other
appropriation, you can spend as much time looking at a
particular program as you think is necessary and you have the
time to spend on it.
I think it's wildly desirable to have people visit - members
of the finance committee or anybody in the legislature - visit
the villages in the North Slope Borough. The more knowledge
you all have, and the more familiarity you have with
particular programs and problems throughout the state, the
better decision you're going to make. There's nothing that
prevents you from doing that now.
On behalf of the North Slope Borough, I would extend an
invitation to each one of you to do that tomorrow, or if you
don't have time tomorrow, when the legislature adjourns and
the weather's nicer in the villages.
So I don't think that's really necessary.
10:23:26 AM
Ms. Burke:
In the area of impacts, I guess I would suggest to you that
the mere introduction last year of Senate Bill 171 seems
certainly to have gotten the Department's attention on the
area of impact and the need to do a better job of tying
perceived impacts to NPR-A development.
10:23:59 AM
Ms. Burke next referenced the "new improved" application packet for
NPR-A impact grants [copy on file].
Take a look if you would at the bottom of page four, where in
bold letters the Department is telling the municipalities in
no uncertain terms that they must clearly identify the NPR-A
development activities or anticipated activities. They've got
to identify the impacts and they've got to tie the impacts to
the existing or anticipated development and then demonstrate
how the proposed project will alleviate those impacts.
10:24:37 AM
Ms. Burke:
If you move along to page eight, toward the bottom of the page
there's a note in boldface type. The boldface type itself
says, "applications must not only identify NPR-A oil and gas
development activities and resulting impacts, but also show
how those are attributable to development within the NPR-A and
how the project will alleviate.
10:25:09 AM
Senator Bunde interjected that he understood the requirement is
stated in the application packet, but that he also knows that
"correlation doesn't relate to cause many times." After this
requirement is met, another party determines whether the argument
is accurate or not accurate. He asked who makes the determination
whether the impact was cause and not simply correlation.
10:25:53 AM
Ms. Burke replied that existing statute provides that the
Department undertakes the review of the applications and issues a
determination.
10:26:06 AM
Senator Bunde assumed the Department would testify to the process
it employs.
10:26:28 AM
Senator Bunde understood the "general philosophy" of awarding
grants is through the appropriation process. The legislature has
chosen at times to not allocate funding to certain other grants it
deemed inappropriate. He asked if under the provisions of this
bill, the legislature would have the ability to deny funding to
certain projects subject to court challenge.
10:27:16 AM
Co-Chair Wilken clarified the question as whether the legislature
could find that no application submitted in a fiscal year met the
impact criterion and subsequently not fund any grants. He answered
this could be possible, provided the legislature followed the
federal and State laws governing impact.
10:27:57 AM
Senator Bunde surmised that such determinations would be subjective
to the make-up of each finance committee.
10:28:16 AM
Ms. Burke commented that a project could be considered relevant to
an impact by one person but could be considered by another as a
"boondoggle". The decisions would always be subjective. Legislative
judgment could not be legislated.
10:29:03 AM
Ms. Burke continued her discussion on the application packet
directing attention to boldface type on page 8.
The note deals with continuation of existing projects and has
a requirement to make sure that the ongoing grants, or grants
that are to continue a project that has already gone on, is
really necessary and the expected outcomes … and they
recommend that the previous reports for the previous grant get
attached to this grant application so they can see the project
as a whole. I view that as another means of providing
oversight in making sure that the Department thoroughly
understands the nature of these projects as they're going
through their evaluation process.
10:30:23 AM
Ms. Burke:
Finally, I'd like to direct your attention to page 11, which
is the scoring section. To be honest with you I don't know
what the point system is today for impacts, but I think that
it's awfully good that at least for purposes of this new round
of grants, and I assume in the future, that current and
potential impacts are worth 45 points among the total of 100.
That's pretty significant. That's almost half of the entire
scoring is going to the issue of impact.
I guess what I would say is in terms of the impact issue, I
don't really think you need legislation at all. I would urge
you to - the Department - you obviously got their attention
here and I guess introduction and discussion was perhaps
enough on this issue. I would urge you to give the Department
a chance to see if this new more stringent, if you will,
attitude toward these grant applications is going to take care
of the problems on the impacts that some of you have
perceived.
10:31:44 AM
Co-Chair Wilken was conflicted in that he did not want to "look
backwards", but recognized the necessity to do so to understand the
issue. The existing scoring system is the "crux of the problem" and
language contained in boldface type in the application packet is
inadequate in addressing funding that is appropriated for purposes
other than the Permanent Fund.
10:32:37 AM
Co-Chair Wilken informed that the current score of 45 points is
given on the impact of a proposed project out of a total of 100
points rating the application. This amount had been lowered in the
past to represent a lesser ratio of the total score, although it
has been returned to the ratio assigned when the program was
established. He contended that the relationship to a NPR-A impact
must account for 100 percent of the basis determining whether a
project qualifies for grant funding. The legislature, to date, has
not provided direction to the Department to do this. The current
system would be difficult to amend and therefore requires
rewriting.
10:34:40 AM
Ms. Burke pointed out that existing State and federal law
stipulates that if a project does not address an impact, it is not
entitled to a priority.
10:35:11 AM
Senator Olson spoke to the membership of the proposed committee,
noting that most members would be legislators and that most
legislators do not represent the election district encompassing the
NPR-A region. He questioned how the committee would be any more
effective or accountable than the Department.
10:35:58 AM
Co-Chair Wilken gave examples of grants awarded in the past for
projects that he determined to have no relation to NPR-A
development impacts. These included $500,000 for the renovation of
the City of Barrow assembly chambers, funding for the disposal of
junked vehicles, and $500,000 to construct a retractable boat ramp
at Wainwright. If he served on the proposed committee, his vote
would be one of six. Other members of the committee could argue
differently. He admitted this would involve a cumbersome and
expensive process but would be necessary. He was unaware of any
other options, but stressed that the current system in which three
bureaucrats make determinations without accountability is
unacceptable.
10:37:28 AM
Senator Olson thanked Co-Chair Wilken for his response.
10:37:40 AM
Senator Olson asked Ms. Burke the extent of her concern regarding
the constitutionality of a legislative body having oversight of an
executive branch entity.
10:38:27 AM
Ms. Burke had not fully reviewed the matter and was unclear how the
process would be implemented. She was concerned about the loss of
grant oversight by the Department as a result of the change to an
appropriation model.
10:39:15 AM
Co-Chair Wilken relayed that the Division of Legal and Research
Services in drafting this bill informed him that the term
"appropriation" better reflected the federal intent. He would
review the matter further.
Co-Chair Wilken indicated he would also further investigate Senator
Stedman's suggestion to incorporate shortages to the Permanent Fund
of previous years in the calculation for percentage to be deposited
to the Fund in the following year.
AT EASE 10:39:50 AM / 10:43:37 AM
MIKE BLACK, Director, Division of Community Advocacy, Department of
Commerce, Community and Economic Development, testified that the
Division, which is responsible for administering the NPR-A grants,
"welcomes" the Committee's involvement and interest in this
program. This legislation would provide the Department greater
guidance. This bill identifies the key issue of determining NPR-A
impact and whether a proposed project would address that impact.
The University of Alaska and industries are involved in studying
this.
Mr. Black informed of the current system in which a review
committee comprised of local government specialists, grant
administrators and similar professionals, utilizes the guidance
provided to it to evaluate the grant applications.
10:46:32 AM
Mr. Black stated that the criteria governing the program have been
modified over past years. The point system was changed as result of
the introduction of this legislation.
10:47:12 AM
Mr. Black continued that once the grants are awarded, the
Department attempts to assist the municipalities in ensuring that
the projects are undertaken appropriately. Efforts are also made to
ensure that the grants provide a positive response to the
identified impact.
10:47:51 AM
Mr. Black admitted that problems could arise and sometimes do. It
has been necessary for the Department to occasionally intervene to
make sure the projects are completed appropriately and that the
funding is expended according to the intention expressed in the
grant application. The Department has had to suspend some grants.
10:48:41 AM
Mr. Black pointed out that the establishment of a legislative
committee could result in duplication or conflict with the
Department's evaluation process. He suggested limiting or
eliminating the Department's evaluation duties and stipulating that
the Department simply presents the completed applications.
10:49:48 AM
Mr. Black cautioned that a lapse date 12 months after the
appropriation would be unreasonable due to time required to receive
construction materials, limited construction season and weather
complications.
Mr. Black furthered that the audit provisions should also be
reviewed. Currently, the Department maintains detailed files for
each grant that include financial records. Auditing these records
would be more cost effective than contracting a Certified Public
Accountant (CPA) to travel to the communities and investigate the
municipal records. Audits are expensive.
10:51:02 AM
Mr. Black noted that currently, if a grant exceeds $300,000, the
audit is not limited to the grant expenditures. Rather the
financial operations of the entire municipality are audited.
10:51:34 AM
Mr. Black commented to the increased costs if an additional audit
of each grant were required. He suggested that the Department's
records on the grants could be sufficient.
10:52:03 AM
Mr. Black summarized that managing the grants would become
difficult under the provisions of the committee substitute.
10:52:25 AM
Senator Bunde reiterated his earlier observation that "correlation
does not mean causation." He again asked how the determination is
made as to whether a proposed project would be legitimate in
addressing NPR-A impacts.
10:53:22 AM
Mr. Black replied that an initial threshold review is conducted,
focused more on form than on impact. The three-member grant
committee then evaluates the impact utilizing the application as
well as independent information. Approximately two weeks is
available from receipt of the applications for this process. The
process is subjective and many textbooks have been written on the
issue of determining impacts.
10:54:47 AM
Senator Bunde asked if committee decisions require a majority or
unanimous consensus.
10:54:59 AM
Mr. Black responded that each member rates the applications and
final decisions are based on the combination of those ratings. If
one member assigns a low impact rating for a proposed project, that
determination could be countered by another member's higher rating.
The intent is to rely on the wisdom of the group. No one member has
the ability to deny an application, although if a member assigns a
zero rating, the overall score of the project would be jeopardized.
10:56:00 AM
Mr. Black expected the proposed legislative committee would find
that the dynamics of the committee in discussing the applications
would cause reflection on points possibly not considered during the
individual review.
10:56:41 AM
Senator Bunde asked the likelihood that the members of the grant
committee as currently operating would have visited the affected
communities.
10:57:05 AM
Mr. Black answered that the membership in the previous two years
has included a local government specialist who is assigned to the
North Slope region and therefore would have visited the
communities.
10:57:27 AM
Senator Bunde asked the cutoff score out of the total 100 points,
in which an application would be approved or declined.
10:57:47 AM
Mr. Black replied that a specified score is not applied. The cutoff
point is established when the committee deems a project to have the
highest impact and other criteria is met. If the committee finds a
proposed project has received a high score and is grouped in a
certain order with other applications, the grant is awarded.
10:58:41 AM
Senator Bunde opined this decision is subjective.
10:58:52 AM
Mr. Black affirmed.
10:58:57 AM
Senator Dyson appreciated the Senate Finance Committee members'
restraint to the temptation to "demagogue the issue" and he
appreciated Co-Chair Wilken's intent to look forward rather than
back. Senator Dyson intended to review past actions to identify
lessons that could be learned. He asked the criteria imposed in the
decision on the renovation of the City of Bethel assembly chambers,
the car dump and other aforementioned projects. He wanted to know
how these projects were deemed appropriate or whether the normal
criterion was disregarded. He asked where the errors were made, or
whether the decisions were valid.
11:00:55 AM
Senator Dyson further questioned whether marginal projects were
approved because of the amount of funds available and because of a
perceived need to expend the funds for grants.
11:01:27 AM
Co-Chair Green requested the witness respond to Senator Dyson's
questions at the next hearing on this bill.
11:01:37 AM
Co-Chair Wilken clarified that this legislation would not require
an independent audit of grants of less than $300,000. Rather an
unaudited review is specified. A review entails significantly less
effort for an accountant.
11:01:57 AM
Co-Chair Wilken then made the following announcement and
accompanying statement.
LB&A [Legislative Budget and Audit Committee] had a report in
January 12th about a project that Pioneer Natural Resources is
going to build called the Oooruguk. It's 26 miles northeast of
Nuiqsut. It's [going to] be 60 production wells on a six acre
island. It has an underground pipeline. It's going to produce
20,000 barrels a day. It's a big project - multi-multi million
dollars.
To get their permits and to get to the point they are today
they had to do 27 different studies and here's the name of
them: everything from avian avoidance, cultural resources, ice
encroachment, bathometric, hydrology, wetland, wildlife
habitat, traditional knowledge, endangered species assessment
- 27 distinct different studies.
I asked the representative from Pioneer, "Sir, did any of
those studies show an impact on the Village of Nuiqsut?" and
he said no.
Those are the kinds of things I think we need to be aware of.
There may or may not be impact and if there is, we need to
quantify it and make sure that the people of Alaska know that
we're vetting those requests so that the monies that are given
to this particular area of the state are done so properly and
done so with their confidence that they are getting their due
out of NPR-A.
That's what this bill is about. It's about impact.
AT EASE 11:03:33 AM / 11:04:22 AM
Co-Chair Green directed that further questions and concerns be
submitted to Co-Chair Wilken.
11:04:36 AM
Senator Hoffman commented to Co-Chair Wilken's conversation with
the representative of Pioneer Natural Resources. The parties
responsible for conducting the studies have not done their job
correctly if they deem that the resource development activities
would have no impact. Such activities have a cultural impact.
11:05:04 AM
Co-Chair Wilken agreed emphasizing this as the need for six months
to review the applications.
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