Legislature(2017 - 2018)BUTROVICH 205

02/21/2018 03:30 PM RESOURCES

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Audio Topic
03:30:17 PM Start
03:30:42 PM SB176
05:05:44 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
          SB 176-TAX CREDIT CERT. BOND CORP; ROYALTIES                                                                      
3:30:42 PM                                                                                                                    
CHAIR  GIESSEL announced  consideration of  SB 176,  sponsored by                                                               
the Administration  through the  Rules Committee, and  managed by                                                               
the Department  of Revenue (DOR).  She said Alaska's oil  and gas                                                               
tax  credit system,  which  included  cashable reimbursement  for                                                               
investments  was reformed  in 2016  and  again in  2017 with  the                                                               
passage of House Bill 247 and  House Bill 111 that ended the cash                                                               
reimbursement provisions.                                                                                                       
3:31:05 PM                                                                                                                    
SENATOR WIELECHOWSKI joined the committee.                                                                                      
CHAIR  GIESSEL   said  however,   the  state  still   has  unpaid                                                               
obligations.  In  response  to   those  funding  obligations  and                                                               
recognizing Alaska's  need to reduce  its reputation for  risk to                                                               
the  world's financial  sector, the  Department of  Revenue (DOR)                                                               
has  proposed  a  solution.  She  welcomed  Commissioner  Sheldon                                                               
Fisher and Ken Alper, Director, Tax Division, to the table.                                                                     
3:31:32 PM                                                                                                                    
SHELDON  FISHER,  Commissioner-designee, Department  of  Revenue,                                                               
Anchorage,  Alaska, introduced  himself  and said  he would  talk                                                               
about  the  proposal  in  SB  176 to  address  the  existing  and                                                               
outstanding oil and gas tax credits.                                                                                            
KEN  ALPER,  Director,  Tax   Division,  Department  of  Revenue,                                                               
Anchorage, Alaska, introduced himself.                                                                                          
COMMISSIONER  FISHER said  they would  first discuss  overarching                                                               
goals and objectives for this  proposal, go into the history, and                                                               
then go into the details and  provide a granular analysis. At the                                                               
end  Mr.  Alper would  provide  a  sectional analysis.  He  would                                                               
prefer questions to be asked as they come up.                                                                                   
COMMISSIONER FISHER  said when the  governor asked him to  be DOR                                                               
commissioner,  he identified  these tax  credits as  an issue  he                                                               
wanted  resolved.  It  has  formed   an  important  part  of  the                                                               
governor's economic stimulus package.                                                                                           
As many  know, the state has  lost about 9,200 jobs  between 2015                                                               
and 2017 and the oil and  gas industry is down almost 31 percent.                                                               
The  Institute of  Social  and Economic  Research  (ISER) at  the                                                               
University of  Alaska is expecting the  year-over-year losses for                                                               
2018  will  be  another  .7  percent.  They  did  not  view  this                                                               
reduction, which is  less than prior years,  indicates a recovery                                                               
in activity but rather that  the state's financial challenges are                                                               
starting  to  be  absorbed.  They  are  still  looking  for  some                                                               
He said  this proposal allows for  up to $600 million  or maybe a                                                               
little bit  more that could be  an economic stimulus for  the oil                                                               
and gas sector of the  economy. It also addresses the uncertainty                                                               
about  how   the  credits  will   be  funded  that   has  created                                                               
limitations in the small companies'  - the ones impacted by these                                                               
credits - ability  to raise capital and to continue  to invest in                                                               
the fields that they have discovered.                                                                                           
3:34:56 PM                                                                                                                    
COMMISSIONER FISHER said he didn't  know how many jobs this might                                                               
create but  he called their  attention to an Institute  of Social                                                               
and   Economic  Research   (ISER)  presentation   last  year   on                                                               
government  spending where  they  estimated that  for every  $100                                                               
million  of  government  spending  around 460  to  900  jobs  are                                                               
created.  When a  stimulus  is  put into  an  economy, the  whole                                                               
economy  is   stimulated  with   downstream  jobs   like  support                                                               
services,  retail   locations,  and  restaurants.  So,   a  large                                                               
overarching goal  of the  $600 million  is to  provide additional                                                               
stimulus into the economy.                                                                                                      
3:35:58 PM                                                                                                                    
He said SB  176 tries to balance a number  of competing interests                                                               
in addressing  the state's fiscal problem.  The governor proposes                                                               
a $477  million budget deficit  and his budget assumes  this bill                                                               
will pass. If it doesn't pass,  another $180 million will need to                                                               
be appropriated  to cover  the statutory  minimum. So,  this bill                                                               
actually  helps minimize  the deficit  in FY19.  Some argue  that                                                               
this money should be spent  on higher priorities, but their first                                                               
priority  is job  creation. And  because  this proposal  actually                                                               
preserves money, those  dollars can be spent  on other priorities                                                               
or to limit the amount of the deficit.                                                                                          
3:37:29 PM                                                                                                                    
SENATOR VON IMHOF  said a good chunk of this  money would pay off                                                               
bank debt and asked how that can create jobs.                                                                                   
COMMISSIONER FISHER  replied that she  was right, but one  of the                                                               
dimensions of  this bill is that  credit holders will be  able to                                                               
reduce  the  discount   rate  the  state  will   charge  them  by                                                               
committing to  reinvest in  Alaska. He  explained that  the state                                                               
has  learned  that right  now  the  capital markets  are  largely                                                               
frozen to  these companies,  because they  are not  performing on                                                               
their current obligations.  As this money comes  to the companies                                                               
and their  balance sheets  are cleaned up,  he is  confident they                                                               
would be able to access additional capital.                                                                                     
SENATOR VON IMHOF  said that would be the  two-step approach that                                                               
they  hope  will happen.  On  his  point  that the  deficit  will                                                               
increase by $180  million without this program, her  view is that                                                               
assumes  every entity  that has  an outstanding  oil and  gas tax                                                               
credit will  participate in  this program.  But what  if everyone                                                               
doesn't participate?                                                                                                            
3:39:43 PM                                                                                                                    
COMMISSIONER  FISHER replied  that today's  numbers are  based on                                                               
the  assumption that  essentially  everyone participates.  Within                                                               
the last week they shared  with the companies the DOR calculation                                                               
of their  credits and the  discount they would receive  under the                                                               
various options  under this program.  Every affected  party wants                                                               
to participate.                                                                                                                 
SENATOR  WIELECHOWSKI said  the  large overarching  goal of  this                                                               
bill is  to provide  stimulus into  the economy  and asked  if he                                                               
evaluated infusing $800  million into the economy  in a different                                                               
way,  like paying  everyone their  full  Permanent Fund  Dividend                                                               
(PFD) check.                                                                                                                    
COMMISSIONER  FISHER  answered  that   they  did  look  at  other                                                               
options,  and  the  Governor's  economic  stimulus  package  also                                                               
includes  a  capital  budget.  Although  he  wasn't  prepared  to                                                               
discuss  that  today, he  could  say  that  it was  for  deferred                                                               
maintenance with an associated fair amount of value.                                                                            
He hopes the committee is persuaded  that this is almost a unique                                                               
opportunity. The reason  is because while the state  is using its                                                               
bonding capacity to pay these  credits off, the discount that the                                                               
credit holders will  take on their credits will  pay the interest                                                               
on  that  debt.  So,  it's  almost  free  money  to  be  able  to                                                               
accelerate the  payment into the current  time-period because the                                                               
cost of borrowing will be borne  by the credit holders. He is not                                                               
aware of any  other option that has that mechanism  built into it                                                               
as a potential.                                                                                                                 
SENATOR WIELECHOWSKI said  then that he assumes  that they hadn't                                                               
done  any other  analysis of  the simulative  effect of  infusing                                                               
$800 million into the economy like paying a full PFD check.                                                                     
COMMISSIONER  FISHER   said  others  have  done   that,  and  the                                                               
department could bring  that forward. He was not  trying to avoid                                                               
that  question, but  it's a  separate  question. The  legislature                                                               
could  choose to  appropriate a  full dividend,  and it  wouldn't                                                               
either positively  or negatively  the merits  and wisdom  of this                                                               
program.  Because of  the  nature of  the  structure, the  credit                                                               
holders themselves are covering the  interest on the debt and the                                                               
described relationship  features are  present regardless  of what                                                               
the legislature decides to do with the PFD.                                                                                     
3:44:44 PM                                                                                                                    
CHAIR GIESSEL asked if the  unpaid credits are considered debt by                                                               
the rating agencies and if  they are negatively reflecting on the                                                               
state's standing.                                                                                                               
COMMISSIONER  FISHER  answered  they  are  part  of  the  payment                                                               
obligations that the state has  and that the credit rating agents                                                               
look at as they consider its debts in considering debt capacity.                                                                
SENATOR  WIELECHOWSKI  asked if  security  is  being offered  for                                                               
these bonds.                                                                                                                    
COMMISSIONER FISHER  answered that  these bonds would  be subject                                                               
to appropriation  bonds. So,  the creditability  of the  State of                                                               
Alaska would be offered. In  many respects, credit agencies would                                                               
think about  this as one  form of  an obligation for  a different                                                               
form  of  an obligation.  In  other  words, the  state's  balance                                                               
sheet, called  the Comprehensive Annual Financial  Report (CAFR),                                                               
already  includes  these credit  obligations  and  those will  be                                                               
converted into a bond instrument.                                                                                               
3:46:16 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if  this is  classified as  a revenue                                                               
bond or a general obligation (GO) bond.                                                                                         
COMMISSIONER  FISHER replied  it is  a "subject  to appropriation                                                               
SENATOR STEDMAN said that "subject  to appropriation" is why they                                                               
are sitting  here today,  because these  credits were  subject to                                                               
appropriations and not  an open-ended call on  the treasury. That                                                               
language   wasn't  in   the  statute.   However,  these   credits                                                               
accumulated  under  the  thinking   that  it  was  an  open-ended                                                               
SENATOR STEDMAN  said one could look  at the budget in  two ways.                                                               
One of  the ways  is that  governors have  to present  a balanced                                                               
budget. So, if the state is  running a deficit, they have to come                                                               
up with some  revenues to make it equal before  handing it to the                                                               
legislature. But the  deficit from owing the credits  is the same                                                               
today as it was a month ago,  and he doesn't see it as increasing                                                               
the deficit by doing something to decrease it.                                                                                  
3:48:25 PM                                                                                                                    
COMMISSIONER FISHER agreed on his  first point that these credits                                                               
were subject to  appropriation, but he differed  in thinking that                                                               
the state bears some responsibility  for creating the expectation                                                               
that the credits would be paid annually as they occurred.                                                                       
He said  the Governor  is trying  to create  a balance  between a                                                               
variety  of  competing interests  and  the  balance comes  in  by                                                               
saying to the credit holders if  you want to receive your cash up                                                               
front you have to be willing  to accept a discount. That discount                                                               
reflects the time/value of money  and actually helps them and the                                                               
state in a number of ways.                                                                                                      
3:49:31 PM                                                                                                                    
To Senator Stedman's  second point on the  deficit, the statutory                                                               
minimum published  in the Revenue  Sources Book for FY19  is $206                                                               
million. The payment  that is contemplated under  this scheme for                                                               
FY 19 would be $25 million. That  is why he says there would be a                                                               
$180 million  difference, and  his point  is that  the Governor's                                                               
budget would have to be increased  by $180 million to account for                                                               
COMMISSIONER FISHER said he hoped  to satisfy their concerns, but                                                               
central to this proposal is a  desire to produce a savings to the                                                               
state  budget in  the  near term  (shifting  payments into  other                                                               
periods) but also  an overall smoothing of  spending into periods                                                               
when the state expects to have more revenue to pay them.                                                                        
3:51:53 PM                                                                                                                    
COMMISSIONER  FISHER said  the second  thing they  are trying  to                                                               
balance is  support for  the small  producers, because  the major                                                               
producers  don't enjoy  a benefit  from  the tax  credits or  the                                                               
credit  program. One  of the  strategic interests  the state  had                                                               
when  it created  the  credits  in the  first  place  was to  try                                                               
inducing small producers  to come to Alaska, because  of the view                                                               
that  it would  increase competition,  particularly on  the North                                                               
Slope, and  generate more development  of the  state's resources.                                                               
As  a  result  of  changes  that have  happened,  many  of  these                                                               
companies are  in default and  unable to access capital.  Part of                                                               
what SB  176 will do  is clean that slate  and allow them  to get                                                               
back to work.                                                                                                                   
3:53:30 PM                                                                                                                    
Finally,  Commissioner  Fisher said,  this  is  an issue  of  the                                                               
state's  credibility: on  the right-hand  side of  slide 3  was a                                                               
cartoon figure of a moose holding  a wad of cash, a document that                                                               
was used  by the  state to  try to attract  producers to  come to                                                               
Alaska. The  sentences under it  said: "For the  entire lifecycle                                                               
of your project, the State of Alaska  is there for you. We do not                                                               
just talk  big, we follow through  big - with cash!  Here is what                                                               
you can expect  when you come to Alaska:" and  then it listed the                                                               
attributes of the program.                                                                                                      
People were trying to get the  word out, and statements like this                                                               
combined  with a  practice of  paying  the credits  on a  current                                                               
basis  induced people  - very  sophisticated  organizations -  to                                                               
invest in Alaska. He thinks as  a matter of ethics and honor that                                                               
these credits should be addressed.                                                                                              
COMMISSIONER FISHER  related that the administration  reached out                                                               
to a  number stakeholders in developing  this bill and one  was a                                                               
bank  that  has historically  lent  into  this space.  The  first                                                               
comment the individual made was that  the bank was not lending to                                                               
Alaska. When asked why, he  answered that the outstanding debt is                                                               
not  performing; any  new  debt  has to  go  to  the same  credit                                                               
committee that  knows it's not  performing. So, they  have closed                                                               
Alaska off to  future lending. They understand how  Alaska got to                                                               
this  point and  view  the  bill as  a  mature and  sophisticated                                                               
response to resolving the credit issue.                                                                                         
3:56:30 PM                                                                                                                    
SENATOR  WIELECHOWSKI  said  the commissioner  acknowledged  that                                                               
these are  very sophisticate investors  and he assumed  that they                                                               
read  the law  before investing  tens of  millions of  dollars or                                                               
more.  The  law  says  it's subject  to  appropriation  and  then                                                               
subject   to  payment   by  the   director:   both  are   totally                                                               
discretionary.  The state  has actually  paid every  penny it  is                                                               
statutorily obligated to pay.                                                                                                   
COMMISSIONER  FISHER responded  that  he is  exactly right.  This                                                               
program does not  contemplate the state's perspective  to be that                                                               
it is worse off than  the statutory formula. This program invites                                                               
credit  holders to  accept a  discount, so  that the  net present                                                               
value of  their payments and  the state's obligations  under this                                                               
bond  are actually  neutral or  modestly improved.  His point  is                                                               
that this  is viewed  as a mature  and sophisticated  response is                                                               
that it  allows the credit issue  to be cleaned-up and  it allows                                                               
the small  producers to go back  to work. It really  doesn't cost                                                               
the state  anything, because the  small producers  themselves are                                                               
accepting  a  discount  and  that  is  paying  for  the  cost  of                                                               
financing the bond program.                                                                                                     
3:58:07 PM                                                                                                                    
SENATOR STEDMAN remarked  that his conversation with  some of the                                                               
bankers  is that  they  missed the  appropriation  risk in  their                                                               
underwriting,  but here  the state  is with  a one-billion-dollar                                                               
mess  in its  lap that  needs to  be cleaned  up; the  banks will                                                               
tighten  up underwriting  going forward.  There is  enough finger                                                               
pointing to go around both sides of the table.                                                                                  
COMMISSIONER FISHER  agreed with  that perspective, but  his only                                                               
point  is  that  the  administration is  trying  to  balance  all                                                               
interests in a  way that is fair and reasonable,  and he hopes to                                                               
persuade  the legislature  and Alaskans  that this  is a  prudent                                                               
COMMISSIONER FISHER  turned the discussion  over to Ken  Alper to                                                               
talk  about the  history and  the background  of the  state's tax                                                               
3:59:54 PM                                                                                                                    
MR. ALPER  said slide 4 provides  a thumbnail history of  the tax                                                               
credit background to walk through  the intent perspective of some                                                               
of the tax  credits that got added over time  and built upon each                                                               
other. The first  was an exploration tax credit  that was started                                                               
in 2003, and that was still during  the era of a gross based tax;                                                               
it had no cash payback element.  It was only used to offset taxes                                                               
and  was intended  to  bring new  exploration,  primarily on  the                                                               
North Slope.                                                                                                                    
In 2006, transferable  and cashable tax credits came  with in the                                                               
Petroleum Production  Tax (PPT)  bill, along with  the transition                                                               
to the  net profits-based tax. New  credits specifically targeted                                                               
capital expenditures (the  state wanted people to  spend money in                                                               
pursuit of  oil) and operating  loss credits, which in  some ways                                                               
was the mirror-image  of a net profits tax.  A profitable company                                                               
that  spends  incremental money  is  reducing  their profits  and                                                               
therefore reducing  their tax basis;  a company  spending without                                                               
production is losing  money: so, that credit was  a percentage of                                                               
their spend roughly equivalent to  what their tax rate would have                                                               
been,  and as  a result,  a  similar economic  benefit of  losses                                                               
equal to  the benefit of  spending to a profitable  company. This                                                               
incentivized  new  field developers  all  of  a sudden  not  just                                                               
explorers.  Embedded within  that was  the idea  of a  repurchase                                                               
where the state  would not just give you a  credit that you could                                                               
use or sell  to another producing oil company  but would actually                                                               
buy them back within certain  constraints that originally went up                                                               
to $25 million/company/year.                                                                                                    
A year later, the Alaska's  Clear and Equitable Share (ACES) bill                                                               
revisited some of  the assumptions in the PPT bill;  one was that                                                               
the limitation  was creating  some market  problems. Anecdotally,                                                               
the prices being  offered for credits by the  major producers was                                                               
lower  than some  felt  comfortable  with at  the  time and  they                                                               
started looking at substantial surpluses.  The cap was deleted as                                                               
to how much could be spent per  company and instead a cap was put                                                               
on the  appropriation. A  statutory formula  and a  specific fund                                                               
was  created to  establish  and hold  the  tax credit  repurchase                                                               
money known as  the ".028 Fund" for AS  43.55.028. It established                                                               
that  some percentage  of production  tax revenue  should be  set                                                               
aside into the fund for the repurchasing purposes.                                                                              
MR.  ALPER stated  that formula  was routinely  ignored for  nine                                                               
years. Between  FY07 and FY15  the budgets that were  passed were                                                               
appropriated the full  amount, and there never was  any intent to                                                               
limit what  the state spent.  It was completely governed  by what                                                               
the  companies were  asking for.  It  wasn't until  FY 2016  that                                                               
those caps first started to come  into play, and maybe by 2013/14                                                               
people had  forgotten that there  was a statutory formula  cap at                                                               
all. But there they were!                                                                                                       
In 2010,  the Cook Inlet  Recovery Act was a  different incentive                                                               
targeted at the  looming gas supply shortages for  utility gas in                                                               
South  Central Alaska  - Anchorage,  Kenai, and  MatSu. It  was a                                                               
very large  credit tied to  drilling-specific costs,  but because                                                               
Cook  Inlet already  had a  very  minimal tax  regime, there  was                                                               
never  was never  an expectation  of  substantial revenue  coming                                                               
from the oil  and gas production there. Those  credits were never                                                               
expected to  generate new revenue  the way the North  Slope taxes                                                               
were  expected to  lead to  new  production and  royalty for  the                                                               
state.  This  credit was  truly  for  preservation of  a  livable                                                               
lifestyle in South  Central Alaska, which relies on  gas for heat                                                               
and electric.  That in some  ways created a portfolio  of credits                                                               
that  was  out  of  scale  with  the  formula  in  the  statutory                                                               
appropriation,  because no  one contemplated  all the  Cook Inlet                                                               
credits when the formulas were put in statute.                                                                                  
In  2013 the  legislature passed  SB 21,  a North  Slope-only tax                                                               
reform  bill that  was primarily  a  tax cut.  It eliminated  the                                                               
capital expenditure  credit and replaced  it with the  per barrel                                                               
credit, which  was tied  to the  price of oil  and the  amount of                                                               
production that  a company  might have.  That made  a fundamental                                                               
change in how  credits were used on the North  Slope, but all the                                                               
credits under  SB  21 remained  cashable just as they  were under                                                               
ACES with  the exception of  that per barrel credit,  which could                                                               
not be cashed out or carried  forward or used generally below the                                                               
minimum tax level.                                                                                                              
4:05:19 PM                                                                                                                    
More  recently, in  2016/17, HB  247 reduced  and eliminated  the                                                               
credits for Cook  Inlet - the state sort of  declaring victory in                                                               
its war on the gas supply  shortage. It also put some limitations                                                               
on the new oil benefits that were  part of SB 21. Finally, HB 111                                                               
wound down  the program  completely to where  the state  would no                                                               
longer  issue  cashable  tax credits.  They  eliminated  the  net                                                               
operating  loss  credit,  the   single  largest-used  credit  and                                                               
replaced  it   with  a  new   system  of   carried-forward  lease                                                               
expenditures  that  companies  will  be  able  to  use  once  the                                                               
underlying  leases  were  brought   into  production.  It  was  a                                                               
substantial change for the explorers  and developers, although it                                                               
didn't materially  affect the tax  status of the  incumbent major                                                               
4:06:15 PM                                                                                                                    
What  have  these  tax  credits   done?  They  have  helped  heat                                                               
Alaskans' homes.  Hilcorp took over  aging Cook Inlet  assets and                                                               
put a lot of money  into their restoration, increasing production                                                               
and  squeezing more  productivity out  of what  some people  were                                                               
beginning  to write  off.  Now  suddenly, there  is  no longer  a                                                               
supply anxiety in Cook Inlet.                                                                                                   
New companies  came into  Alaska looking  for gas:  Bluecrest and                                                               
Furie being the most prominent  examples. (Mr. Alper said he gets                                                               
a  little  bit  of  leeway  regarding  confidentially,  as  these                                                               
companies  had  outed  themselves  as users  of  the  tax  credit                                                               
program,  and he  could talk  more  about specifics  in a  public                                                               
4:07:36 PM                                                                                                                    
On  the North  Slope, the  state  has created  the potential  for                                                               
substantial new production: new oil  and jobs. Pikka is Armstrong                                                               
and Repsol's  field with  a new partner  called Oil  Search, Ltd.                                                               
The Nuna  field, which is an  expansion to Oooguruk, is  a Caelus                                                               
field  originally developed  by  Pioneer. All  those things  feed                                                               
into  the  Governor's  stimulus goals  for  jobs  and  additional                                                               
revenue -  although the production  tax from  a new oil  field in                                                               
its early  years of  production is relatively  low in  large part                                                               
because of  the gross value  reduction. However, they  are paying                                                               
royalties from day  one and that is a  substantial revenue stream                                                               
for the  state.  The production  tax benefits of the  gross value                                                               
reduction go  away after three to  seven years, and then  the tax                                                               
will  start to  increase to  the  state. All  that revenue  funds                                                               
government services.                                                                                                            
SENATOR  STEDMAN commented  that some  legislators have  sat here                                                               
for a decade  or so and struggled with trying  to rejuvenate Cook                                                               
Inlet to prevent brown outs in  the Railbelt area, but one of the                                                               
things  they  rarely mention  is  the  impact of  the  Regulatory                                                               
Commission of Alaska (RCA) and  deregulation of pricing.  As they                                                               
attempted   to   stimulate   Cook  Inlet,   and   quite   frankly                                                               
overstimulated it, the  RCA allowed the price to  flow more. Once                                                               
that kicked in,  there was more gas in Cook  Inlet than they know                                                               
what to  do with. Looking at  this in hindsight, about  every two                                                               
years  they  were here  at  the  Resources  Committee to  try  to                                                               
stimulate Cook Inlet with everything they could think of.                                                                       
MR. ALPER said  it's not part of their pitch,  but he is inclined                                                               
to agree with the Senator on some of the history.                                                                               
SENATOR STEDMAN asked  if they go forward with  the bond package,                                                               
would all the participants in it remain confidential.                                                                           
MR. ALPER  replied not necessarily. Part  of HB 247 is  an annual                                                               
report  to  the  legislature  of  how  much  a  specific  company                                                               
received in  cash from the  state in the previous  calendar year.                                                               
The  first report  was issued  last March  and they  will have  a                                                               
similar  report  in a  month  or  so  with  the 2017  totals.  As                                                               
expected,  that number  will be  around $77  million, most  of it                                                               
going  out in  August/September. If  all this  money is  spent in                                                               
2018  to finance  credits, the  state interprets  the law  to say                                                               
that the  state would  put that in  the subsequent  years' annual                                                               
4:11:51 PM                                                                                                                    
MR.  ALPER  said slides  6  and  7  summarize the  state's  total                                                               
purchases to date:  actual cash out the door is  $3.6 billion. Of                                                               
that, some  has gone to  companies that aren't yet  in production                                                               
and may never  be in production (for  example: failed exploration                                                               
and  companies that  have  left Alaska).  But  16 companies  have                                                               
received  credits  who  now  have new  production  of  about  175                                                               
million barrels  of oil equivalent,  much of it gas,  through the                                                               
end of CY16.  That is the best comprehensive data  they have, and                                                               
production is split evenly between  North Slope and the non-North                                                               
Slope (the new North  Slope fields that came on in  the last 8 or                                                               
10 years  fall in  this category  and the new  gas wells  are the                                                               
worked-over  gas  wells that  he  noted  in  the last  couple  of                                                               
Slide 7  is about where the  state is now, which  is holding $806                                                               
million in  credits, about $500  million of that North  Slope and                                                               
about $300 million non-North Slope.  Among that $800 million, are                                                               
$60 million of "conditional  certificates." These are exploration                                                               
requests  that  have  not  been fully  reviewed  and  vetted  and                                                               
issued. Per the changes made in  HB 111 last year, the DOR issues                                                               
a  certificate at  the time  of application  for the  purposes of                                                               
getting them  in the queue.  These have  to be finalized  and may                                                               
have  some small  dollar adjustments  before  being bought  under                                                               
some program.                                                                                                                   
4:14:08 PM                                                                                                                    
MR.  ALPER said  in the  next 10  years they  expect another  106                                                               
million barrels  from fields currently  producing and  another 23                                                               
million from the fields not yet  producing; adding that to the 86                                                               
million that  already happened, they  see 215 million  barrels of                                                               
oil  on the  North  Slope  coming directly  from  the tax  credit                                                               
In  Cook Inlet,  (there  is  no Middle  Earth  production in  the                                                               
forecast), all the  current oil and gas  production has benefited                                                               
from  these  credits. There  is  no  question about  it.  Roughly                                                               
speaking,  the  ongoing  production  to meet  the  needs  in  the                                                               
Railbelt is  90 billion cubic feet  per year, which works  out to                                                               
15 million barrels of oil  equivalent. Additionally, the oil from                                                               
the Cook  Inlet has increased in  the last several years  and now                                                               
works out to about 5 million  barrels per year. That number could                                                               
go  up; Bluecrest  might talk  about  some of  their upside,  for                                                               
example. But  that 5 million  plus the 15 million  oil equivalent                                                               
of the  gas is about  20 million times  the 10-plus years  in the                                                               
forecast added  to what  we already have,  for about  300 million                                                               
barrels  of oil  equivalent  incentivized from  oil  and gas  tax                                                               
credits  in  Cook  Inlet.  The  sum-total  is  over  500  million                                                               
SENATOR STEDMAN wanted to know  the non-North Slope total credits                                                               
and  total severance  and royalties  and when  the severance  and                                                               
royalties will equal the credit expenditures.                                                                                   
MR. ALPER said  he would do his  best to get the  answer for him,                                                               
but the  answer for  Cook Inlet  is probably  many years.  On the                                                               
North Slope, he imagined a payout  in a more reasonable period of                                                               
time,  because the  taxes in  the  Cook Inlet  just simply  won't                                                               
support  the credit  expenditure. The  royalties, however,  will,                                                               
but it will take longer.                                                                                                        
COMMISSIONER FISHER  continued on to  slide 8 that gets  into the                                                               
real proposal.  It indicates the estimated  statutory payment for                                                               
FY19-FY25.  The  statutory minimum  is  a  formula based  on  the                                                               
production  taxes that  the  state levies  and  the threshold  is                                                               
$60/barrel. If it is at  $60/barrel or higher, then the statutory                                                               
minimum is 10  percent of production taxes and if  it's less than                                                               
$60 then  it's 15  percent. It's important  to say  these figures                                                               
will be  updated in the  spring forecast  that will be  issued in                                                               
mid-March. The  schedule has caused,  in some cases,  a cessation                                                               
of  activities  by small  producers  as  they have  struggled  to                                                               
maintain financial viability.                                                                                                   
SENATOR  WIELECHOWSKI noted  that  the  FY19 estimated  statutory                                                               
payment  is $206  million and  the  statute, AS  43.55.028(b)(1),                                                               
says  that  the money  appropriated  to  the fund  including  any                                                               
appropriation of  the percentage...is  based on revenue  of taxes                                                               
levied under  AS 43.55.011, which  is the oil and  gas production                                                               
tax formula. But the revenue  forecast for oil and gas production                                                               
tax in  FY19 is  $338.8 million.  When he  multiplies that  by 15                                                               
percent, he  gets $50,700,000, not  $206 million. That  figure is                                                               
actually high,  because it includes the  Hazardous Spill Response                                                               
Fund.  It's probably  closer to  $48 million.  So, it  looks like                                                               
that number is overstated by $158 million.                                                                                      
4:19:33 PM                                                                                                                    
MR. ALPER  responded that the  math he  was about to  describe is                                                               
not new  methodology; it has been  used for the last  three years                                                               
(for as  long as  it has been  relevant, because  the legislature                                                               
paid  them in  full  before then).  Section  .028(b)(1) says  the                                                               
percentage  of  the   revenue  from  .011,  and   that  has  been                                                               
interpreted  to mean  the  actual tax  calculation,  which is  35                                                               
percent of production  tax value prior to the  application of any                                                               
credits. Thirty-five percent  of production tax value  in FY19 is                                                               
in the neighborhood  of $1.3 billion, and about  $1 billion worth                                                               
of  primarily per-barrel  credits  will be  offset against  that,                                                               
which results in  the approximately $300 million  in revenue that                                                               
is in the Revenue Sources Book.  It's that $1.3 billion times the                                                               
15 percent, and  the 15 percent is used because  the forecast oil                                                               
price  is $57/barrel,  which  is less  than  $60/barrel. That  is                                                               
where the forecast gets the $206 million.                                                                                       
SENATOR  WIELECHOWSKI said  that is  not how  he recollected  the                                                               
legislation was passed. The state  could theoretically get into a                                                               
situation where 100 percent was  engulfed in paying out taxes and                                                               
that was never the intent  (recalling previous testimony from the                                                               
administration).  It was never  the intent to allow two-thirds of                                                               
the state's production tax revenue to go to paying tax credits.                                                                 
MR. ALPER  said it  would come  up again as  they go  through the                                                               
sectional analysis,  and the portion  of the bill  that describes                                                               
the  mechanism  for  calculating  the anticipated  cash  flow  to                                                               
producers,  and therefore  how the  buyout amount  is calculated,                                                               
presumes the same calculation that  get them to the $206 million.                                                               
It  repeats the  language in  a way  that clarifies  what Senator                                                               
Wielechowski is pointing out: it's  before the application of any                                                               
credits. If  the method he is  suggesting were used in  the bill,                                                               
and the payout  was in the neighborhood of $50  million per year,                                                               
it  would take  16 years  to get  through $800  million and  they                                                               
would start seeing very reduced  and probably unacceptable buyout                                                               
amounts  to companies  because of  the compounded  discount rates                                                               
over 16  years. There is  some imperfect clarity in  that section                                                               
of the  language, which  was corrected for  the purposes  of this                                                               
program in the new sections added by the bill.                                                                                  
4:22:22 PM                                                                                                                    
COMMISSIONER  FISHER reiterated  what  Mr. Alper  said, which  is                                                               
that  this is  not a  change to  the way  the administration  has                                                               
calculated this  and has  published in  the Revenue  Sources Book                                                               
for  a  number  of  years.  The  appropriations  that  have  been                                                               
submitted by  the administration and approved  by the legislature                                                               
have been  based on this  formula; the debate has  been following                                                               
this formula.  In his mind,  this is another opportunity  for the                                                               
state to  either help  or harm  its reputation  if the  result of                                                               
this process is  that in the very year where  these credits are a                                                               
meaningful  amount, the  state chooses  to  reinterpret that  and                                                               
reduce it again. It sends a  signal to the industry that whenever                                                               
it's  in the  state's interest  it  will reinterpret  the law  to                                                               
favor itself. It is dangerous to do that.                                                                                       
4:23:48 PM                                                                                                                    
COMMISSIONER FISHER  went to  the slide  9 hypotheticals:  if you                                                               
assume  a credit  holder has  $100  million in  credits that  are                                                               
payable over a four-year period  in equal amounts of $25 million,                                                               
the program offers  two alternatives to that credit  holder.  The                                                               
lower  discount  rate  is  estimated  to  be  5.1  percent;  that                                                               
represents the state's cost of  borrowing and has two components:                                                               
the DOR has  estimated, based on current  market conditions, that                                                               
it would cost about 3.6 percent  to borrow the money (interest on                                                               
the bonds  plus the cost of  issuance), and 1.5 percent  has been                                                               
added as  a cushion to  come up with  an estimated state  cost of                                                               
borrowing  of 5.1  percent.  The 10  percent  number is  somewhat                                                               
arbitrary: it  is roughly a  mid-point between the state  cost of                                                               
borrowing and  their estimate  for the  weighted average  cost of                                                               
capital for the  credit holders. The 10-percent  discount rate is                                                               
the  base rate  under  the  bill. So,  if  a  credit holder  does                                                               
nothing,  the DOR's  offer  to  them would  be  discounted at  10                                                               
To  qualify for  the  lower  discount rate  of  5.1 percent,  the                                                               
credit  holder  must  give  the  state  one  of  four  additional                                                               
benefits:  first,  they  have  to  agree to  give  the  state  on                                                               
overriding  royalty interest,  they  have to  commit to  reinvest                                                               
this money  in Alaska within a  24-month period, or if  they have                                                               
seismic data that  has been the subject of the  credits they have                                                               
to   agree  to   an  early   waiver  of   the  10-year   term  of                                                               
confidentiality for  it. Finally,  there are two  credit programs                                                               
that are modest in size and  a little different than most of what                                                               
they have talked about: one  is capital investments in refineries                                                               
and  the  other  is  gas  storage  credits  associated  with  the                                                               
Interior Energy Project (IEP); those  would qualify for the lower                                                               
rate by definition.  He provided two examples  of payment options                                                               
on slide 9.                                                                                                                     
COMMISSIONER FISHER  said someone might  ask why a  credit holder                                                               
would accept $87  million for $100-million worth  of credits, and                                                               
the  answer is:  they  need the  money now.  And  even though  10                                                               
percent is materially above the  state's cost of capital, but the                                                               
department believes  it is  less than a  credit holder's  cost of                                                               
capital.  This means  if they  can't secure  this financing  at a                                                               
lower  cost elsewhere,  that  would make  them  more inclined  to                                                               
accept the  discount. When  the state pays  them $87  million, it                                                               
would turn to the financial markets and borrow the $87 million.                                                                 
He  explained that  the present  value  of payments  to the  bond                                                               
holder  and the  payments under  the  debt would  be roughly  the                                                               
same. In  fact, under  the 10  percent discount,  the state  is a                                                               
little bit better off; under  the 5 percent discount the payments                                                               
between  the those  two are  neutral.  Of course,  the state  has                                                               
received  some other  benefit:  the  overriding royalty  interest                                                               
which  would be  intended  to  have an  equivalent  value to  the                                                               
roughly  $6 million  difference between  the 10  percent discount                                                               
and the 5.1  percent discount rate in this  example. Under either                                                               
scenario,  the state  would  be covering  its  costs through  the                                                               
discount rate that the credit holder would accept.                                                                              
4:29:32 PM                                                                                                                    
Slide  10 walks  through  how the  mechanism  would work.  Before                                                               
issuing  bonds, the  state  would secure  a  commitment from  the                                                               
credit holder  to participate in  the program. That  requires the                                                               
department to estimate  what proceeds would be  available to them                                                               
under the various scenarios and  then credit holder would have to                                                               
make an irrevocable commitment to participate.                                                                                  
COMMISSIONER FISHER  said the  reason the  irrevocable commitment                                                               
to  participate  is  important  is before  going  to  market  and                                                               
issuing the bonds,  he wants a precise number for  the debt. Once                                                               
the commitment  is received the  state would issue bonds.  Of the                                                               
current  outstanding  $806  million in  credits,  the  department                                                               
estimates  $100 million  worth will  likely be  purchased by  the                                                               
majors to  offset other tax  liabilities that they  have, leaving                                                               
about $706 million to be addressed  in the first issuance of this                                                               
program. That  would result in  a bond  issuance in the  range of                                                               
$618  million to  $660 million,  depending on  the discount  rate                                                               
that is applied.                                                                                                                
COMMISSIONER FISHER  said the state  could be in the  bond market                                                               
by  August or  September with  this program,  assuming this  bill                                                               
passes by May.  In the future, additional issuances  will made as                                                               
additional credits  become due, and estimate  in the neighborhood                                                               
of $200 million over the next three successive years.                                                                           
SENATOR  VON IMHOF  asked what  the irrevocable  commitment means                                                               
and when it has to happen.                                                                                                      
COMMISSIONER FISHER replied the  department would give the credit                                                               
holders notice  and a  period of  time for  closing of  about two                                                               
weeks  before  issuing the  bonds.  "Irrevocable"  means at  that                                                               
point they are  bound to accept that offer from  the state, so it                                                               
can rely on it for the bond issuance.                                                                                           
SENATOR VON IMHOF asked if  they were talking about issuing bonds                                                               
in late July.                                                                                                                   
COMMISSIONER FISHER answered late July or early August.                                                                         
MR.  ALPER  said the  lower  discount  rate  is an  estimate  for                                                               
today's  purposes. The  exact rate  will not  be known  until the                                                               
bonds are sold,  but commitments will be made based  on the DOR's                                                               
best  estimate two  weeks  before.  To the  extent  there is  any                                                               
interest  rate  risk,  it's whatever  happens  in  that  two-week                                                               
SENATOR VON IMHOF  remarked that she hoped the  state wouldn't go                                                               
under water in that two-week period.                                                                                            
COMMISSIONER FISHER replied that they  are confident that the 1.5                                                               
percent  cushion  built  into  the   offerings  would  cover  any                                                               
interest rate movement between the commitment and issuance.                                                                     
SENATOR VON IMHOF said okay.                                                                                                    
4:34:17 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked "how it  can be constitutional  to do                                                               
this?"  Article  9,  Section  8  says  no  state  debt  shall  be                                                               
contracted unless  authorized by law for  capital improvements or                                                               
for housing loans  for veterans and it is ratified  by a majority                                                               
of the voters.                                                                                                                  
Section  11 has  exceptions, but  those say  the restrictions  on                                                               
contracting the debt  of Section 8 do not apply  to debt incurred                                                               
through the issuance  of revenue bonds by a  public enterprise or                                                               
public  corporation of  the state  or political  subdivision when                                                               
the  only  security   is  the  revenues  of   the  enterprise  or                                                               
He  said  the commissioner  had  testified  that  this is  not  a                                                               
revenue bond,  that no security  is offered, and that  no revenue                                                               
will be generated by an  enterprise or corporation. "This clearly                                                               
violates  the  constitutional  prohibition on  bonding,"  Senator                                                               
Wielechowski said.                                                                                                              
COMMISSIONER FISHER  invited the DOR State  Investment Officer to                                                               
comment on this issue.                                                                                                          
4:35:15 PM                                                                                                                    
DEVEN  MITCHELL,  State  Investment Officer,  Depart  of  Revenue                                                               
(DOR), said Senator  Wielechowski is right that  this wouldn't be                                                               
a constitutional debt like general  obligation debt. He has heard                                                               
lawyers  refer to  it  as  "lower case  "d"  debt."  It would  be                                                               
similar  to   an  Alaska   Housing  Finance   Corporation  (AHFC)                                                               
obligation:  they are  creating a  public corporation  that would                                                               
enter  into a  contractual arrangement  with the  state and  that                                                               
arrangement would  formulate a  commitment of  the state  to pay,                                                               
and  that commitment  to pay  would be  pledged to  third parties                                                               
that would purchase the state's  bonds - similar to the financing                                                               
of the  Goose Creek  Correctional Facility,  which was  a revenue                                                               
bond of the MatSu Borough  that didn't pledge anything except for                                                               
the state's commitment  to pay through a lease  the state entered                                                               
into with the borough.                                                                                                          
The commitment to pay is  subject to an appropriation commitment;                                                               
it's a pledge  to third parties; it's the basis  of the rating on                                                               
those bonds and the basis of the investors' risk in waiting.                                                                    
4:36:36 PM                                                                                                                    
SENATOR WIELECHOWSKI  said he asked  the Division  of Legislative                                                               
Legal for  an opinion,  but he  hadn't received  it yet.  It just                                                               
seems  like  a  really  questionable  way  of  circumventing  the                                                               
constitutional    prohibition    against   bonds.    You    could                                                               
theoretically say we  have a $2.5 billion deficit  and we're just                                                               
going  to   issue  a   bond  that   is  subject   to  legislative                                                               
appropriations,   which  is   exactly  what   the  constitutional                                                               
founders wanted to prohibit.                                                                                                    
MR. MITCHELL responded that, as  Senator Wielechowski pointed out                                                               
earlier,  the state  has a  variety of  public corporations  that                                                               
have that power. The Alaska  Pension Obligation Bond Corporation,                                                               
for instance, has the ability  to issue $5-billion worth of state                                                               
funded debt that is on the books right now.                                                                                     
SENATOR  WIELECHOWSKI said  that is  because AGDC  and AHFC  have                                                               
potential  revenue.  Pension  obligation   bonds  sought  to  get                                                               
revenue by investing the money at an 8 percent rate of return.                                                                  
4:37:26 PM                                                                                                                    
COMMISSIONER FISHER  said this is  an important  conversation and                                                               
the  department feels  comfortable  with its  position. The  bond                                                               
counsel still has  to issue an opinion and he  is happy to engage                                                               
in a  debate. He suggested tabling  the issue and coming  back to                                                               
it after a section analysis.                                                                                                    
4:38:34 PM                                                                                                                    
SENATOR  BISHOP said  taking an  overriding  royalty position  in                                                               
return for these discounts was mentioned earlier. Correct?                                                                      
COMMISSIONER FISHER answered yes.                                                                                               
SENATOR BISHOP said, "Well, there's your linkage."                                                                              
COMMISSIONER  FISHER responded  it  could be,  depending on  what                                                               
percentage of credit holders use that function.                                                                                 
4:39:06 PM                                                                                                                    
COMMISSIONER FISHER said slide 12  was about details of the bond;                                                               
it would  be a 10-year  term; the all-in  cost would be  a little                                                               
over  3.6  percent. It  has  been  modelled  using two  years  of                                                               
interest  only, three  years of  growing increased  debt service,                                                               
and  five years  of a  flat  amortization at  the end  - for  the                                                               
initial debt. Successive years would  be interest-only paid "with                                                               
a bullet at the end."                                                                                                           
4:40:28 PM                                                                                                                    
Slide 13 models  the numerics of the  statutory payment schedules                                                               
and  the amount  of  payments annually.  Comparing the  statutory                                                               
minimum  amount  to the  aggregate,  one  sees a  couple  things:                                                               
first,  in every  period  between  now and  FY25,  the amount  of                                                               
payments  would  be  less  but obviously  go  longer.  The  large                                                               
amounts are not  paid out in the next couple  of years, which has                                                               
a  number of  helpful  features.  First, it  allows  the state  a                                                               
little  more time  to deal  with its  current fiscal  challenges,                                                               
giving the legislature a chance  to see where the state's funding                                                               
will come from, and the costs  are shifted into periods where the                                                               
state  could  be expected  to  have  revenue  to cover  them.  In                                                               
addition, the present value of  these two streams - the statutory                                                               
payment  and  the aggregate  stream  -  are either  favorable  or                                                               
neutral to the state, because of the discount options.                                                                          
SENATOR STEDMAN  said the schedule could  be crafted in a  lot of                                                               
ways and that he liked the  idea that the department is trying to                                                               
deal with  "this billion-dollar  mess," but he  personally didn't                                                               
like  the  interest-only  aspect.  He was  concerned  also  about                                                               
shifting this problem down the road  to the next governor and the                                                               
governor after  that. The  state could bite  the bullet  over the                                                               
next two  or three  years and make  the payment  schedule shorter                                                               
and get it  over with. Everyone knows the money  is going to come                                                               
out of the Permanent Fund to run  the state in the next couple of                                                               
years. "We  created this mess, we  should clean it up,  and leave                                                               
the  budget  to  the  next   legislature  in  the  best  position                                                               
SENATOR VON  IMHOF wanted to  build on what Senator  Stedman just                                                               
said and asked if there is a way  to do a hybrid of the proposal:                                                               
the discount makes  sense and going out in the  bond market makes                                                               
sense,  too,  but having  more  aggressive  payments. The  totals                                                               
indicate  the state  will pay  a couple  hundred million  more by                                                               
eeking  this  out   over  the  extra  five  or   six  years.  She                                                               
understands that by delaying the  payment and doing interest-only                                                               
helps the current cash flow, but she  thinks if there is a way to                                                               
model the payments in five or  six years, they could just be done                                                               
with it.                                                                                                                        
4:45:34 PM                                                                                                                    
COMMISSIONER FISHER  said he could  certainly model any  of those                                                               
scenarios. In  the interests  of simplicity,  he pointed  them to                                                               
the  third column  from  the right  on slide  14  that is  titled                                                               
"Current  Total Payments  to Revenue."  That column  includes the                                                               
payments  to   revenue  under   state  debt   obligations,  state                                                               
supported  debt service  (for things  like lease/purchase  of the                                                               
Atwood Building or supporting the  Goose Creek Facility through a                                                               
lease  commitment,   school  reimbursement   programs,  statutory                                                               
payments  under PERS  and TRS,  as  well as  these credits).  So,                                                               
starting in FY19,  those add up to 35 percent  of revenues and it                                                               
declines down to 20 percent of  revenues out to FY27. Out of that                                                               
35 percent  in FY19,  10 percent  of that  is these  credits, and                                                               
under this financing program, that  would become 1.3 percent. So,                                                               
the state  is actually in a  period (between now and  2024) where                                                               
35 to 31  percent of revenue is consumed by  these other expenses                                                               
that don't  fund daily  state government  operations; they  go to                                                               
commitments the state  has made. This program has  the ability of                                                               
smoothing out  the overall  payments, and while  it does  that by                                                               
shifting  them into  the future,  it creates  a flatter  schedule                                                               
that may be more appropriate. However,  he said this is clearly a                                                               
decision for the legislature to address.                                                                                        
4:48:31 PM                                                                                                                    
Slide  15 was  a  recap  of the  proposal  which  is an  economic                                                               
stimulus:   they  expect   most  of   the  credit   holders  will                                                               
reinvestment  in   Alaska;  it   supports  small   producers  and                                                               
unfreezes some  of their projects; and  it reestablishes Alaska's                                                               
reputation.  The  commissioner  added   that  as  these  entities                                                               
reinvest  and continue  to pursue  their projects,  production is                                                               
expected  sooner  than  otherwise  projected,  which  results  in                                                               
future  royalties, jobs  and other  benefits. It  moves the  cost                                                               
into  periods  where  the  cost  and cash  flow  will  be  better                                                               
4:50:07 PM                                                                                                                    
At ease                                                                                                                         
4:50:21 PM                                                                                                                    
CHAIR GIESSEL  called the meeting  back to order and  invited Mr.                                                               
Alper to provide a sectional analysis of SB 176.                                                                                
MR. ALPER said  the bill is conceptually  three different things;                                                               
it creates  a bond corporation,  makes certain amendments  to tax                                                               
credit  statutes, and  creates the  mechanism to  buy them  back.                                                               
Another section deals with the  idea of overriding royalties, DNR                                                               
statutes, at the end of the bill.                                                                                               
Section 1 exempts the overriding  royalty interest as well as the                                                               
bond corporation from  the Procurement Code. This  language is in                                                               
a lot of bills.                                                                                                                 
Section 2 is many pages long  and creates a new chapter AS 37.18,                                                               
which  establishes   the  Alaska  Tax  Credit   Certificate  Bond                                                               
Corporation within the DOR. This  new entity parallels almost all                                                               
the   language  that   created   the   Pension  Obligation   Bond                                                               
Corporation  in previous  legislation. He  emphasized that  these                                                               
subsections and  components were  not made up  on the  fly; there                                                               
was precedent for all of it.                                                                                                    
MR.  ALPER   continued  explained   that  they  are   creating  a                                                               
corporation, so  it needs  a board of  directors, which  is three                                                               
department  commissioners, including  the DOR  commissioner. They                                                               
are authorized to  issue bonds of up to $1  billion and then have                                                               
a reserve fund, the vehicle through  which the money that goes to                                                               
pay the  interest on  the bonds  passes through,  as well  as the                                                               
money that passes  through to the companies from  the credits are                                                               
bought. It  authorizes the  corporation to set  the terms  of the                                                               
bonds and has a sunset date.                                                                                                    
Should the legislature move around  some of the assumptions about                                                               
the bond, the  payback schedule, what's interest  only and what's                                                               
not, presuming that  the discount rate stays the  same, Mr. Alper                                                               
said that will  not change any of the offers  to buy credits from                                                               
the companies. The present value  of all the variations should be                                                               
about the  same. The part where  they are valuing the  credits is                                                               
not going  to be impacted by  putting in either a  five-year or a                                                               
ten-year schedule.  It's just a  matter of the future  state cash                                                               
flow  in  having  to  pay  down on  the  principal  and  interest                                                               
payments on those bonds.                                                                                                        
MR. ALPER said  the proposed corporation must  adopt a resolution                                                               
to  approve  the bonds  (AS  37.18.060)  and certain  enforcement                                                               
rights to  the bond holders. The  bonds may not be  issued unless                                                               
the discount rate is at least  1.5 percent greater than the total                                                               
interest  cost. This  gives the  state protection  that it  won't                                                               
lose  money  through  arbitrage or  anything  else.  The  Pension                                                               
Obligation Bond  Corporation has a similar  provision. The amount                                                               
the state  expects to earn should  be greater than the  amount it                                                               
will pay. Bonds are legal instruments.                                                                                          
He didn't  like the  language: "This  chapter shall  be liberally                                                               
construed to carry out its  purposes," which is legal language to                                                               
say that we  understand what we are supposed to  do with this and                                                               
we are going  to do it. The corporation may  adopt regulations as                                                               
necessary and the definitions.                                                                                                  
MR.  ALPER said  he was  not the  most qualified  person to  talk                                                               
about the  details, but someone  from Treasury would be  happy to                                                               
talk in greater detail about section 2 if needed.                                                                               
4:53:43 PM                                                                                                                    
He  said sections  3,  4,  and 5  are  all parallel  construction                                                               
amending the three  existing tax credits in  the corporate income                                                               
tax statutes (AS  43.20.): the Kenai Gas  Storage credit program,                                                               
the  LNG storage  credit for  the Interior  Gas Utility,  and the                                                               
refinery infrastructure credit. All are  written so that they can                                                               
be paid out of the .028  Fund. Those are amended and conformed to                                                               
say the  credits can be  bought using  the proceeds of  this bond                                                               
SENATOR  WIELECHOWSKI asked  if  this  corporation will  actually                                                               
have an office and  people working in it or is it  just sort of a                                                               
"dummy  pass-through  corporation"  to avoid  the  constitutional                                                               
prohibition on GO bonds.                                                                                                        
MR. ALPER answered  there would be no staff or  office; this is a                                                               
subsidiary of  the existing Treasury  Division that has a  lot of                                                               
bonding programs. The  fiscal note has $2,500  which is basically                                                               
an annual  registration charge associated  with having  this bond                                                               
out  there.  He wouldn't  characterize  it  as circumventing  the                                                               
SENATOR STEDMAN asked  him to clarify the comment  about how some                                                               
of the other credits are tied into this bond package.                                                                           
MR. ALPER said  those three corporate income tax  credits are not                                                               
in AS  43.55 and a small  amendment was needed to  say they could                                                               
also be  paid out  of this bond  proceeds mechanism,  which isn't                                                               
directly passing through the .028 Fund.                                                                                         
SENATOR  STEDMAN said  this  is  a bigger  target  than just  the                                                               
credit balance.                                                                                                                 
MR.  ALPER answered  no; those  specific income  tax credits  are                                                               
already in the universe they  are talking about. The $806 million                                                               
includes any refinery credits, and  when they talk about the $200                                                               
million  of credits  yet  to  come even  though  the program  has                                                               
sunset,  they are  talking  about the  last half  year  or so  of                                                               
cashable credits that were earned before  the sunset in HB 111 as                                                               
well as  the last couple of  years of the refinery  credit, which                                                               
sunset  in  2019, and  the  Interior  Gas Utility  credit,  which                                                               
sunsets in 2020. Those are  already presumed to be eligible under                                                               
the program,  but their enabling  statutes need to be  amended to                                                               
make sure they are eligible to get the bond cash.                                                                               
4:57:11 PM                                                                                                                    
He said sections  6 and 7 are  the parts of the  Tax Credit Fund,                                                               
itself,  that talks  about how  cash is  used. Specifically,  the                                                               
money  is used  to purchase  tax credits  that comes  from direct                                                               
legislative appropriations; the money  from the bond proceeds can                                                               
also be used to purchase tax credits. It's conforming language.                                                                 
Section 7  references a provision that  was added by HB  247, the                                                               
so-called "Haircut,"  that puts a $70  million cap on how  much a                                                               
given company  can get in a  year, and says of  that $70 million,                                                               
the second  $35 million, if  the company  wants it, will  have to                                                               
take a  reduction in value.  This program is being  exempted from                                                               
that Haircut. He  clarified that obviously if there  is a company                                                               
with a large  number of credits, they would expect  they would be                                                               
getting more  than $70 million  and want  to make sure  that that                                                               
cap language does not apply to  the bond program. It just applies                                                               
to the traditional tax credit appropriations.                                                                                   
Section  8 is  a definitions  section. The  important definitions                                                               
are: "money disbursed by the  commissioner," which means the bond                                                               
money and "total  interest cost" is a fiduciary  term meaning the                                                               
cost  of  the  interest  plus the  financing  and  creation  cost                                                               
(management costs  of doing the  bond issuance). The rate  in the                                                               
final bond will be the total interest cost plus 1.5 percent.                                                                    
4:58:54 PM                                                                                                                    
Section 9 has  to do with another section added  into HB 247 that                                                               
says if a  company has an obligation to the  state through unpaid                                                               
royalties or fines,  in addition to taxes the  state could offset                                                               
their  tax credits  to pay  these  state obligations  to a  state                                                               
agency. This authority  has always existed and  is being extended                                                               
to include this new program.                                                                                                    
Section 10 is  the guts of the bill; the  new changes and several                                                               
new subsections create  the authority to go  through the purchase                                                               
mechanisms   for   this   bonding   program.   It   creates   new                                                               
.028(k)(l)(m) and (n):                                                                                                          
     .028(k):   how   a   company  makes   the   irrevocable                                                                    
     commitment  of credits  to the  program.  It also  says                                                                    
     they have  to offer all  their certificates or  none at                                                                    
     all. It also says if  they choose not to participate in                                                                    
     the  first round  by  the cutoff  date,  July 1,  2018,                                                                    
     those credits are not eligible  for the second round of                                                                    
MR. ALPER explained  that the department tried to  be as flexible                                                               
as  possible but  got  a little  restrictive  here because  their                                                               
modeling indicated the possibility  of gaming the system. Someone                                                               
could  choose to  not participate  hoping that  a bunch  of other                                                               
people do;  clear the decks, get  rid of all the  credits in line                                                               
in front  of them; and  improve their  position if they  chose to                                                               
participate in a second round of financing.                                                                                     
     .028(l) creates  the expectation  of cash flow  for the                                                                    
     companies. It creates new  definitions of "assumed pro-                                                                    
     ration  methodology"  and "assumed  appropriation."  In                                                                    
     other    words,    it    references    the    statutory                                                                    
     appropriation, and given how  many credits a particular                                                                    
     company has and  what year they came  in, and therefore                                                                    
     where they fit in the rank  order of the credits in the                                                                    
     pro-ration among all the other  credits from that year,                                                                    
     when they would expect to  get their money. It empowers                                                                    
     the department to  figure out what the  cash flow would                                                                    
     be. Then it  will be discounted at the rate  to find in                                                                    
     subsequent section (m).                                                                                                    
     He   said  the   department   gave   the  companies   a                                                                    
     preliminary   analysis    of   what    their   expected                                                                    
     appropriations would  be and what their  discount would                                                                    
     be so that they  could participate in this conversation                                                                    
     during the session.                                                                                                        
5:02:19 PM                                                                                                                    
     .028(m)  says  the discount  rate  in  which a  present                                                                    
     value will  be established to  pay a company off  is 10                                                                    
     percent unless one of the four criteria are met:                                                                           
     1. one of the corporate income tax credits                                                                                 
     2. the overriding royalty interest                                                                                         
     3. the  commitment to reinvest all  the proceeds within                                                                    
     the  state   within  24   months.  This   requires  the                                                                    
     commissioner to  sign off on  this being  an acceptable                                                                    
     commitment on them being able to get a higher buyout.                                                                      
     4.  the waiver  of the  10-year confidentiality  period                                                                    
     for those companies holding the seismic credits.                                                                           
MR.  ALPER explained  that .028(m)  doesn't "hard  code" the  5.1                                                               
percent.  It says  total interest  cost plus  1.5 percent,  which                                                               
gets determined closer to the date of issuing the bonds.                                                                        
     .028(n)  says once  the credit  is bought  at something                                                                    
     less  than  face  value, the  remnant  amount  (the  13                                                                    
     percent not being bought) retains  no value. It expires                                                                    
     by selling the rest to the state at a discount.                                                                            
5:03:37 PM                                                                                                                    
Section 11  is about overriding royalty  interests. It authorizes                                                               
the commissioner of DNR to  negotiate these. If a company chooses                                                               
to offer a royalty interest, which  would be a share of the value                                                               
(not  an ownership  interest  in oil);  it's  a financial  quasi-                                                               
royalty  often used  in industry  when someone  sells a  lease to                                                               
another  company,   they  might  retain  an   overriding  royalty                                                               
interest. For  example, an offer  is made.  There is a  method by                                                               
which DNR  values it, risks  it, and considers the  likelihood of                                                               
it playing  out and becoming  real production. In the  context of                                                               
Commissioner Fisher's slide with $87  million scenario or the $93                                                               
million scenario,  that royalty  has to have  a present  value to                                                               
the  state  of  at  least   $6  million  to  warrant  giving  the                                                               
incremental cash to the company for it.                                                                                         
5:04:38 PM                                                                                                                    
Section  12  is  regular  regulatory  language  authorizing  both                                                               
departments to write regulations.                                                                                               
Section  13 allows  those regulations  to be  retroactive to  the                                                               
effective date should it take longer than that to write them.                                                                   
There  is an  immediate  effective  date on  the  bill. It  isn't                                                               
usually in  their bills, but  the commissioner  mentioned wanting                                                               
to go to  the market in August  and it would take 90  days to get                                                               
all the pieces ready  to be able to do that.  So, they would like                                                               
to have  the statutory authority  to be  preparing for it  at the                                                               
end of the legislative session.                                                                                                 
5:05:26 PM                                                                                                                    
CHAIR GIESSEL thanked the presenters for explaining the bill.                                                                   
She held SB 176 committee and said she looked forward to getting                                                                
the answers to the committee's questions.