Legislature(1997 - 1998)

04/29/1998 01:50 PM House FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                                                                               
             HOUSE FINANCE COMMITTEE                                           
    April 29, 1998                                                             
                          1:50 P.M.                                            
                                                                               
TAPE HFC 98 - 134, Side 1.                                                     
TAPE HFC 98 - 134, Side 2.                                                     
TAPE HFC 98 - 135, Side 1.                                                     
TAPE HFC 98 - 135, Side 2.                                                     
                                                                               
CALL TO ORDER                                                                  
                                                                               
Co-Chair Therriault called the House Finance Committee                         
meeting to order at 1:50 P.M.                                                  
                                                                               
PRESENT                                                                        
                                                                               
Co-Chair Hanley   Representative Kelly                                         
Co-Chair Therriault   Representative Kohring                                   
Representative J. Davies  Representative Martin                                
Representative G. Davis  Representative Moses                                  
Representative Foster  Representative Mulder                                   
Representative Grussendorf                                                     
                                                                               
ALSO PRESENT                                                                   
                                                                               
Avrum Gross, Attorney, North Slope Borough, Juneau; Deborah                    
Vogt, Deputy Commissioner, Department of Revenue; Eddy                         
Jeans, Manager, School Finance Section, Education Support                      
Services, Department of Education; Rick Cross, Deputy                          
Commissioner, Department of Education; Kristie Tibbles,                        
Staff, Senator Drue Pearce.                                                    
                                                                               
TESTIFIED VIA TELECONFERENCE:                                                  
                                                                               
Steve Van Sant, State Assessor, Anchorage; John Eng,                           
Associated General Contractors, Anchorage; Tom Brooks,                         
Chief Engineer, Alaska Railroad Corporation, Anchorage;                        
Bill Hupprich, Associate General Counsel, Alaska Railroad                      
Corporation, Anchorage; Bill Sheffield, President, Alaska                      
Railroad Corporation, Anchorage.                                               
                                                                               
SUMMARY                                                                        
                                                                               
SB 36 An Act relating to transportation of public                              
school students; relating to school construction                               
grants; relating to the public school foundation                               
program and to local aid for education; and                                    
providing for an effective date.                                               
                                                                               
 SB 36 was HELD in Committee for further                                       
consideration.                                                                 
                                                                               
SB 285 An Act relating to state procurement practices.                         
                                                                               
SB 285 was HELD in Committee for further                                       
consideration.                                                                 
SENATE BILL NO. 285                                                            
                                                                               
"An Act relating to state procurement practices."                              
                                                                               
KRISTIE TIBBLES, STAFF, SENATOR DRUE PEARCE, explained that                    
when highway improvements are needed, a project is designed,                   
a request for bids is advertised, and a construction                           
contract is then competitively awarded by the Department of                    
Transportation and Public Facilities (DOT&PF).  When the                       
highway that needs the work involves the Alaska Railroad,                      
the work involving the Railroad property is not included in                    
that bid.  When such a situation occurs, the Department                        
negotiates a force-account contract with the Alaska                            
Railroad.  That arrangement reduces the amount of work which                   
the private industry can participate in and keeps the                          
Department public fund expenditure from going through a                        
competitive bid arrangement.                                                   
                                                                               
Ms. Tibbles reported that SB 285 would reintroduce                             
competition for construction of DOT&PF highway projects                        
which involve the Alaska Railroad.  SB 285 will establish a                    
fair and effective manner by which to award construction                       
contracts for those projects and will require the Alaska                       
Railroad Corporation to utilize a competitive bidding                          
process, openly advertised when managing projects.                             
                                                                               
JOHN ENG, (TESTIFIED VIA TELECONFERENCE), ASSOCIATED GENERAL                   
CONTRACTORS, ANCHORAGE, testified in support of the bill                       
before the Committee.  He stated that taxpayer dollars                         
should be used for improvements to other properties included                   
in the bidding process.  He urged passage of the                               
legislation.                                                                   
                                                                               
Representative G. Davis inquired if the bill had been                          
created to address a specific problem.  Mr. Eng replied that                   
in recent years, the Department of Transportation has                          
negotiated account contracts with the Alaska Railroad,                         
project paid for with tax dollars.  Consequently, general                      
contractors have not had the opportunity to bid on that                        
work.  The Alaska Railroad could participate by working for                    
contractors that bid on those projects.  The Railroad would                    
not be able to bid or sign a contract on a force-account                       
contract.                                                                      
                                                                               
Representative G. Davis questioned the legal authority of                      
those people working within the Alaska Railroad right-of-                      
way.  Mr. Eng replied that the right-of-way is property                        
which belongs to the Alaska Railroad, and that DOT&PF works                    
together with them to address highway improvements which                       
occur within that area.                                                        
                                                                               
Representative J. Davies asked if there would be a problem                     
separating the roadwork from the signaling and control work.                   
Mr. Eng replied that would not create a problem.                               
                                                                               
TOM BROOKS, (TESTIFIED VIA TELECONFERENCE), CHIEF ENGINEER,                    
ALASKA RAILROAD CORPORATION, ANCHORAGE, commented that in                      
the existing system, DOT&PF treats the Alaska Railroad as a                    
utility.  If one of their projects impacts the Alaska                          
Railroad, they come to the Railroad to provide funding                         
needed to accommodate the changes required.                                    
                                                                               
He continued, that work is generally done with a railroad                      
work force, however, from time to time, there has been a                       
request from the Department to pursue a construction                           
contract.  When that work is done, the Railroad employees                      
100% Alaskans.  He continued, if the work were bid, there                      
are a limited number of qualified contractors in the State.                    
Mr. Brooks emphasized that if the work were competitively                      
bid, there is no guarantee that it would stay in Alaska.                       
                                                                               
Mr. Brooks stressed that there is valid concern when                           
addressing the safety of the trains.  He added, if the bill                    
is separated, it is important that signaling and flag                          
protection continues to be part of the Alaska Railroad                         
effort.  He reiterated that the signaling work is a                            
specialty contract situation and that railroad flag                            
protection is a matter of safety.                                              
                                                                               
BILL HUPPRICH, (TESTIFIED VIA TELECONFERENCE), ASSOCIATE                       
GENERAL COUNSEL, ALASKA RAILROAD CORPORATION, ANCHORAGE,                       
remarked that if the proposed legislation is enacted, it                       
could cause problems in Union agreements by restricting the                    
Railroads authority to contract or subcontract out the work.                   
He warned that the legislation could place the Alaska                          
Railroad in the middle of a Department project.  If the work                   
were not done with railroad people, it would be best to have                   
the Department contract directly with the bidder, which                        
would solve the Union contract problem.                                        
                                                                               
Mr. Hupprich advised that the Alaska Railroad is opposed to                    
passage of the bill.  He spoke to Amendment #1.  [Copy on                      
File].  He recommended that if the legislation is to pass                      
that "construction work" must exclude signal work and rail                     
flagging.                                                                      
                                                                               
Mr. Hupprich pointed out that Amendment #1 proposes to amend                   
Section 1.36.30.015(a), on the fifth line, placing a period                    
after "Public Facilities" and deleting the remainder of the                    
underlined portion of the amendment.  Co-Chair Therriault                      
clarified that if the money were coming from the Department,                   
they would then be the ones handling the entire project.                       
                                                                               
BILL SHEFFIELD, (TESTIFIED VIA TELECONFERENCE), PRESIDENT,                     
ALASKA RAILROAD CORPORATION, ANCHORAGE, reiterated that the                    
concern with the legislation is a matter of safety,                            
particularly, signaling and flagging.  Governor Sheffield                      
explained that the Alaska Railroad Corporation is a                            
specialist in railroad construction and that most DOT&PF                       
jobs are done from standard plans, generally not charging                      
for the engineering and/or site inspection.  He reiterated                     
that the Alaska Railroad is in opposition to the                               
legislation.                                                                   
                                                                               
In response to a concern by Representative Foster, Mr.                         
Brooks explained that the Alaska Railroad occasionally                         
receives grant money from the federal government that passes                   
through DOT&PF.  The intent is that funding not be a part of                   
the proposed legislation.                                                      
                                                                               
Representative G. Davis asked if DOT&PF would have the legal                   
authority to dictate control of the project.  Governor                         
Sheffield replied that the Alaska Railroad does have control                   
of its own right-of-way where it crosses a highway belonging                   
to the Department.  If the Department is to improve the road                   
or reconstruction is done, there must be coordination of the                   
project so that it is done safely.                                             
                                                                               
Representative Martin suggested that DOT&PF could be a                         
better facilitator of cooperation.  Governor Sheffield                         
reiterated the need that the Alaska Railroad is in charge of                   
the signalization.                                                             
                                                                               
Co-Chair Hanley advised that his preference is to allow the                    
competitive bidding process, then whom ever meets the                          
qualifications and the lowest bid should be able to do the                     
work.  He asked if that language was included would there                      
continue to be a Union contract problem for the Alaska                         
Railroad.  Mr. Hupprich replied it could work if the                           
language of the amendment was deleted.                                         
                                                                               
Co-Chair Hanley asked if the Department bids out the job                       
through an open competitive process, the Railroad then bids                    
as one of the contractors, would there continue to be a                        
problem.  Mr. Hupprich replied there wouldn't and that the                     
Alaska Railroad could support that language.                                   
                                                                               
SB 285 was HELD in Committee for further consideration.                        
SENATE BILL NO. 36                                                             
                                                                               
"An Act relating to transportation of public school                            
students; relating to school construction grants;                              
relating to the public school foundation program and to                        
local aid for education; and providing for an effective                        
date."                                                                         
                                                                               
DEBORAH VOGT, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,                      
advised that the answers to Co-Chair Therriault's questions                    
were addressed in a letter from the Department dated                           
4/29/98.  [Copy on File].  She added that in the members                       
packet was a spreadsheet illustrating the ASSESSED VALUES                      
and TAX RATES (taken from the Alaska Taxable).  [Copy on                       
File].                                                                         
                                                                               
Ms. Vogt commented that the Department of Revenue's primary                    
responsibility is carried out in the Oil and Gas Audit                         
Division located in Anchorage.  The responsibility of that                     
agency is to access the property that is taxed under AS                        
43.66.  The State carries out those assessments and                            
announces the values to the various municipalities; the                        
municipalities or the taxpayers can appeal those assessments                   
to the review board.                                                           
                                                                               
Ms. Vogt explained that the Department began a regulation                      
process on AS 43.56 last summer.  Both taxpayers and                           
municipalities are in the process of identifying what                          
general subject areas will be addressed.                                       
                                                                               
The methodologies used by the municipalities under AS 43.56                    
have been the subject of a great deal of interest over the                     
years.  In the end, everyone who has looked at the                             
methodology, has returned to that methodology established                      
twenty years ago.  By now there is twenty years of                             
continuous and consistent construction of those statutes.                      
She emphasized that the Department at this time, has found                     
no reason to again review those determinations.                                
                                                                               
Co-Chair Therriault noted that Ms. Vogt's letter had made                      
reference to the 1989 Senate Select Advisory Committee on                      
Municipal Taxation of Oil and Gas Properties.  Ms. Vogt                        
replied that this was a "blue ribbon commission", members                      
which had been chosen to review these issues and make                          
recommendations to the Legislature.                                            
                                                                               
Co-Chair Therriault made reference to the two methodologies                    
which in the past has allowed the municipalities to move                       
from one method to the other, converting the tax to a mill                     
rate.  He noted that this had not been proposed in statute                     
anywhere.  Statute states that an area is to access one of                     
the two methods.  Ms. Vogt replied that the statutory base                     
from which that issue had been established in AS 29.45.100,                    
clarifies that all limitations do not apply for bonded                         
indebtedness.                                                                  
                                                                               
Co-Chair Therriault replied that was for bonded indebtedness                   
and that the way it is being applied is impacting                              
justification to remove all limitations.  Ms. Vogt explained                   
that the limitations on the operating budgets are                              
implemented by the boroughs, whereas, the limitations on                       
bonded indebtedness to the operating budget applies to the                     
225%, which then determines a mill rate cap established by                     
statute, multiplied by 30 mills, times the 225% limit which                    
gives a dollar amount (30 mills applied against that tax                       
base).  The bonded indebtedness establishes the bonded                         
indebtedness for all properties in the municipality.                           
                                                                               
In response to a handout distributed, Representative J.                        
Davies questioned if Co-Chair Therriault was insinuating                       
that an illegal formula was being used.  [Copy on File].                       
Co-Chair Therriault stated that he had received the handout                    
from the Ketchikan City and Borough group without properly                     
checking it before releasing it.  [Copy on File].                              
                                                                               
Representative Martin asked if a ceiling had been set.  Ms.                    
Vogt replied that the Court established that ceiling in the                    
North Slope Borough versus the Sohio case in 1978.  There                      
was language in statute stipulating that the Statute of                        
Limitation did not apply to bonded indebtedness.  The State                    
argued that the limitations were waived only when the bonds                    
were in jeopardy of default.  The Supreme Court responded                      
that the limitations are removed in all cases of bonded                        
indebtedness.                                                                  
                                                                               
Representative Martin asked to what degree the State was                       
morally obligated to school bonding indebtedness.  Ms. Vogt                    
could not answer that question nor speak to the motivation.                    
                                                                               
Co-Chair Therriault inquired, when using method C and                          
arriving at a dollar amount, and then returning back to                        
method B and assessing against the tax base, would that                        
artificially keep a millage rate on the local property,                        
unusually low.  Ms. Vogt noted that the conversion of the                      
mill rate from the smaller property base to the larger rate                    
is a cosmetic difference, and that it would arrive at the                      
same result.  The issue raised by Representative Therriault                    
is how the 225% property tax base gets built.  All the                         
property is prorated and reduced to form the cap.  Ms. Vogt                    
disagreed with Representative Therriault's characterization                    
that they convert to method B; she understood that they use                    
method C for the operating budget and that there is no                         
limitation on bonding indebtedness.                                            
                                                                               
Co-Chair Therriault questioned that portion.  The Department                   
must appropriate that part of the oil and gas properties                       
which are subject to taxation, while apportioning the local                    
owned property.  He advised that there is not a statutory                      
directive to do that.  Ms. Vogt remarked that this is the                      
issue which has been questioned over the years.  She                           
suggested that perhaps the Department of Revenue should                        
physically designate pieces of property within the 225%                        
limit.  The proportioned pro rata reduction is the only way                    
that mandates could be applied.                                                
                                                                               
Co-Chair Hanley inquired the combined North Slope Borough                      
mill rate.  Ms. Vogt stated that the total mill rate was                       
18.51%.  The handout chart indicates how the mill rate is                      
established.                                                                   
                                                                               
(Tape Change HFC 98- 134, Side 2).                                             
                                                                               
Co-Chair Hanley questioned if the 225% cap was the total                       
dollar amount.  Ms. Vogt replied that 27 mills would be                        
applied to the 225% portion for the operating budget.  Co-                     
Chair Hanley inquired the mill rate calculated on the total                    
budget in order to arrive at the bond debt service rate.                       
Ms. Vogt replied that the debt service rate would be the                       
13.39.  The chart indicates how the mill rate for the                          
smaller tax base on the 225% limit is converted for the mill                   
rate for the purpose of the property tax bills.                                
                                                                               
Co-Chair Hanley asked if the North Slope Borough had passed                    
an ordinance on the mill rate assessment.  Ms. Vogt stated                     
that they do pass an ordinance, although, she had not seen                     
it.  The figure indicated in the handout refers to the                         
ordinance passed in that area and sets out the manner in                       
which the entire mill rate is built.                                           
                                                                               
Co-Chair Therriault asked if the Department had adopted                        
regulations incorporating the methodology as recommended in                    
the 1978 memo from the Department of Revenue.  Ms. Vogt                        
stated it had not been done to date, although, there is a                      
regulation project in the makings at this time and that a                      
task force group was currently looking at those issues.                        
                                                                               
Co-Chair Therriault commented that this concern is so "big"                    
and complicated, the Legislature, to date has chosen not to                    
address these concerns.  He acknowledged this was not the                      
fault of the North Slope, suggesting that perhaps the tax                      
paid by private citizens was low due to the methodology                        
being used.  Co-Chair Therriault believed that the residents                   
of the North Slope Borough would be more mindful of their                      
total debt if they were paying the proper mill rate,                           
pointing out the impact to the State Treasury.                                 
                                                                               
Ms. Vogt responded that the 1978 North Slope Borough versus                    
Sohio lawsuit had a tremendous impact.  Unless that Court                      
decision was reversed, it would be difficult to change what                    
is currently happening.  Co-Chair Therriault argued that any                   
Court decision was subject to interpretation.  He did not                      
agree that the interpretation of the Court decision was to                     
remove the limitations on everything.  The oil and gas                         
taxation mechanism was created separately and was to be                        
treated separately so that a percentage of the wealth of                       
those properties could flow to the general fund in order to                    
be distributed across the State.  He recommended those funds                   
could be distributed to help pay for K-12 education.                           
                                                                               
Co-Chair Hanley asked if Ms. Vogt had read the Ketchikan                       
analysis.  Ms. Vogt commented that she had seen a part of it                   
and that there were a couple of differences between the way                    
Ketchikan reads the status quo and the way the Department                      
understands it to be.  The first difference is a question of                   
whether the North Slope Borough (NSB) versus Sohio case did                    
restrict bonded indebtedness taxation to the 225% limit.                       
That language makes it clear that the limitations do not                       
apply, but it does not appeal the power to tax.                                
                                                                               
Co-Chair Therriault noted that the tax case implied that for                   
the bonded indebtedness portion of their budget, a                             
municipality could go above the limit, but would not be able                   
to do so for the operating budget.  Ms. Vogt agreed.  She                      
understood that the Ketchikan representative was saying that                   
the Court allowed bonded indebtedness to go beyond a rate                      
and amount but not on the tax base.  An additional concern                     
resulting from that testimony was the idea that Ketchikan                      
was interpreting the current practice as evidence that the                     
municipality had chosen method B.  Ms. Vogt disagreed,                         
noting that they had chosen and continue to use the 225%.                      
                                                                               
Co-Chair Hanley asked if the House Finance Committee passed                    
a resolution or sent a letter to the Department requesting                     
that the Department address this concern in a different                        
manner, would the Legislature be guaranteed that would                         
happen.  Ms. Vogt replied that 20 years of a statute of                        
continuous and consistent action carries a fair amount of                      
weight, although, if the Legislature passed a statute, then                    
the Department would adhere to that change.                                    
                                                                               
In response to Representative Mulder's accusation of the lie                   
being lived by North Slope Borough for the past 20 years,                      
Ms. Vogt cautioned that this was a statutory area which has                    
not been clear to everyone, neither the Department of Law,                     
the Department of Revenue nor the North Slope Borough.                         
                                                                               
Representative J. Davies pointed out that the Legislature                      
took a close look at the concern when it formed the 1989                       
Select Committee; that group provided a blessing of the                        
status quo.                                                                    
                                                                               
Co-Chair Therriault referenced a memo from Tamara Cook                         
regarding the municipally taxation of oil and gas production                   
and pipeline property.  [Copy on File].  In that memo, she                     
made reference to the portion of the statute which stated                      
that the Department might designate a portion of the tax                       
base against which the local tax may be applied.  Co-Chair                     
Therriault emphasized that proration of personal property is                   
not correct.  Ms. Vogt acknowledged that this is the issue                     
which has been in conflict and that methodology has been                       
publicly scrutinized and brought to the attention of the                       
Legislature.                                                                   
                                                                               
Representative Foster requested that the Department of Law                     
come before the Committee to respond to legal concerns                         
regarding the North Slope Borough accusations.  He strongly                    
protested materials distributed in members packets.  Co-                       
Chair Therriault cited that what was requested was                             
clarification of how the statute should be applied.                            
                                                                               
AVRUM GROSS, ATTORNEY, REPRESENTING THE NORTH SLOPE BOROUGH,                   
JUNEAU, spoke to the taxation of oil and gas property as                       
pertaining to the context within SB 36.  He insinuated that                    
this is an issue of "life and death" for the North Slope                       
Borough.  Mr. Gross stressed that there has been no                            
illegality and no impropriety.  The North Slope Borough and                    
the State of Alaska have followed rigorously the statutes                      
which have been passed by the Legislature.                                     
                                                                               
Mr. Gross pointed out that the presentation given by the                       
representatives from Ketchikan was confusing and misleading.                   
He advised that he had been involved with this issue since                     
its inception in 1973, during a Special Legislative Session                    
which settled the litigation between the oil companies and                     
the State over the pipeline.  Part of that Special Session                     
addressed the taxation of the pipeline and related property.                   
Taxation focused on a number of things, one of which was the                   
taxation of oil and gas property used in the development of                    
oil.                                                                           
                                                                               
Mr. Gross continued, at that time, the State imposed a 20-                     
mill tax on all pipeline property.  The issue arose                            
regarding what that would do to municipal taxation.                            
Municipalities were granted the right to tax oil and gas                       
property that was located within their boundaries.  Their                      
power to tax was limited by statute.  Mr. Gross pointed out                    
that this was the only limitation that is found on taxation                    
of real property or property of this nature in the State.                      
                                                                               
In the case of oil and gas, the State imposed some                             
limitations.  The limitations that were imposed are found in                   
the municipal code.  Those limitations are two-fold.                           
                                                                               
? The first is the total amount of tax, which the                              
borough can impose, which could make for a low                                 
mill rate.                                                                     
? The second limitation is what has created                                    
confusion in the House Finance Committee.  It does                             
not limit the amount of tax imposed, but instead,                              
limits the value of property upon which the tax is                             
imposed.  That is determined by taking the total                               
assessed valuation of all real property in the                                 
State, divide it by the number of residents in the                             
State, which provides an averaged accessed value                               
per resident.  That figure is multiplied by 225%,                              
and then multiply that amount by # of people in                                
the municipality.  Then we would have the assessed                             
value in the municipality upon which a property                                
tax maybe assessed.  If that value were higher                                 
than the assessed value of all the property in the                             
municipality, there would be a problem.                                        
                                                                               
Mr. Gross continued, the problem comes when the property                       
value in the municipality is greater than the amount                           
produced in the formula.  He questioned what is done in                        
order to reduce the assessed value to limit on which you                       
impose a tax.  There are two options:                                          
                                                                               
? Reduce the oil and gas property down                                         
proportionately, or                                                            
? Reduce all the property down proportionately.                                
                                                                               
Mr. Gross continued, the Statute which Mr. Bullock,                            
Ketchikan Borough, is concerned about specifies that a                         
municipality may level and collect a tax on the full and                       
true value of that portion of taxable property as assessed                     
by the Department of Revenue and does not exceed the                           
accessed valuation produced by the 225% figure.  The only                      
property, which gets reduced, is the oil and gas property.                     
Everyone else pays taxes at the full and true value.                           
                                                                               
Mr. Gross noted that the Department of Revenue analyzed                        
this, noting that it was only one statute, which is part of                    
a total code which authorizes municipalities to tax oil and                    
gas property.  Mr. Gross pointed out that there are two                        
other statutes.  That statute does not indicate what should                    
be done if the value of all the property exceeds the                           
maximum.  There is another statute, AS 43.56.10 010(c),                        
which indicates what exercise should be undertaken.  That                      
statute states that if the total value of the accessed                         
property exceeds the 225% limit, the Department of Revenue                     
shall designate the portion of that tax base against which                     
the local tax may be applied.  When referring to a portion                     
of the tax base, they were referring to the entire tax base.                   
They were speaking about a proportionate reduction of the                      
entire tax base.                                                               
                                                                               
At that time, the Attorney General also looked at the                          
general statute AS 43.56, which required municipalities to                     
tax oil and gas property at the same rate as all other                         
property.  If only the oil and gas property is reduced, and                    
the value of other things was not proportionately reduced,                     
the effective tax rate would not be the same.  The purpose                     
of the Legislature was to insist upon a proportioned                           
reduction of all taxes under the 225% tax limit.                               
                                                                               
Mr. Gross advised that the legislation is not clear.                           
Someone had to make an opinion and that opinion was issued                     
in 1978.  In 1985, the issue was surfaced again by Mr.                         
Bullock when he worked for the Department of Revenue.  At                      
that time, the Attorney General looked at the statutes and                     
concluded that the method used by the North Slope Borough                      
was acceptable and reasonable.  It had been authorized and                     
directed by the State.  In 1989, the Select Committee                          
comprised of members from the former Commissioner of the                       
Department of Revenue and the former Commissioner of the                       
Department of Community and Regional Affairs was created and                   
the Legislature was once again made aware of the situation.                    
                                                                               
Mr. Gross spoke to the second issue pertaining to bonds.                       
For all municipalities in the State of Alaska, there are no                    
limits on the ability to tax for bonds.  There is a general                    
30-mill limitation on municipal taxation.  That limitation                     
falls by the wayside when talking about bonds.  The                            
Legislature, when it adopted these two limits, put in a                        
separate statute which stated that these limits do not apply                   
to the payment of bonds.  The issue arose in the Sohio case                    
and the Supreme Court stated it was all bonds.  There is no                    
limitation on the ability of the Borough to tax to pay                         
bonds.                                                                         
                                                                               
Mr. Gross advised that if were changed, it would be fatal to                   
the North Slope Borough.  In reliance upon what the State                      
has told it to do, the North Slope Borough has issued bonds                    
and has created an operating budget.  If that were changed                     
now, it would shift an inordinate chunk of the obligation to                   
support the local government on the people who own other                       
than oil and gas property in that area.  In some cases, that                   
burden would be very high and as a result the budget of that                   
area would have to be radically cut.  Lots of people would                     
be unemployed.  The bond situation would be worse and would                    
affect more than the people that live in that area.  The                       
North Slope Borough bonds would go into default.  There                        
would be no way the residents could pay for basic public                       
service bonds and they would have to assume new obligations                    
for bonds.                                                                     
                                                                               
Mr. Gross asked members to consider what would happen to the                   
financial structure of the North Slope Borough and what                        
would occur to the bond rating of the State, if bonds,                         
issued under one tax structure, and all of a sudden, the                       
Legislature changed the tax structure before the bonds were                    
paid.  There would be no tax structure for the bonds.  He                      
stressed that this issue is for real.  In 1989, the State                      
Assessor claimed that this could happen if the bonds went                      
into default.                                                                  
                                                                               
Mr. Gross reiterated that the North Slope Borough has done                     
exactly what the State of Alaska has told it to do during                      
all of the last Administrations.  There has been a                             
consistent interpretation for the past twenty years, and                       
that these people have made a "good faith" interpretation of                   
what they consider to be the law.                                              
                                                                               
In conclusion, Mr. Gross commented that the North Slope                        
Borough only uses the 225% for its operating budget.  It                       
taxes on full and true value for bonds.  There are two ways                    
of taxing, one for operating and one for bonds.  The Borough                   
shows the tax bill to the residents as if it took the 225%                     
figure and blew it up to true value with a corresponding                       
mill rate reduction.                                                           
                                                                               
(Tape Change HFC 98- 135, Side 1).                                             
                                                                               
In response to a concern of Representative Therriault, Mr.                     
Gross replied that if the State's statutes require that oil                    
and gas property in a borough be assessed at the same                          
millage rate as all other property, and that property is                       
reduced by 50%, the millage rate would effectively be                          
reduced in half.  Mr. Gross emphasized that this would not                     
be fair.                                                                       
                                                                               
Co-Chair Therriault advised that language in Title 43,                         
states that the municipality may levy and collect a tax                        
under a rate of taxation that applies to other property                        
taxes of the municipality.  Mr. Gross remarked that was a                      
statute which was somewhat confusing to interpret.  The                        
Attorney General at that time looked to other provisions in                    
the code to try to find guidance in how to do this.  Co-                       
Chair Therriault advised that the Legislative Majority                         
attorney suggested that could not be done.  Mr. Gross                          
acknowledged that twenty years ago, no one knew how this                       
would turn out.  And now twenty years later, Mr. Gross                         
suggested that a court of law probably would not change the                    
situation.  He emphasized that the Legislature should not                      
change the status quo because such action will devastate the                   
North Slope Borough.                                                           
                                                                               
Co-Chair Hanley and Mr. Gross discussed SB 36 and how the                      
tax and millage rate would affect full and true value.  Mr.                    
Gross noted that he was only present to address the oil and                    
gas property tax issues.  He understood that SB 36 spoke to                    
taxable value.  He pointed out that the assessor had assumed                   
that it would be applied on the 225% assessed rate because                     
the Borough uses the 225% figure for operating expenses,                       
which includes schools.  The assumption was that the bonded                    
indebtedness would use full and true value.                                    
                                                                               
Co-Chair Hanley noted that in order to make a policy call,                     
the Legislature needs to know what it will cost to fund the                    
bill.  The impact to North Slope Borough will differ                           
depending on the interpretation.                                               
                                                                               
In response to Representative Martin's comment, Mr. Gross                      
explained that there are written opinions which explain what                   
the interpretation of the statute is.  He pointed out that                     
what keeps arising is the same issue brought forward by Mr.                    
Bullock and that in each case that concern has been struck                     
down.                                                                          
                                                                               
Representative J. Davies pointed out that the Department of                    
Education has never assumed a position.  They accepted the                     
value which was provided by the assessor and deferred the                      
decision of which value choice was to be used.                                 
                                                                               
Co-Chair Hanley inquired how the 4 mills would be applied                      
and how that would impact SB 36.                                               
                                                                               
STEVE VAN SANT, (TESTIFIED VIA TELECONFERENCE), STATE                          
ASSESSOR, ANCHORAGE, stated that the official full value                       
given to the NSB would be the $12 billion.  Co-Chair Hanley                    
reiterated that the 4 mills would be on the full value.  He                    
voiced concern that the current Administration seems to be                     
arguing two different opinions concurrently.  Mr. Gross                        
pointed out that there are two different statutes being                        
addressed.  One allows the NSB to tax and the other is the                     
contribution that local municipalities have made for school                    
funding.  He understood that the assessor would use taxable                    
value.  He thought that the taxable value for the operating                    
budget was limited by the 225% which is the $2 billion.  The                   
taxable value for bonded repayment was not so limited, so it                   
would be taxed at full and true value.  Mr. Gross believed                     
that both of those made sense.                                                 
                                                                               
Mr. Gross addressed the interpretation of the taxation                         
method.  He believed that it should be clarified in SB 36                      
without meddling around with AS 43.56, by simply specifying                    
how the local contribution is to be computed.                                  
                                                                               
Co-Chair Therriault asked if there had ever been a legal                       
opinion from the Department of Law on the interpretation of                    
the statute.  Mr. Gross replied that in 1985, Attorney                         
General Gorsuch issued an opinion stating that the method                      
used by the North Slope Borough was reasonable.                                
                                                                               
Co-Chair Therriault asked how could the Department of                          
Education implement language defining a school.                                
                                                                               
RICK CROSS, DEPUTY COMMISSIONER, DEPARTMENT OF EDUCATION,                      
noted that the Department would define schools as                              
consistently as possible with the direction given.  He noted                   
that there is a problem rebuilding all schools in the State                    
trying to use a similar code.  Currently, schools are                          
distributed randomly and the definition in one community                       
would be quite different from the definition in another.                       
He acknowledged that this has been a problem for the                           
Department.  He reiterated that there has been a struggle in                   
trying to create a definition which makes sense for all the                    
Alaskan communities and schools.                                               
                                                                               
Co-Chair Therriault voiced concern in places where there is                    
a wall dividing a building and then calling it two schools.                    
He asked if the Department would allow that under the                          
current definition.  Mr. Cross responded that could be a                       
problem and that the Department's ability to control and                       
regulate should be addressed.  He advised that was not the                     
prevailing problem in providing a definition of school.  The                   
current table used has problems with basic integrity.                          
                                                                               
Co-Chair Therriault theorized that a community that has                        
multiple, small operations which are close, could affect the                   
validity of the McDowell tables.  Mr. Cross stated that he                     
had asked the McDowell Group that specific question                            
regarding the integrity of the table.  They replied that                       
there was flexibility in the chart, although, it would                         
eventually need to be redone.                                                  
                                                                               
Mr. Cross pointed out that when artificial schools are                         
created, then the number of schools in the State is                            
decreased.  The McDowell study assumed that there are 480                      
schools in the State.  As the schools decrease, there is a                     
new redistribution.  That would not provide a consistent or                    
even result.                                                                   
                                                                               
Representative Martin asked what would be a fair                               
distribution of the resources.  Mr. Cross replied that the                     
Governor's bill provides a fair compromise.  The Department                    
understands that there are varying views on what is a                          
reasonable approach and the Department has opted not to use                    
the funding communities.  Mr. Cross stated that it is                          
important to recognize that the current foundation formula                     
has inequities within the districts that are at the cap, and                   
that revenue generation potential must also be addressed.                      
                                                                               
Co-Chair Therriault requested a description of the disparity                   
concern.                                                                       
                                                                               
(Tape Change HFC 98- 135, Side 2).                                             
                                                                               
EDDY JEANS, MANAGER, SCHOOL FINANCE SECTION, EDUCATION                         
SUPPORT SERVICES, DEPARTMENT OF EDUCATION, explained that it                   
is important that SB 36 meet the federal disparity test.                       
The Department has provided a preliminary disparity test.                      
Disparity is based on budgeted data and is run on actual                       
audited local contributions and revenues.  The disparity                       
test takes all the revenue that a school district generates                    
through a school operating fund, divides that by the                           
adjusted instructional unit as is done in the current                          
formula or the adjusted Average Daily Membership (ADM).                        
That data provides a revenue per adjusted student and that                     
data is then sorted high to low, eliminating the top 5%                        
students and then eliminating the bottom 5% students and                       
measuring the different between the high and the low.  The                     
difference is divided by the low, which provides the                           
disparity.                                                                     
                                                                               
Co-Chair Therriault asked if the House HESS version met the                    
disparity standard.  Mr. Jeans replied it would.  Under the                    
current foundation program, single site appropriation has                      
been made outside of the foundation formula for the past ten                   
years.  Those single site school districts appear in the top                   
10% of districts and get discarded each year.  These are                       
small allocations to those districts in terms of dollars,                      
which inflates dollars on a per student basis.  The                            
disparity comes in at 23% in those cases.                                      
                                                                               
Mr. Jeans continued, if the Department took the single site                    
table, placed that in the foundation formula as an                             
adjustment, there would be additional instructional units                      
for those districts, which would therefore reduce the                          
revenue per instructional unit and bring them back down.                       
Mr. Jeans continued, that would bring them within the 23%,                     
which is the limit.  Because the Department receives                           
appropriations outside the formula, it will drive it up.                       
Under the current foundation statutes, municipal districts                     
are allowed to contribute 23% above basic needs.  That is                      
what maintains the 25% federal disparity standard.  Thus,                      
concluded Mr. Jeans testimony on SB 36.                                        
                                                                               
SB 36 was HELD in Committee for further consideration.                         
ADJOURNMENT                                                                    
                                                                               
The meeting adjourned at 4:10 P.M.                                             
H.F.C. 15 4/29/98 p.m. .                                                       

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