Legislature(2017 - 2018)ADAMS ROOM 519
05/02/2018 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB331 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 331 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
May 2, 2018
9:29 a.m.
9:29:00 AM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 9:29 a.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Mark Neuman - Alternate
Representative Dan Ortiz
Representative Lance Pruitt
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative Steve Thompson
ALSO PRESENT
Jane Pierson, Staff, Representative Neal Foster; Mike
Barnhill, Deputy Commissioner, Department of Revenue; Ken
Alper, Director, Tax Division, Department of Revenue; Jim
Beckham, Deputy Director, Division of Oil and Gas,
Department of Natural Resources; David Teal, Director,
Legislative Finance Division; Representative Charisse
Millet; Representative Jennifer Johnston; Representative
Chris Birch; Representative Jonathan Kreiss-Tompkins;
Representative Lora Reinbold; Representative George
Raucher; Representative Mark Neuman.
PRESENT VIA TELECONFERENCE
Emily Nauman, Legislative Legal Services;
SUMMARY
HB 331 TAX CREDIT CERT. BOND CORP; ROYALTIES
CSHB 331 (FIN) was REPORTED out of committee with
a "do pass" recommendation and with three new
fiscal notes: two indeterminate fiscal notes and
one fiscal impact note by the Department of
Revenue; and one previously published zero note:
FN1(DNR).
HOUSE BILL NO. 331
"An Act establishing the Alaska Tax Credit Certificate
Bond Corporation; relating to purchases of tax credit
certificates; relating to overriding royalty interest
agreements; and providing for an effective date."
9:29:51 AM
Co-Chair Seaton MOVED to RECIND action on Conceptual
Amendment 11 [The amendment was considered during the April
27, 2018 meeting.]
Representative Pruitt OBJECTED.
Co-Chair Seaton explained his motion. He noted that the
sunset date changes conflicted with the "028" credits
[AS.43.55.028. Statute containing credit provisions] and
the timing in relation to the bond issue. He voiced that a
future legislature could consider the action.
Co-Chair Foster indicated Representative Charise Millet had
joined the meeting.
Representative Pruitt WITHDREW his OBJECTION
There being NO OBJECTION, it was so ordered.
Co-Chair Seaton WITHDREW Conceptual Amendment 11.
Co-Chair Seaton MOVED to ADOPT proposed committee
substitute for HB 331 (FIN), Work Draft (30-GH2863\O,
Nauman, 5/1/18).
Representative Wilson OBJECTED for discussion.
Co-Chair Foster invited Ms. Pierson to the table to explain
the changes in the committee substitute (CS).
9:32:52 AM
JANE PIERSON, STAFF, REPRESENTATIVE NEAL FOSTER, reviewed
the changes to the bill by reading from a prepared
statement:
Page 1. Lines 1-5 Title The title in version O is
amended to include language acknowledging the issuance
of bonds, the payments and refunds of unused portions
of certain tax credits issued under AS 43.20, and the
changes to the oil and gas tax credit fund added by
amendment #3.
Page 1, Line 13 Page 2, Line 11 AS 37.18.010
Technical and conforming changes were made.
Page 2, Lines 17 25 AS 37.18.030(a) "powers of the
corporation" was added to the subsection title.
Purchases or payments was changed to "purchases,
refunds and payments". "Transferred" was changed to
"disbursed" consistent with the rest of the bill. The
restriction on bonding in the last sentenced before
December 31, 2021, now excludes refunding bonds from
this subsection.
Representative Wilson referenced line 21 and wondered about
the change from "shall" to "may." Ms. Pierson responded
that the change occurred when Legislative Legal Services
(LAA) was drafting the bill and making technical and
conforming changes. She deferred to LAA for further
clarification.
9:35:03 AM
EMILY NAUMAN, LEGISLATIVE LEGAL SERVICES (via
teleconference), explained that in the "A" version of the
bill the sentence mandated that all proceeds from the bonds
were disbursed to the commissioner {Department of Revenue
(DOR)] for purchases of tax credits under AS.43.55.028.
However, on page 3, lines 15 through 18 the section allowed
the proceeds to be deposited into the reserve fund. She
reasoned that the word "shall" conflicted with both options
and she changed the word to "may" to conform to the
language on page 3. Representative Wilson deduced that the
word "may" was not implying an option to not pay the
credits. Ms. Nauman responded affirmatively and added that
"may" allowed some proceeds to be deposited into the
reserve fund.
Ms. Pierson continued reading from her prepared statement:
Page 2, Lines 26 29 AS 37.18.030(b) Language was
changed to parallel the bond approval structure
language in art. IX, sec. 8, Constitution of the State
of Alaska.
Page 3, Lines 15-23 AS 37.18.040(a)(2) This paragraph
was broken into subparagraphs for clarity.
Page 3, Lines 24 Page 4, Line 2 AS 37.18.040(b) The
reference to subsection (h) was removed, consistent
with the removal of subsection (h).
Page 4, Lines 3-7 AS 27.18.040(c) The phrase "as
defined in (b) of this section" was problematic since
"required debt service reserve" was not defined in
(b). (defined in AS 26.67.290(b)) Reference to (h) was
also removed, consistent with the removal of
subsection (h).
Former subsection AS 37.18.040(h) was removed. It
appears that the former subsection (h) was a holdover
from drafting the pension obligation bond
authorization and per legislative legal, it appears to
serve no purpose in this bill.
Page 6, Lines 11-17 AS 37.18.050(d) A cross reference
was added to (b) in addition to the reference to (a)
since some of those actions happen under (b).
Page 6, Lines 23-24 AS 37.18.060 Language was added
stating the corporation shall publish notice of the
adopted resolution.
Representative Wilson asked where the notice would appear.
Ms. Pierson deferred the answer to DOR.
9:40:02 AM
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
responded that legal notices were often published in
publications that were distributed statewide like the
"Alaska Journal of Commerce." The statute did not specify
where the legal notices were to appear. Representative
Wilson asked whether legal notices were common practice
with bonds. Mr. Barnhill responded that the legal notice
was placed by the bond corporation to broadcast that a
resolution was published. He indicated that the statute of
limitations was 45 days; the public had 45 days to file a
lawsuit.
Ms. Pierson continued with the summary.
Page 7, Lines 3-6 AS 37.18.080 This section was
changed to Purposes; limitation on issuances from
Purposes and sufficiency of revenue. There does not
appear to be a sufficiency of revenue provision in
this bill.
Page 7, Lines 12 18 AS 37.18.090(b) Changes language
to parallel the bond approval structure language in
art. IX, sec. 8, Constitution of the state of Alaska.
Page 8, Line 4 AS 37.18.090(e) was added to the O
version. "The corporation is authorized to incur
expenses to carry out this section."
Page 8, Lines 11-18 AS 37.18.110 Limitations on
Judicial Action was added per Amendment #2.
Page 8, Line 29 Page 9, Line 4 AS 37.18.190(4)
Drafting correction deleting "means and includes" to
conform with the legislative drafting manual.
Former Sec. AS 37.18.900(5) was removed the definition
of "department" is not used in this chapter.
9:43:05 AM
Representative Wilson asked to return to page 8, lines 19-
23. She wondered why the section numbers were changed. Ms.
Pierson deferred to LAA.
Ms. Nauman explained that renumbered sections were due to
drafting decisions. The numbering change occurred so that
the entire "numbering set" of the chapter would not be
used.
Representative Neuman referred to page 8, lines 11 through
18, Section AS.37.18.11 that pertained to the limitation on
judicial action. He wondered if the language was "boiler
plate" type policy or if the language was something new.
9:44:59 AM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
acknowledged that the legality of the bond issue was in
question. He indicated that if challenged, the
administration wanted a quick resolution to prevent a
lawsuit after the bonds were already sold. The
administration felt that dealing with legal challenges
"sooner rather than later" enabled the plan to move forward
faster. He furthered that a fair amount of precedent
regarding limitations on judicial action existed. He noted
that similar language was placed in legislation related to
the Stranded Gas Act, Alaska Gasline Inducement Act (AGIA),
and the Alaska Gasline Development Corporation (AGDC).
Representative Neuman asked if the language had been used
before. Mr. Barnhill indicated that he had never seen the
provision used regarding bonds. However, it had been used
in conjunction with other state statutes in the context of
gas development. Representative Neuman interpreted the
language in a manner that he thought dictated to industry
that the state had the absolute authority on how to use the
bonds. He voiced that the "bottom line" interpretation and
message to industry was that "the state was going to be
correct no matter what the dispute is." Mr. Barnhill stated
that the provision was in direct response to the conflict
in legal opinion between LAA and the Department of Law. He
reported that the likelihood of litigation was plausible,
and the department wanted to engage in the process as soon
as possible. He indicated that the proposal was not the
only situation where a state entity issued subject to
appropriation debt and thought it was necessary to get
through the litigation quickly to remove the "cloud" from
the concept of subject to appropriation debt.
9:48:14 AM
Representative Neuman relayed his experience with Knik Arm
Bridge and Toll Authority (KABATA) employing a revenue bond
proposal to repay the state. He commented that the revenue
bonds needed a known revenue source. He indicated that the
current bond proposal; issuing revenue bonds without a
revenue source was the reason for the legal question. He
characterized the scenario as "unique" and concluded that a
"unique judicial action plan" was necessary in case of
legal challenges. He maintained that there were
"significant differences" between DOL and LAA and he
thought "it was a huge red flag." He wondered why the
language was necessary. Mr. Barnhill explained that the
department did not view the bill's structure as a revenue
bond per say. The bond was structured to be issued by a
state corporate entity that did not receive revenue,
therefore used a subject to appropriation tool, which was
at the center of the legal dispute. He declared that the
method was "unusual", but the point of the language was to
move it along the legal process and gain "clarity" from the
state Supreme Court "as quickly as possible."
Representative Neuman asked whether the state could
accomplish the same goal without the legal challenges "by
simply stating that the legislature could appropriate up to
$180 million per year for 5 years to pay off oil and gas
tax credits out of the general fund (GF)." Mr. Barnhill
asked whether he meant that the security for the bonds used
legislative appropriation "upfront." Representative Neuman
replied that the proposal "was still a moral obligation of
the state." The bill specified the payment schedule without
knowing the interest rates, the amount of debt, and the
purchase price of the bonds. He thought that the same
result could be accomplished by granting DOR the
appropriation authority or create a corporation with the
authority to comply with the payment schedule in the bill;
$180 million per year for 5 years up to $800 million. Mr.
Barnhill responded that he "wished" a resolution was "that
easy." He deduced that Representative Neuman's scenario
"would suffer from the same problem." Representative Neuman
asked whether the reason was that the scenario still relied
on legislative appropriation. Mr. Barnhill answered in the
affirmative.
9:52:08 AM
Vice-Chair Gara surmised that the bond issuance would not
proceed without an opinion from the attorney general and
the legislature would receive a letter from the National
Bond Council who would issue an opinion after a legal
review. Mr. Barnhill replied that Vice-Chair Gara was
correct. Vice-Chair Gara voiced that the process provided
him with the assurance he needed regarding the legislation.
Ms. Pierson continued to read from her prepared statement:
Page 9, Lines 7- 16 AS 43.20.046(e) Language was added
regarding subject to appropriation by the legislature
Language was also added to allow the Department of
Revenue to make a refund using the oil and gas tax
credit fund, from money disbursed to the commissioner,
or both.
Page 9, Lines 17 26 AS 43.20.047(e) Language was
also added to allow the Department of Revenue to make
a refund using the oil and gas tax credit fund, from
money disbursed to the commissioner, or both.
Page 9, Line 27 Page 10, Line 5 AS 43.20.053(e)
Language was also added to allow the Department of
Revenue to make a refund using the oil and gas tax
credit fund, from money disbursed to the commissioner,
or both.
Page 10, Lines 6-13 AS 43.55.028(b) New language added
by amendment #1. The balance of the amendment is found
in (r)of this section.
Page 10, Line 14 Page 11, Line 11. AS 43.55.028(e)
Language was added to allow the purchase of tax
credits with money in the oil and gas tax credit fund,
money disbursed to the commissioner, or both. Language
was also added on line 24 27 that reflect amendment
#3.
Page 12, Lines 4-12 AS 43.55.028(i) This section was
rearranged to be in alphabetical order, as is standard
for definitions sections. "For the purchase in this
section" was removed from the definition of "true
interest cost." Because the bonds will be purchased
under AS 43.55.028, the language was unnecessary and
confusing.
Page 12, Line 30- Page 14, Line 8 AS 43.55.028(k) In
an effort for clarity, some of the repetitive language
was removed regarding notice and ties other provisions
to the 10-day notice of acceptance.
Page 14, Lines 9- 26 AS 43.55.028(l) Proration
language has been moved into subparagraphs to provide
clarity.
Page 14, Line 27 Page 16, Line 8 AS 43.55.028(m)
This draft the phrase "each year" in multiple places
in this subsection, since the first sentence specifies
that the discount rate applies each year after the
first year. Amendment # 4 is included in subsection
(m) and (n).
Page 16, Lines 9-15 AS 43.55.028(n) Language was added
to state that penalties do not occur, if the applicant
could not incur the expenditures due to natural
disaster, injunction or other court order.
Page 16, Lines 29 Page 17, Line 2 AS 43.55.028(r)
New language relating to amendment #1 on the double
draw.
Page 17, Lines 10-12 AS 44.37.230(a) expands the
requirements for the Department of Natural Resources
to assist the Department of Revenue were expanded.
9:56:36 AM
Ms. Pierson continued reading from a prepared statement:
Page 19, Lines 1-4 AS 44.37.230(g) gives the
Department authority to request information from an
applicant and to require the applicant to provide
additional information.
Page 19, Line 18. Sec 13 Repealer section. Section 13
repeals specific sections of HB111.
The most important section being repealed is Sec. 31,
which is itself a repealer of a bunch of sections of
law including all of 43.55.028. It also repeals a
number of sections specific to purchasing credits
through the .028 fund (for example 43.20.053(e). The
rest of 053 is the refinery credit. The (e) is how the
.028 fund is used to purchase them.
Most of the other repealed sections from HB111 are all
conforming, the change language to adapt to the fact
that certain statutes are no longer repealed. Since
they're not being repealed, we don't need the
conforming amendments. All of this together is in Sec.
13 of HB331.
The last item listed in Sec. 13 is repealing Sec. 43
of HB111. This one is the condition that triggers the
repealer: the commissioner of revenue says there are
no more credits to buy.
Representative Wilson asked whether all the information was
confidential. Mr. Alper replied that the Department of
Natural Resources (DNR) might want to weigh in. He
responded that whatever revenue DOR received was
confidential tax payer information. He thought that DNR had
a similar confidential taxpayer relationship through
royalty payments and would act similarly with HB 331.
9:57:41 AM
JIM BECKHAM, DEPUTY DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, answered that any
additional information the department would request were
financial statements, reserve reports, and geological and
geophysical engineering information that would likely be
held confidential after the analysis was completed.
Ms. Pierson continued with Page 19, Line 18, Section 13 of
the legislation related to repealers. She deferred to DOR
and LAA to explain the changes.
Mr. Alper delineated that HB 111 (Oil & Gas Production
Tax;Payments;Credits) [CHAPTER 3 SSSLA 17 - 07/27/2017] was
adopted the previous session, contained a contingent set of
repealers. Once the last tax credit was paid off a process
was triggered that eliminated the 028 fund and all
corresponding statutes would be repealed. The problem was
that there were many sections in the CS that referenced the
fund and the process "would be orphaned without the
language that was being repealed." The way the
administration chose to resolve the issue without adding
many pages of additional language to the bill was to simply
"eliminate the future contingent repealer." Therefore, the
language provided that "once the credits were paid the fund
statutes would be left in place," which enabled an
expedient way for the CS to contain a simpler bill
structure. The section repealed the future effective dates
and the actual repealer section in HB 111. He indicated
that when the credits were paid off the credits were
eliminated but the statues remained in place.
Co-Chair Foster invited Ms. Nauman to comment.
Ms. Nauman concurred with Mr. Alpers statements.
Ms. Pierson continued:
Page 19, Line 19 Page 20, Line 11 Notice to the
Revisor of Statutes. Provides language for the
Commissioner of Revenue to provide the revisor of
statutes information when bonds and the oil and gas
tax credit fund are no longer being used.
Co-Chair Seaton informed the committee that the repealer
section in the CS accomplished the provisions contained in
the withdrawn amendment. He added that the provision
alerted a future legislature to repeal the statutes that
were no longer in effect.
Mr. Alper interjected that similar language was in Section
43 of HB 111 and was the conditional trigger that set the
repeals in motion. The language in Section 14 of the CS
merely notified a future legislature of the need to repeal
the statues.
10:03:22 AM
Ms. Pierson relayed the changes on Page 20:
Page 20, Line 24 Repeals Section 46, ch. 3, SSSLA 2017
which is the delayed effective date.
Mr. Alper explained that Section 13 of HB 111 contained the
substantive repealers and Section 46 was the effective date
section related to the repealers. He concluded that Section
16 of the CS was functionally an effective date section in
another bill.
Co-Chair Foster noted that Representative Lora Reinbold and
Representative George Raucher were in the audience.
10:04:40 AM
Representative Ortiz asked for a general summary of the
changes between the original version and the CS. Mr.
Barnhill responded that the CS contained the amendments the
committee adopted in the previous meeting. In addition, the
CS attempted to align the differences in the bill drafting
preferences between DOL, LAA, and the bond council
according to LAA preferences. Representative Ortiz asked if
the effect of any of the changes made the bill more
resistant to legal challenges. Mr. Barnhill believed the
drafting changes provided more clarity but not
"immunization against legal attack."
Representative Ortiz cited Ms. Nauman's legal opinion
previously submitted [refer to 4/21/2018 meeting (copy on
file)]. He asked if her opinion remained the same. Ms.
Nauman responded in the affirmative and added that none of
the changes in the CS resolved any of the legal issues she
identified in her legal memo. However, the bill did address
one of the constitutional issues she identified. She
explained that originally money was transferred from the
bonds to the corporation to the commissioner who then
purchased tax credits. The process was not subject to
legislative appropriation and she believed that all the
transfers of funds moving in and out of the general fund
was subject to appropriation. The new CS provided that the
legislature must appropriate the money that would be used
to purchase the tax credits and included the conforming
changes necessary throughout the bill.
10:08:10 AM
Representative Wilson referenced page 14, subsection (l)
and asked why the subsection was rewritten. Mr. Alper
replied that the subsection was written and included
(c)(1), (2), and, (3) to describe the sequence of the
calculation and how it was calculated and prioritized. He
noted the change was stylistic and was previously in
paragraph format and included the words "proration
methodology" versus "proration amount" in the CS. The
underlying logic was identical to provisions in the
original bill. He delineated that all holders of
certificates that requested money in the earliest years had
priority over later years' requests, and equal priority was
granted within the same year; all the 2016 credits would be
paid first, subsequently the 2017 and 2018 would be paid
sequentially. He pointed to the language in Section 18 that
defined the statutory appropriation based on the current
revenue forecast before the application of tax credits. The
specificity eliminated any potential dispute over the
appropriation formula. Therefore, subsection (l) enabled
DOR to calculate the schedule of payments for any credit
holders to which the discount rate was applied, contained
in subsection (m).
Representative Wilson cited that page 18, line 11 contained
the phrase "an overriding interest agreement." She reported
that the words "overriding interest" was removed and asked
why. Mr. Alper thought the section described an overriding
royalty contract agreement and the word agreement in the
bill referred to the overriding royalty contract.
Representative Wilson noted that on lines 23, 25, and 27
[page 18] the words "or leases" were removed and questioned
why.
10:11:19 AM
Mr. Beckham deferred to Ms. Nauman regarding why the
stylistic change was made. He noted that "lease or leases"
was not that critical and any lease that was proposed for
an overriding royalty agreement would be considered.
Ms. Nauman stated that she could answer both of
Representative Wilson's previous questions. She believed
that the phrase "overriding royalty interest agreement" was
cumbersome therefore, removed "overriding royalty
interest," left the word "agreement," and defined agreement
as an overriding royalty interest agreement on page 19,
line 14. She remarked on the singular use of the word
"lease." She clarified that on page 17, line 26 and lines
29 and 30 the language was "lease or leases" to acknowledge
that a proposed agreement could possibly include more than
one lease. She pointed to page 18, lines 16 through 31
related to information collected on the lease and detailed
that the singular implied that the information would be
derived from any lease subject to the agreement. In
addition, use of the singular conformed to LAA's drafting
manual that preferred use of the singular.
Representative Wilson appreciated the letter Mr. Beckham
sent in response to her previous questions regarding the
overriding royalty interest (ORRI) agreements HB 331 would
authorize (copy on file) but wanted more clarity. She
offered her interpretation of what the agreement was and
inquired whether she was correct.
10:14:17 AM
Mr. Beckham did not understand Representative Wilson's
question. Representative Wilson was trying to understand
"what the agreement would look like." She asked whether a
company that chose to enter the ORRI agreement versus a
capital expenditure would need a field that was already
producing oil, if so, would the agreement grant the state a
percentage of the oil "as their [the company's] donation
versus doing a capital project." She wondered whether she
was "completely wrong." Mr. Beckham thought her question
centered around the lease and whether the field was in
production. He answered that the lease was not required to
be in production at the time of the ORRI request. The
department would have to access the potential production
and timing of production to assist in accessing the risk
and whether the ORRI met the requirements of the bill.
Representative Wilson wondered what would happen if the
state decided to take the risk, but the production was
under the estimates. She asked whether the company would be
penalized or if the state accepted the losses. Mr. Beckham
understood that there was no such recourse provision in the
CS, which was typical for an ORRI and the reason why it was
rarely used and the least preferred of the funding options
for projects. He detailed that an entity offered a company
money in exchange for an ORRI when the project was in
production and the investor was repaid first before
expenses or taxes were deducted from the project. He
reiterated that that was the nature of an ORRI and no
recovery clause was included in the bill should a field not
go into production.
10:17:41 AM
Representative Wilson asked about the interest rates on
bonds and whether they were set or flexible. She wondered
if the state was "held harmless" against raising interest
rates. Mr. Barnhill indicated that the bonds were priced by
the market. He communicated that if the bonds were issued
on a fixed rate basis, which was the administration's
intent, the interest would be set, and the coupon rate
would not change.
10:18:31 AM
Co-Chair Seaton referred to page 14, lines 27 and 28
dealing with subsection (m). He read the following: "? the
department shall discount the assumed payment amount each
year after the first year by a discount rate." He moved to
page 15 and pointed to lines 5 through 9 and read:
the discount rate is the true interest cost plus 1.5
percent but may not exceed 10 percent. For a purchase
of a transferable tax credit certificate issued under
AS 43.55.023 or a production tax credit certificate
issued under AS 43.55.025, the discount rate is the
true interest cost plus 1.5 percent, but may not
exceed 10 percent, in total,
Co-Chair Seaton pointed out that net present value was not
mentioned, and he wanted assurance that the words "each
year" implied that the calculations were cumulative based
on the net present value and the 1.5 percent not exceeding
10 percent related to the discount rate did not assume that
amount was the total discount on the repurchase of credits
3 years into the future. Ms. Nauman concurred with his
conclusions regarding cumulative calculations. Co-Chair
Seaton concluded that considering the meaning of cumulative
and the 10 percent in total could not be interpreted as a
10 percent total discount rate. He asked whether he was
correct. Ms. Nauman replied that the neither version of the
bill specified whether the discount rate was cumulative or
compounding and there was no change between the versions.
She did not believe the change to "may not exceed 10
percent" modified the understanding and was analogous to
the previous language. Co-Chair Seaton was trying to
determine whether the language in the prior version was
problematic. He wanted to clarify on the record that the
calculation was based on the net present value and the
interest rate was cumulative each year.
Mr. Barnhill emphasized that Co-Chair Seaton's conclusions
were the absolute intention of DOR and he reminded the
committee he included the calculation in a previous
presentation {provided on April 21, 2018 (copy on file)].
regarding HB 331.
Co-Chair Seaton wanted to ensure that the intent of the CS
repealed sections of session law enacted in HB 111 from the
prior session. He emphasized that it was not the intent of
the repeals in Sections 13 or 16 to extend the ability of a
person to earn a purchasable tax credit certificate. The
ability to transfer tax credit certificates ended on July
1, 2017 with the passage of HB 111. He maintained that
"nothing in the bill was intended to change that."
10:24:24 AM
Representative Guttenberg pointed to page 20, line 20 and
noted the term "expressly designate." He wondered why the
word expressly was included. Mr. Alper explained that
Section 15 of the CS broadly stated that if regulations
were still being drafted after the effective date of the
bill the intent of the CS allowed the regulations to be
retroactive to the effective date. He believed that the
word expressly noted the intent that regulations applied
retroactively. However, the department could not presume
retroactivity applied; the department had to state the
intent.
Mr. Barnhill explained that with respect to retroactive
statutes the law required that retrospective applications
were made explicit. He assumed the law also applied to
regulations.
Co-Chair Foster wanted to finish the motion to adopt the
CS.
Representative Wilson WITHDREW her OBJECTION.
There being NO OBJECTION, the committee substitute for HB
331 (FIN) was adopted.
10:27:10 AM
Representative Neuman asked whether the ORRI provisions
were included because of prior agreements at the time the
credits were offered and if the new agreements would
override the prior agreements. Ms. Nauman was unable to
answer the question and deferred the answer to DNR.
Representative Neuman asked whether Cook Inlet agreements
were made with different companies at the time the credits
were offered. Ms. Nauman would have to do some research to
answer that question.
Representative Neuman was concerned that the legislature
did not know what agreements the credits were issued under.
He wondered how the previous agreements, that were offered
to incentivize exploration, would be impacted. He noted
that the various companies had different needs and the
legislature granted the department "leeway" to negotiate
agreements. He wondered whether the ORRI provisions would
override prior agreements.
10:30:04 AM
Mr. Barnhill explained the roll of the overriding royalty
agreements served in the CS. He communicated that the
purpose was for the companies to access a lower discount
rate. The bill set a discount rate of 10 percent for
repurchased tax credits, but if they wanted to get more for
the credits they could offer an overriding royalty. Nothing
in the bill impacted existing overriding royalties. The
bill established an application process for a tax credit
holder to submit an offer for an overriding royalty to DNR.
The department evaluated the value of the agreement's worth
to determine whether the offer equaled the amount of the
increment received through the lower discount rate. He
added that any other previous overriding royalty agreements
remained in effect.
Representative Neuman reiterated his question. Mr. Alper
wanted to clarify the difference between an overriding
royalty agreement and a royalty. He detailed that a large
portion of oil and gas production in Alaska was located on
state land. The state, as the landowner signed a lease and
received a royalty, which was a percentage of the amount of
production and a portion was deposited into the permanent
fund. An overriding royalty agreement did not change the
royalty. He characterized the agreement as a "side deal
separate and distinct from the land use royalty agreement."
An overriding royalty was not limited to state land and did
not supersede any previous contracts with producers.
Representative Neuman inquired whether the issued credits
were considered a moral obligation to the state. Mr. Alper
responded that the state never signed a contract related to
credits; credits were written in statute and offered based
on certain exploration activities performed by the
producers. He furthered that the credits had value
"statutorily." The producers could use the credits to
offset taxes or were traded or sold to other companies and
subject to appropriation or could be sold back to the state
for cash. The state never committed to full reimbursement
of the credits, however the state paid the credits in full
for 8 years in a row, but the state was not obligated to do
so.
10:35:21 AM
Representative Kawasaki referred to DNR's letter regarding
ORRI agreements. He read the following from the letter:
Subsection (f) requires DNR to evaluate a company's
proposed agreement based on several factors. This will
likely require DNR to consider sensitive and
proprietary information about the company's finances,
development plans, geological, geophysical and
engineering information and resources under its
leases.
Representative Kawasaki asked how the department factored
in risk of failure over the life of an ORRI agreement. Mr.
Beckham replied that the risk assessment was a complex
process that DNR's commercial analyst would go through. He
noted that the modeling process was similar to the
production forecast. He could not explain the details of
the risk calculations. Representative Kawasaki referred to
an example provided in the letter:
DNR would consider the criteria in AS 44.37.230(f) to
determine whether the anticipated net present value of
OilCo's proposed ORRI agreement would meet or exceed
the $9 million-dollar difference between the purchase
amount of the certificate at the lower discount rate
with the ORRI agreement and the high discount rate
without the ORRI agreement. The 30 barrel per day ORRI
is nearly 11,000 barrels annually for the life of the
lease. At $50 per barrel, that is approximately
$550,000 per year.
Representative Kawasaki deduced that DNR would accept an
ORRI agreement like the one exemplified. He asked what
happened if the amount of production was lower or the price
per barrel was lower than the amount predicted in the
agreement. Mr. Beckham explained that the payment would be
different than what was calculated; higher or lower. The
example was simplistic and was designed to show the type of
agreement the department would consider an acceptable
agreement and was anticipating receiving. Representative
Kawasaki restated his question regarding failure; if the
price of oil or production dropped below what was specified
in the agreement. Mr. Beckham noted that he was uncertain
about what Representative Kawasaki considered a failure. He
delineated that the percentage calculated for the ORRI was
described in the bill and was a straight percentage on the
total production without deduction for taxes and expenses,
if the production or price decreased the ORRI payment would
be less.
10:39:43 AM
Representative Kawasaki asked whether other ORRI agreements
carried a statutory penalty if the producer failed to meet
the obligation and goals of the agreement. Mr. Beckham
responded that there were no penalty provisions in ORRI
agreements. He clarified that an ORRI was an investment by
an investor into a project with a promise to be paid on
total production before any expenses. The risk was whether
the project came into production. The investor lost money
in the event production never happened and had no recourse
to recover the funds. He furthered that regarding the ORRI,
if the project happened with a lower production rate a
temporary built-in royalty modification was paid until the
project could "stand on its own without the royalty
modification and the original lease provision rate applied.
Representative Kawasaki asked if he anticipated many
companies holding tax credits would take advantage of the
ORRI provisions. Mr. Barnhill thought the likelihood was
difficult to predict. Presently, the department had not
received "any expressions of interest."
10:42:00 AM
Representative Grenn noted that the bill referred to "a tax
credit certificate." He asked whether each certificate was
considered separately in the case of a company holding
multiple certificates. Mr. Alper reported receiving
questions from industry regarding whether credits could be
split. He referred to the matter as the "splitting issue."
He pointed out that in general, companies were holding
multiple tax credit certificates for multiple years and
projects for different types of activities such as well
lease expenditure credit, exploration credit, or operating
loss credits. He announced that DOR would accept splitting
at the individual certificate level. He exemplified that if
a company had four seismic certificates and only wanted to
waive its confidentiality on two, receive a lower discount
rate, and use the discount rate on the other two
certificates such actions were acceptable. He qualified
that the only caveat was that a company must offer all
their credits.
10:44:28 AM
Vice-Chair Gara opined that the bill contained "pluses and
minuses" and that the bill avoided $300 million in credit
payments for several consecutive years that the state could
not afford. He defined that currently the law allowed
companies to deduct the credits against oil taxes in any
year they desired, and it was beyond the state's control.
He asked for an estimate of what the price of oil would be
if companies could deduct $200 million to $300 million off
their production taxes. Mr. Alper replied that the ability
to purchase tax credits to offset taxes was constrained
over the last several years because of the low price of
oil. He explained that the producers had been paying
production tax based on the minimum tax; 4 percent floor.
Regulations specified that a company was prohibited from
using purchased credits to decrease its taxes below the
minimum tax. The price of oil had to support a tax above
the minimum called the "crossover" for an entire tax year
in order for companies to use their per barrel credits to
lower their production tax. The crossover point varied
among companies, but an average estimate was $65/bbl. He
added that in the scenario when the price varies between
prices above and below the minimum floor it created the
concern over "migrating credits." The $8.00 per barrel
credit earned over several months in one year could be used
to offset taxes in the "true up" to "drag" taxes down to
the floor during a year of migrating credits. He delineated
that if the price of oil remained in the "mid-seventies"
per barrel of oil for one year the production taxes would
be $300 or $400 million above the minimum tax revenue; the
price that allowed producers to purchase credits and "buy
themselves back down" to the minimum tax. Vice-Chair Gara
asked whether in the future, without the bill, could the
state lose between $200 million to $300 million in
production taxes at a full year of $75/bbl. Mr. Alper
responded in the affirmative. He deduced that the longer
the state made credit payments the larger the probability
that the credit holders would sell the credits at "whatever
price they could get." Conversely, if demand increased due
to higher oil prices he foresaw scenarios where companies
purchased hundreds of millions in credits to reduce their
taxes. He concurred that the administration wanted to avoid
the scenario through the legislation.
10:49:38 AM
Representative Wilson asked if the state owed the credits.
Mr. Alper responded in the affirmative. She asked whether
the previous discussion related to how the credit holders
could utilize their credits was in current statute and
whether nothing new was being created in the bill beside
the bond package. Mr. Alper replied in the affirmative. He
elaborated that the credits were worth "100 cents on the
dollar." He believed that Vice-Chair Gara's concern related
to a hardship situation where a credit holder sold their
certificate for 50 cents on the dollar and received 100
percent benefit offset against its own taxes. The original
benefit was intended for the small explorers and was
diluted when passes on to the major producers.
Representative Wilson heard negative criticism of the bill
related to the payment scheduled. She asked whether the
state would be able to meet the bond obligation and if it
placed "the retirement issue in more jeopardy" with passage
of the legislation. Mr. Barnhill answered that under
current cash flow projections published by the Office of
Management and Budget (OMB) the administration did not
share the concerns. Representative Wilson had met with the
department and discovered that the state "could make more
money off of our money" through the bond proposal than
through paying a specified amount each year. The state was
controlling its liability. She wanted to ensure the public
that the state was not jeopardizing the state's retirement
obligation. She cited the presentation on April 21, 2018 on
slide 18 ["State of Alaska Department of Revenue HB 331:
Oil and Gas Tax Credit Bond Proposal" (copy on file)] that
showed the state's debt capacity and credit rating. She
relayed that the way the state was paying its debt, the
state, in the end, should have a better credit rating and
less debt.
10:53:00 AM
Representative Neuman observed that the state recently
received $275 million from 2011 tax returns. He noted that
the money was typically deposited into the Constitutional
Budget Reserve (CBR), but the deposit was not mandated via
statute. He asked whether the payment could be used to pay
the credits. He mentioned that a bill was passed in the
prior week that allowed other use of the tax funds. Mr.
Alper thought that he was referring to a newspaper article
that reported the $275 million was the total of the audits
that the tax division had completed in the last year, which
was requested to be paid before the statute of limitations
went into effect. The money had not been paid but had been
requested in a "Notice and Demand" letter. The companies
could appeal through a long process; often the amount paid
was reached through a settlement. He emphasized that he
money received through tax audits was "absolutely the
property of the CBR" under Article 9, 17 (a). He added that
Representative Neuman was referring to changes made in the
prior year that related to retroactivity to offset prior
year taxes, so long as there was not a burden placed on the
CBR and issues related to the Trans-Alaska Pipeline System
(TAPS) settlement. A legal opinion sought by DOR that
stated that the TAPS issue was related to transportation
and any tax settlement was not subject to Article 9 of the
constitution requiring the deposit into the CBR.
Representative Neuman contended that the legislature "made
the rules" and knew money was "used otherwise." He asked
whether regarding the legislation, the typical investment
strategies were being considered. Mr. Barnhill thought
Representative Neuman was referring to whether the Alaska
Permanent Fund or other investment funds of the state could
purchase the bonds issued under the bill. He explained that
there was nothing in the bill that encouraged or
discouraged any state investment fund to purchase the bonds
and was simply not addressed. Representative Neuman deduced
that the risk to industry increased if the companies did
not know the value of the bonds, which equaled more cost.
He reiterated that DOR had basic standards for investing
and wondered whether the proposal considered the
guidelines. Mr. Barnhill responded that when the bond
corporation issued the bonds the coupon price would be set
by the market estimated in the range of 3.6 percent and
instruments subject to appropriation. The market would add
a premium to the coupon to compensate for the risk. The
risk premium was not anticipated to be significant based on
the state's "excellent credit history." Any purchaser of
the bonds would be aware of the subject to appropriation
nature of the bonds and would know the coupon rate.
10:58:56 AM
Co-Chair Foster asked Mr. Teal to review the fiscal notes.
He also noted Representative Dan Saddler in the audience.
10:59:14 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
reviewed the fiscal notes for HB 331. He reported that the
previously published DNR, Division of Oil and Gas fiscal
note FN1 (DNR), was zero. He remarked that DNR could absorb
the costs of commercial analyses of any overriding royalty
interest agreement applications if the number of
applications were low. He turned to the previously
published DOR zero fiscal note FN3 (REV), appropriated to
Taxation and Treasury for FY 2019 that included a cost in
the outyears of $2.5 thousand for a yearly agent fee that
applied for the length of the bond. He moved to the
previously published DOR fiscal impact note FN4 (REV),
appropriated to Administration and Support in the amount of
$737.9 million, which authorized the use of the bond
proceeds to purchase participating tax credit certificates.
He noted that currently the fund source code 1178 was a
temporary code for undesignated general fund (UGF) use. In
the future, a new fund code would be created to reflect the
subject to appropriation bonds.
Representative Wilson asked why the fiscal note contained
the UGF fund source versus a designated general fund (DGF)
fund source since the money would come from the sale of the
bonds. Mr. Teal replied that the Legislative Finance
Division (LFD) used a temporary fund source in situations
necessitating a new fund source code because the bill might
not pass into law; therefore, creating fund codes with no
applications. He confirmed that the bond sale proceeds were
not UGF and would be an "other duplicated fund code." The
bonds were not counted as an expenditure, but the annual
appropriation of debt service was, and "in theory" was
considered a general fund (GF) cost.
11:03:27 AM
Mr. Teal moved to the new Debt Service fiscal impact note
appropriated to Oil & Gas Tax Credits Financing in the
amount of $27 million in FY 19. He noted that in the future
the appropriation was anticipated to increase to roughly
$123 million but the future years were indeterminate
because the amount required to pay the bonds depended on
the bond financing and other variables.
Mr. Alper drew attention to a table on the second page of
the previous two fiscal notes that contained the expected
bond payments through FY 28. He relayed the assumptions
made to determine the figures. He pointed to the $737.9
million noted as the "amount paid with discount" and $27
million interest payment in FY 19 and explained that the
numbers assumed that all $807 million in outstanding
credits were sold into the program and all would receive
the lower 5.1 percent discount rate. He ascertained that
the actual numbers would be less than the assumed numbers
shown on the fiscal notes. He noted that the chart showed
the anticipated payment total and the interest and
principal amounts.
11:06:04 AM
Representative Wilson asked what would happen if the
legislature did not make the appropriation. Mr. Alper
believed that the bond markets would respond
disapprovingly, and the non-payment would negatively impact
the state's bond rating. Representative Wilson wanted the
consequences stated on the record. She stressed the
importance of keeping to the payment schedule.
Representative Kawasaki stated that the fiscal note showed
a 10-year bond period. He thought the time period was
longer. Mr. Alper answered that the bill did not specify or
codify bill terms or the payment schedule. He indicated
that the trustees of the corporation would set them, and
the market would accept the terms. Therefore, the length
would be established after the bill passed. He reminded
committee members that there would be a second, third, and
fourth round of smaller issue bonding for late coming tax
credits that would all be on their own 10 year payment
schedule. Representative Kawasaki deduced that the 32nd
Legislature would anticipate an estimated bond payment of
$113 million. Mr. Alper answered in the affirmative.
Mr. Teal pointed out that the fiscal note did not show the
savings from the amount that was currently deposited into
the Oil and Gas Tax Credit Fund, which would be eliminated
in lieu of debt service payments. He noted that there was
not a fiscal note because there was no way to determine
what the savings would be or how much the savings would be
compared to the current approach. He emphasized that in the
long run the debt service payments should be approximately
equal to the purchases that would be made without the bill
on a net present value basis. The bonding approach would
pay the credits off immediately and the legislature would
continue to pay, but as debt service rather than fund
capitalization.
11:11:29 AM
Representative Ortiz remarked that if HB 331 was adopted
the state was obligated to purchase $807 million in
credits. He wondered about credits that had yet to be
applied for, which he believed were about $200 million. He
inquired whether the bill addressed the outstanding
credits. Mr. Alper replied that the estimated number of
outstanding credits was $150 million, and most were
anticipated the coming summer from 2017. He communicated
that the future issues were addressed in the bill that
authorized the multiple bond issuances and the ability to
issue bonds through FY 2021. He expected issuances once per
year for four years. The department could not think of a
way to build the information into the fiscal note due to
many unknowns. He delineated that the actual bond payments
were anticipated to increase because of the second, third,
and fourth round of issuances. However, more than 80
percent of the credits would be issued in the first bond
issuance and the remainder would be "remnants of the sun
setting bond program."
11:13:25 AM
Co-Chair Seaton MOVED to report CSHB 331(FIN) out of
Committee with individual recommendations and the
accompanying fiscal notes.
Representative Wilson OBJECTED for discussion.
Representative Neuman believed the credits should have been
paid a long time ago. He was concerned about the process
due to the constitutionality question associated with the
legislation. He stressed that the bill added "a tremendous
amount of risk" and increased debt; the risk was
proportionate to cost. He stated that the financial terms
were unknown. He maintained that generally, there was a
letter of interest pertaining to revenue bonds. The
legislature had not yet seen any interest. He remarked that
the legislature had a bad "track record" when claiming a
bill would produce savings. He asserted that the bill
created more rules telling industry what they had to do to
receive credits that they initially acted in good faith
obtaining. He stated that the legislature continued to
introduce legislation to increase oil and gas taxes. He
spoke about the fiduciary responsibility of the state. He
repeated his concern about increased risk. He believed that
the legislature should have just paid the debt off within 5
years. He stressed that the state's economy was suffering
and contended that the bill involved great risk to the
state. He had no confidence in the legislation.
11:19:53 AM
Representative Wilson spoke about a refinery in her region
that received tax credits that were saving millions of
dollars for the state. She was comfortable with the bill.
She appreciated the answers to questions she asked. She
stated that the bill did not cost the state more money. The
state would benefit from more production. She was
encouraged by Representative Guttenberg's amendment that
encouraged local hire. She thought the bill was the next
best way to incentivize production on the North Slope. She
hoped the state learned that it must abide by the rules it
established. She thought that the market place provided
sufficient checks and balances to make her comfortable with
the bill.
Representative Wilson WITHDREW her OBJECTION.
Representative Kawasaki OBJECTED for discussion.
Vice-Chair Gara voiced that he had "mixed feelings" about
the bill. He believed the that risk issue favored the bill
because the amount the state paid for the credits would be
known. He had not offered amendments because he thought it
would delay the bill's passage. He supported a "clean" bill
moving through the process. He did not believe the state
was doing well in terms of revenue. He discussed some items
he would have wanted included in HB 331. He favored closing
"the corporate tax loophole" on oil and gas companies. He
thought the companies should pay the same tax whether they
were listed as C corporations, S corporations, or LLC's;
not as they were listed with the Securities and Exchange
Commission (SEC) but by activity. He thought increasing oil
taxes would be appropriate, but he did not believe that the
amendment would pass and further delay the end of session.
He maintained that oil taxation could be done in a way that
encouraged development but was fairer to the state.
Finally, on a technical point - the risk the state took by
leaving on the books the ability for other companies to
purchase the credits at a discount was a "terrible deal"
for the state. He provided a scenario where a company could
purchase the credits at a discount and charge the state the
full amount. The state would not know how much it would owe
the following year for credit repayment. He cautioned that
the bill provided stability, but the provision "lurks as a
risk" to the state's financial stability.
11:26:47 AM
Representative Kawasaki expressed concerns with the bill.
He referred to the legislature's own legal counsel
testimony regarding their issues with Articles 8 and 11 of
the state Constitution and the dedication of funds in
Article 9 and noted that they believed their concerns were
valid. He had not seen a legal opinion signed by the
attorney general that stated otherwise. He felt that the
committee was not listening to their own legal counsel. He
added that without hearing definitively from the
administration he had trouble supporting the bill. He
reported that the bill authorized a $1 billion bond without
a vote of the people and he maintained his concern. He
commented that the state could not currently pay its
obligations for schools, public safety, roads, and
maintenance. He believed that the state should have paid
the statutory amount for Permanent Fund Dividends. He noted
that the subject to appropriation aspect "gave him very
little comfort" because it was imperative to pay the bond
debt. He worried that the bill encumbered future
legislatures. He did not believe the bill was ready for
passage.
11:30:52 AM
Representative Pruitt thanked DOR for its work towards
analyzing a mechanism that would repay the debt. He
appreciated LAA expressing its concerns. He believed that
the effect the bill had in determining whether bonding was
a mechanism that could continue to be utilized was
appropriate to define. He clarified there was an opinion
from the Attorney General Lindemuth that had come out
earlier in the morning. He pointed out that the memo
highlighted the conversation that took place at the
constitutional convention. He read from the opinion:
B. Neither the text of the constitution nor the
deliberations of the delegates to the constitutional
convention reveals the intent to prohibit issuance of
bonds subject to appropriation.
Representative Pruitt opined that there was not an attempt
to prohibit the types of subject to appropriation
issuances. In addition, the constitution recognized that
public corporation bond payments would be financed by
legislative appropriation and was a framework that was
being established. He highlighted the long history of
subject to appropriation use by municipalities and the
long-standing precedence that existed. He reported that the
Supreme Court had also looked at "the plain meaning and
purpose of the [constitutional] provision and the intent of
the framers" in the recent case of Wielekowski v. the
State. He believed that by analyzing what the thought
process was when the constitution was established placed
"the bill on good footing." He thought the efforts of DOR
and Representative Guttenberg ensured that the "money would
be put back into the state" and "intended to put people
back to work and put more oil down the pipeline." He stated
that King Economics determined that the bill would save the
state money when compared to paying through the statutory
formula and by leaving it in the Earnings Reserve Account
(ERA) the bonding enabled the state to make more money in
interest. He thought the bill had been well thought out and
was well discussed. He thought it was a positive effort for
the state. He asked for members' support. He thanked both
Co-Chairs for allowing the process to unfold.
11:38:19 AM
Representative Ortiz appreciated the comments of
Representative Pruitt. He had concerns about the bill and
wanted to associate himself with the comments of
Representative Kawasaki.
Co-Chair Seaton noted that the DOL legal opinion had been
distributed to committee members [the memo was not
distributed during the meeting and was not on file.]
Representative Kawasaki WITHDREW his objection.
There being NO further OBJECTION, it was so ordered.
CSHB 331 (FIN) was REPORTED out of committee with a "do
pass" recommendation and with three new fiscal notes: two
indeterminate fiscal notes and one fiscal impact note by
the Department of Revenue; and one previously published
zero note: FN1(DNR).
Co-Chair Foster indicated the committee would be recessed
[note: the meeting never reconvened].
ADJOURNMENT
11:40:20 AM
The meeting was adjourned at 11:40 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 331 BIll version O.pdf |
HFIN 5/2/2018 9:00:00 AM |
HB 331 |
| HB 331 A to O comparison document.pdf |
HFIN 5/2/2018 9:00:00 AM |
HB 331 |
| HB 331 (FIN) Sectional HFIN CS-O.pdf |
HFIN 5/2/2018 9:00:00 AM |
HB 331 |