Legislature(2001 - 2002)
04/09/2002 01:58 PM House FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
April 09, 2002
1:58 P.M.
TAPE HFC 02 - 77, Side A
TAPE HFC 02 - 77, Side B
TAPE HFC 02 - 78, Side A
TAPE HFC 02 - 78, Side B
CALL TO ORDER
Co-Chair Williams called the House Finance Committee meeting
to order at 1:58 P.M.
MEMBERS PRESENT
Representative Bill Williams, Co-Chair
Representative Eldon Mulder, Co-Chair
Representative Con Bunde, Vice-Chair
Representative Eric Croft
Representative John Davies
Representative John Harris
Representative Bill Hudson
Representative Ken Lancaster
Representative Carl Moses
Representative Jim Whitaker
MEMBERS ABSENT
Representative Richard Foster
ALSO PRESENT
Representative Pete Kott; Ed Flanagan, Commissioner,
Department of Labor and Workforce Development; Neil
Slotnick, Deputy Commissioner, Department of Revenue;
Michael Hurley, Phillips Alaska, Anchorage; John Bitney,
Legislative Liaison, Alaska Housing Finance Corporation,
Department of Revenue; Joe Dubler, Director of Finance,
Alaska Housing Finance Corporation, Department of Revenue;
Linda Sylvester, Staff, Representative Pete Kott; Richard
Mastriano, Director, Division of Labor Standards & Safety,
Department of Labor; Michael Hurley, Phillips Alaska,
Anchorage; Paul Fuhs, Yukon Pacific
PRESENT VIA TELECONFERENCE
Dan Fauske, Executive Director, Alaska Housing Finance
Corporation, Department of Revenue, Washington D.C.; John
Wagner, Tax Counsel, Omaha, Nebraska; Steve Kantor,
Financial Advisor, New York; Howard Zucker, Tax/Bond
Counsel, New York; Pat Gamble; Bill O'Leary; Stephanie
Madsen; Jeff Brown, Goldman Sacks and Co.; Paul Bloom; E.
Wohlforth; Bill O'Leary, Vice President, Alaska Railroad
Corporation, Anchorage
SUMMARY
HB 423 An Act relating to the Alaska Railroad;
authorizing the Alaska Railroad Corporation to
provide financing for the acquisition,
construction, improvement, maintenance, equipping,
or operation of facilities for the transportation
of natural gas resources within and outside the
state by others; authorizing the Alaska Railroad
Corporation to issue bonds to finance such
facilities; and providing for an effective date.
HB 423 was HEARD and HELD in Committee for further
consideration.
HB 504 An Act relating to the wages of people working in
the fisheries business.
HB 504 was HEARD and HELD in Committee for further
consideration.
#HB504
HOUSE BILL NO. 504
An Act relating to the wages of people working in the
fisheries business.
REPRESENTATIVE PETE KOTT explained that the bill would allow
the remote processors the same opportunity as the non-remote
processors in deducting from an employees wage, the cost of
food and lodging.
Representative Kott noted that in 1959, the statute was
enacted by the Legislature, which promulgated regulations,
which exempted the remote processors. He stated that was
over-stepping the boundary. HB 504 is an attempt to address
concerns voiced by the remote processors.
Representative Kott referenced the committee substitute
which would amend the Alaska Wage and Hour Act by adding a
new section dealing with wages paid to employees in a
fisheries business. An employer engaging in the fisheries
business may deduct up to $15 dollars each day from the
applicable minimum wage paid to an employee for the combined
cost of board and lodging provided to the employee. That
deduction can be made only if it is based on a negotiated
union agreement or a written agreement between employer and
employee, entered into at the time of hire and that
specifies the daily rate of deductions for room and board.
Representative Kott added that as defined in AS 43.75.290, a
"fisheries business" means a person who engages in process
fishery resource for sale by freezing, cooking, salting, or
other methods and would includes but is not limited to
canneries, cold storages, freezer ships and processing
plants.
Co-Chair Mulder MOVED to ADOPT the work draft, #22-LS1595|P,
Craver, 4/8/02, as the version of the legislation before the
Committee. There being NO OBJECTION, it was adopted.
Vice-Chair Bunde asked if there were actual cost figures
associated with the board and room.
Representative Kott replied that he had not yet acquired the
exact amounts. According to the current federal
regulations, the processors cannot charge over and beyond an
amount that would bring them a profit.
Vice-Chair Bunde asked about the fiscal note and how many
Alaskan processors would it apply to.
Representative Kott replied it would affect about thirty
companies. He reiterated that $15 dollars was a fair amount
to pay for three meals a day and lodging.
Representative Lancaster asked if the legislation would be
opening the door for remote construction sights.
Representative Kott commented that the "door would be opened
for an industry that already has the door half opened". He
stressed that the request was not for an exemption but
rather parity for a quality of something that is already
taking place. He agreed that another industry could be able
to come in and pass similar legislation.
Representative Davies asked what the differences between the
work draft and the original bill was.
Representative Kott explained the two changes which had been
made:
· Adding the $15 dollar price; and
· Placing into statute that there must be a written
agreement.
Representative Davies noted that the stipulation that
lodging would be "without profit" had not been included.
LINDA SYLVESTER, STAFF, REPRESENTATIVE PETE KOTT, explained
that the original language of HB 504 comes directly from
regulation. The regulations come directly from the federal
code, which define the fair labor standards act. Those
standards are from federal legislation enacted in 1938. By
using the terms "reasonable costs and without profit" will
create built in protections for the employee that the
charges will not be too excessive. The committee substitute
proposes that in lieu of having a determination made by the
Department of Labor for the reasonable costs, which would be
further defined by non-profiting, new language would be
substituted, indicating the $15 dollar figure. She added
that was a compromise given the assumption that the $15
dollars is a "reasonable cost" for room and board.
Representative Hudson thought that the fiscal note was
predicated upon the Department interpreting the reasonable
costs without profit. By modifying that to the "P" version,
it would be removed. He noted that the $15 dollars was a
set fee and would not indicate the actual costs. He
understood that the fiscal note had been prepared to
determine what the reasonable costs would be. He believed
the fiscal note could be zeroed out.
Representative Kott agreed and recommended that the question
be posed to Commissioner Flanagan from the Department of
Labor.
Representative Harris advised that $15 dollars a day would
be charged for each day even if the employee was not
working. He noted that would have to be agreed upon by the
employee and employer before the work began. Representative
Harris requested the bill's history.
Representative Kott explained that the minimum wage issue is
looming over that industry. He pointed out that many of
processing plants would be closing after this season.
Closing the plants will not help these communities and their
taxation concerns. In addition to the minimum wage change,
there are additional cost driving factors.
Representative Kott stated his intent was to help the
industry and that current regulations are "out of step" with
the statutes.
Representative Harris inquired if this could be corrected
through a regulation change rather than a statute change.
Representative Kott did not believe that it could be
corrected through the regulation process. He noted that the
Administration is "at a place" in which they could remove
the regulation that stipulates alternative public housing
must be available in that area. He wanted to see a
statutory change.
Representative Croft asked if in the adopted work draft,
language had been removed regarding a determination of the
room or board price.
Representative Kott replied it had been and that $15 dollars
is a reasonable amount. He pointed out that testimony heard
from the Department of Labor acknowledged that $10 dollars a
day was reasonable. The fiscal note was based on that.
Representative Croft asked if it was understood that $15
dollars was both reasonable and fair and that the employer
would not be making a profit at $15 dollars a day.
Representative Kott agreed and that a profit could not be
made according to the federal standards.
Representative Croft inquired if there was an appropriate
distinction between a site that has an alternative and one
that does not.
Ms. Sylvester pointed out that in the original language, the
fair labor standards act, the act and the act of an employer
counting the cost of room and board as a credit toward their
wages has been upheld in federal court. The issue decided
was if the employee needed to be consulted on that on a
daily basis. The federal court upheld the statute and the
determination that an employer could take a credit against
the wages. The language in the original bill considered
that the reasonable cost would be a profit for the adequate
protection for the employee. The bill was further amended
to include some requirements to the contract. That contract
is signed at the beginning, with the employee's
understanding of what the wage and limitations of that work
site will be. She noted that through a compromise with the
Finance Chair, rather that relying on the terms and
definitions of the federal code, a $15 dollar substitution
would be made.
Representative Croft warned that someone might sign the
agreement with little understanding of the conditions. He
questioned what the limitations on the quality of the food
and housing would be once the words like "reasonable" and
"fair" were removed.
Ms. Sylvester acknowledged that the Department of Labor had
registered those concerns. She added that a company could
not take the proposed credit if there was an alternative.
If an employee made a complaint, the Department of Labor
would respond. If there were no value to the food or
lodging, there would be no credit given. She reiterated
that a decision had been made at the federal level.
Representative Croft asked if that was included in the
language of the legislation.
Ms. Sylvester responded that would rest in the manner in
which the Department of Labor addresses their complaints.
She noted that they previously testified regarding how they
would address those situations. They do inspect and if
there is a complaint, they respond.
Representative Kott mentioned the types of people who are
attracted to the fish processor-type work. For the most
part, they are students that come from out of State. He
thought most of the workers would choose the lodging option.
He pointed out that there are training and transportation
costs associated with these services. The employers want to
guarantee that the person being hired, understands what they
are getting into. Often times, when going to remote sites,
the employee opts for that knowing that they will not be
distracted by places to spend their money. It is the intent
of the employers to attract and retain their seasonal
employees.
Representative Lancaster asked if the legislation would
allow the employer to draw the $15 dollars if they do not
take the housing option.
Representative Kott responded that could be addressed during
the contractual side of the agreement. He stated that the
Legislature should not be dictating the terms of the
contract. The terms should be left to each individual
employer, however, the language should not be concrete. He
commented that the market place would dictate a number
between zero and $15 dollars per day. He noted that the
employee would investigate which employer would offer the
best deal.
Representative Davies pointed out that if the fish were not
running really well and the employee was only working eight
hours a day, five days a week, that employee would be making
$1,0000 dollars a month. If the legislation were in place,
that same employee would be required to pay $450 dollars a
month for food and lodging.
Representative Kott admitted that there will be times when
the fish are not running, regardless, it would still cost
the employee something to live and eat where ever they were.
He added that the last thing an employer wants is to have
their employees not working. He added that the employee
could be transferred to another remote site if there was no
work. The employers attempt to keep all employees working
most of the time.
Representative Davies commented that the employee could be
"over the barrel" because of the transportation costs. He
foresaw that circumstances could be unbearable for some
individuals and they would then be really "stuck".
Representative Kott understood that during the hiring
process, language is clarified that the transportation costs
would be paid out to the site and back, based on the
fulfilling the contract. He interjected that there is "zero
tolerance" for the use of drugs and/or alcohol at the site.
If using, the employees would be sent back at their own
expense.
Representative Davies reiterated his concern with those
times there are no fish.
Representative Kott claimed that would be the last thing
that a processor would want to happen.
Representative Moses questioned how a remote site is
determined.
Ms. Sylvester replied that in the regulations, it is
indicated that a remote site exists if there are no
alternative places available to sleep and eat.
Representative Moses asked if the $15 would be subject to a
local sales tax.
Ms. Sylvester explained that the tax issue is an Internal
Revenue Service (IRS) question. The IRS determined that it
would not be included as income, because the facilities were
on the premises of the employer. That is the way in which
the employee gets out of paying taxes on the credit for
wages paid. For purposes of the wage and hour act and the
fair labor standards, that language does not consider room
and lodging for the benefit of the employee, but rather the
cost spent is for the benefit of the employer. She added
that a person would not be charged a sales tax on that
income.
Representative Whitaker noted that the language indicates
that a maximum of $15 dollars a day would be taken from the
pay relative to the applicable minimum wage. He asked if
there would be a sliding upward scale if the employee made
more than minimum wage.
Representative Kott explained that was not the intention.
The maximum is $15 dollars per day. At present time, remote
sites cannot pay below minimum wage.
Representative Whitaker asked if the intention was no more
than $15 dollars per day would be charged, regardless of the
wage paid.
Representative Kott reiterated that $15 dollars a day was
the maximum, and noted it could be less.
Vice-Chair Bunde questioned the IRS impact.
Ms. Sylvester explained that under the IRS code, the $15
credit is not considered part of the wage. However, if the
employer paid the employee that $15 dollars, the employee
would then be taxed on that income.
Ms. Sylvester interjected that there is a floor and that
"zero wages" was the term used for when more expenses are
acquired then actual wages paid. According to the fair
labor standards act, the employer cannot go below what the
st
minimum wage was in January 1, 1997. The Alaska wage and
hour law takes precedence over federal law and is stricter.
She reiterated that the State cannot fall below what federal
law is.
Representative Davies asked if the State cannot go below the
federal standard, how could they then deduct the $15
dollars.
Ms. Sylvester responded that the people that work in the
canneries make a lot of money and they cannot go below $4.85
per hour level. If they did, they would be precluded
because the employer cannot break federal law.
Discussion among Committee members followed regarding the
minimum wage concerns and the minimum wage floor.
Co-Chair Williams noted that Alaska pays above the federal
established minimum wage.
Representative Davies reiterated his concern of what happens
when the employee is not getting the hours. Under that
circumstance, almost half of the employee's income would be
going to their deduction.
Representative Hudson asked if people coming to Alaska to
work in the sport fishing lodges would be affected.
Ms. Sylvester advised that AS 23.10.085© applies and states
that the regulations may permit deductions by employers
paying minimum wage, applicable through the wage and hour
act, to employees for the reasonable cost as determined by
the director on an occupation basis for furnishing board and
lodging. She stressed that it could apply to any situation
of any remote sight; however, the only industry that this
bill applies to is the fisheries business.
Representative Hudson recommended that there be equity in
treatment. He questioned if the Department's regulations
could manage the expense in a similar fashion.
TAPE HFC 02 - 77, Side B
Ms. Sylvester noted that the Department of Labor regulations
allows for that as long as there is alternative lodging
available. The statutes clearly state it will be on an
occupation basis. She noted that the Department could
further discuss that.
Representative Kott interjected that the legislation can
only happen on an occupational basis. He pointed out that
there had been a misinterpretation of the statute regarding
the difference between a remote and a non-remote processing
plant. He maintained that there is no difference.
Representative Harris acknowledged that the bill only deals
with the fisheries business, however, voiced concern that it
could be "turned" to the North Slope construction business.
Representative Kott explained that the bill clarifies that
the minimum wage earner could be penetrated. In the case of
construction workers, they earn substantially more than
minimum wage.
Representative Harris advised that he was thinking "down the
road" and his concern when similar legislation occurs in the
future to other industries.
Co-Chair Williams inquired if it would fall under the fair
competition standards.
Ms. Sylvester interjected that the issue is regarding paying
minimum wage. The most important issue is to allow the
employer to deduct the room and board from the wages.
Currently, regardless of how much an employee is making, the
employer is prevented from recouping those costs from the
employee. The amenities create a cost to the employer;
urban employers are not asked to float these costs, but the
remote employers are. The statute instructs the Department
to make that determination on an occupational basis.
ED FLANAGAN, COMMISSIONER, DEPARTMENT OF LABOR AND WORKFORCE
DEVELOPMENT, voiced strong opposition to the proposed bill.
He stated that an inaccurate rendition of the regulatory
history had been provided by the sponsor's office.
Commissioner Flanagan noted that the Alaska wage and hour
act was written in 1959, with permissive language, which
allows the Department to "may" promulgate regulations that
would allow for deductions for room and board. He noted
that was the same year that the minimum wage was established
at fifty cents over the federal minimum of $1 dollar an
hour. Some of the issues raised at this time, placed that
permissive language into the bill. No regulations were
promulgated until 1985. He emphasized that the policy has
been consistent through eight Administrations and three
different political parties, and indicates that room and
board in remote locations is not charged to the workers. He
pointed out that has been the custom of this country.
The 1985 regulations codified what the process was. At that
time, the Department stated that there would be allowances
made for reductions. He claimed that if the notion that
room and board was being a "fringe" benefit was accepted,
new and disturbing ground would be broken. The State would
be well on its way to charging all other industries the
same. He stressed that the Department has been consistent
and that there has been no oversight on the interpretation.
Commissioner Flanagan identified the significance of the
proposed change. There are some cannery workers that do
make money, however, he pointed out that they usually work
80 hours a week. With that many hours, the person would be
clearing $565 dollars per week. Given the proposed wage
increase, they would make $775 dollars per week. He
reminded members, that in those areas, there is no quality
of life. Some of these employees do not work the rest of
the year. These people cannot afford this legislation.
Commissioner Flanagan pointed out that the bill has an
immediate effective date. It could be imposed before the
minimum wage goes into effect. That would knock down their
salaries to less than $5 dollars an hour. That would be a
shame.
Commissioner Flanagan asserted that the Legislature should
be helping people "move over" the poverty level and minimum
wage. He stressed that the ones who will benefit from the
change are the employers. He pointed out that the
percentage of actual Alaskan workers has risen in that
industry from 24% ten years ago to currently about 40%.
Commissioner Flanagan emphasized that the proposed bill is
"bad legislation". The medium age for a cannery worker in
the State of Alaska is 34 years old. He disagreed with
comments made by Representative Kott that usually college
kids are hired. Commissioner Flanagan advised that there is
only one plant that hires the old model "college kid",
hoping to make a "bundle". Current day employees are "real"
people trying to make a living.
Commissioner Flanagan urged that the Committee reconsider
moving the bill.
Co-Chair Williams stated that the bill was attempting to
help the processors. He understood that the logging
industry used to pay room and board to loggers living in
remote sites.
Commissioner Flanagan replied that if they were paying for
room and board, they were not in compliance. He
acknowledged that the industry was having difficult times,
but to change the method in aiding them and denying workers
an increase in the minimum wage is bad policy. When times
were better in fishing, the processors made money, the
communities and fishermen made more money. The cannery
workers only make minimum wage, regardless of the health of
the industry. He reiterated that they do not make more
money when times get better.
Co-Chair Williams reiterated that the legislation was an
attempt to help the processors.
Commissioner Flanagan agreed that was the intent of the
legislation, however, stated that was not a good remedy.
Commissioner Flanagan disagreed with turning the State's
back on 33 years of practice and now beginning to charge for
room and board. He added that the action would affect all
the other industries.
Co-Chair Williams stated that the fishing industry is "down
on their knees" at this time. The Legislature is attempting
to help that industry. He acknowledged that the fishing
industry is changing.
Vice-Chair Bunde asked if there was a shortage of labor in
the industry.
Commissioner Flanagan replied that there has been in recent
years and that it moves up and down. There have been
attempts to move people from one location to another
attempting to follow the fish down.
Vice-Chair Bunde suggested that currently it is more of an
employees rather than an employers market.
Commissioner Flanagan replied that was true two years ago,
however, he was not sure about the circumstances at this
time. He noted that there have been many closures, however,
the processors have submitted more job orders than last
year. Commissioner Flanagan reiterated that the work camps
are a work, sleep, eat, environment. The cannery workers
make very little for the amount of work they do.
Vice-Chair Bunde claimed that some people chose to work hard
so that they can "take the rest of the year off".
Representative Davies commented that it would help the
processors if the minimum wage were cut in half. He asked
Commissioner Flanagan if the federal floor concerns had been
addressed.
RICHARD MASTRIANO, DIRECTOR, DIVISION OF LABOR STANDARDS &
SAFETY, DEPARTMENT OF LABOR, commented that he did not know
what Ms. Sylvester was referring to. If someone came to the
Department with a contractual situation and if that employee
agreed and voluntarily signed the contract, the employer
could make those deductions. It could be below minimum
wage.
Commissioner Flanagan interjected that there have been
situations in which the employee ended up with a zero
paycheck.
Mr. Mastriano added that that there have been times in which
transportation and other costs were deducted from the
employee wages, leaving the employee with no check. Those
are the types of complaints that an investigator would look
into.
Representative Kott asked if Mr. Mastriano had visited the
processing plant in Petersburg.
Mr. Mastriano replied that was not located in his area and
that he had not visited it.
Representative Kott asked if that plant was allowed to
deduct their food and lodging costs. He noted that they
were not a remote site.
Commissioner Flanagan replied that the Icicle plant in
Petersburg pays their employees $7 dollars per hour.
Representative Kott thought that with Icicle deducting those
costs, they were penetrating the minimum wage.
Commissioner Flanagan explained that there are alternatives
for food and lodging in Petersburg.
Representative Kott suspected that there would be only a few
people living in the campgrounds and not taking advantage of
the option offered by Icicle. He claimed that there are
benefits to eating in the camp provided meal facility.
Commissioner Flanagan replied that there are other
alternatives in Petersburg and that a person could probably
subsist on a lot less than $20 dollars per day. Deducting
is illegal and that has been the law for over forty years.
The legislation proposes to change the definition of room
and board, which is a major departure from what the practice
has been. He acknowledged that there are "tough" times for
the fishing and processing industry but they should not be
"helped out on the backs of workers".
Representative Kott pointed out that for some workers, the
employer has dropped their pay below minimum wage. He
stated that it should be made equitable and should be either
rejected or repealed. He did not understand how the State
could distinguish between rural and urban in an occupational
setting.
Commissioner Flanagan explained the area practices and the
established situation in the State at that time,
differentiates between urban and rural. The industry
guaranteed that certain industries would be excluded when
there was an alternative. In some locations such as
Petersburg or Kodiak, there is a local work force that works
in places. He noted that a formal campground could be an
option in Petersburg and Kodiak.
Representative Kott claimed that the regulation has been
discriminatory based on "remoteness".
Co-Chair Williams characterized that the bill as helping the
industry.
Representative Harris acknowledged that HB 504 was intended
to help the industry. He inquired if there had been an
effort with the Administration to work out the differences
to make the legislation "more appealing".
Representative Kott replied that there has not been much
dialogue with the Administration. He claimed that it was a
"cut and dry" issue.
Representative Croft claimed that there is a fundamental
difference between having a choice and not having a choice.
When a non-remote processor offers sub-standard housing for
the crew, they can go somewhere else. He asked the
Department's authority to monitor or change the condition of
the provided housing and food.
Commissioner Flanagan responded that the authority for
worker housing is listed under the Occupational Safety and
Health Administration (OSHA). He did not know how they
would deal with a complaint regarding the quantity and/or
quality of the food.
Representative Croft asked what would happen if there was an
allegation that the worker was not getting their $15 dollars
worth of food and bed.
Mr. Mastriano responded that if someone were to complain to
the Department about the reasonable costs charged, the
Department goes by the federal guidelines and would perform
a reasonable cost audit.
Representative Croft understood that the Department would
not have the authority, under the proposed legislation, to
define "reasonable".
Commissioner Flanagan stated that the fiscal note was based
on the original bill. If lawfully adequate room and board
were being provided, the cost would probably be over $15
dollars. If there were complaints, the Department would
have to investigate. The $15 dollar amendment moves much of
the fiscal note and there would probably not be more than
forty or fifty audits a year.
Representative Davies and Co-Chair Williams argued over
whether to discuss the bill further.
Co-Chair Mulder interjected that there was bond counsel on
line to discuss HB 423. He noted that was costing the State
$150 dollars per hour for the legal advice. He pointed out
that he had urged Co-Chair Williams to wrap up discussion on
HB 504 more quickly. He apologized to the Committee.
Co-Chair Mulder digressed and asked if the ergonomics
regulations were still in place.
Mr. Mastriano replied that the Department was in the process
of rewriting those regulations.
Representative Croft asked the source of "reasonable and
fair" with regard to the food and lodging and the context in
which it was being used.
Mr. Mastriano replied that was a federal source reference.
He added that the costs of actually operating the facility
must be taken into account, and not for profit. If the
facilities were similar, they would look at what the cost
for utilities & depreciation would be. All those
considerations take into account what a reasonable profit
is.
Representative Croft asked how long that had that been a
part of federal law.
Mr. Mastriano replied since 1938 and that whenever a
reasonable cost is determined, profits are not included.
Co-Chair Williams stated that HB 504 would be HELD in
Committee.
HB 504 was HELD in Committee for further consideration.
TAPE HFC 02 - 78, Side A
HOUSE BILL NO. 423
An Act relating to the Alaska Railroad; authorizing the
Alaska Railroad Corporation to provide financing for
the acquisition, construction, improvement,
maintenance, equipping, or operation of facilities for
the transportation of natural gas resources within and
outside the state by others; authorizing the Alaska
Railroad Corporation to issue bonds to finance such
facilities; and providing for an effective date.
NEIL SLOTNICK, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
spoke in support of the legislation. He observed that the
initial review indicated that public financing could not be
used for private activity. There are some exceptions to
that rule, with a private activity cap for $225 million
dollars, which the State does have access to. That cap is
almost always fully subscribed to because Alaska Housing and
Finance Corporation (AHFC) use it for some of THEIR housing
finance needs. None of the exceptions fit into something as
large as a gas pipeline. Mr. Slotnick pointed out that
there was one other exception and that there could be a
"special congressional" exception to the requirement.
Mr. Slotnick noted that is where is was left when some
outside advisors, bond counsel and the investment bank,
Goldman and Saks, came to the Department of Revenue and
informed the State of a special State exception that already
exists in federal law, the Railroad Transfer Act. He
pointed out that a copy of that statute had been included in
member's packets, USC Title 45, Chapter 21, the Railroad
Transfer Act, Section 12.07.A6A. (Copy on File). The
exception allows the railroad to borrow money on a tax-
exempt basis for purposes, which would include the financing
of a transportation project of a natural gas pipeline. In
addition, the Railroad would not have to take ownership of
the pipeline.
Mr. Slotnick explained that would be termed "conduit"
financing. He referred to Page 4 of the handout and the
financing of the marine terminal by the City of Valdez.
That City, using its tax-exempt financing status, did the
financing but Valdez did not have to undertake the ownership
of the marine terminal. They did not have to use their own
credit-at-risk to issue bonds. The bonds are guaranteed by
the credit of the underlying companies. The State is using
the same analogy to explain what can be done for the gas
pipeline. The law in the Railroad Transfer Act is a unique,
special exception that does not have the same limitations of
other practices trying to do private activity financing.
Mr. Slotnick explained how the financing would move forward
in the market. He referred to the Canadian gas pipeline.
That project was 70% debt and 30% equity, which is about the
most debt that the market would allow the State of Alaska to
undertake. The market wants to guarantee that there is a
principal behind the financing that has its own capital at
risk. Tax-exempt financing runs at about 20% - 25% less
than taxable financing.
Mr. Slotnick referenced the "Alaska Gas Pipeline Financing
Alternatives" handout. (Copy on File). He noted Page 12,
"Taxable versus Tax-Exempt: Gross Interest Cost". He
commented that the best way to determine the savings is by
preparing a present value analysis. There would be
approximately a $1 billion dollar savings if the producers
had access to tax exempt financing through the Railroad. He
reviewed some of the assumptions used in preparing the
analysis:
· The credit would be backed by companies
through a ship or pay contract.
· If project financing was used, it was assumed
that there would be approximately an 8.5%
interest rate with 6.5% tax exempt;
· Four year construction period; and
· Twenty-five year bond issue.
Mr. Slotnick explained why the State legislation was
necessary even with the federal authorization. The feds
gave the authority, but when the State purchased the
Railroad, it did not give authority to issue bonds for a gas
pipeline transportation project. The legislation authorizes
the sale of bonds in the market for a project that is backed
by contracts with the producers.
JEFF BROWN, (TESTIFIED VIA TELECONFERENCE), GOLDMAN AND
SACKS, spoke in support of the legislation. He observed
that there would be a 20-year amortization on the debt. The
Governor's number of $1 billion dollars could be larger
given more aggressive assumptions. He complimented the
Alaska State Department of Revenue for their detailed work.
In response to a question by Vice-Chair Bunde, Mr. Slotnick
noted that producers do not feel that there is enough
incentive. The Department's assumptions were based on a $17
billion dollar project and a $3 barrel of gas would have led
the State to the same conclusion.
Vice-Chair Bunde estimated that a substantial return on the
investment would be needed.
Mr. Slotnick did not know what the hurdle rate would be for
the producers.
Representative Davies observed that there are concerns
regarding the application of the Railroad Act.
Mr. Slotnick noted that the IRS has not been consulted on
the issue.
ERIC WOHLFORTH, (TESTIFIED VIA TELECONFERENCE), ECONOMIST,
ANCHORAGE, explained that it was adequate and complete for
the Railroad to undertake tax exempt financing of the gas
line when the Legislature authorizes that project. The
Railroad lacks the power to issue bonds; consequently, the
bill is needed. Once the bill passes, the Railroad would be
legally able to move forward with the pipeline-financing
project.
Representative Davies asked about the issues around the IRS
re-authorization.
Mr. Wohlforth explained that the federal authorization path
cleared without conflicts or ambiguities. It was clarified
that there could not be specific exemptions. There is no
doubt that there is clear authority to undertake the
project.
Representative Hudson asked about the problem between the
Railroad and the pipeline and the restrictions upon the
Railroad's use of the tax-free borrowing capacity.
Mr. Wohlforth advised that the financing of a gas pipeline
is within the charter authority of the Railroad and the
Railroad was authorized to undertake financing for that
purpose. It would be used for transportation.
Representative Hudson asked who would own the $1 billion
dollar asset.
Mr. Wohlforth explained that the gas pipeline would remain
within the ownership as if no public financing had taken
place and would be a pass through, non-recourse financing.
It would be a financing not involving the change of
ownership. There would be legal support of the bonds, but
it would not allow any transfer of ownership.
Representative Hudson asked clarification that the State
would no longer have the asset value of $1 billion dollars
if the Railroad secures the tax-free funds.
Mr. Wohlforth agreed and added that the State would not have
ownership in the gas pipeline were financed.
Representative Croft asked if it was assumed was that the
producers would own it.
Mr. Wohlforth thought that question should be left to
Department of Revenue.
Mr. Brown added that the shippers for the oil companies
would own the pipeline and that they would be able to take
the depreciation benefits on the pipeline. He explained
that was important because:
· The ownership is a huge economic issue; and
· The Governor's Pipeline Counsel recommended
that the State not own the pipeline.
Representative Croft asked if the "shippers" were the people
who own the right to the oil.
Mr. Brown commented that the shippers could either be those
who own the oil or the "ultimate" customers.
Representative Croft understood that the more financially
secure the entity, the less advantage they get from the
status. He asked if it was correct that a corporation as
solvent as Exxon, would receive less of a benefit than an
independent pipeline company.
Mr. Brown agreed that was a "fair assumption". With most
big projects, there is an advantage to the user of the
pipeline in order for it to be project financed. That
minimizes the expensive equity put in. Different companies
will look at it differently. Initially, only a few
companies were registered but as it became a success, twenty
or thirty companies came on board. That is why companies
appreciate doing their own balancing rather than using a
project balance sheet.
Representative Croft asked the different models created
between a company owned by an independent versus the
producer.
Mr. Brown noted that if an AAA oil company were financing it
long term and using relatively less debt, versus a BBB
pipeline company, the benefit would be very different.
Representative Whitaker asked if the mid-point savings would
be $1 billion dollars over a twenty-year time period and if
it would be weighted equally over the course of the twenty
years.
Mr. Slotnick stated that was not accurate as that is not the
manner in which the municipal bond market works. The full
advantage of the tax exemption is not yet provided.
Bondholders do not like to take long-term tax risk. The $1
billion dollars value is the present value and in actuality,
it would be more like $5 billion dollars real terms.
Mr. Brown noted that the raw numbers amounted to nearly $100
million dollars per year.
Representative Whitaker thought that the $100 million
present dollar per year value added to an expected return,
by the State's assumption would not get the project "over
the hurdle". He claimed that the producers were seeking
another number.
Mr. Slotnick advised that the economists had plugged in
various assumptions over the years. He did not know what
was a reasonable projection.
Representative Whitaker referenced the $163 million dollar
FY05 fiscal note projection, a contractual expense to be
paid by bond proceeds. He questioned what the $163 million
dollars would be used for.
Mr. Slotnick advised that would be used for the expense of
issuing bonds. It would be paid to bond counsel,
underwriters and financial advisors. The decision would be
left up to the Railroad, as they would be the contracting
entity. Mr. Slotnick suggested that future questioning be
directed to the Railroad. He advised that he had spoken
with the Railroad to help develop the procedures for going
to market. The agencies involved are Alaska Housing Finance
Corporation (AHFC), Alaska Industrial Export & Development
Authority (AIDEA), and the Department of Revenue.
Vice-Chair Bunde asked who would pay the cost.
Mr. Slotnick explained that the cost would be paid by the
Railroad and would be reimbursed through the proceeds of the
bond sale. The eventual payer would be the owner of the
pipeline.
Representative Whitaker commented that the cost would be
reflected in the tariff. He assumed that the State of
Alaska would essentially be paying the $160 million dollar
cost.
Mr. Slotnick acknowledged that the cost of issuance of the
bonds would be reflected in the tariff, even if it were
taxable through taxable bonds or through tax-exempt bonds.
DAN FAUSKE, (TESTIFIED VIA TELECONFERENCE), EXECUTIVE
DIRECTOR, ALASKA HOUSING FINANCE CORPORATION, DEPARTMENT OF
REVENUE, WASHINGTON D.C., stated that there are a lot of
questions that need to be answered in reference to the IRS.
He noted that those concerns are beyond the control of AHFC
and the legislators. He commented that the proposed
legislation was a very "do-able" deal. However, the IRS
agents or U.S. Congress could question the deal. He stated
that it is important that the State put itself in a position
to act on the proposed deal. He believed that would send a
strong message to Congress about Alaska's preparedness to
undertake the deal. Additionally, it would send a message
to the oil and gas industry that the project is do-able and
in the case of dollars, tax exempt financing would be a step
in the right direction to make the project viable.
Mr. Fauske referenced the fiscal note and the underwriting
costs. The costs are built in on how to price that bond.
Mr. Fauske did not know how those costs would be paid.
JOHN BITNEY, LEGISLATIVE LIAISON, ALASKA HOUSING FINANCE
CORPORATION, DEPARTMENT OF REVENUE, referenced the handout
distributed, "Presentation to the House Finance Committee by
Alaska Housing Finance Corporation, April 9, 2002". (Copy
on File). He noted that the information in the handout is a
replica of what AHFC provided to the Alaska Railroad for
preparing the tax-exempt finance bond.
JOE DUBLER, CHIEF FINANCAL OFFICIER, ALASKA HOUSING FINANCE
CORPORATION, DEPARTMENT OF REVENUE, introduced the team of
participants with AHFC and financial advisors that were on
line.
Mr. Dubler spoke to the assumed a 30-year term. He claimed
that AHFC's proposed numbers were more aggressive. He
referenced the booklet and the tax-exempt bond issuance:
· Selecting appropriate professionals such as
the financial, tax, legal, and financing
specific experts;
· Performing feasibility analysis such as tax,
financial, and project analysis;
· Developing optimal finance structure such as
coordination with users of project;
· Generating local support;
· Providing information to the public; and
· Responding to rating agency concerns and
obtaining a rating.
TAPE HFC 02 - 78, Side B
· Marketing the bonds with the institutional
and the retail investors; and
· Providing continuing disclosure.
Representative Whitaker thought that there should be more
than one approach to the bond issue.
Mr. Bitney explained that AHFC was hoping that based upon
their experience in providing the "lion's share" of tax
financing to the State, they would show the types of things
that are necessary to undertake that type of financing. HB
423 would authorize the Alaska Railroad for the federal tax
exemption. The passage of the bill would be financing under
the auspicious of the Alaska Railroad. At that point, it
would be the obligation of that agency to conduct the
financing.
Representative Whitaker asked if there would be an
opportunity for the State to gain some of that portion back.
Mr. Wohlforth explained that in 1974, the City of Valdez was
part of the first financing. The City charged 1% and has
continued to charge that fee for recent refinancing,
extending the term to 2031. With the 1% increased aid fee
the City has charged, they now have a permanent fund in the
order of approximately $55 million dollars. That could be a
consideration for the Railroad.
Representative Whitaker questioned if the AHFC approach was
different from the approach put forward by the Department of
Revenue.
Mr. Bitney responded that there have been no decisions
regarding the specific approach of how to address the
concern. AHFC is providing a series of necessary steps in
order that it can happen. The key rests with the selection
of the people involved in structuring the financing.
Representative Whitaker asked if the State was on the
correct financing course.
Mr. Bitney did not know of any problems at this point. It
is a process that needs to be driven by the Railroad.
Representative Whitaker commented on the nature of the
transaction and the value it could have for serving the
State of Alaska. He suggested that if AHFC should become
aware of something in the process that was "non-
competitive", they would come forward and warn the
Administration.
Mr. Dubler explained that to the extend that AHFC was
involved in any transaction, they will take steps to insure
the process.
Representative Whitaker asked who would insure that the
process was procedurally competitive and in compliance with
how the public process is conducted.
Mr. Bitney advised that at this point in the process, AHFC
is not in charge of the financing, pointing out that right
now, AHFC is only addressing the process needed to get the
procedure started.
Mr. Dubler explained that the meeting presentation had been
encouraged by Alaska Railroad and was not intended to be a
secondary or alternate approach.
Representative Whitaker asked who is in charge.
Mr. Dubler explained that the Railroad is in charge.
Mr. Fauske noted that AHFC was asked to prepare advice based
on their experience. There are a couple of agencies
involved that have extensive experience in financing. These
agencies stand on the position that offering assistance
would help show the way for the transaction to happen.
Alaska Railroad will be issuing the bonds and they have no
experience in doing that. With a model in place, AFHC,
AIDEA and the State would be the best and most effective tax
models.
Mr. Fauske mentioned that with a "deal" this large, it is
important to get as many outside firms as possible involved
to help market it. It is imperative that the Alaska
Railroad authority will reside with that entity and that the
Railroad has absolute control over the financing. He
advised that there have been no discussions other than how
to approach the issue with the underwriters. Mr. Fauske
urged that the idea move forward as it would mean a great
deal for the State and to the Nation.
MICHAEL HURLEY, PHILLIPS ALASKA, ANCHORAGE, spoke in support
of HB 423. He noted that Phillips Alaska has reviewed the
concept embodied in the bill. Conduit financing does have
the potential to benefit the gas pipeline project.
Additional clarity in several areas will be needed. He
added that Phillips Alaska is continuing to evaluate the
impacts more fully. At this time, Phillips Alaska supports
passage of the legislation, which would provide the
authorization necessary if the project were to become a
viable alternative.
Representative Whitaker asked who Mr. Hurley previously
represented.
Mr. Hurley noted that in the past, he had represented three
companies, Exxon Mobil, British Petroleum and Phillips
Alaska.
JERRY MCCUTHEON, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE,
claimed that there will not be a gas pipeline out of Alaska
in our lifetime. He spoke to concerns regarding the C2's
and C3's. The project would need about five trains a day.
He commented that it could be done, if the State was willing
to pay for the track. Amtrak is requesting billions of
dollars. Amtrak and the Alaska Railroad are the two
eligible entities for those billions for which Amtrak
desperately needs. He said that the current system of
putting the gas liquids in a hot oil line is wasteful.
Vice-Chair Bunde suggested that there should be
opportunities for future legislators to "weigh-in" or review
the procedures. He warned about the size of the project and
the amount of oversight that it will need.
PAUL FUHS, YUKON PACIFIC CORPORATION, spoke in support of
the proposed legislation. He noted that when it was first
proposed, it could only be used for a pipeline through
Canada. The Oil and Gas Committee did amend the bill to
allow other options including the pipelines to tide water in
Alaska.
Mr. Fuhs pointed out that the State is attempting to make an
economic model of a project available to the Oil and Gas
Committee in contrast to other projects. Mr. Fuhs noted
that there have been rates of returns indicated in the range
proposed by Vice-Chair Bunde. If the railroad model could
improve the financing, those rates would improve more.
He claimed that there is a huge fight regarding who will get
the value added for the project. At this time, there are 18
alternative proposals. He stated that he would make the
handout about the alternative mean proposals available to
the Committee. (Copy on File). Two tests need to be used to
determine whether the project is feasible:
· The first is the economic amount being put
forward and whether the market would be
buying that gas; and
· Whether the bonds can be sold. People will
need to believe in the economics of the
project.
Co-Chair Williams noted that HB 423 would be HELD in
Committee for further consideration.
ADJOURNMENT
The meeting was adjourned at 4:45 P.M.
| Document Name | Date/Time | Subjects |
|---|