Legislature(2015 - 2016)BUTROVICH 205

04/05/2016 03:30 PM RESOURCES

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Audio Topic
03:30:51 PM Start
03:31:47 PM Confirmation Hearing
03:45:00 PM SB130
03:48:23 PM Continuation of Dor Overview of Alaska Oil and Gas Tax Reform
04:32:36 PM SB129
05:17:34 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Consideration of Governor's Appointee: TELECONFERENCED
Alaska Gasline Corporation Board of Directors:
Joey Merrick
-- Public Testimony on Appointee --
+ HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
<Pending Referral> -- Invited Testimony Only --
+= SB 130 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
*+ SB 129 AIDEA: FUNDS; LOANS; PROGRAMS; DIVIDEND TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
           SB 130-TAX CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
                [Contains discussion of HB 247.]                                                                              
                                                                                                                                
3:45:00 PM                                                                                                                    
CHAIR GIESSEL announced  consideration of SB 130  and invited Mr.                                                               
Alper to  continue the Department of  Revenue's presentation that                                                               
will begin on slide 31.                                                                                                         
                                                                                                                                
^Continuation of DOR overview of Alaska Oil and Gas Tax Reform                                                                  
RANDALL  HOFFBECK,  Commissioner,  Department of  Revenue  (DOR),                                                               
Juneau,   Alaska,  said   Director   Alper   will  continue   the                                                               
presentation, but he was available for questions on SB 130.                                                                     
                                                                                                                                
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
Juneau, Alaska, said  slide 31 has the title  "Impact on Specific                                                               
Industry Sectors." Slide 32 points  out how particular sectors of                                                               
the  oil  and gas  economy  would  be  impacted by  the  specific                                                               
provisions of  the bill  at different price  points. He  said the                                                               
provisions  of  SB  130  do  not impact  the  North  Slope  major                                                               
producer at  higher prices (generally above  $85/barrel where the                                                               
minimum tax kicks in). Below that  level is where the minimum tax                                                               
tends to  take precedence over the  35 percent net tax.  The bill                                                               
attempts to raise the minimum tax from 4 percent to 5 percent.                                                                  
                                                                                                                                
In a period  of very low prices such as  now, and especially into                                                               
a second consecutive year, the  issue of using net operating loss                                                               
(NOL)  credits to  reduce payments  below the  minimum tax  floor                                                               
comes into  play, and SB  130 would prevent that  from happening.                                                               
It would cause those additional  NOL credits to be rolled forward                                                               
and be  added to  the stack of  NOL credits for  use in  a future                                                               
year after the price has recovered.                                                                                             
                                                                                                                                
CHAIR  GIESSEL  asked at  what  price  the 12.5  percent  royalty                                                               
begins to spiral upward to over 100 percent.                                                                                    
                                                                                                                                
MR.  ALPER answered  that happens  when the  profits begin  to be                                                               
very constrained at anywhere less than $50/barrel.                                                                              
                                                                                                                                
3:48:23 PM                                                                                                                    
SENATOR STEDMAN asked  what taking the floor from 4  to 5 percent                                                               
means in dollars and what the trigger  point is to get out of it.                                                               
At  some point,  he also  wanted a  discussion on  the per-barrel                                                               
sliding credit  when the floor  gets triggered, which  the Senate                                                               
hadn't heard, because it was put  in by the House. He also wanted                                                               
to know  if they had NOL  credit figures for FY15/16/17  and what                                                               
the expectations are for them getting paid off.                                                                                 
                                                                                                                                
MR.  ALPER  explained  that  he would  try  to  "unpack"  Senator                                                               
Stedman's  questions.  First off,  he  would  deliver details  of                                                               
raising the  floor from 4 to  5 percent and the  trigger point in                                                               
his  follow-up  presentation  tomorrow,  but  under  the  current                                                               
system, $78 is the cross-over  point of existing the minimum tax.                                                               
Because of  the way the cost  and tax curves work  the higher the                                                               
minimum tax  gets, the  higher the cross-over  gets. It's  in the                                                               
high $70s at  the 4 percent level  and it will be in  the $80s at                                                               
the 5 percent level.                                                                                                            
                                                                                                                                
The fiscal note to the original  bill did not delve into stacking                                                               
up  of net  operating  loss (NOL)  credits,  because the  numbers                                                               
didn't  became apparent  until the  spring  revenue forecast.  An                                                               
updated  fiscal note  currently attached  to the  House companion                                                               
bill, CSHB  247, has numbers for  both the original bill  and the                                                               
amended bill. Hardening the floor  raises revenue by $150 to $200                                                               
million a year at these prices, but  the NOL that is forced to be                                                               
carried over  due to the floor  hardening and raising goes  up to                                                               
about  $700 million  in  a  couple of  years  and  to about  $1.5                                                               
billion by 2019/20.                                                                                                             
                                                                                                                                
SENATOR STEDMAN  followed up  saying a verbal  answer is  kind of                                                               
okay, but  it would be  beneficial for  the committee to  see the                                                               
current NOL operating  and capital numbers for  FY16/17 on paper.                                                               
Lawmakers,  as  policy  makers, need  to  clearly  recognize  the                                                               
magnitude of what they are dealing  with. He also needs help with                                                               
how much  of the non-deductible  capital costs are  applicable to                                                               
the carry-forward credits, and a  clear understanding of how Cook                                                               
Inlet and  Middle Earth  are being  treated differently  than the                                                               
North Slope.                                                                                                                    
                                                                                                                                
MR. ALPER  said Mr. Stickle was  back in the office  taking notes                                                               
as they speak, and  the stacking up of the NOL  credits is in the                                                               
most current  fiscal note, which  is on BASIS. He  clarified when                                                               
he says $700  million or $1.5 billion, that's in  credits - after                                                               
the  multiplication  of  whatever   the  much  larger  loss  was,                                                               
multiplying times the credit percentage.                                                                                        
                                                                                                                                
3:54:19 PM                                                                                                                    
Slide  33 shows  that the  North Slope  new or  smaller producers                                                               
that have  built the newer  fields will  see no change  at higher                                                               
oil prices,  but a more  substantial impact below the  85 percent                                                               
range.  Because  of the  nature  of  the  GVR,  the new  oil  tax                                                               
provisions of SB  21, their per-barrel credit is  allowed to drop                                                               
taxes  to  zero   (the  production  from  those   fields  is  not                                                               
susceptible to the  minimum tax).  SB 130 attempts  to harden the                                                               
floor by making new oil susceptible  to the minimum tax, as well.                                                               
So, effectively  there is an increase  in some cases from  a zero                                                               
to  a 5  percent gross  tax that  would substantially  impact the                                                               
smaller  producers more  than the  major producers.  Likewise, if                                                               
the  company is  an  operating loss,  the  gross value  reduction                                                               
(GVR) that is used  for the benefit of new oil  cannot be used to                                                               
increase the size of an NOL. The  intent is that the NOL would be                                                               
limited to  35 percent of the  actual cash flow loss  and not the                                                               
more synthetic calculated loss that includes the GVR.                                                                           
                                                                                                                                
SENATOR STEDMAN asked  if a company has a $27  million credit for                                                               
FY17, if any  interest accrues. How is it treated  once it exists                                                               
and is not turned into cash?                                                                                                    
                                                                                                                                
MR.  ALPER answered  that he  wasn't sure  what provision  he was                                                               
referring  to, but  the floor  hardening and  the requirement  of                                                               
having an  operating loss carry  forward for the  major producers                                                               
is very much  deferring of an obligation (because  it would still                                                               
need to  be issued;  the deductions  would simply  be taken  in a                                                               
future  year), but  the third  bullet on  slide 33  would be  the                                                               
elimination of  a benefit  (it would not  roll forward).  If that                                                               
number is  $27 million, it  means that the companies  in question                                                               
would have  an operating  loss credit that  would be  $27 million                                                               
less than it  would be if they  were able to use the  GVR in that                                                               
calculation.                                                                                                                    
                                                                                                                                
3:57:10 PM                                                                                                                    
Slide 34  talks about the impacts  to a new project  developer on                                                               
the North  Slope building its  first oil field but  not currently                                                               
producing oil and  gas. The NOL credit is baked  in at 35 percent                                                               
as  a provision  of SB  21. That  is not  changed. The  credit is                                                               
earned, and  the question then becomes  how to cash it  out. Here                                                               
there is a little fork in the  road. If it's a large company with                                                               
global revenues  in excess of  $10 billion, the state  won't cash                                                               
out that credit. They can sell  it to another company or they can                                                               
hold it  until they have  a liability. For the  smaller companies                                                               
with revenues  below $10  billion, an annual  cap of  $25 million                                                               
per company  that would  be paid  out in a  single year  is being                                                               
proposed.  Any  credits  in  excess   of  that  number  would  be                                                               
effectively rolled forward  to a future year  and continue adding                                                               
to the stack of unpaid credits.                                                                                                 
                                                                                                                                
SENATOR STEDMAN said  he assumed they would see  some modeling on                                                               
credits under  both the  current statute  and under  the proposed                                                               
changes,  so they  can visualize  how the  treasury was  going to                                                               
deal with the NOLs two or three years out.                                                                                      
                                                                                                                                
MR. ALPER said he is talking  about two different stacks of NOLs:                                                               
the ones that  are not refundable, because they are  owned by the                                                               
major producers,  a number that  gets quite high, and  the earned                                                               
credits  that  are cashable,  but  capped  annually, stacking  up                                                               
alongside them.  He would bring  a slide tomorrow that  would put                                                               
some  numbers on  it. He  explained that  the fiscal  note has  a                                                               
negative number in  savings in some years. That is  the result of                                                               
credits being  earned in one year  and the state saving  money by                                                               
not cashing  them out  since cashable credits  are capped  at $25                                                               
million/year,  roll  forward to  be  paid  out in  another  year.                                                               
However, there  are circumstances in  years three or  four, based                                                               
on  available information,  when the  state is  cashing out  more                                                               
credits  than  it otherwise  would  have  under the  status  quo,                                                               
because some  of the older ones  that rolled forward stack  up on                                                               
top of each other.                                                                                                              
                                                                                                                                
SENATOR STEDMAN  rephrased his previous question;  when he talked                                                               
about the  creation of NOL  carry forwards, he was  talking about                                                               
companies  with less  than $10  billion in  one category  and the                                                               
others in  another category, but  the Revenue Sources  Book lumps                                                               
them all together.                                                                                                              
                                                                                                                                
MR. ALPER said he will provide  those numbers to him, and the Tax                                                               
Division would help get him whatever he is looking for.                                                                         
                                                                                                                                
4:02:13 PM                                                                                                                    
He  explained  that  in  Cook  Inlet,  (slide  35)  the  existing                                                               
producer who  is selling oil  and gas generally to  the Anchorage                                                               
bowl and  the Southcentral utility  market is paying low  to zero                                                               
taxes due to the tax caps that  have been in place since 2006 and                                                               
will  be  there  through  2021.  Those  companies  are  currently                                                               
eligible for repurchase  of their QCE and WLE credits  in the 20-                                                               
40 percent range. A typical project  is around 30 percent, so the                                                               
state is effectively paying 30 percent of that spending.                                                                        
                                                                                                                                
SB 130  repeals those  specific credits.  In a  broad sense  if a                                                               
company is  not in  an operating  loss situation,  it's perfectly                                                               
reasonable that they  pay zero tax, but refunding  the credits to                                                               
the company that is paying zero  tax while earning a profit seems                                                               
a little bit  unnecessary, or possibly even  excessive, given the                                                               
state's current fiscal  situation. They are not  looking to touch                                                               
upon the tax  caps themselves, which remain on  the books through                                                               
the end of 2021.                                                                                                                
                                                                                                                                
4:03:46 PM                                                                                                                    
Slide  36  captures  the  new Cook  Inlet  field  developer  that                                                               
currently gets  a 25 percent  NOL credit that gets  stacked along                                                               
with what he  described for the producers in  the previous slide.                                                               
Those  two credits  taken  together  tend to  mean  the state  is                                                               
providing reimbursement in the neighborhood  of 50-60 percent for                                                               
ongoing  work in  the Cook  Inlet right  now. By  repealing those                                                               
capital and  well credits,  the intent of  the legislation  is to                                                               
reduce the state's level of ongoing support to 25 percent.                                                                      
                                                                                                                                
MR. ALPER  explained that  the 50  percent level  seems excessive                                                               
given  the  fiscal realities  and  the  need to  prioritize.  The                                                               
choice  was made  to  prioritize the  operating  loss credit  and                                                               
continue  the support  at  35  percent. Of  that  25 percent  NOL                                                               
credit, the  same limitations on  repurchase kick in as  those on                                                               
the previous  slide.  The  larger companies, should that  kind of                                                               
multi-national be operating  in Cook Inlet, would not  be able to                                                               
cash  those  certificates  and the  smaller  companies  would  be                                                               
limited by  the $25 million  annual cap. Everything in  excess of                                                               
that gets carried forward.                                                                                                      
                                                                                                                                
4:05:17 PM                                                                                                                    
Slide  37 covered  the Interior/Frontier  area, or  Middle Earth,                                                               
that is  getting 65 percent  credits for exploration.  That means                                                               
the 40 percent exploration credit  under most circumstances and a                                                               
25 percent NOL.  In development they are in the  same paradigm as                                                               
the  Cook Inlet  folks:  the  25 percent  NOL  plus the  weighted                                                               
average  of  the  capital  and well  credits.  By  repealing  the                                                               
capital  credits the  developer, once  they are  proven and  have                                                               
found something,  fall under  the same  25 percent  category that                                                               
the Cook Inlet  developer does. However, because there  is a need                                                               
to find  that resource in the  first place and because  there has                                                               
been a previous legislative decision  made to encourage people to                                                               
find and  explore for  oil and  gas in  the Interior  basins, the                                                               
exploration credits  have been previously extended  through 2022.                                                               
That is not  being touched in the legislation  before them, which                                                               
means the state will continue  to support exploration work at the                                                               
65 percent level in Nenana and Glennallen.                                                                                      
                                                                                                                                
4:06:25 PM                                                                                                                    
SENATOR COGHILL said these credits  have been pretty much dormant                                                               
and the  expectation is the  other credits that apply  within the                                                               
Cook Inlet have been more valuable.                                                                                             
                                                                                                                                
MR. ALPER  said these credits are  the ones that have  been used.                                                               
The  dormant ones  are  the  super credits  (80  percent for  the                                                               
Interior and  75 percent for  seismic) that were created  in 2012                                                               
and those  are scheduled for  sunset. Although one  explorer, the                                                               
Ahtna Corporation, has talked about an extension.                                                                               
                                                                                                                                
SENATOR STEDMAN asked what other  basins are doing in response to                                                               
the lower prices  and what kind of credits or  fiscal health they                                                               
have extended  to the  industry over the  last several  years. He                                                               
also wanted some comparative work done on Texas or North Dakota.                                                                
                                                                                                                                
CHAIR  GIESSEL replied  that enalytica  had responded  to similar                                                               
questions in other  committees and she would ask  them to provide                                                               
that information to this committee.                                                                                             
                                                                                                                                
SENATOR COSTELLO wanted to know  the driving principles behind SB                                                               
130.                                                                                                                            
                                                                                                                                
COMMISSIONER HOFFBECK  explained that they looked  at the credits                                                               
in three categories: ones that  weren't used, ones that were used                                                               
differently than  intended, and  ones that  had worked  well. The                                                               
ones  that didn't  work the  way they  were intended  were either                                                               
credits that  weren't used or when  the focus of the  use was not                                                               
where it was intended. A prime  example is some of the Cook Inlet                                                               
Recovery Act credits that were put  in place to try and deal with                                                               
energy security in Southcentral  Alaska, but were equally applied                                                               
to  oil  exploration  and development.  Everything  was  done  to                                                               
preserve the  Net Operating  Loss Credit, but  with some  caps on                                                               
it. There  are no  taxes on  oil in  Cook Inlet  and there  is no                                                               
energy security issue there now, either.                                                                                        
                                                                                                                                
SENATOR  COSTELLO asked  if  the  administration's other  revenue                                                               
generating  bills   have  an  overall  driving   principle.  Were                                                               
decisions made based on modeling that was done first?                                                                           
                                                                                                                                
COMMISSIONER  HOFFBECK answered  that  the  entire reason  behind                                                               
these bills is revenues and being able to afford the credits.                                                                   
                                                                                                                                
4:11:27 PM                                                                                                                    
SENATOR WIELECHOWSKI  said the real  behavior they have  tried to                                                               
incentivize is  gas exploration in  Cook Inlet, the  Interior and                                                               
the frontier  areas to have  gas for local communities,  but what                                                               
seems to be  happening is that a  lot of money is  being used for                                                               
oil exploration  and development and  asked if it is  possible to                                                               
develop a system that provides incentives for gas only?                                                                         
                                                                                                                                
MR. ALPER answered  it's doable. They started looking  at it this                                                               
year when the  question started to be asked about  the oil versus                                                               
gas  split. The  department  looked through  historic Cook  Inlet                                                               
credits and  came up with roughly  a two-thirds/one-third metric.                                                               
Sometimes it's a  question of the bill's construction;  it has to                                                               
be  worded  in a  way  that  focuses on  gas.  That  is when  the                                                               
drafters get nervous,  because there is a tendency  "to not ring-                                                               
fence."  It's similar  to  cost allocation  issues  on the  North                                                               
Slope and why the gross value  reduction is structured the way it                                                               
is  as  part  of  gross  rather   than  part  of  net.  The  most                                                               
technically complicated  maneuver is how  to divide up  the lease                                                               
expenditures.  In some  ways, it  is a  more solvable  problem in                                                               
Cook  Inlet because  the taxes  are already  broken out  by field                                                               
(it's a  multiplier by field),  more like the ELF  was structured                                                               
on the  North Slope in the  past. It's a challenge,  but it's not                                                               
impossible, he said.                                                                                                            
                                                                                                                                
SENATOR  WIELECHOWSKI asked  for rough  numbers on  how much  the                                                               
state  would save  if they  would allow  the continuation  of gas                                                               
credits but not oil credits in Cook Inlet.                                                                                      
                                                                                                                                
MR. ALPER answered  that the overall savings would  be about one-                                                               
third of  that amount  because about two-thirds  of the  money is                                                               
currently  supporting gas.  That changes  from year  to year  and                                                               
scenario to scenario.                                                                                                           
                                                                                                                                
COMMISSIONER  HOFFBECK said  this  has almost  become a  backward                                                               
looking  analysis  of the  credits,  because  going forward  when                                                               
people look for gas, sometimes they  find oil and vice versa, and                                                               
generally they  find them  together. So, there  would have  to be                                                               
some kind of allocation of the credits based on the productions.                                                                
                                                                                                                                
4:14:21 PM                                                                                                                    
MR. ALPER said  slides 38 & 39  are a very high  level summary of                                                               
some  of  the  fiscal  note information  for  both  the  original                                                               
version  and  the  latest  modifications   based  on  the  spring                                                               
forecast.  So,  at  the  time   they  introduced  the  bill  they                                                               
estimated it to be about a  $500 million piece of legislation, at                                                               
least  in  its initial  year.  Of  that,  about $200  million  in                                                               
reductions comes  from the repeal  of certain provisions  as well                                                               
as the  elimination of "loopholes or  unforeseen circumstances in                                                               
statute." A second  $200 million comes from  deferred payments on                                                               
credits. The great  bulk of that was in the  $25 million caps and                                                               
similar provisions  that said companies  are going to  be earning                                                               
certificates  but the  state was  not going  to be  fully funding                                                               
them in  the first  year. A  couple of  other provisions  fall in                                                               
that  category.  Finally,  there  is additional  revenue  in  the                                                               
neighborhood  of about  $100  million  between strengthening  the                                                               
minimum  tax, which  was worth  about $50  million, and  then the                                                               
increase to 5 percent from 4  percent brings in about another $50                                                               
million.                                                                                                                        
                                                                                                                                
MR. ALPER said a little bit  of additional revenue comes from the                                                               
proposed  interest  rate  reform,  but  interestingly,  only  the                                                               
revenue  from  non-oil  and  gas taxes.  He  explained  that  the                                                               
interest rate statutes  are in the general  revenue statutes that                                                               
apply to all 24 taxes. If that  change is made and the state gets                                                               
a  little bit  more  interest money  from a  cigarette  tax or  a                                                               
corporate income  tax, that show up  in the fiscal note  going to                                                               
the General  Fund (GF), but the  oil and gas tax  assessments end                                                               
up going into  the Constitutional Budget Reserve,  so they aren't                                                               
in the fiscal note as going to the GF.                                                                                          
                                                                                                                                
MR.  ALPER said  the department  did a  much more  granular model                                                               
once they had  the spring forecast and prepared a  fiscal note in                                                               
a   table   format  more   comparable   to   what  the   previous                                                               
administration did  during the SB  21 hearings and this  model is                                                               
very  much a  work  in progress.  Based on  that  and the  latest                                                               
information   on  some   revised  company   spending  information                                                               
including in  Cook Inlet,  the actual  elimination part  was only                                                               
going to  eliminate about $50 million  a year at first,  but then                                                               
the  deferral went  up to  $550 million.  This is  from a  lot of                                                               
ongoing work in larger projects that  would get capped at the $25                                                               
million  level. That's  about $600  million in  immediate revenue                                                               
savings with some of that rolling into future years.                                                                            
                                                                                                                                
A big reason  for the jump in NOL credits  is that some companies                                                               
were  losing more  money than  they  thought they  were going  to                                                               
lose.  A second  big  reason, which  took them  a  little bit  by                                                               
surprise, was  that the  exploration numbers  for last  year were                                                               
far  larger  than  originally anticipated.  And  that  is  simply                                                               
because  of the  credit sunsetting.  If people  were planning  on                                                               
exploration  work in  the next  five or  10 years,  it was  worth                                                               
their while to front-load that work  and get it done now, because                                                               
on  the North  Slope, in  particular,  the state  has 85  percent                                                               
credit  support  for exploration  work.  Companies  leapt at  the                                                               
opportunity.                                                                                                                    
                                                                                                                                
Meanwhile, on the revenue side,  Mr. Alper said, hardening of the                                                               
floor would bring  in about $185 million, about  $50 million more                                                               
than thought,  mainly because  more of  the major  producers have                                                               
operating losses and will therefore  pay more money above that to                                                               
get to  the minimum  tax that the  department had  calculated six                                                               
months ago.                                                                                                                     
                                                                                                                                
4:18:10 PM                                                                                                                    
Now  the state  is  seeing  a bill  of  well  over $700  million,                                                               
although that  number drops off  dramatically in the  next couple                                                               
of years.  Part of that is  because of the inadequacies  of their                                                               
credit  forecasting. They  simply don't  know what  companies are                                                               
going to be  doing workwise two or three years  from now, because                                                               
the  companies themselves  don't  know. The  department uses  the                                                               
same  somewhat  conservative  methodology   that  goes  into  its                                                               
production forecast  based on what  companies tell them.  They go                                                               
out to  them twice a  year and ask what  wells they are  going to                                                               
drill and  what projects they  are going to  do and try  to build                                                               
that into  some sort of a  forecast both of spending  and revenue                                                               
production. It's  all tied  together in the  same data  set along                                                               
with the credit forecast.                                                                                                       
                                                                                                                                
4:18:38 PM                                                                                                                    
SENATOR MICCICHE joined the committee.                                                                                          
                                                                                                                                
MR. ALPER  said the bill  was written  with an effective  date of                                                               
July  1, 2016,  essentially next  fiscal year,  but honoring  all                                                               
existing credits  meant they would be  paid in full prior  to the                                                               
effective date,  and the department  wants to make sure  there is                                                               
adequate funding to  pay for those credits  before messing around                                                               
with any caps or changes.                                                                                                       
                                                                                                                                
He recapped  that there  is the $200  million through  the credit                                                               
veto  from the  previous session  when the  Governor limited  the                                                               
credit  repurchase  to  $500 million.  The  department's  revised                                                               
estimate for FY17  is $575 million in credits  ($575 million plus                                                               
the $200 million  carry over) that will be fully  paid before any                                                               
of the  provisions of the  bill kick  in. Anything earned  in the                                                               
first  half of  this calendar  year prior  to the  effective date                                                               
would also  come in under  the old system, and  therefore, enough                                                               
money is needed to pay those.                                                                                                   
                                                                                                                                
The bill contemplates a $1  billion transition fund in a one-time                                                               
appropriation to the Tax Credit  Fund. The number $926,575,000 is                                                               
in a  fund cap  fiscal note  attached to this  bill. There  is no                                                               
magic to  that number;  it is simply  the difference  between the                                                               
$73.4 million in the operating  budget and around $1 billion. The                                                               
expectation is, were  the bill fully implemented  as written, the                                                               
annual  cost   of  refundable  tax   credits  would  be   in  the                                                               
neighborhood of  $100 million  and could be  part of  the regular                                                               
appropriation process going forward.                                                                                            
                                                                                                                                
4:20:47 PM                                                                                                                    
SENATOR  STEDMAN asked  the difference  in  making the  effective                                                               
date of July  1, 2016, January 1, 2016 or  January 1, 2017, since                                                               
January 1, 2016, is extremely retroactive.                                                                                      
                                                                                                                                
COMMISSIONER  HOFFBECK responded  that the  thought process  on a                                                               
fairly  immediate  effective date  was  to  prevent a  flight  to                                                               
credits with a January 1, 2017  effective date. They have heard a                                                               
lot of testimony in the  last few committees about the importance                                                               
of the summer season particularly in  Cook Inlet, and the July 1,                                                               
2016  effective date  may have  been too  aggressive. Having  the                                                               
retroactive effective  date was not  seen as being useful  in the                                                               
process.                                                                                                                        
                                                                                                                                
MR. ALPER added  that he got some push back  from his staff based                                                               
on changing anything in other  than a calendar year. He explained                                                               
that for parts of the bill that  are referred to when a credit is                                                               
earned for  an activity (capital  credit, for example),  any date                                                               
on the  calendar is fine  as long as they  get the work  done and                                                               
can  effectively show  receipts. However,  those that  impact the                                                               
overall tax calculation  - changes to operating  loss credits and                                                               
that sort of  thing - is where there is  tremendous resistance to                                                               
anything other than a calendar  year based change, because of the                                                               
nature of  the production tax  filings. There have been  a couple                                                               
of  years  when  the  department   had  to  effectively  split  a                                                               
company's  tax returns  in  two  and do  them  both in  parallel,                                                               
because of a tax change in the middle of the calendar year.                                                                     
                                                                                                                                
SENATOR WIELECHOWSKI  asked if  the state  would be  honoring the                                                               
existing  estimated $625  million  in credits  to  be earned  and                                                               
payable in FY17.                                                                                                                
                                                                                                                                
COMMISSIONER HOFFBECK  answered that  those credits  were already                                                               
earned in CY15 and come due on July 1, 2016, which is FY17.                                                                     
                                                                                                                                
4:24:05 PM                                                                                                                    
MR. ALPER said  slide 44 shows how this fits  into the Governor's                                                               
overall fiscal  plan. He explained  that the  Governor introduced                                                               
10  bills at  the beginning  of this  session: 8  traditional tax                                                               
bills:  the  income  tax,  the   3  consumption  taxes  (tobacco,                                                               
alcohol, motor  fuel), 3  business taxes  (fish, mining,  and the                                                               
cruise ship  head tax), plus  the Permanent Fund  Protection Act,                                                               
and  the  Alaska  Industrial  Development  and  Export  Authority                                                               
(AIDEA) loan bill. The intent  of those bills taken together with                                                               
the budget  cuts were proposed to  balance the budget for  FY19 -                                                               
to transition  the state  from the structural  deficits it  is in                                                               
now  to  something where  it  can  consistently have  a  balanced                                                               
budget in place by two years  from now - based on projections, at                                                               
least,  at  the  time  last  fall when  they  were  putting  this                                                               
together. This broader package,  specifically this tax credit, is                                                               
looking at  some sort  of certainty.  Industry knows  the current                                                               
situation  is  unstable  and  they know  something  is  going  to                                                               
change. The  administration wants  to change it  and get  it over                                                               
with and let them have a little bit of certainty going forward.                                                                 
                                                                                                                                
Likewise, Mr. Alper said, the  governor's fiscal plan offers some                                                               
funding certainty  to the financing  community if there is  a big                                                               
delta between what  the state is offering in credits  and what it                                                               
will be able to repay. They  learned that last year with just the                                                               
line item  veto and it could  potentially get a lot  worse if the                                                               
situation  doesn't  get  better.   Meanwhile,  as  the  state  is                                                               
withdrawing some  support for  ongoing development,  they thought                                                               
this companion  AIDEA loan  bill (SB 129)  would be  an important                                                               
feature. It creates a fourth fund  at the AIDEA to concentrate on                                                               
oil and gas development loans.                                                                                                  
                                                                                                                                
MR. ALPER  said that  AIDEA has  given loans in  the oil  and gas                                                               
industry;  it  invests  throughout   Alaska's  economy.  But  the                                                               
Revolving Loan Fund  attempts to be a  diversified portfolio that                                                               
touches upon all  sectors of the economy. Oil and  gas loans tend                                                               
to be quite  large and a diversified portfolio  could very easily                                                               
become  unbalanced with  them. The  thought was  to create  a new                                                               
fourth fund  in addition to  the Revolving Loan Fund,  the Energy                                                               
Transmission  Fund, and  the  Arctic  Infrastructure Fund.  Quite                                                               
specifically,  development  loans  are for  proven  reserves  not                                                               
exploration. They  envision that the resource,  itself, the value                                                               
in the  ground, would  be part  of the  collateral that  could be                                                               
offered on those loans.                                                                                                         
                                                                                                                                
A fiscal note capitalizes the fund  with $200 million to make the                                                               
first loans. One of the features  in that legislation is that all                                                               
repayments could  be deferred for  several years, the  idea being                                                               
to make  a loan for  building an  oil field, for  instance, which                                                               
might take  five years. Once it  is in production, they  would be                                                               
able to start making payments, and  it's a revolving fund so that                                                               
money could  come back and be  used to make other  loans. That is                                                               
how the fiscal  plan ties together with  SB 130 as one  of the 10                                                               
pieces.                                                                                                                         
                                                                                                                                
4:27:53 PM                                                                                                                    
Meanwhile the  DOR must administer all  of this. It has  a fairly                                                               
complex and  comprehensive Tax Revenue Management  System that is                                                               
in  its  final  stages  of  development.  Its  portal  is  called                                                               
"Revenue Online" and it allows for  online filing. All of the tax                                                               
types are currently  functional within what is  called "TRMS." He                                                               
thanked  the  legislature,   particularly  Senator  Stedman,  who                                                               
chaired Senate  Finance at that  moment in 2011 when  $34 million                                                               
got  appropriated to  buy the  system. It  has been  very much  a                                                               
successful software megaproject for the State of Alaska.                                                                        
                                                                                                                                
So, talking to  the software developer about  the legislation and                                                               
the many changes before them, they  are estimating it will take a                                                               
little  over $1  million in  a one-time  cost -  for programming,                                                               
testing, and use  of staff. They don't  anticipate any additional                                                               
changes  to  administer  the program;  staffing  needs  will  not                                                               
change. A fairly robust amendment  process will start this summer                                                               
to  implement any  changes in  this legislation  as well  as some                                                               
other oil and  gas regulatory changes that have  been building up                                                               
over the last couple of years.                                                                                                  
                                                                                                                                
4:29:31 PM                                                                                                                    
Finally, he said, all their  presentations are out on BASIS where                                                               
staff has access to them.                                                                                                       
                                                                                                                                
4:30:27 PM                                                                                                                    
SENATOR STEDMAN remarked that the  Senate had never been asked to                                                               
look at  other committee presentations before,  particularly ones                                                               
in the House.                                                                                                                   
                                                                                                                                
MR.  ALPER  said he  would  provide  the presentations  to  Chair                                                               
Giessel  so  that they  could  be  put  online  as part  of  this                                                               
committee's record and be easy to find for everybody.                                                                           
                                                                                                                                
CHAIR GIESSEL,  finding no further  questions, said SB  130 would                                                               
be held in committee.                                                                                                           

Document Name Date/Time Subjects
AGDC Board Factsheet.pdf SRES 4/5/2016 3:30:00 PM
AGDC Board
AGDC-Resume-Joey Merrick.pdf SRES 4/5/2016 3:30:00 PM
AGDC Board
SB129 ver A.PDF SRES 4/5/2016 3:30:00 PM
SB 129
SB129 Transmittal Letter.pdf SRES 4/5/2016 3:30:00 PM
SB 129
SB129 Sectional Analysis.pdf SRES 4/5/2016 3:30:00 PM
SB 129
SB 129 Presentation to SRES 4.5.16.pdf SRES 4/5/2016 3:30:00 PM
SB 129
DOR Presentation to SRES-4-2-2016.pdf SRES 4/5/2016 3:30:00 PM
SB 130
SB129 Fiscal Note-DCCED-AIDEA-04-01-16.pdf SRES 4/5/2016 3:30:00 PM
SB 129