Legislature(2017 - 2018)ADAMS ROOM 519

04/21/2018 01:00 PM FINANCE

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Audio Topic
01:05:19 PM Start
01:06:48 PM HB331
05:08:12 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      April 21, 2018                                                                                            
                         1:05 p.m.                                                                                              
1:05:19 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
1:06:48 PM                                                                                                                    
Co-Chair Foster  called the House Finance  Committee meeting                                                                    
to order at 1:05 p.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 Dan Ortiz (via teleconference)                                                                                   
Representative Lance Pruitt                                                                                                     
Representative Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Mike Barnhill,  Deputy Commissioner, Department  of Revenue;                                                                    
Ken Alper,  Director, Tax  Division, Department  of Revenue;                                                                    
Deven  Mitchell, Executive  Director, Alaska  Municipal Bond                                                                    
Bank Authority, Department of  Revenue; Emily Nauman, Deputy                                                                    
Director,  Legislative  Legal   Services;  Jerry  Luckhaupt,                                                                    
Revisor,  Legislative Legal  Services; Bill  Milks, Attorney                                                                    
V,  Civil  Division,  Labor   and  State  Affairs  Attorney,                                                                    
Department of  Law; Mary Hunter Gramling,  Attorney V, Civil                                                                    
Division,    Natural   Resources,    Department   of    Law;                                                                    
Representative Lora Reinbold; Representative Gary Knopp.                                                                        
PRESENT VIA TELECONFERENCE                                                                                                    
Sheldon   Fisher,  Commissioner,   Department  of   Revenue;                                                                    
Douglas  Goe,  Partner,  Orrick, Herrington,  and  Sutcliffe                                                                    
LLP, Portland; Representative Dan Ortiz.                                                                                        
HB 331    TAX CREDIT CERT. BOND CORP; ROYALTIES                                                                                 
          HB 331 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
Co-Chair  Foster reviewed  the  agenda for  the meeting.  He                                                                    
invited testifiers to the table.                                                                                                
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."                                                                          
1:07:26 PM                                                                                                                    
SHELDON  FISHER, COMMISSIONER,  DEPARTMENT  OF REVENUE  (via                                                                    
teleconference),  thanked members  for the  hearing and  for                                                                    
all  of their  hard  work.  He relayed  that  the state  had                                                                    
struggled   with   addressing   its   financial   challenges                                                                    
originating with  a substantial drop  in oil prices.  One of                                                                    
the challenges was that the  state could no longer afford to                                                                    
pay its  oil and gas tax  credits, which had been  the prior                                                                    
practice.  There was  a general  sense from  the legislature                                                                    
and   the  administration   that   the   practice  was   not                                                                    
sustainable.  The state  currently  owed approximately  $800                                                                    
million  in  credits  to  companies  that  had  invested  in                                                                    
Alaska.  The  pertinent  question  was how  to  address  the                                                                    
issue.  He reported  the  administration's  proposal [in  HB                                                                    
331] was atypical  - it was not an increase  in revenue or a                                                                    
spending cut. The  bill proposed the use of debt  to pay off                                                                    
the credits.                                                                                                                    
Commissioner Fisher  stated that  the proposal  was slightly                                                                    
unusual  as it  would use  debt  and ask  credit holders  to                                                                    
accept a  discount on  the credits.  The discount  would pay                                                                    
off the interest  that would accrue on  the debt; therefore,                                                                    
the  bill was  generally  cost  neutral to  the  state -  it                                                                    
included  a very  modest benefit  to the  state. Paying  the                                                                    
credits was  important to  the state's  economy and  the oil                                                                    
industry, which had  been the source of most  of the state's                                                                    
funding. The administration believed  the bill would provide                                                                    
an  opportunity to  put Alaskans  back to  work, provide  an                                                                    
infusion of cash  into an industry that was  critical to the                                                                    
state,  and  result  in oil  production  more  quickly  than                                                                    
Co-Chair Foster acknowledged  Representatives Gary Knopp and                                                                    
Lora  Reinbold in  the audience.  He asked  members to  hold                                                                    
their questions until the end of the presentation.                                                                              
1:12:23 PM                                                                                                                    
MIKE BARNHILL,  DEPUTY COMMISSIONER, DEPARTMENT  OF REVENUE,                                                                    
introduced   himself.    He   introduced    the   PowerPoint                                                                    
presentation titled  "State of Alaska Department  of Revenue                                                                    
HB 331: Oil & Gas Tax  Credit Bond Proposal" dated April 21,                                                                    
2018  (copy on  file). He  highlighted others  available for                                                                    
questions. He began  on slide 2 and relayed that  one of the                                                                    
primary  objectives of  the bill  was to  encourage economic                                                                    
stimulus  in  the  oil  and   gas  sector.  The  uncertainty                                                                    
regarding the  tax credits had  led to stalled  projects and                                                                    
frozen credit.  There were a  variety of ways  of addressing                                                                    
the   owed  tax   credits.   The  administration   supported                                                                    
addressing  the credits  in a  way that  directly confronted                                                                    
the  uncertainty in  the oil  and  gas sector,  particularly                                                                    
when it  came to  small oil  and gas  exploration companies.                                                                    
The goal  was to get the  funds to companies to  enable them                                                                    
to  payoff   loans,  begin  to  make   new  investment,  and                                                                    
hopefully bring new jobs and production to the state.                                                                           
1:14:37 PM                                                                                                                    
Mr. Barnhill  turned to slide  3 titled "Bill  is Structured                                                                    
to   Balance   Competing  Interests."   The   administration                                                                    
recognized  there were  numerous  stakeholders involved  and                                                                    
its goal  was to  provide a solution  that struck  a balance                                                                    
between the various perspectives  and objectives. He pointed                                                                    
to the  red circle  of arrows  on slide  3 and  reported the                                                                    
administration   recognized   there  were   extreme   fiscal                                                                    
constraints in the  state's budget due to  the declining oil                                                                    
price. The  bill matched the cost  of the debt service  in a                                                                    
cost neutral way to expected  state cash flows. In the early                                                                    
years there would be relatively  small debt service payments                                                                    
and in later years the  payments would be higher because the                                                                    
administration  anticipated  state revenues  would  increase                                                                    
going forward.  The administration  wanted to  support small                                                                    
oil and gas exploration firms  to produce new production and                                                                    
to get  them to  redeploy capital into  the state's  oil and                                                                    
gas  basins and  encourage projects  that had  been underway                                                                    
when uncertainty arose regarding the tax credits.                                                                               
Mr. Barnhill  explained that  the uncertainty  regarding the                                                                    
payment  of   the  tax  credits   had  eroded   the  state's                                                                    
credibility in terms of a  place that welcomes investment in                                                                    
the oil and  gas sector. He noted that  Alaska competed with                                                                    
other  oil  and  gas  basins worldwide  and  when  companies                                                                    
decided where to invest, they  considered the credibility of                                                                    
the location and  the prospect for return  on investment. He                                                                    
pointed to a  drawing of a moose on the  right side of slide                                                                    
3,  which was  meant to  remind people  that when  the state                                                                    
engaged  in  marketing the  oil  and  gas tax  credits  (the                                                                    
information   dated   to   2013),   the   state   had   made                                                                    
representations  there would  be  cash in  the  form of  tax                                                                    
credits representing  an investment  of the  state alongside                                                                    
exploring firms  and producers. He  believed it  was helpful                                                                    
to remember there had been  expectations in place that would                                                                    
help  the companies  achieve the  state's  goals of  getting                                                                    
small firms  into the state  exploring and producing  oil in                                                                    
new basins.                                                                                                                     
1:17:13 PM                                                                                                                    
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
advanced to  slide 4 and  provided a 15-year history  of tax                                                                    
credits in Alaska.  He began with 2003  when the legislature                                                                    
passed   an  exploration   incentive  credit   that  was   a                                                                    
percentage  of  exploration cost.  At  the  time, the  state                                                                    
still had gross  revenue-based tax. The net  profits tax was                                                                    
already on  the books by  the time the  Petroleum Production                                                                    
Tax  (PPT) legislation  passed in  2006.  Alongside PPT  had                                                                    
been the idea  of transferrable credits and  credits tied to                                                                    
net operating losses  (NOLs) for the first time,  as part of                                                                    
the net profits system and  to a limited extent, the ability                                                                    
of  state  repurchase.  In   2007,  the  legislature  passed                                                                    
Alaska's Clear  and Equitable  Share (ACES),  which included                                                                    
tax  changes and  the Oil  and  Gas Tax  Credit Fund.  Also,                                                                    
included in  the ACES  bill was  the statutory  formula that                                                                    
had  been  significant topic  of  conversation  in the  past                                                                    
several  years  -  establishing that  a  percentage  of  the                                                                    
production tax  revenue (however  defined) should go  to the                                                                    
fund  annually to  purchase the  credits.  The language  had                                                                    
been  routinely   ignored  -  the  amount   appropriated  in                                                                    
beginning in  FY 08  and through FY  15 had  been open-ended                                                                    
language allowing  the purchase  of whatever  was requested.                                                                    
The language had  been sitting in statute  since the passage                                                                    
of ACES in 2007.                                                                                                                
Mr. Alper  continued to  review the  historical oil  and gas                                                                    
tax  credit  background.  He  explained  that  2010  greatly                                                                    
expanded the  scope of  credits, primarily  due to  the Cook                                                                    
Inlet  Recovery  Act that  added  the  new 40  percent  well                                                                    
credit, new  applicability of credits,  and changed  some of                                                                    
the rules,  which resulted in giving  large credit subsidies                                                                    
for  Cook  Inlet  exploration,  primarily  targeted  at  the                                                                    
utility  gas (keeping  lights  on  in Southcentral  Alaska).                                                                    
Additionally, credits  for exploration  in the  Interior had                                                                    
been  increased. The  passage  of  SB 21  had  been a  major                                                                    
change to the  tax system. The bill removed  the North Slope                                                                    
capital  credit, increased  the size  of the  NOL credit  to                                                                    
align with the  base tax rate, and added the  new per barrel                                                                    
credits  that  were not  cashable  but  represented a  large                                                                    
component of the  current tax calculation (the  credit was a                                                                    
sliding  scale for  most production,  tied to  the price  of                                                                    
Mr.  Alper continued  that  in recent  years,  as the  state                                                                    
entered  a  fiscal  crisis and  discovered  the  tax  credit                                                                    
regime  was  no  longer  affordable,  two  major  pieces  of                                                                    
legislation  had passed  the legislature  that were  winding                                                                    
down the  program. In 2016,  HB 247 was primarily  known for                                                                    
eliminating the  Cook Inlet  credits and  locking in  a very                                                                    
low  tax regime  indefinitely in  the Cook  Inlet area.  The                                                                    
bill had  also established  a seven-year  sunset on  the new                                                                    
oil benefits  called gross value  reduction (GVR)  that were                                                                    
part  of  SB 21.  In  2017  the  legislature had  ended  the                                                                    
creation of  new cashable  credits (a cap  and end  had been                                                                    
applied to the  program) - there were still  a few trickling                                                                    
in, but there  were now a finite number of  tax credits that                                                                    
the state  needed to contemplate  how to monetize  and close                                                                    
out. The  purpose HB 331 was  to close the book  on that era                                                                    
of tax credits.                                                                                                                 
1:20:44 PM                                                                                                                    
Mr. Barnhill advanced to slide  5 and addressed the benefits                                                                    
of oil  and gas tax  credits to  date. He detailed  that tax                                                                    
credits had been instrumental in  resolving gas shortages in                                                                    
the  Cook Inlet/Railbelt  region. The  threat of  brown-outs                                                                    
was completely gone, largely due  to the tax credits and the                                                                    
investment  the state  made in  developing gas  resources in                                                                    
Cook  Inlet.   Elsewhere  on  the  North   Slope  there  was                                                                    
potential for new production from  new areas including Pikka                                                                    
and Nuna  [fields]. He detailed that  the opportunities were                                                                    
exciting for  Alaska and the purpose  of HB 331 was  to help                                                                    
secure the potential for new production going forward.                                                                          
Mr.  Barnhill relayed  that  slide 6  and  slide 7  included                                                                    
statistics  about the  amount  the state  had  spent in  tax                                                                    
credits and  the result  of the  expenditure. The  state had                                                                    
spent $3.6 billion  in total cash purchases  through the end                                                                    
of FY  18, $2.5 billion of  the total had gone  to producing                                                                    
companies. The North Slope had  86 million barrels of oil to                                                                    
date and  Cook Inlet  had produced  89 million  barrels. The                                                                    
bottom of  slide 6  showed the  outstanding tax  credits and                                                                    
their location.  The North Slope  balance was  $514 million,                                                                    
and the non-North Slope was $293 million.                                                                                       
Mr.  Barnhill  continued  that  on  slide  7,  which  showed                                                                    
anticipated  production related  to  tax credit  investments                                                                    
for the next 10 years.  Combining all of the numbers equaled                                                                    
an annual potential  of 129 million barrels of  oil from the                                                                    
North Slope  and 20  million barrels of  oil the  Cook Inlet                                                                    
region.  The intent  of  the  bill was  to  help secure  the                                                                    
state's  existing  investments  in   Alaska's  oil  and  gas                                                                    
resources. He reported  positive news that the  price of oil                                                                    
had reached  about $73 per  barrel during the  current week.                                                                    
The administration wanted  the companies currently exploring                                                                    
with  the goal  of producing  to  have the  ability to  take                                                                    
advantage of a rising price environment.                                                                                        
1:23:22 PM                                                                                                                    
Mr. Barnhill reviewed  how the state arrived  at its current                                                                    
situation on slide  8. He reported that  until recently, the                                                                    
state had been  able to pay all tax  credits when presented.                                                                    
He remarked there  could be a long discussion  on whether it                                                                    
had been  the original intention  of the legislature  or how                                                                    
the legislature intended  to pay the credits,  but until the                                                                    
price of  oil collapsed in  2014 the state paid  the credits                                                                    
when presented. In FY 16 there  had been a veto that reduced                                                                    
the payment to $500 million. In  FY 17 and FY 18 the payment                                                                    
had been set at the  Department of Revenue's (DOR) statutory                                                                    
calculation amount. He explained  that under AS [43.55] .028                                                                    
the  legislature was  called upon  to appropriate  a certain                                                                    
amount  to the  oil  and  gas tax  credit  fund; the  amount                                                                    
appropriated  was based  on the  price of  oil. He  detailed                                                                    
that if  the price of  oil was  less than $60  [per barrel],                                                                    
the  statutory   formula  called   on  the   legislature  to                                                                    
appropriate  10 percent  of the  value of  the taxes  levied                                                                    
under  the oil  and gas  production  tax. If  the price  was                                                                    
higher  than $60  [per barrel]  the  legislature was  called                                                                    
upon  to appropriate  15 percent  of the  taxes levied.  The                                                                    
administration  recognized   the  statute  was   subject  to                                                                    
appropriation - the legislature  could choose to appropriate                                                                    
some, all,  or none.  He turned  to an  annual appropriation                                                                    
schedule from the  Revenue Sources Book on slide  9 that had                                                                    
been produced by DOR based on the statute.                                                                                      
1:25:08 PM                                                                                                                    
Mr. Alper elaborated  on the two tables on slide  9. The top                                                                    
table presumed the statutory formula.  He noted the asterisk                                                                    
next  to  the FY  24  number  [of  $89] implied  the  actual                                                                    
formula  would  be more  than  the  number listed,  but  DOR                                                                    
believed the amount  listed was the only  amount required to                                                                    
finish paying  the credits. The administration  was aware of                                                                    
the $807 million  owed and an additional $140  million or so                                                                    
working their way through the  system. The last credit would                                                                    
be  paid  in FY  24  if  the  price  forecast held  and  the                                                                    
legislature  appropriated at  the statutory  schedule in  FY                                                                    
24. He  explained that if  a lower amount  was appropriated,                                                                    
it would  impact those relying  on the funds and  could slow                                                                    
continued exploration and development.                                                                                          
Mr. Alper highlighted that currently,  many of the companies                                                                    
could  not   access  additional  funds  because   they  were                                                                    
delinquent  on  existing  debts  that  were  in  some  cases                                                                    
pledged by  the expected tax  credit payments. There  was an                                                                    
alternative  way of  calculating  the  formula depending  on                                                                    
whether the 10  or 15 percent was taken before  or after the                                                                    
application of  tax credits  against liability.  The House's                                                                    
version of the  FY 19 operating budget  was passed presuming                                                                    
the smaller number in the  schedule. He pointed to the table                                                                    
on   the  bottom   of  slide   9  and   detailed  that   the                                                                    
appropriation would  be much smaller  at $40 million  or $50                                                                    
million  per year  and  there would  still  be $700  million                                                                    
remaining  to  be  paid  in FY  24.  Under  the  alternative                                                                    
formula,  it would  take 15-plus  years to  pay off  the tax                                                                    
credits instead of 6 years.                                                                                                     
1:27:16 PM                                                                                                                    
Mr. Alper continued to slide  10 that included an example to                                                                    
show how the formula envisioned  in HB 331 would be applied.                                                                    
The example used a theoretical  company with $100 million in                                                                    
tax  credits, $50  million  to  be issued  in  2016 and  $50                                                                    
million  to  be  issued  in 2017.  The  existing  regulation                                                                    
scheduled and  ranked the credits  based on time  first; the                                                                    
initial appropriations would  pay off the 2016  credits in a                                                                    
pro  rata formula  first  and the  2017  credits second.  He                                                                    
explained that  the more  newer credits  a company  had, the                                                                    
quicker it  would receive its  money, whereas  later credits                                                                    
would mean  the company would  receive its money  later. The                                                                    
example used a company with  both types of credits. The bill                                                                    
envisioned  that,  presuming   the  statutory  appropriation                                                                    
occurred, a company would receive  a certain amount of money                                                                    
per year for several years.                                                                                                     
Mr. Alper detailed  that the cash flow would  be turned into                                                                    
a value  based on  a net present  value type  discount rate.                                                                    
The bill contained two different  discount rate options. The                                                                    
more advantageous  to industry  was a rate  of approximately                                                                    
5.1 percent and  would be set at the time  bonds were issued                                                                    
based on  the state's  actual interest cost  (total interest                                                                    
cost  to borrow  the money  plus 1.5  percent). The  state's                                                                    
interest cost  was estimated at  3.6 percent.  The companies                                                                    
that did  not choose to  meet the threshold would  receive a                                                                    
10 percent discount rate. He  elaborated that the 10 percent                                                                    
rate  had  been chosen  as  a  midpoint. The  administration                                                                    
recognized  that the  state's cost  of capital  was somewhat                                                                    
lower  at 3  to  5 percent,  but many  of  the companies  in                                                                    
question  had a  cost of  capital in  the 15  to 17  percent                                                                    
range -  they were  working in  the private  equity markets;                                                                    
therefore,  the state  was  offering  something better  than                                                                    
what  they  could  obtain  from  the  markets,  while  still                                                                    
advantageous  to the  state. The  10 percent  base rate  was                                                                    
hard coded in the bill.                                                                                                         
Mr. Alper explained  that to qualify for the  lower rate the                                                                    
company would have  to meet one of  four criteria including:                                                                    
agree to an overriding  royalty interest, commit to reinvest                                                                    
the money in  Alaska, agree to early  waiver of confidential                                                                    
seismic data,  or have refinery  or gas storage  credits. He                                                                    
elaborated on the criteria and  stated that if the state was                                                                    
going  to give  a company  $90 million,  the company  had to                                                                    
make a commitment to invest the  money in the next two years                                                                    
in  oil  project  capital expenditures.  He  explained  that                                                                    
seismic exploration work was held  by the state and released                                                                    
publicly ten years  later; if the company agreed  to give up                                                                    
its  ten-year exclusive  confidential right  to the  seismic                                                                    
data  it   would  receive  the  better   discount  rate.  He                                                                    
highlighted  that a  small number  of the  credits were  for                                                                    
refinery expansion projects. He  elaborated that because the                                                                    
refinery projects did  not neatly fit into  other boxes, the                                                                    
administration decided  those companies  would automatically                                                                    
come  in  at  the  better discount  rate.  In  general,  the                                                                    
refinery  projects  had  lead   to  some  type  of  economic                                                                    
improvement for  Alaska. For example,  the asphalt  plant in                                                                    
North  Pole  was  providing  lower  priced  asphalt  to  the                                                                    
Department of  Transportation and Public Facilities  and the                                                                    
state was  seeing immediate economic benefits.  The discount                                                                    
would be  applied to each  year of payments starting  in the                                                                    
second  year.  He  likened  it to  a  compound  interest  in                                                                    
1:31:05 PM                                                                                                                    
Mr.  Alper turned  to the  graph on  slide 11  and continued                                                                    
with the theoretical example of  a company with $100 million                                                                    
in credits split  between 2016 and 2017. He  returned to the                                                                    
statutory appropriation  and explained  that in FY  19 there                                                                    
would  be $184  million appropriated.  He explained  that if                                                                    
there was a company with  $50 million out of the approximate                                                                    
$400 million  in FY  16 credits, it  would stand  to receive                                                                    
about $23 million out of  the $184 million. Likewise, of the                                                                    
$168  million  appropriated  in FY  20,  the  company  would                                                                    
receive about  $21 million until it  was paid in full  in FY                                                                    
23. He was speaking about the column titled "face value."                                                                       
Mr. Alper  continued to  address the table  on slide  11 and                                                                    
pointed  out  the  columns   showing  years  discounted  and                                                                    
discount rates.  He explained that  starting in year  2, the                                                                    
actual payment  was reduced based  at the 10 percent  or 5.1                                                                    
percent per  year, compounding. The first  year the discount                                                                    
would be applied  once, the second year it  would be applied                                                                    
twice,  and so  forth. The  total  effect was  shown in  the                                                                    
totals at  the bottom of  each column. He explained  that if                                                                    
the  theoretical company  was able  to get  the 5.1  percent                                                                    
discount  rate,  the  state would  be  purchasing  its  $100                                                                    
million credits  for slightly over  $91.5 million.  With the                                                                    
10  percent discount  rate the  company  would receive  just                                                                    
under 85  cents on the  dollar. He  relayed it would  be the                                                                    
company's choice  subject to its ability  to offer something                                                                    
to  be  deemed  eligible  to receive  the  better  discount.                                                                    
Participating in the program would  cost the company between                                                                    
8.5 percent and 15 percent of its face value.                                                                                   
Mr.  Barnhill commented  that every  tax credit  holder that                                                                    
could potentially  participate in  the program  had received                                                                    
the  table shown  on slide  11 personalized  with their  own                                                                    
numbers to see how they would be impacted.                                                                                      
Mr. Alper reported that for  the most part the companies had                                                                    
responded  positively. He  communicated  that a  substantial                                                                    
majority  had expressed  interest  in  participating in  the                                                                    
1:33:31 PM                                                                                                                    
Mr.  Alper explained  that  slide 12  showed  that the  same                                                                    
analysis  applied  if   the  lower  statutory  appropriation                                                                    
mechanism was provided. In other  words, instead of the $184                                                                    
million in the  coming year, the $41 million  was plugged in                                                                    
and applied in the subsequent  year. The example showed that                                                                    
rather than paying off the  last of the company's credits in                                                                    
FY 23, it would  not get paid in full until  FY 31. The same                                                                    
$100 million face value would  be received, but the discount                                                                    
rates  became  much more  onerous  because  of the  compound                                                                    
interest effect  of waiting the  additional number  or years                                                                    
to which the  discount rate was applied. By FY  31, when the                                                                    
company  received its  last $5  million, after  12 years  of                                                                    
discounting  its  value  was   only  $1.6  million  to  $2.8                                                                    
million. He pointed out the discount was dramatic.                                                                              
Mr. Alper  continued that even  at the 5.1  percent discount                                                                    
rate, the  company would still  be losing 27 percent  of the                                                                    
face  value. At  the 10  percent discount  it would  lose 44                                                                    
percent  of  face value.  There  was  a dramatic  difference                                                                    
between  slides 11  and  12  based on  the  time factor  and                                                                    
presumed  appropriation included  in  the formula.  Although                                                                    
there was  some ambiguity and  debate over what  the current                                                                    
statutory  formula   said,  the  bill  would   hardcode  the                                                                    
presumption of the  larger formula. He detailed  that if the                                                                    
bill  passed, there  would not  be a  question over  how the                                                                    
numbers would be  calculated. The bill would  not change the                                                                    
statutory appropriation  formula, which would remain  at the                                                                    
will  of the  legislature.  For the  purpose of  calculating                                                                    
discount rates,  the bill  assumed the  larger appropriation                                                                    
schedule for the offers.                                                                                                        
1:35:29 PM                                                                                                                    
Mr. Alper moved to slide  13 and explained that a multi-step                                                                    
process would  occur if  the bill  passed. First,  DOR would                                                                    
reach out  to the  companies to get  a binding  statement of                                                                    
their intent  to participate in the  program. The interested                                                                    
credit  holders would  make an  irrevocable commitment.  The                                                                    
state needed the commitment in  order to know what to borrow                                                                    
from the  market. He detailed  the state would need  to know                                                                    
which companies  would participate  and which  discount rate                                                                    
they  would qualify  for. The  known credits  as of  January                                                                    
2018 was $807  million - those credits  would qualify first.                                                                    
Based on  what portion came  in at which discount  rate, the                                                                    
total bond issuance  would be between $683  million and $738                                                                    
million plus  any financing fees  paid to  underwriters. The                                                                    
administration's hope  was to receive  the bond  issuance as                                                                    
soon as August 2018.                                                                                                            
Mr.  Alper  explained  there  were  additional  pending  tax                                                                    
credits not  included in the  $807 million. The  first group                                                                    
included the last NOL credits  allowable under law. He noted                                                                    
that HB  111 (passed  in 2017)  cut the  NOL credits  off in                                                                    
mid-2017.  He  elaborated that  the  2017  tax returns  were                                                                    
currently under review by the  tax division and would mostly                                                                    
be issued in  July 2018. There were  inevitably credits that                                                                    
would  trickle  in  late due  to  late  applications.  Other                                                                    
remaining credits  included refinery credits that  sunset in                                                                    
2020  and the  credit to  the Interior  gas utility  for its                                                                    
primary gas storage  tank in Fairbanks. He  detailed that if                                                                    
the  gas utility  work was  completed by  2020, it  would be                                                                    
possibly  the  last cashable  tax  credit  to come  in.  The                                                                    
credits  would be  eligible  for  subsequent bond  offerings                                                                    
that would be  issued in 2019, 2020, and  possibly 2021. The                                                                    
bill would sunset  after 2021 and the state  would no longer                                                                    
have the ability to issue bonds.                                                                                                
1:38:05 PM                                                                                                                    
Mr. Alper explained the third  step would be to purchase the                                                                    
certificates  (slide  14).  The  10  percent  rate  fell  in                                                                    
between  the state's  and companies'  cost  of capital.  The                                                                    
5.12 percent rate  would be pinned down in the  last weeks -                                                                    
the exact amount would not be  known until the state went to                                                                    
market.  Companies  would receive  the  lower  rate if  they                                                                    
offered any one of four options:                                                                                                
   1. Overriding royalty of equivalent value                                                                                  
   2. Investment commitment of equivalent value within 24                                                                     
   3. Waiver of seismic data confidentiality waiver, or                                                                       
   4. Refinery / gas storage credit                                                                                           
1:38:44 PM                                                                                                                    
Mr.  Alper discussed  that borrowing  money cost  money. The                                                                    
state  would be  paying  interest to  whoever purchased  the                                                                    
bonds. However,  the interest the  state would pay  would be                                                                    
less  than the  discounts received  from buying  the credits                                                                    
from companies. The idea was  that the state would breakeven                                                                    
or  make a  small  amount  of money  on  the relative  value                                                                    
between what  it gained  from the discount  and what  it got                                                                    
from the interest.  There was no specific  hardcoding of the                                                                    
bonds in the bill, but  the assumed formulas included a ten-                                                                    
year payback  where the  first two  years would  be interest                                                                    
only, the  debt service  would be  increased in  years three                                                                    
through five, and  a flat payment to fully pay  off the debt                                                                    
would occur in  years six through ten.  The rationale behind                                                                    
the  assumptions  was  that DOR  saw  the  state's  finances                                                                    
improving in three  to four years with the  presumption of a                                                                    
percentage of  market value and improvements  to the overall                                                                    
fiscal  situation. The  department believed  it would  be in                                                                    
the state's interest  to push some of the  larger costs into                                                                    
the  later  years.  Meanwhile,  there  would  be  short-term                                                                    
budgetary gains  from making the  interest only  payments in                                                                    
the initial years.                                                                                                              
Mr. Alper explained that the  smaller subsequent bond issues                                                                    
were structured  with a ten-year  system as well,  but years                                                                    
one  through  nine would  be  interest  only and  a  balloon                                                                    
payment  would  take  care  of  the rest  in  year  ten.  He                                                                    
reiterated  that the  administration  was  looking for  cost                                                                    
equivalency - it was not trying  to make money off the backs                                                                    
of the companies, but it was  also not looking to pay out of                                                                    
pocket for the debt service.                                                                                                    
1:40:37 PM                                                                                                                    
Mr. Alper  addressed a table  showing anticipated  cash flow                                                                    
to the  state before and  after the proposed  program (slide                                                                    
16).  The Cohorts  1 through  4  referred to  the four  bond                                                                    
issues. Cohort 1 was the  initial large bond that would take                                                                    
place in  the coming fall to  pay off the $807  million. The                                                                    
assumption in the table was  that everyone would participate                                                                    
and  that everyone  would receive  the  more advantageous  5                                                                    
percent  discount rate,  which meant  the maximum  borrowing                                                                    
and maximum payments on the  state's part. He noted that the                                                                    
statutory payment equaled $946  million. He detailed that if                                                                    
the amount was turned into  a net present value (meaning the                                                                    
state's  time was  worth 5  percent  per year)  it would  be                                                                    
about $810 million. Meanwhile, the  ten years of payments in                                                                    
Cohort  1 were  $27 million  in the  first two  years, $61.6                                                                    
million  in  the third  year,  and  $123 million  in  future                                                                    
years. Cohorts  2 through  4 were  smaller and  pertained to                                                                    
the last  credits that  would trickle  into the  system. The                                                                    
total  payments for  the first  five years  were lower  than                                                                    
they would be under the statutory formula.                                                                                      
Mr.  Alper elaborated  that  until FY  24  the bond  program                                                                    
would have  smaller payments  than status  quo. In  the end,                                                                    
the state  would pay  out slightly  less than  $1.1 billion,                                                                    
but the present  value of that cash flow with  the 5 percent                                                                    
discount was $782  million. In present value  terms, even if                                                                    
all companies  participated and  took the  most advantageous                                                                    
structure, the state  would still gain about  $27 million in                                                                    
value versus the status quo.                                                                                                    
1:42:45 PM                                                                                                                    
Mr. Alper moved to slide  17 and addressed the bill's impact                                                                    
on  debt  capacity  and credit  rating.  The  administration                                                                    
believed  the bill's  impact on  the  state's debt  capacity                                                                    
would  be  limited  because the  existing  credits  were  an                                                                    
obligation of the state that  showed up on its balance sheet                                                                    
as a liability.  He noted that in some ways,  the bill was a                                                                    
restructuring  of  an existing  debt.  He  explained it  was                                                                    
similar  to  the  way  the   state  made  Public  Employees'                                                                    
Retirement  System (PERS)  and  Teachers' Retirement  System                                                                    
(TRS) payments  on behalf  of local  jurisdictions -  it was                                                                    
money owed  that the state  was buying down. The  bill would                                                                    
have  a neutral  to positive  impact on  the state's  credit                                                                    
rating, indicating a desire and plan to payoff obligations.                                                                     
Mr.  Alper reported  that the  bill would  reduce the  FY 19                                                                    
payment  of $184  million (8.1  percent  of anticipated  UGF                                                                    
revenue) to  $27 million in  interest payments  (1.1 percent                                                                    
of UGF revenue).  He elaborated the shift  constituted a big                                                                    
short-term  improvement   to  the  state's  cash   flow.  He                                                                    
explained that future payments would  be flattened in a very                                                                    
advantageous way.                                                                                                               
Mr. Alper advanced to slide  18 and continued to address the                                                                    
bill's impact on debt capacity  and credit rating. The slide                                                                    
included  a  table from  the  Revenue  Sources Book  showing                                                                    
fiscal years  [FY 18  through FY 27]  and associated  UGF in                                                                    
addition  to existing  state  debt  service obligations  for                                                                    
things like  general obligation bonds, state  supported debt                                                                    
service (e.g. Goose Creek  Correctional Center debt), school                                                                    
debt  reimbursement,  and  expected statutory  payment  into                                                                    
PERS and TRS. He noted that  the numbers added up to roughly                                                                    
20  percent per  year  of future  unrestricted revenue  (the                                                                    
first  gray  column). The  next  two  sets of  columns  were                                                                    
"either/or" scenarios.  The second gray column  depicted the                                                                    
statutory tax  payments scenario where payments  in the next                                                                    
several years would  be over 30 percent per  year. The third                                                                    
gray  column showed  the debt  service scenario  where there                                                                    
would  be smaller  numbers  in the  present  stepping up  to                                                                    
larger numbers in  the future. He elaborated  there would be                                                                    
a sequence of  numbers remaining around 25  percent over the                                                                    
long-term, which  would flatten out the  state's obligations                                                                    
and push a bit into future years.                                                                                               
1:45:51 PM                                                                                                                    
Mr.  Alper concluded  the presentation  with  slide 19.  The                                                                    
bill was part of the  governor's economic stimulus plan. The                                                                    
administration   anticipated  the   bill  would   result  in                                                                    
substantial   reinvestment   in  Alaskan   projects   nearly                                                                    
immediately, which would lead to  jobs and future oil in the                                                                    
pipeline.  Small producers  had been  encouraged to  come to                                                                    
Alaska,  in  part  by  tax  credits.  The  bill  would  help                                                                    
unfreeze pending development projects.                                                                                          
Mr. Alper stressed that the  great majority of the companies                                                                    
wanted to develop  oil and gas they had  discovered and were                                                                    
trying  to  straighten out  their  finances  to do  so.  The                                                                    
credits  needed to  be paid  off in  order for  companies to                                                                    
complete  their projects.  The  administration believed  the                                                                    
bill would  help re-establish  Alaska as  a premier  oil and                                                                    
gas  exploration and  production basin.  The goal  was about                                                                    
diversifying  the North  Slope -  bringing new  players into                                                                    
Alaska to help provide some  competition for the three major                                                                    
companies that had largely dominated  oil and gas production                                                                    
for the  last 40 years.  The ultimate goal was  more revenue                                                                    
from production.  The secondary benefit was  moving the cost                                                                    
of the  tax credits  into future  years that  better matched                                                                    
the state's anticipated cash flow.                                                                                              
Co-Chair Foster indicated that he  would open up the meeting                                                                    
for questions.  Following a  question period,  the committee                                                                    
would  discuss   the  constitutionality  of  the   bill.  He                                                                    
reviewed the available testifiers.                                                                                              
1:49:13 PM                                                                                                                    
Vice-Chair Gara  communicated that he  had a huge  amount of                                                                    
respect for Mr. Alper and Mr.  Barnhill, but he was upset by                                                                    
the  presenters'  testimony  about   the  state  losing  its                                                                    
credibility  (slide  3).  He wanted  to  consider  the  bill                                                                    
fairly. He  stressed that from  2008 to 2015 the  state paid                                                                    
much  more  in tax  credits  than  statutorily required.  He                                                                    
believed  the state  had still  paid more  than required  in                                                                    
subsequent  years.  He  interpreted tax  credit  statute  to                                                                    
specify that  the state owed  10 percent of the  revenues it                                                                    
took  in from  production taxes.  He believed  revenue meant                                                                    
the money  the state received,  not the money it  would have                                                                    
received if it  had a 35 percent tax, which  was the way the                                                                    
administration  interpreted it.  In any  case and  under any                                                                    
circumstances,  the state  had paid  more than  required. He                                                                    
was angered  by the  inference that legislators  had somehow                                                                    
risked  the   state's  credibility   by  paying   more  than                                                                    
required. He wanted  to consider the bill on  its merits but                                                                    
did not  appreciate that the  presentation started  out with                                                                    
an accusation.                                                                                                                  
1:51:13 PM                                                                                                                    
Mr. Barnhill  responded that the respect  the administration                                                                    
had for the  legislature was mutual. He  clarified that when                                                                    
the  administration reported  there had  been an  erosion of                                                                    
the  state's  credibility  it was  not  an  accusation;  the                                                                    
administration was merely reporting  what it was hearing. He                                                                    
reasoned that it  may or may not be fair.  All of the events                                                                    
Vice-Chair Gara had articulated  about the state going above                                                                    
and beyond were  true. He believed the oil  and gas industry                                                                    
understood  why  the  payments   had  been  reduced  to  the                                                                    
statutory level -  the price of oil had  collapsed and there                                                                    
had  been a  high degree  of fiscal  constraints, which  had                                                                    
taken  the  state  quite  some  time  to  sort  through.  He                                                                    
believed  it was  important for  all  Alaskans to  recognize                                                                    
that  Alaska was  in  competition with  oil  and gas  basins                                                                    
Mr. Barnhill elaborated that boards  of directors and owners                                                                    
of  companies had  opportunities  to go  elsewhere and  they                                                                    
compared the relative prospectivity  in Alaska with relative                                                                    
prospectivity elsewhere.  He continued  that two  years back                                                                    
when the state had begun paying  less than, there had been a                                                                    
disruption of  expectations. He understood the  statute said                                                                    
what  it said,  and  the  legislature operated  accordingly;                                                                    
nevertheless,  he believed  it was  important to  understand                                                                    
the  expectations  were  for  a  higher  level  of  payment.                                                                    
Primarily  because there  had  been  various projects  under                                                                    
development  and close  to development  and  bank loans  had                                                                    
been  secured on  the expectation  that the  money would  be                                                                    
coming  faster  regardless  of the  legislature's  power  to                                                                    
appropriate some,  all, or  none. He  clarified that  it was                                                                    
not  an accusation,  merely  the facts.  The  last thing  he                                                                    
wanted was  for someone to  take offense or consider  it was                                                                    
their  fault. He  stated it  was  the nature  of the  beast;                                                                    
there was  no fault, it was  just the fact. The  goal was to                                                                    
find  a  balanced  solution that  could  work  for  multiple                                                                    
Mr. Alper added  that in the early years it  was not so much                                                                    
that the state had paid more than  it had to. In many of the                                                                    
earlier  years   the  state  had   very  large   amounts  of                                                                    
production tax revenue, upwards of  $6 billion per year in a                                                                    
couple of the  years. Based on those  amounts, the statutory                                                                    
formula  would have  resulted in  a very  large number.  The                                                                    
department had determined what  would have been appropriated                                                                    
had  the formula  been  followed. In  the  early years,  the                                                                    
state would  have over-appropriated; it would  have resulted                                                                    
in  more  money in  the  fund  than  had been  requested  by                                                                    
companies. He  elaborated that  it would  have more  or less                                                                    
endowed a fund  - the department had seen the  fund reach up                                                                    
to $700 million in its model.                                                                                                   
Mr. Alper  continued that starting  in about 2013  the state                                                                    
would have  been drawing  down the  fund and  buying credits                                                                    
faster than  new money would have  been put in as  the price                                                                    
of oil  began to decline.  The fund  would have hit  zero in                                                                    
about FY  15 and the  state would  have been pretty  much in                                                                    
the same place.  He believed the issue was  in expectation -                                                                    
had the state  gone this route, when it arrived  at 2016 and                                                                    
later,   companies    would   have   understood    how   the                                                                    
appropriation   worked.  Whereas   instead,  companies   had                                                                    
developed  the  expectation  the   annual  budget  would  be                                                                    
written in  an open-ended  way. The  effect would  have been                                                                    
the same,  but companies had come  to rely on the  idea that                                                                    
no  matter what,  the state  would be  appropriating to  the                                                                    
amount requested,  which in retrospect  may have been  a bit                                                                    
of a mistake.                                                                                                                   
1:55:47 PM                                                                                                                    
Vice-Chair  Gara  rejected  the   idea  that  companies  had                                                                    
developed  an  expectation. He  reasoned  that  of course  a                                                                    
company  wanted to  receive  as  much as  it  could get.  He                                                                    
believed companies  read the statute  when they  applied for                                                                    
the credits. He stressed  that the statutory calculation was                                                                    
10 percent  of the  revenues generated from  production tax,                                                                    
whereas the  calculation used by  the administration  was 10                                                                    
percent of money  the state would have received if  it had a                                                                    
35  percent tax.  He elaborated  that  statute specified  10                                                                    
percent of revenue at prices  over $60 per barrel. He stated                                                                    
the argument  could easily be  won in a court.  He continued                                                                    
it  was a  much smaller  amount  of revenue  owed under  the                                                                    
statute than  shown on  slide 16.  He would  pose additional                                                                    
questions later. He was angered by the presentation.                                                                            
Mr. Barnhill  regretted that Vice-Chair  Gara was  angry. He                                                                    
communicated   that    they   completely    understood   the                                                                    
difficulties and  recognized there were different  and valid                                                                    
interpretations  of  the  statute.  The  goal  was  to  push                                                                    
through the  different interpretations  to solve  a problem.                                                                    
The problem  was not the differing  legal interpretations of                                                                    
the statute.  The desire was  to jump start  exploration and                                                                    
production at present and to  get the benefit of the state's                                                                    
investments through  the oil and  tax credit program  it had                                                                    
already  made,   in  order  to   get  new   production.  New                                                                    
production would  hopefully result  in jobs,  new royalties,                                                                    
new taxes, new  funding for the state and  for the Permanent                                                                    
Fund Dividend program.  He did not believe  it was necessary                                                                    
to argue  the statute,  but that it  was necessary  to solve                                                                    
the problem.                                                                                                                    
1:58:31 PM                                                                                                                    
Representative  Ortiz   wondered  if   HB  331   would  have                                                                    
negative,  positive,  or  neutral  effects  on  the  state's                                                                    
ability to finance an  infrastructure package and/or finance                                                                    
the gas pipeline.                                                                                                               
DEVEN  MITCHELL, EXECUTIVE  DIRECTOR, ALASKA  MUNICIPAL BOND                                                                    
BANK AUTHORITY,  DEPARTMENT OF REVENUE, the  legislation had                                                                    
some  pros and  cons  related to  debt  capacity and  credit                                                                    
quality.  As   shown  in  the  presentation,   there  was  a                                                                    
reamortization of an existing  obligation that would provide                                                                    
some budgetary  relief. The state  had a liability  that was                                                                    
being refinanced  with a discount on  the existing liability                                                                    
that offset  the cost of  the extended amortization.  At the                                                                    
same  time,  the  state  was taking  a  liability  that  was                                                                    
"soft," meaning  the legislature  had greater  discretion in                                                                    
choosing amounts  it would  appropriate for  the obligation.                                                                    
There  was the  potential  for an  increase  in the  state's                                                                    
relationship with  the oil  and gas  sector and  business in                                                                    
general that  the state's word  was something  other parties                                                                    
could  rely on.  He believed  there could  be some  positive                                                                    
impacts   related   to   the  Alaska   Gasline   Development                                                                    
Corporation (AGDC)  because the  bill would  demonstrate the                                                                    
state  following through  on  its  prior commitments.  There                                                                    
would  be  some impact  on  the  state's debt  capacity  and                                                                    
ability to fund other projects  once the liability became an                                                                    
annual obligation the capital markets would be reliant on.                                                                      
2:01:51 PM                                                                                                                    
Representative  Wilson thanked  the  administration for  the                                                                    
bill, which  provided an  option. She  believed it  had been                                                                    
well considered. She  thought SB 21 had  helped increase oil                                                                    
development, but further development  had been hampered. She                                                                    
asked how  much income the  state received in the  years the                                                                    
credits were due. She stated  that the credits may have been                                                                    
turned in  for development that may  have been in FY  16, FY                                                                    
17, and FY 18.                                                                                                                  
Mr. Alper replied that the  great bulk of the credits issued                                                                    
in  the calendar  year  2016  were for  work  done in  2015.                                                                    
Companies that filed  tax returns in March  of 2016 received                                                                    
credits later  that year. The  work done in 2015,  which led                                                                    
to the  credits, for the most  part had not yet  resulted in                                                                    
production. He furthered  that the companies hoped  to be in                                                                    
production in  the next  several years.  In the  North Slope                                                                    
the  credits  were  primarily   NOLs,  when  companies  were                                                                    
producing they  were most  likely not  operating at  a loss;                                                                    
however, in  2015 the price  of oil  had been so  low, there                                                                    
had  been producers  operating  at a  loss.  The Cook  Inlet                                                                    
credits  were largely  tied  to spending.  He  cited the  25                                                                    
percent well lease expenditure  credit. There were companies                                                                    
operating and possibly profitable  that were earning credits                                                                    
simultaneous with  their work. He  did not believe  he could                                                                    
easily determine the amount of  production the 2015 and 2016                                                                    
spending profiles led to.                                                                                                       
2:04:04 PM                                                                                                                    
Representative Wilson noted they  were discussing credits of                                                                    
approximately $800  million. She asked how  much revenue the                                                                    
state  had received  during that  same period  of time.  She                                                                    
assumed the  state had  received something  in terms  of oil                                                                    
because production had been incentivized.                                                                                       
Mr.  Alper responded  that  the  pending credits  associated                                                                    
with  2015 and  2016  were approximately  $800 million;  the                                                                    
total oil and gas revenue over  the two years was $2 billion                                                                    
or   $3  billion.   He  stated   it  was   relatively  small                                                                    
historically   speaking.  He   returned  to   slide  6   and                                                                    
referenced $3.6  billion in cashable  credits that  had been                                                                    
paid  out beginning  in  FY 07  through the  end  of FY  18.                                                                    
During the time  the $3.6 billion went out the  door, a very                                                                    
large amount of oil and gas  revenue came into the state. He                                                                    
believed  the  revenue was  in  excess  of $40  billion.  He                                                                    
detailed  it had  been  a  time period  when  the state  had                                                                    
larger  budgets, bigger  capital budgets,  and had  put down                                                                    
the savings it  had been working through over  the past four                                                                    
years of the current fiscal crisis.                                                                                             
Representative  Wilson  stated   her  understanding  that  a                                                                    
formula would  still be utilized  for companies  who decided                                                                    
to opt  out of the  plan. She  asked which formula  would be                                                                    
used -  a lower  one or one  that many  legislators believed                                                                    
they should have been using all along.                                                                                          
Mr. Alper  replied that the legislature  would appropriate a                                                                    
number. At  present, the operating budget  was in conference                                                                    
committee and had two different  numbers. He conjectured the                                                                    
outcome could be  either number or somewhere  in between. It                                                                    
was  important to  structure  the  legislation so  companies                                                                    
that  chose  not  to  participate   would  not  be  unfairly                                                                    
advantaged by their nonparticipation.  He elaborated that if                                                                    
a  company  was holding  a  credit  that would  normally  be                                                                    
further back  in the line and  everyone got out of  the line                                                                    
in front  of them by  joining the program, that  the company                                                                    
would not receive more than  it otherwise would have had the                                                                    
program not existed.                                                                                                            
Mr. Barnhill added  that DOR had been in touch  with each of                                                                    
the 37 tax credit holders on  a fairly regular basis. One of                                                                    
the things the department wanted  to know in advance was how                                                                    
many of the 37 tax  credit holders were definitely not going                                                                    
to participate in the program.  Currently, no one within the                                                                    
group had  said they  would definitely not  participate. The                                                                    
vast  majority  had  communicated they  were  interested  or                                                                    
likely to  participate. The  department had  communicated to                                                                    
the  companies  its  desire  to  know  definitively  in  the                                                                    
relatively near future.                                                                                                         
2:07:33 PM                                                                                                                    
Representative  Wilson  was   concerned  about  Mr.  Alper's                                                                    
statements that a  company who opted out of  the program and                                                                    
waited in  line would not get  any more than the  people who                                                                    
took the  program. She believed  the point of opting  out of                                                                    
the  program would  be  for  a company  to  stay whole.  She                                                                    
reasoned if a  company waited it should not  have to receive                                                                    
a discount to  its credits. She stated she  would wait until                                                                    
an amendment came  before the committee. She  asked what the                                                                    
state's yearly  payments would be  if all  companies decided                                                                    
to participate  in the program  (in comparison  with current                                                                    
Mr.  Alper asked  if Representative  Wilson was  asking what                                                                    
the appropriation  would be in  the absence of the  bill. He                                                                    
wondered if she  was asking how long the  companies would be                                                                    
waiting.  He  referenced  slide  16 and  asked  if  she  was                                                                    
referring to the  number in the statutory  payment column of                                                                    
the table.                                                                                                                      
Representative Wilson  clarified she was asking  a different                                                                    
question.  She asked  how much  the state's  annual payments                                                                    
would be  if it had to  bond for $800 million.  She wondered                                                                    
if there  would still  be a  balloon payment  at the  end of                                                                    
nine years  and asked  if the entire  $800 million  would be                                                                    
owed at that time.                                                                                                              
Mr. Alper pointed to the Cohort  1 column on slide 16, which                                                                    
presumed  how to  pay off  the  $807 million  if the  method                                                                    
included  interest only  for two  years, a  fraction of  the                                                                    
principal  for  years three  through  five,  and a  balanced                                                                    
payment  for the  remaining five  years. The  schedule could                                                                    
easily  be restructured  to  have a  flat  payment over  ten                                                                    
years  of whatever  the  number would  be  to amortize  $807                                                                    
million. He  clarified it was actually  $740 million because                                                                    
of  the  discount. With  a  flat  rate  the state  would  be                                                                    
looking at  payments between $105  million and  $110 million                                                                    
per year  rather than the  Cohort 1 schedule that  paid less                                                                    
at the beginning and $123 million in the last few years.                                                                        
Representative Wilson  surmised it  would be higher  than if                                                                    
the state  went with the $40  million, which was one  of the                                                                    
ways  to look  at the  credits, versus  the $200  million in                                                                    
conference  committee. She  was trying  to ensure  the state                                                                    
did not  end up in a  bind. She asked if  the department had                                                                    
talked to the Division of  Retirement and Benefits about the                                                                    
amount owed  to PERS  and TRS. She  asked whether  the state                                                                    
could be faced  with deciding which of the items  to fund if                                                                    
oil remained around the current price.                                                                                          
2:10:19 PM                                                                                                                    
Mr. Barnhill  turned to slide  18. The chart showed  how the                                                                    
various  payment obligations  stacked up  going forward.  He                                                                    
pointed  to   the  column  labeled  "statutory   payment  to                                                                    
PERS/TRS"  and believed  it was  what Representative  Wilson                                                                    
was   referencing   with   respect  to   anticipated   state                                                                    
assistance payments. The numbers  were shown as a percentage                                                                    
of UGF to  show the relative burden each  of the obligations                                                                    
had.  The information  in the  gray column  to the  left was                                                                    
pulled from Mr.  Mitchell's state debt report.  To the right                                                                    
of the column included two  scenarios of how the tax credits                                                                    
would  be paid  in terms  of the  percentage burden  on UGF.                                                                    
Under  the status  quo,  the statutory  formula  as DOR  had                                                                    
interpreted it  and published in  the Revenue  Sources Book,                                                                    
created  a  lumpy  cash outflow  profile  where  the  burden                                                                    
increased  sharply  in  the  next  four  years  because  the                                                                    
payments were  in the  $170 million  to $184  million range.                                                                    
Whereas, the bill proposed a  backloaded debt service (shown                                                                    
on the  right of  the table). The  department had  taken the                                                                    
anticipated  payments for  PERS/TRS  into consideration.  In                                                                    
recognition  of that,  the  administration  was proposing  a                                                                    
backloaded  debt service  to  better  match the  anticipated                                                                    
cash outflows and reduce the impact to the General Fund.                                                                        
2:12:29 PM                                                                                                                    
Representative  Grenn referenced  earlier  comments made  by                                                                    
Vice-Chair  Gara  and was  reminded  of  a quote  "trust  is                                                                    
earned  in drops  and  lost in  buckets."  He believed  that                                                                    
regardless of whatever  expectations had been set  up in the                                                                    
first years  of paying credits back,  the state's reputation                                                                    
had  been created  in the  past several  years. He  believed                                                                    
that reputation,  whether right  or wrong, was  brought into                                                                    
company board  rooms and executive sessions.  He thought the                                                                    
bill went a long way  in helping to correct that reputation.                                                                    
He  asked  if  the  department   had  talked  to  banks  and                                                                    
creditors  about   the  proposals.  He  wondered   what  the                                                                    
reaction had been.                                                                                                              
Mr.  Alper responded  that the  chart on  slide 11  had been                                                                    
sent  to all  37 companies.  He noted  there were  companies                                                                    
with credit  in the  hundreds of  thousands and  others with                                                                    
credit  in the  hundreds of  millions, meaning  there was  a                                                                    
widely disparate  set of information the  department shared.                                                                    
In particular, there  were two major banks  that had credits                                                                    
assigned to  them -  there were  provisions in  statute that                                                                    
allowed the companies  to pledge the credit  by assigning it                                                                    
to  a  financer.  The  tax   division  would  make  payments                                                                    
directly to the  assignees. He noted that about  half of the                                                                    
credits fell  into that category.  The banks did not  get to                                                                    
choose  whether a  company participated,  but they  did have                                                                    
significant leverage  because many  were in  forbearance and                                                                    
were delinquent on loans.                                                                                                       
Mr.  Alper  believed  banks would  be  putting  pressure  on                                                                    
companies  to participate.  One of  the companies,  ING, had                                                                    
testified  to   the  House   Resources  Committee   and  had                                                                    
communicated  its initial  goal  was to  be  made whole.  He                                                                    
elaborated that ING  was owed $100 million,  but the company                                                                    
had  $140  million  in  credits. If  the  state  bought  the                                                                    
credits at 70 cents on the  dollar, ING would be made whole,                                                                    
but  that  was  not  their preferred  outcome  because  they                                                                    
wanted their  customer to succeed.  He continued  that ING's                                                                    
hope was  for the system  to be  closed out. Once  the loans                                                                    
were  made  current,  ING would  be  much  more  comfortable                                                                    
making  additional loans  to let  the companies  continue on                                                                    
their work, which was ultimately the goal of the bill.                                                                          
2:15:41 PM                                                                                                                    
Representative  Grenn asked  how  many of  the 37  companies                                                                    
that fell into Cohort 1 on slide 16.                                                                                            
Mr.  Alper  replied that  the  37  companies held  the  $807                                                                    
million. Cohort 1  was the assumption that  all $807 million                                                                    
would sell  into the  bill in  round one  once the  bill was                                                                    
Representative Grenn  asked Mr. Alper to  explain what would                                                                    
happen to a company that chose not to participate.                                                                              
Mr. Alper  replied that the  amount borrowed in  the bonding                                                                    
program  would  shrink by  that  amount  [to account  for  a                                                                    
company  not  participating].   He  provided  a  theoretical                                                                    
example  where $100  million chose  not to  participate. The                                                                    
$707 million  would go through  the discounting  process and                                                                    
bonds  would  be  purchased.  The   $100  million  would  be                                                                    
awaiting  appropriation. He  explained that  if the  program                                                                    
passed, the legislature may not  ever appropriate money into                                                                    
the  tax  credit  fund  again.  In  that  circumstance,  the                                                                    
company  would be  waiting until  it got  into production  -                                                                    
waiting until  it had a  tax liability to offset  the credit                                                                    
against or  it would retain  the ability to sell  its credit                                                                    
to another  producer (generally one  of the  major producers                                                                    
with an ongoing tax liability).                                                                                                 
Mr.  Alper  continued  that alternatively,  the  legislature                                                                    
could appropriate a  limited amount to the  tax credit fund.                                                                    
He used  a scenario where the  House passed a budget  with a                                                                    
$49  million appropriation  included.  As  the only  company                                                                    
that elected not to participate  in the HB 331 proposal, the                                                                    
company may  expect to receive  the entire $49  million. The                                                                    
department did  not want to  interpret the scenario  in that                                                                    
way - DOR  felt it would unfairly advantage  the company for                                                                    
not   participating.   Under   normal   circumstances,   the                                                                    
company's share would have been  $10 million or $15 million.                                                                    
The state  would want to dole  that money out over  a number                                                                    
of years  to treat  the company  the same  as it  would have                                                                    
been treated had the bond bill not passed.                                                                                      
Mr. Barnhill returned to slide  11. He indicated that one of                                                                    
the features of the bill,  was its requirement for companies                                                                    
to  participate with  all of  their credits.  He highlighted                                                                    
the hypothetical company  on slide 11 and  explained that if                                                                    
it opted not to participate  it would receive $23 million in                                                                    
year  one (if  the  legislature made  an appropriation).  He                                                                    
characterized the scenario  as all or nothing.  If a company                                                                    
did not  participate it ran  the risk that it  could receive                                                                    
some,  all, or  none of  the payments  in years  two through                                                                    
five.  He  explained  that the  legislature  had  the  legal                                                                    
authority  to appropriate  some, all,  or none  according to                                                                    
statute.  For  that   reason,  the  administration  believed                                                                    
companies had  evaluated the risks of  not participating. At                                                                    
present,  no  companies  had  communicated  they  would  not                                                                    
Representative Grenn  asked whether the passage  of the bill                                                                    
had the  potential to reduce  UGF by $150 million  (based on                                                                    
the statutory appropriation schedule on slide 9).                                                                               
Mr. Alper responded in the  affirmative but noted there were                                                                    
a  couple of  assumptions  that were  necessary to  overcome                                                                    
first.  He elaborated  that if  the statutory  appropriation                                                                    
passed it would be $184  million (the number in the Senate's                                                                    
current  version  of  the  operating  budget  in  conference                                                                    
committee. Whereas,  if the bill  passed, it included  a $27                                                                    
million fiscal note for debt  service. The $27 million would                                                                    
be added  to the  budget with the  expectation that  most or                                                                    
all of  the $184  million could  be eliminated,  which would                                                                    
reduce spend by around $150 million.                                                                                            
2:20:39 PM                                                                                                                    
Representative Thompson was angered  at the thought that the                                                                    
credits had  not yet been  paid. He remarked that  the there                                                                    
had been  a real problem  where Cook Inlet had  been running                                                                    
out of  gas. He  recalled Anchorage  had been  preparing for                                                                    
rolling   brownouts.  The   state   had   been  faced   with                                                                    
determining how  to incentivize  bringing more  companies to                                                                    
Alaska.  The [credits]  had  worked and  Cook  Inlet was  no                                                                    
longer  running out  of gas.  Simultaneously  the state  had                                                                    
discovered there was less and  less oil coming down the pipe                                                                    
line. He referenced slide 3  showing that the state had been                                                                    
after encouraging new  companies to come to the  state to do                                                                    
more exploration and locate more oil.                                                                                           
Representative Thompson  reiterated that the  incentives had                                                                    
been  successful.  Small  companies  had  found  substantial                                                                    
reservoirs of oil that would  add 200,000 barrels or more to                                                                    
the  pipeline  around  2021  to  2023.  By  not  paying  the                                                                    
credits, the companies had not  been able to borrow money to                                                                    
get the  oil into the  pipeline. He stressed  the importance                                                                    
of fulfilling the  state's obligation to pay  the credits in                                                                    
order to  creat more jobs  and put  more oil into  the line.                                                                    
The  revenue would  fund schools,  highways, and  health and                                                                    
social services.  He believed everything  in the  budget was                                                                    
subject to  appropriation by the legislature.  He thought it                                                                    
was unfortunate that the state had  not been able to pay the                                                                    
credits off. He understood that  the crash in oil prices had                                                                    
not  been anticipated,  but he  believed  denying the  money                                                                    
owed to  companies was wrong.  He underscored that  the bill                                                                    
would get  the money back  into the market and  would create                                                                    
jobs. He supported the legislation.                                                                                             
2:23:18 PM                                                                                                                    
Co-Chair  Seaton  was  disturbed  to  hear  that  the  state                                                                    
anticipated more  revenues going forward and  that POMV gave                                                                    
more revenue  to pay the  credits in the future.  He thought                                                                    
that counting on  savings to pay larger bills  in the future                                                                    
was not  something that should  be projected with  the bill.                                                                    
He referenced the idea that  the 10 or 15 percent production                                                                    
tax that had been voted  on would go towards paying credits;                                                                    
however, over 60  percent of all production  tax received by                                                                    
the state  was going  to pay  the $184  million. He  did not                                                                    
believe  anyone had  voted  to  put 60  percent  of the  tax                                                                    
received in  the .028 fund.  He stated it  was categorically                                                                    
Co-Chair Seaton  continued that he  had heard  several times                                                                    
that the Cook Inlet credits  had worked. He pointed out that                                                                    
two things  had happened  in Cook Inlet  simultaneously. The                                                                    
Regulatory Commission of Alaska  (RCA) had limited the price                                                                    
charged for  gas at about  $2.25/mcf. At the same  time, the                                                                    
gas  producers  received $6.58  to  $7.50/mcf  so they  made                                                                    
money. He stressed that no  one would have explored for gas,                                                                    
even  with   tax  credits,  if   the  limitation   had  been                                                                    
$2.25/mcf.  He advised  members to  include the  increase in                                                                    
price allowed  in regulation when  discussing the  issue. He                                                                    
stressed  it had  been  a major  factor  enabling people  to                                                                    
Co-Chair Seaton  was amenable to using  DOR's interpretation                                                                    
of  the   statutory  tax   calculation;  however,   if  some                                                                    
companies chose not to participate,  he would emphasize that                                                                    
the  alternative calculation  should exist  at a  much lower                                                                    
statutory rate. He addressed  reinvestment and remarked that                                                                    
the  provision  asking  a  credit  holder  to  agree  to  an                                                                    
overriding  royalty interest  made sense  [to qualify  for a                                                                    
lower  rate, the  credit  holder  had to  meet  one of  four                                                                    
provisions  (slide  10)]  for  a company  that  had  an  oil                                                                    
project.  He surmised  the situation  did not  pertain to  a                                                                    
company  with  seismic  data  where it  could  agree  to  an                                                                    
overriding royalty but would never  be producing oil anyway.                                                                    
He  hoped the  bill would  allow a  company to  agree to  an                                                                    
overriding  royalty  and  that  the  Department  of  Natural                                                                    
Resources (DNR)  and DOR  had to approve  it made  sense. He                                                                    
was trying to determine how  the second bullet point "commit                                                                    
to reinvest the money in Alaska" worked.                                                                                        
2:27:57 PM                                                                                                                    
Co-Chair Seaton continued  that he had heard  from had heard                                                                    
from the banks  that the majority of funds that  would go to                                                                    
the  oil companies  would  go to  paying  off existing  bank                                                                    
loans. He stated  that the money would not  be residing with                                                                    
the oil  companies, but  would go  towards wiping  out their                                                                    
debt. He stated that the companies  had been able to get the                                                                    
financing  using tax  credits  as the  underlying value.  He                                                                    
asked how the commitment to  spend the money in Alaska going                                                                    
to work if most of the money would go to repay banks.                                                                           
Mr.  Barnhill regarding  companies  that  had pledged  their                                                                    
credits to  a bank -  their credit was currently  frozen. He                                                                    
spoke  to  a  hypothetical  situation where  a  company  had                                                                    
assigned its credits,  its credit was frozen,  and it wanted                                                                    
to access the lower discount  rate, the company would submit                                                                    
a qualified plan of capital  expenditures to DNR (similar to                                                                    
other  programs administered  by DNR)  and had  to make  the                                                                    
expenditure in two  years in order to  qualify. He explained                                                                    
that DNR already  had a process to ensure  that the expenses                                                                    
were qualified and that they would be made.                                                                                     
Mr. Barnhill  elaborated that  DOR's understanding  from the                                                                    
banks was  that unfreezing the current  credit situation and                                                                    
uncertainty  would enable  the company  owner to  obtain new                                                                    
financing. One of  the banks had shared that  the credit had                                                                    
not frozen  in Texas  for as  long as it  had in  Alaska. He                                                                    
detailed there  had been  work-outs and  restructurings, but                                                                    
primarily  because  of  a  much  different  cost  structure,                                                                    
Texas,  Oklahoma,  and  elsewhere  had been  able  to  clear                                                                    
through  the  credit  issues  very  quickly  to  get  credit                                                                    
flowing again  allowing companies  to get credit  and drill.                                                                    
He  explained  it was  not  the  case in  Alaska,  primarily                                                                    
because the state  had a much higher cost  structure and due                                                                    
to uncertainty regarding the tax  credits. The goal with the                                                                    
bill was to get as much  certainty as possible, if a company                                                                    
wanted to  access the  lower discount  rate, that  the money                                                                    
would be invested over two years in Alaska.                                                                                     
2:32:05 PM                                                                                                                    
Co-Chair  Seaton  asked  Mr.  Barnhill  to  follow  up  with                                                                    
information  about the  consequence  that would  occur if  a                                                                    
company did  not follow through  with the plan. He  asked if                                                                    
there would  be a forfeiture of  the lease to the  state. He                                                                    
mentioned   Norway  as   an  example.   He  would   be  more                                                                    
comfortable if there was a  commitment [from companies] that                                                                    
the work plan would be followed through.                                                                                        
Mr. Barnhill  believed the suggestion  was a great  idea. He                                                                    
deferred to Mr. Alper for further comment.                                                                                      
Mr. Alper  replied that it  was not explicit.  He elaborated                                                                    
that  the  bill  referred  to  the  term  qualified  capital                                                                    
expenditures, a term in statute  relating to the original 20                                                                    
percent qualified  capital expenditure  credit on  the North                                                                    
Slope.  The type  of activity  the companies  would have  to                                                                    
commit to and invest  would be upstream capital expenditures                                                                    
(oil  field development  work).  He did  not  know what  the                                                                    
remedies  would be  if  a company  made  the commitment  and                                                                    
later  reneged.  The  department   would  get  back  to  the                                                                    
committee about the issue.                                                                                                      
2:33:41 PM                                                                                                                    
Mr.  Barnhill  addressed  Co-Chair Seaton's  question  about                                                                    
companies that decide  not to participate in  the program if                                                                    
the  bill passed.  He restated  Co-Chair Seaton's  view that                                                                    
the  appropriation made  for those  companies  be under  the                                                                    
alternative statutory  formula, which produced a  much lower                                                                    
statutory  appropriation should  the  legislature decide  to                                                                    
appropriate.  He reported  that the  idea was  not something                                                                    
the administration had considered.  He stated the team would                                                                    
need  to weigh  the  pros and  cons of  the  method. From  a                                                                    
policy perspective, one of the  obvious benefits was that it                                                                    
would help encourage companies on  the fence with respect to                                                                    
participating, to  participate. He  reasoned it  would bring                                                                    
certainty  to  the  statutory interpretation.  He  expounded                                                                    
that  with  the  understanding that  the  legislature  could                                                                    
appropriate some  money or none, it  may encourage companies                                                                    
to make a certain decision.                                                                                                     
Mr. Barnhill  moved to Co-Chair  Seaton's point  about price                                                                    
regulation  in Cook  Inlet. He  had  not been  aware of  the                                                                    
price regulation and appreciated  the information. He wanted                                                                    
to  present  what had  happened  in  Cook Inlet  fairly  and                                                                    
accurately.  With respect  to statutory  interpretation, the                                                                    
administration  recognized  the alternate  legal  arguments.                                                                    
The  administration was  trying to  push through  the debate                                                                    
and come up  with a solution that would benefit  Alaska as a                                                                    
whole. For better  or for worse, several years  back DOR had                                                                    
come up  with the  interpretation it  had; it  had published                                                                    
the interpretation  through a series of  calculations in the                                                                    
Revenue Sources Book.                                                                                                           
Mr.  Barnhill  addressed  Co-Chair Seaton's  first  question                                                                    
about  whether anything  the  department  said assumed  that                                                                    
POMV would  come into its  anticipated cash flow.  He turned                                                                    
to slide 18  and explained that the gray column  to the left                                                                    
["Subtotal: Current  Obligations without Tax  Credits") came                                                                    
out of  the DOR debt  report. The anticipated UGF  came from                                                                    
the  Office  of  Management  and Budget's  (OMB)  cash  flow                                                                    
projections  and did  not include  Permanent Fund  earnings.                                                                    
There  was  another  chart that  Mr.  Mitchell  had  started                                                                    
including  on  request  that showed  what  would  happen  if                                                                    
Permanent Fund revenues came into the UGF.                                                                                      
Co-Chair Seaton thought he had  heard a statement earlier in                                                                    
the presentation and reasoned that  if the statement was not                                                                    
anticipated  it should  come out  of  the presentation.  Mr.                                                                    
Barnhill responded, "fair enough."                                                                                              
2:37:13 PM                                                                                                                    
Representative Guttenberg observed  that the whole situation                                                                    
was built on  actions in the past; however, if  the past was                                                                    
not considered,  the mistakes would be  repeated. He thought                                                                    
the  bill  was  trying  to  fix things  from  the  past.  He                                                                    
stressed that the number of  non-Alaskans working in the oil                                                                    
and gas  industry was 37  percent and rising.  He elaborated                                                                    
that  he had  been a  part  of that  world for  a number  of                                                                    
decades and his  experience was that companies  did not hire                                                                    
Alaskans. He continued that everyone  talked about jobs - it                                                                    
was included in the  presentation several times; however, he                                                                    
wondered who the jobs were for.                                                                                                 
Representative  Guttenberg continued  that companies  on the                                                                    
North Slope  had been  managing the workforce  for 30  to 35                                                                    
years. He  found the situation  unacceptable. He  planned to                                                                    
discuss the  issue further when  the committee  talked about                                                                    
the  relationship between  the  bonds and  the industry.  He                                                                    
referred  to the  comment that  was made  about Texas'  cost                                                                    
structure versus  Alaska's cost  structure. He  believed the                                                                    
issue was  only relevant in  that the system  had stabilized                                                                    
in  Texas more  quickly.  He underscored  that  Texas was  a                                                                    
different world  from Alaska  in terms  of lease  owners. He                                                                    
continued  there were  thousands of  lease owners  in Texas,                                                                    
whereas the state was the leaseholder in Alaska.                                                                                
Representative  Guttenberg  remarked   that  the  bill  only                                                                    
looked at  "us and  paying off the  tax credit  holders." He                                                                    
asked about  the state  and its  borrowing capacity  and its                                                                    
relationship with paying  off loans. He spoke to  all of the                                                                    
conditions  the   state  had   and  the   variables  between                                                                    
"everything hitting the  fan and being able to  pay them off                                                                    
sooner." He  asked if  there would  be a  presentation about                                                                    
that as well.                                                                                                                   
Mr.  Barnhill  addressed the  issue  of  Alaskans not  being                                                                    
hired or  losing jobs at a  quicker rate in the  oil and gas                                                                    
industry.  He stated  it had  been a  problem the  state had                                                                    
struggled with  from the beginning.  He elaborated  that the                                                                    
state had  taken laws that  require Alaska-hire to  the U.S.                                                                    
Supreme Court; the court had  ruled it was very difficult to                                                                    
enforce   local-hire    preferences.   Nevertheless,   every                                                                    
gubernatorial administration since  1977 had some initiative                                                                    
to try  to encourage,  coerce, or  cajole the  industry into                                                                    
hiring more  Alaskans. The issue  had been and  always would                                                                    
be a  concern. He acknowledged and  validated Representative                                                                    
Guttenberg's concern  and relayed the concern  was shared by                                                                    
everyone. The  bill tried to  provide a solution  that would                                                                    
enable   the   industry   to   hire   more   Alaskans.   The                                                                    
administration  would  do  everything it  could  within  the                                                                    
boundaries  of  U.S.  constitutional  law to  make  sure  it                                                                    
Mr. Barnhill stated  he would pass on  the comment regarding                                                                    
the Texas  cost structure. He  had merely been passing  on a                                                                    
comment provided by one of  the banks involved regarding its                                                                    
observation about the differences  between Alaska and Texas.                                                                    
The issue was  leading the state to come up  with a solution                                                                    
that would  hopefully put Alaska,  Texas, and other  oil and                                                                    
gas basins on more equal  footing when it came to companies'                                                                    
decisions  about  whether  and  where to  invest.  He  asked                                                                    
Representative   Guttenberg   to   rephrase   his   question                                                                    
pertaining to future presentations.                                                                                             
2:42:31 PM                                                                                                                    
Representative  Guttenberg  stated  that the  committee  had                                                                    
been talking  about paying  off the  tax credit  holders. He                                                                    
asked about  the state's relationship with  the bond market.                                                                    
He spoke to  the state's liability it would or  would not be                                                                    
able to pay off. He asked about other risks.                                                                                    
Mr.   Barnhill  answered   that  HB   331  was   a  proposed                                                                    
restructuring  of an  existing  obligation of  approximately                                                                    
$800 million.  He explained that the  obligation would still                                                                    
exist if  the bill  passed and debt  was issued.  The reason                                                                    
the  administration  had  proposed   of  a  backloaded  debt                                                                    
service structure was to  get at Representative Guttenberg's                                                                    
concern  related to  the risk  the  state would  not pay  or                                                                    
would  have difficulty  in paying  the obligation.  Based on                                                                    
DOR's anticipated  cash flow, the  risk would be  reduced by                                                                    
matching  the  obligations and  cash  flows  related to  all                                                                    
state obligations  to the state's anticipated  cash flow. He                                                                    
acknowledged that it did not take  all of the risk away. The                                                                    
administration was trying  to craft a solution  based on the                                                                    
best information  available in  a way  that poses  the least                                                                    
risk  possible  to  the state  going  forward,  while  still                                                                    
accomplishing the objective of  jump starting the particular                                                                    
oil and gas industry sector.                                                                                                    
Representative   Guttenberg   appreciated   Mr.   Barnhill's                                                                    
comments about  the local hire,  the U.S.  constitution, and                                                                    
the commerce clause.  He stated it was  well established and                                                                    
was the law,  but it was not the problem.  He explained that                                                                    
if the  state was using  General Fund dollars on  a project,                                                                    
it asked the  company to hire more Alaskans,  because it was                                                                    
paid for with Alaskan dollars.  He was interested in knowing                                                                    
about the areas outside the  commerce clause. In some cases,                                                                    
the state  had incentives  built into  statute. He  asked if                                                                    
"this is  outside of that  or is this similar?"  He stressed                                                                    
the  need  to hire  students  from  the state's  engineering                                                                    
schools,  apprentice  and  trade programs,  and  others.  He                                                                    
underscored that currently over  $500 million in payroll was                                                                    
leaving the state  according to the Department  of Labor and                                                                    
Workforce  Development.  He  explained   the  state  had  an                                                                    
inherent vested  interest in a  part of the economy  that it                                                                    
was not  capturing. He thought  the state should be  able to                                                                    
do it in a way that was neutral for others.                                                                                     
2:46:02 PM                                                                                                                    
Mr. Alper thought Representative  Guttenberg was asking that                                                                    
if  the state  was going  to give  a company  the additional                                                                    
advantage  of  the lower  discount  rate,  whether it  could                                                                    
encourage companies  to the extent legally  possible to hire                                                                    
Alaskans.  He  was  prepared  to  work  with  Representative                                                                    
Guttenberg to try to find  a way to address something within                                                                    
the language of the bill. He  stated that it was a judgement                                                                    
call  - companies  would be  applying for  a lower  discount                                                                    
rate and the DOR commissioner  was determining it was in the                                                                    
best  interest  of the  state.  He  speculated that  perhaps                                                                    
something  could be  addressed in  the language.  There were                                                                    
always  the legal  limitations of  trying to  force [Alaskan                                                                    
hire].  He  was prepared  to  help  in  any way  within  the                                                                    
department's powers to provide comfort in the bill.                                                                             
Representative  Guttenberg  commented that  Co-Chair  Seaton                                                                    
had  asked  about  reinvesting  in  Alaska.  He  stated  the                                                                    
legislature  did   not  have  any  oversight   over  a  plan                                                                    
submitted   by  the   industry   or  qualified   expenditure                                                                    
information. He wondered how to  deal with a situation where                                                                    
a company  qualified but  the terms  were more  favorable to                                                                    
the  company  than to  the  state.  He cited  a  theoretical                                                                    
example where  the company wanted  to do wellhead  work, but                                                                    
the state  wanted increased  development and  production. He                                                                    
asked  how  the  state  would have  any  command  over  what                                                                    
qualified as a qualified expenditure.                                                                                           
Mr. Alper referred  back to a table on slide  11 showing the                                                                    
side-by-side  comparison of  the  two discount  rates for  a                                                                    
theoretical producer. The company  would receive $85 million                                                                    
without the  reinvestment commitment and slightly  less than                                                                    
$92  million with  the  reinvestment  commitment. Under  the                                                                    
current version of  the bill, if a company  showed intent to                                                                    
spend $92 million  in upstream development work  in the next                                                                    
two years, it would receive  the $92 million. In the absence                                                                    
of the  commitment it would  receive $85 million.  The great                                                                    
bulk of the companies  were non-producers that currently did                                                                    
not  have  much,  if  any  production.  The  companies  with                                                                    
production were  looking to greatly expand  that production.                                                                    
The department  had not contemplated  a restriction  on what                                                                    
sort of expenditure, other than  the requirement to meet the                                                                    
definition  of qualified  capital expenditure  (upstream oil                                                                    
and  gas  development work).  A  capital  expenditure met  a                                                                    
federal depreciation  standard. He  did not think  there was                                                                    
significant risk of companies trying  to work around that by                                                                    
doing maintenance  work, given  the nature of  the companies                                                                    
involved.   He  thought   perhaps   companies  would   offer                                                                    
additional information during public testimony.                                                                                 
2:49:46 PM                                                                                                                    
Representative  Pruitt referred  to  slide  4. He  clarified                                                                    
that in  2013 the  per-barrel credit  that had  replaced the                                                                    
capital credit was part of the  tax and did not actually add                                                                    
to  the taxable  credits  currently owed  by  the state.  He                                                                    
thought the bullet point could be confusing.                                                                                    
Mr.  Alper  explained  that  the old  ACES  regime  had  the                                                                    
capital  credit, which  was  eligible  for cash  repurchase.                                                                    
Although it  had generally been  used by major  producers to                                                                    
reduce the tax calculation and  the credit had not typically                                                                    
been paid  to the majors.  He explained that the  per barrel                                                                    
credit  was never  cashable; it  could be  used to  offset a                                                                    
company's  taxes  in  the  current year  but  could  not  be                                                                    
carried forward, transferred, or cashed.                                                                                        
Representative  Pruitt referred  to  slide  7 regarding  the                                                                    
amount  of  production  that  had   come  from  the  current                                                                    
credits.  He stated  that certain  investment had  come from                                                                    
the  credits that  had not  yet been  booked; therefore,  it                                                                    
could  not  be included  in  the  projected information.  He                                                                    
asked for the accuracy of his statements.                                                                                       
Mr.  Alper   replied  that  it  was   difficult  to  discuss                                                                    
specifics  because  of  taxpayer  confidentiality.  He  used                                                                    
Caelus  as  an  example  because the  company  had  publicly                                                                    
talked  about tax  credits  it was  owed.  He detailed  that                                                                    
Caelus  was  a  producer  and  had  an  operating  field  in                                                                    
Oooguruk it had purchased from Pioneer.                                                                                         
Mr. Alper moved to slide  6, which listed 86 million barrels                                                                    
of  oil [on  the North  Slope] in  existing production.  The                                                                    
presentation included  the production profile for  a similar                                                                    
field and what  it would be expected to produce  in the next                                                                    
ten  years. The  106 million  [barrels] on  slide 7  was the                                                                    
continuing production  from currently producing  fields that                                                                    
were related in  some way to previous year  tax credits. The                                                                    
23 million  barrels listed  in the  second bullet  point was                                                                    
the production  from fields that  received tax  credits thus                                                                    
far and  that initial  production was  expected in  the next                                                                    
few years. He noted it was  a small number that was expected                                                                    
to  grow dramatically  in the  future. He  cited Armstrong's                                                                    
Pikka field as  an example. He continued that  they could be                                                                    
talking  about  many  millions of  barrels  years  into  the                                                                    
future; some  of that production  would start to be  seen in                                                                    
the outyears of the ten-year production forecast.                                                                               
2:53:29 PM                                                                                                                    
Representative Pruitt  returned to slide 10  and asked about                                                                    
the various options  that would enable a  company to receive                                                                    
the  lower discount  rate.  He  requested additional  detail                                                                    
about the overriding royalty  interest. He mentioned seismic                                                                    
data. He wondered if the state  would be able to receive the                                                                    
state  would  receive  the interest  presently  or  in  five                                                                    
Mr. Alper  replied that  Section 11  of the  bill was  a DNR                                                                    
section  and created  a  process by  which  a company  would                                                                    
offer  and negotiate  an  overriding  royalty interest  with                                                                    
DNR. He  explained that a  company would communicate  it was                                                                    
prepared to offer "x" amount (e.g.  an extra 1 or 2 percent)                                                                    
on the  particular leases for  a given period of  time (e.g.                                                                    
ten  years).  Under the  bill,  DNR  would  come up  with  a                                                                    
present   value  based   on   the   additional  revenue   it                                                                    
anticipated to  come to  the state  and the  associated risk                                                                    
that the revenue would come  to fruition. He turned to slide                                                                    
11 and  expounded that DNR  would look at the  increment the                                                                    
company was  asking for. Under  the theoretical  scenario on                                                                    
slide 11,  the producer would  get an extra $7  million (the                                                                    
difference  between  the  lower   and  the  higher  discount                                                                    
rates).  If the  company  believed the  additional value  of                                                                    
what was  being offered from  the state was greater  than $7                                                                    
million, it would agree to the overriding royalty interest.                                                                     
Representative Pruitt  asked about  the seismic  data bullet                                                                    
point on slide 10.                                                                                                              
Mr. Alper  answered that  if a  company received  credit for                                                                    
doing  seismic work,  it submitted  the  information to  DNR                                                                    
where it  was kept in a  library and published after  a ten-                                                                    
year period.  He explained that the  publication was perhaps                                                                    
used  by other  companies  to invest  in  leases nearby.  He                                                                    
noted that  in 2017 there had  been items in the  news where                                                                    
ten-year  old   seismic  data  was  publicly   released.  He                                                                    
explained  that  the  company had  the  10  years  exclusive                                                                    
rights, but the state was in  possession of the data for its                                                                    
own  planning  purposes  and   scheduling  lease  sales.  To                                                                    
qualify  for  the  lower  discount rate  under  the  bill  a                                                                    
company  would give  up its  exclusive right  and the  state                                                                    
would  have   the  ability  to  publish   the  seismic  data                                                                    
2:56:44 PM                                                                                                                    
Representative  Pruitt  referenced   the  commitment  for  a                                                                    
company  to reinvest  the  money in  Alaska  (slide 10).  He                                                                    
believed the  goal appeared  to be  moving the  37 companies                                                                    
into  utilizing  the  credits. He  provided  a  hypothetical                                                                    
scenario  where  36  companies decided  to  use  the  option                                                                    
offered under HB 331, meaning  there was 1 remaining company                                                                    
the state  was still paying  under the minimum.  He believed                                                                    
that  company  may  have  a  bonus  and  benefit  the  other                                                                    
companies   did  not   receive.   He   continued  that   the                                                                    
legislature would  not appropriate up  to the gross  or net.                                                                    
He reasoned  the one  company could  receive a  windfall and                                                                    
everyone  else   "playing  good"   did  not.   He  suggested                                                                    
including a provision  specifying that if a  company did not                                                                    
participate, the state would pay out  as if the pro rata was                                                                    
still in place. Therefore, if  a company was supposed to get                                                                    
a small  portion of the  amount, it would still  receive the                                                                    
same  amount.  He  asked  if  the  administration  would  be                                                                    
amenable to the idea.                                                                                                           
Mr. Barnhill indicated that  Representative Parish had asked                                                                    
the  same  question in  the  House  Resources Committee.  He                                                                    
believed the  change would be beneficial  and the department                                                                    
had  prepared the  amendment to  submit  at the  appropriate                                                                    
Representative  Pruitt  addressed  the cohort  debt  service                                                                    
payment  scenarios on  slide 16.  He believed  he understood                                                                    
why Cohorts 2  through 4 used interest only  initially and a                                                                    
balloon payment at  the end. He thought  the balloon payment                                                                    
had been  scheduled to  occur after Cohort  1 had  been paid                                                                    
off. He pointed out that the  first payment for Cohort 1 was                                                                    
around  $27  million. He  noted  that  the Senate  had  been                                                                    
amenable to pay $181 [million]  for FY 19, whereas the House                                                                    
had included  $47 million. He recognized  the current fiscal                                                                    
situation  and did  not want  to  push something  off to  an                                                                    
Representative Pruitt believed Mr.  Alper had stated earlier                                                                    
that the forecast for additional  oil and gas revenue due to                                                                    
increased throughput  made DOR comfortable that  there would                                                                    
be increased revenue in the  future. He believed it had been                                                                    
separate from a conversation about  a POMV. He reasoned that                                                                    
the future  was still unknown.  He asked why  the particular                                                                    
system with interest and a  low payment in the beginning had                                                                    
been decided  upon in Cohort 1.  He asked if there  had been                                                                    
another  mechanism that  would  allow the  state  to pay  an                                                                    
amount  it was  already  comfortable paying  in the  current                                                                    
year,  which  would  mean  a   less  substantial  burden  in                                                                    
Mr. Barnhill responded that there  was an infinite number of                                                                    
ways  to model  debt financing.  The model  on slide  16 had                                                                    
been  developed to  match debt  service  to anticipated  UGF                                                                    
revenue. One legitimate criticism  of the structure was when                                                                    
any  debt   service  was  backloaded,  it   meant  increased                                                                    
financing costs  over time. The  way to counter that  was to                                                                    
flatten or  frontload the debt service  profile, which saved                                                                    
on financing costs and may  reduce risk slightly in terms of                                                                    
the  coupon the  state had  to pay  in order  to market  the                                                                    
loans. The administration was striving  for what it believed                                                                    
was an optimal  balancing based on the  variety of competing                                                                    
concerns;  however,   it  recognized  there  may   be  other                                                                    
optimals  for  debt  service  including  a  flatter  payment                                                                    
Mr. Barnhill communicated  that DOR had prepared  a model to                                                                    
review different scenarios of  debt service and had provided                                                                    
the  model to  the Legislative  Finance Division  earlier in                                                                    
the  session.  He  offered  to go  through  the  model  with                                                                    
members  outside of  the meeting.  Ultimately, the  goal for                                                                    
the net  present value line  on the table was  for cashflows                                                                    
under statute  versus cash flows under  debt service roughly                                                                    
penciled out in order to maintain a cost neutral approach.                                                                      
Mr. Barnhill  agreed there were  a variety of ways  to reach                                                                    
that  goal  and  the  administration  recognized  that  some                                                                    
committee members  would be more comfortable  with a flatter                                                                    
or  front-loaded  debt  service  schedule.  Ultimately,  the                                                                    
discretion  to structure  the debt  service fell  within the                                                                    
authority  of the  directors of  the state  tax credit  bond                                                                    
corporation.  He elaborated  those  directors  of the  state                                                                    
bond  committee  included  the  commissioners  of  DOR,  the                                                                    
Department   of  Administration,   and  the   Department  of                                                                    
Commerce,   Community   and    Economic   Development.   The                                                                    
administration was  willing to  engage in discussion  to try                                                                    
to find some optimal approach that worked.                                                                                      
Co-Chair  Foster noted  he anticipated  a  minimum of  three                                                                    
meetings on the topic.                                                                                                          
3:04:05 PM                                                                                                                    
Representative Pruitt remarked that  over the past few years                                                                    
he and the administration had  disagreed on the past, but he                                                                    
appreciated  that the  administration had  brought the  bill                                                                    
forward.  He reasoned  that whatever  happened  in the  past                                                                    
regarding the reason  for the tax credits  and the agreement                                                                    
behind  them,  no  longer  mattered.  He  stated  that  what                                                                    
mattered was  the money  was owed and  it was  impacting how                                                                    
the state  was viewed  in international markets.  He thanked                                                                    
the  administration  for  developing   the  bill,  which  he                                                                    
believed  was one  of the  most important  things the  state                                                                    
could do to get back on stable footing.                                                                                         
Representative Kawasaki  commented that  he had been  in the                                                                    
legislature through  ACES, the Cook Inlet  Recovery Act, and                                                                    
several  iterations of  tax  bills. He  had  never felt  the                                                                    
state would  be in a position  where it would be  giving out                                                                    
more in credits than it  was receiving in production tax. He                                                                    
also  appreciated  that  the administration  had  brought  a                                                                    
proposal forward, but he believed  there was a difference of                                                                    
opinion about  what the state  should do. He noted  that the                                                                    
committee had heard much about  how the bond would work, but                                                                    
not about how  the bill would work. He asked  if a review of                                                                    
how the bill would work would be provided at a later time.                                                                      
Mr. Alper  replied that the  administration had  submitted a                                                                    
sectional  analysis that  he could  review at  any time.  He                                                                    
explained   there  were   four  components   of  the   bill.                                                                    
Initially, the bond corporation  was created and had various                                                                    
rights  and  responsibilities  in  how  reserve  funds  were                                                                    
established,   funds  passed   through,  and   credits  were                                                                    
purchased. Second, there were  numerous technical changes to                                                                    
existing  tax  credit  statutes to  clarify  that  the  bill                                                                    
option was in  addition to the existing  system, which would                                                                    
remain in  place as an  option for companies that  chose not                                                                    
to participate. Third, there  were specific procedures about                                                                    
how  a company  would engage  in the  program; how  it would                                                                    
offer its  credits; how  the state  would value  the credits                                                                    
and  determine  a company's  anticipated  cash  flow in  the                                                                    
absence of the program; what  a company's proration would be                                                                    
if the  statutory appropriation  occurred; what  a company's                                                                    
cashflow would be;  how to discount the cashflow;  and how a                                                                    
company would get  higher or lower of  the variable discount                                                                    
Mr. Alper  explained that  Section 10  of the  bill included                                                                    
all of  the nuts and  bolts of  the new program.  The fourth                                                                    
part of the  bill was the overriding royalty  interest - the                                                                    
process  to  negotiate a  value  with  DNR  and to  find  it                                                                    
acceptable.  He   could  provide  greater  detail   when  he                                                                    
reviewed the sectional.                                                                                                         
Co-Chair  Foster   relayed  the  committee  would   move  to                                                                    
constitutional questions  and would take up  a more detailed                                                                    
sectional analysis at the next bill hearing.                                                                                    
3:08:16 PM                                                                                                                    
Representative Kawasaki provided a  scenario where a company                                                                    
agreed to reinvest a given amount  of money in the state and                                                                    
qualified for the  10 percent discount rate,  but then found                                                                    
itself in  default. He asked if  the state would be  out the                                                                    
Mr. Alper  replied there was  not currently a remedy  in the                                                                    
bill. He  detailed that DOR  would work internally  and with                                                                    
DNR to determine whether a  remedy could be added. Under the                                                                    
theoretical scenario on  slide 11 the state would  be out $7                                                                    
million. The  hypothetical company  would have  received the                                                                    
lower  discount -  it had  received an  extra $7  million by                                                                    
promising  to  reinvest  the  money.  The  department  would                                                                    
follow up on  what the options for state recourse  may be if                                                                    
the company reneged on its agreement.                                                                                           
Representative Kawasaki  noted that  the bill  addressed how                                                                    
debt  was assumed  and that  it  would still  be subject  to                                                                    
appropriation. He asked  how it would work.  He wondered how                                                                    
it would  work to have  a subject to  appropriation statute,                                                                    
while having  a debt  to bond  holders. He  asked if  it was                                                                    
similar  to   the  statute  specifying  the   state  owed  a                                                                    
particular amount to producers.                                                                                                 
Mr. Barnhill  answered that  Section 2 of  the bill  was the                                                                    
authority  to create  the corporation  that would  issue the                                                                    
debt. The language in the  section was almost entirely taken                                                                    
from  statute pertaining  to the  Alaska Pension  Obligation                                                                    
Bond  Corporation. In  both cases  the corporations  had the                                                                    
ability to statutorily issue subject to appropriation debt.                                                                     
Mr. Barnhill explained the  corporations were not authorized                                                                    
to  issue debt  that  would bind  the state's  appropriation                                                                    
power or to  issue "big D" constitutional  debt that pledges                                                                    
the full  faith and credit  of the state. He  underscored it                                                                    
was  an  extremely  important   distinction  that  would  be                                                                    
discussed  by attorneys  later. When  the state  issued debt                                                                    
that  pledges the  full faith  and  credit of  the state  it                                                                    
constitutionally required approval  from the legislature and                                                                    
the  people.  The  pledge was  functionally  a  transfer  of                                                                    
appropriation  power to  the court  system. He  expounded it                                                                    
was  the only  situation  he  was aware  of  in the  state's                                                                    
constitutional  system where  the courts  took over  for the                                                                    
legislature  in  terms  of being  able  to  appropriate.  He                                                                    
summarized that if the state  issued general obligation debt                                                                    
and bound  the state  with a  pledge of  the full  faith and                                                                    
credit  and  the  legislature refused  to  appropriate  debt                                                                    
service, the court  system could step in and  order the debt                                                                    
service;  the   courts  would  override   the  legislature's                                                                    
appropriation power.                                                                                                            
3:12:53 PM                                                                                                                    
Mr. Barnhill  elaborated that debt  that was short  of that,                                                                    
the  legislature  at all  times  maintained  its ability  to                                                                    
appropriate what  it chose (just  like under the  tax credit                                                                    
program). He  read from page  4, line 15, subsection  (g) of                                                                    
the bill:                                                                                                                       
     To ensure the maintenance  of the required debt service                                                                    
     reserve  in  the  reserve  fund,  the  legislature  may                                                                    
     appropriate annually to the  corporation for deposit in                                                                    
     the fund...                                                                                                                
Mr. Barnhill pointed to page 4, lines 22 and 23:                                                                                
     Nothing in this subsection creates a debt or liability                                                                     
     of the state.                                                                                                              
Mr.   Barnhill  noted   bond  counsel   was  available   for                                                                    
questions.  The administration  believed  the obligation  in                                                                    
the bill would be subject to appropriation.                                                                                     
Co-Chair Foster  noted they  would get  into the  issue more                                                                    
Mr.  Mitchell  spoke  to  the   nature  of  the  subject  to                                                                    
appropriation  commitment.  Currently,  if  the  legislature                                                                    
chose not to  appropriate for the obligation  there would be                                                                    
a further  degradation of the relationship  with the state's                                                                    
primary  industry. If  the  legislation  passed, bonds  were                                                                    
issued, and the legislature  chose not to appropriate, there                                                                    
would be  credit action taken  against the state and  a loss                                                                    
of  access  to  capital  markets. There  would  be  negative                                                                    
ramifications in either  case - both may  impact the state's                                                                    
credit  quality.  From his  perspective  it  was more  of  a                                                                    
bright line when  it came to any consideration  of taking on                                                                    
a capital  market obligation secured by  the state's subject                                                                    
to  appropriation commitment  as a  term of  art within  the                                                                    
industry,  which is  one notch.  He elaborated  that if  the                                                                    
state was AA,  it was an AA- credit rating.  He explained it                                                                    
was a  very high  pledge of the  state organization  to make                                                                    
the payments  into the future.  He believed  the distinction                                                                    
was important.                                                                                                                  
Representative  Kawasaki   remarked  that  there   would  be                                                                    
discussion about  the constitutionality later on.  He stated                                                                    
that the  payments would be  subject to  appropriation under                                                                    
the  bill.  He  compared  the  situation  to  not  paying  a                                                                    
personal credit  card. He reasoned  he would receive  a huge                                                                    
interest  rate   spike  and  the   bank  could   take  other                                                                    
belongings.  Once  the state  committed  to  the concept  it                                                                    
would be committing to a particular schedule of payments.                                                                       
Mr. Mitchell agreed  there would be a  schedule of payments.                                                                    
He  also agreed  there would  be no  recourse. He  explained                                                                    
that in  the event of  a default  on a signature  loan there                                                                    
was not  much recourse for the  lender other than to  ding a                                                                    
person's  credit score  and perhaps  limit  their access  to                                                                    
additional  loans. He  explained it  was comparable  to what                                                                    
would happen to  the state if it defaulted  on an obligation                                                                    
contemplated in the legislation.                                                                                                
3:16:32 PM                                                                                                                    
Representative Kawasaki asked how  much more the state could                                                                    
be obligated at the present time with its current rating.                                                                       
Mr. Mitchell answered there was  gradation to the answer. In                                                                    
the instance of the credits  there was an existing liability                                                                    
the state had  historically been paying at  a certain level.                                                                    
As  demonstrated in  the percentages  of UGF  revenue, there                                                                    
was  some benefit  to the  restructuring of  the obligation;                                                                    
however, it became  a hard liability that  would be included                                                                    
in  the  state's net  tax  supported  debt, rather  than  an                                                                    
operating obligation of the state.  The debt proposed in the                                                                    
bill would  have some impact  on the state's  debt capacity.                                                                    
He  shared  that the  debt  affordability  analysis for  the                                                                    
current year,  which relied on the  historical definition of                                                                    
UGF revenue  (no POMV or  Permanent Fund  income), estimated                                                                    
the  debt  capacity in  the  $300  million to  $400  million                                                                    
range.  He explained  that because  the bill  dealt with  an                                                                    
existing  obligation,  the  administration  argued  that  it                                                                    
would not have a one-for-one  type of impact on capacity. He                                                                    
estimated it at the $200  million range. He characterized it                                                                    
as an art rather than a specific science.                                                                                       
Mr. Mitchell  explained that when the  department had worked                                                                    
with the  rating agencies with  the Pension  Obligation Bond                                                                    
Corporation's  issuance, which  had  been  proposed at  $2.2                                                                    
billion,  it  would  more  than   double  the  state's  debt                                                                    
commitments. There  had been  no rating  action by  Fitch or                                                                    
Moody's. He noted that S&P  had expressed some concern about                                                                    
the size of  the increase in net tax supported  debt and had                                                                    
discussed a  one-notch rating adjustment  to the state  as a                                                                    
result of the  issuance. He stated there was  an impact, but                                                                    
if the  debt had all  been new money for  general obligation                                                                    
bonds to build  a dream list of capital  projects, all three                                                                    
agencies  would  have  downgraded  the  state's  rating  and                                                                    
probably by more than a notch.                                                                                                  
3:19:14 PM                                                                                                                    
Representative Tilton  asked about the 5.1  percent discount                                                                    
rate and the  confidence level in the state's  ability to do                                                                    
that in the current environment.                                                                                                
Mr.  Barnhill  answered  that the  department  had  been  in                                                                    
constant  communication with  underwriters  about the  rates                                                                    
the state may  be able to access. The department  had used a                                                                    
true interest  cost rate of  3.26 percent, which  remained a                                                                    
good  rate.  Rates had  ticked  up  a  bit lately,  but  for                                                                    
various reasons, including the  possibility that some of the                                                                    
bonds could  be issued on  a tax-exempt basis,  DOR believed                                                                    
3.26 percent  was a  good estimate.  He reiterated  that the                                                                    
department remained  in close contact with  underwriters who                                                                    
provided a good idea of rates.                                                                                                  
3:20:43 PM                                                                                                                    
Vice-Chair Gara believed the credits  were a real obligation                                                                    
the state needed to pay.  The question was whether the state                                                                    
could come up  with an affordable way to pay  - the governor                                                                    
had proposed HB  331. He was not keen on  coming up with new                                                                    
ways  for the  state to  spend  money. He  stated there  was                                                                    
still something  on the books  that he found  concerning. He                                                                    
used a scenario  where the current bill  proposal turned out                                                                    
to  be unconstitutional,  meaning  the state  would have  to                                                                    
come  up with  a  new  way to  pay  the  credits. Under  the                                                                    
current plan  if the state  paid $35 million to  $40 million                                                                    
per year  at oil prices of  $60 per barrel, the  state would                                                                    
still owe $500 million in ten  years. He agreed that was not                                                                    
the  best  way  forward.   He  was  not  enthusiastic  about                                                                    
adopting the bill  and maintaining every way to  pay off the                                                                    
credits    on   the    books.    He    commented   on    the                                                                    
unconstitutionality  of the  bill's  method. He  highlighted                                                                    
the option for  any company with profits to pay  60 cents on                                                                    
the  dollar and  receive  a 100  percent  deduction off  the                                                                    
taxes paid. He asked for detail on the option.                                                                                  
Mr. Barnhill was  gratified and humbled that  there had been                                                                    
some  success  in  convincing people  of  the  problem  that                                                                    
needed to  be solved. He had  done his own research  and was                                                                    
absolutely  persuaded that  the approach  was constitutional                                                                    
and that the state had  issued subject to appropriation debt                                                                    
for decades.  He was also persuaded  that the constitutional                                                                    
framers knew what  they were doing when they  adopted a debt                                                                    
restriction in the constitution  pertaining to debt pledging                                                                    
the full faith and credit of  the state. He hoped they could                                                                    
move  forward  with  the  proposal   given  the  late  date.                                                                    
Additionally,  it  would be  discouraging  for  his team  to                                                                    
start anew.  He hoped to move  forward and set the  minds of                                                                    
legislators  and the  public at  rest  that the  bill was  a                                                                    
legal  and standard  way  of  restructuring obligations.  He                                                                    
deferred to Mr. Alper for additional detail.                                                                                    
3:24:36 PM                                                                                                                    
Mr. Alper answered it was  important to recognize there were                                                                    
three different  ways to monetize  or get value for  the tax                                                                    
credit.   The  cashing   out  by   the   state  subject   to                                                                    
appropriation  was always  number three  - it  had been  the                                                                    
last  one  added  and  just  happened to  be  the  one  that                                                                    
dominated  the  system  for  much  of  recent  history.  The                                                                    
initial option had been to offset  a company's own taxes - a                                                                    
company could earn  a credit and reduce its taxes  if it had                                                                    
a tax  liability. He  elaborated that if  a company  did not                                                                    
have a tax liability, but  it anticipated one within several                                                                    
years, it may be in the  company's best interest to hold the                                                                    
credits.   Vice-Chair   Gara's   question  was   about   the                                                                    
transferability of  credits. For  example, if a  company was                                                                    
holding a $10  million tax credit, a major  oil company with                                                                    
a tax  liability could purchase  and use the  credit against                                                                    
its tax  liability. The transfer  of credits did  not happen                                                                    
much  for a  number  of  years, but  they  were starting  to                                                                    
happen again. It was important  to recognize it was a market                                                                    
transaction  - someone  would buy  the credits  for whatever                                                                    
they could, and  someone was going to sell them  for as much                                                                    
as they could.  In 2006 and 2007 there was  talk the credits                                                                    
were selling  for 70 cents on  the dollar - he  did not know                                                                    
how much  truth there was to  that. He remarked it  was that                                                                    
and  anxiety over  the number  being too  low and  unfair to                                                                    
explorers that created  the idea of state  repurchase at 100                                                                    
Mr. Alper continued that when  the state had been buying the                                                                    
credits there  had been no  need for a secondary  market. In                                                                    
recent years  when there may  have been a  secondary market,                                                                    
the  market did  not develop,  primarily  due to  a lack  of                                                                    
ability to  use the credits.  Under current law, it  was not                                                                    
possible to  use purchased  credits to  go below  the floor.                                                                    
When the  price of oil  had been  $40 per barrel,  the major                                                                    
producers had  been paying at  the floor and had  no ability                                                                    
to purchase  the credits.  He elaborated  that if  the major                                                                    
producers had  offered to buy  the credits, they  would have                                                                    
offered a  relatively deep discount  because they  could not                                                                    
use  them immediately  -  they would  have  been buying  the                                                                    
credits on the hope that two  or three years later the price                                                                    
of oil  would recover and  they could then use  the credits.                                                                    
He mentioned a temporary  circumstance related to the Trans-                                                                    
Alaska Pipeline  System (TAPS) settlement where  some of the                                                                    
major  producers owed  past year  liabilities  because of  a                                                                    
settlement that reduced the  tariff (transportation cost) in                                                                    
2011 through  2013. The department believed  companies would                                                                    
buy some credits  to offset additional tax  liability in the                                                                    
Mr. Alper explained  that prior to the passage of  HB 111 in                                                                    
2017 allowing the use of credits  going back in time had not                                                                    
been  allowed. He  continued that  oil prices  had increased                                                                    
into the $70 per barrel range.  He explained that if a major                                                                    
producer's tax would be $200  million above the minimum tax,                                                                    
they  would  be  in  the  market for  $200  million  in  tax                                                                    
credits.  He believed  that  if the  company  could buy  the                                                                    
credits  -  he  used  60   percent  for  $120  million,  the                                                                    
companies would leap  at the option. The  company selling it                                                                    
would want closer to $190  million. The administration hoped                                                                    
that  putting the  offer on  the  table where  it would  buy                                                                    
credits at 85  cents to 90 cents on the  dollar, would put a                                                                    
floor under  the secondary market.  No one would  be selling                                                                    
to  producers for  60 cents  if  the state  was offering  85                                                                    
cents. The state  was in some ways  protecting the explorers                                                                    
from  the possibility  that the  market price  would be  too                                                                    
3:29:24 PM                                                                                                                    
Mr. Alper  continued to  answer that in  the absence  of the                                                                    
bill, some  explorers would get  more desperate -  some were                                                                    
closer to  bankruptcy than  others and  would be  looking to                                                                    
cash  out for  whatever they  could. He  elaborated that  if                                                                    
there  was  a limited  demand  and  several hundred  million                                                                    
dollars  of  supply, the  market  price  would be  low,  and                                                                    
people would be  selling credits for a much  lower price. He                                                                    
believed  the  solution to  the  weak  secondary market  was                                                                    
passing HB 331.                                                                                                                 
Vice-Chair Gara asked  if the bill option  were to disappear                                                                    
off the books, whether the  other option would remain. Under                                                                    
that  scenario, if  oil was  at  $80 per  barrel, the  state                                                                    
could  see $200  million worth  of deductions  from the  oil                                                                    
production tax  at a  time when  the state  was in  a fiscal                                                                    
crisis. He  was concerned  about adding  another way  to pay                                                                    
tax credits  and leaving all  the other existing  options on                                                                    
the books.  He was concerned  about the potential  of paying                                                                    
60 cents  on the dollar and  charging the state a  dollar on                                                                    
the dollar.                                                                                                                     
Mr.  Alper  responded that  many  of  the conversations  had                                                                    
taken  place  the  preceding  year  when  HB  111  had  been                                                                    
debated. One of  the concerns the state  and legislature had                                                                    
was  about  multibillion  dollar  investment  projects  that                                                                    
under  the  old  system  would be  leading  to  billions  of                                                                    
dollars  in  tax credit  -  additional  obligation that  the                                                                    
state could not  afford and may never be able  to afford. He                                                                    
believed  he had  stated that  if the  obligations were  out                                                                    
there and  there was  a $150  per barrel  oil spike  for one                                                                    
year, the  state may not  see any revenue because  the major                                                                    
producers would  be scooping  up all of  the tax  credits to                                                                    
offset them. That  program had been ended and  the state was                                                                    
no longer  producing new tax  credits. He concluded  that to                                                                    
the extent  there was  a problem,  the problem  of companies                                                                    
offsetting  their  taxes  with  purchased  tax  credits  was                                                                    
Mr.  Alper   detailed  that  he   would  be   anxious  about                                                                    
eliminating  the  ability  to   sell  the  credits  for  two                                                                    
separate reasons.  First, companies selling the  credits may                                                                    
need the money  and if they did not have  the ability to use                                                                    
them and  did not have  the appropriation to  monetize them,                                                                    
it   could   drive   them  into   bankruptcy.   In   certain                                                                    
circumstances,  even   selling  at   a  discount   might  be                                                                    
advantageous to  bankruptcy. The  state could set  a minimum                                                                    
price and  implement restrictions, but it  could not legally                                                                    
force  anyone to  purchase  another  company's tax  credits.                                                                    
Second,   the  tax   credits  were   sometimes  pledged   as                                                                    
collateral.  He  detailed  that  someone  would  lend  money                                                                    
against  the  tax  credit  or  to a  company  and  would  be                                                                    
promised the  tax credit. In  those circumstances,  if there                                                                    
was a  default, the tax  credits could change  hands without                                                                    
the state having any voice in  the matter. He would not want                                                                    
to  encumber  that  transaction because  it  may  prevent  a                                                                    
company from  being able  to borrow the  money in  the first                                                                    
3:32:48 PM                                                                                                                    
Representative  Wilson  asked   for  verification  that  the                                                                    
credits  were had  been earned  by  companies that  invested                                                                    
billions in  Alaska, hired Alaskans,  and produced  oil that                                                                    
funded government. Mr. Barnhill replied in the affirmative.                                                                     
Representative Wilson surmised that  the credits were like a                                                                    
refund check for  companies that had already  done the work.                                                                    
Mr. Barnhill answered in the affirmative.                                                                                       
Representative  Wilson stated  that the  companies had  done                                                                    
the work  the state had  asked and previously the  state had                                                                    
given the  refund when  it came due.  She reasoned  that the                                                                    
state was putting more obligations  on companies despite the                                                                    
fact they  companies fulfilled  their end  of the  deal. She                                                                    
asked for the accuracy of her statement.                                                                                        
Mr.  Barnhill  asked  for verification  that  Representative                                                                    
Wilson was  referring to the  discount the state  was asking                                                                    
companies to take on the face value of their tax credits.                                                                       
Representative Wilson stressed the  issue was not only about                                                                    
asking  the companies  to take  less for  the work  they had                                                                    
done.  She  explained  the bill  would  implement  four  new                                                                    
obligations  on the  companies  in order  to  qualify for  a                                                                    
lower discount rate  [slide 10]. She reasoned  that not only                                                                    
would companies be  asked to take a discount,  they would be                                                                    
asked  to fulfill  additional  requirements  to receive  the                                                                    
discounted money.                                                                                                               
Mr. Barnhill affirmed that the  bill asked companies to take                                                                    
a discount  to participate in  the program. The goal  of the                                                                    
legislation  was  to  craft a  fair  balance  between  state                                                                    
interests and oil  and gas tax credit  holder interests. The                                                                    
flip side was without the program  and the ability to pay in                                                                    
the  current year,  the  companies would  have  to wait.  He                                                                    
explained  that  waiting  involved  a time  value  of  money                                                                    
calculation. He  elaborated if the  state paid  companies in                                                                    
two to four years from the  present, the value of the dollar                                                                    
would be  less in the future  than at present. The  goal was                                                                    
to produce  a payment to  companies in the present  that was                                                                    
worth more  than a payment  in two  to four years'  time. He                                                                    
continued that the administration  was aiming for a solution                                                                    
the  companies would  see as  fair  and that  would be  cost                                                                    
neutral or a slight benefit to the state.                                                                                       
3:36:06 PM                                                                                                                    
Representative Wilson  had been in  favor of looking  at the                                                                    
discount portion  - she could  see that under the  higher or                                                                    
lower  discount, everyone  would not  get paid  immediately.                                                                    
She was  concerned about adding  requirements for  credits a                                                                    
company had already earned. She  wanted to ensure the public                                                                    
realized  that companies  had held  up to  their end  of the                                                                    
deal.  She referenced  the  conversation  about including  a                                                                    
provision  on Alaskan-hire.  She  believed in  Alaskan-hire,                                                                    
but it was  an additional obligation to the  credits and for                                                                    
a company to  move up on the payment list  order. She wanted                                                                    
to be  careful about the  requirement. She pointed  out that                                                                    
the  commercial fishing  industry was  made up  of something                                                                    
like 70  percent out-of-state workers.  She did  not believe                                                                    
it was  fair to constantly talk  about that the oil  and gas                                                                    
industry was  not hiring enough  Alaskans, while  not making                                                                    
the  same argument  about other  industries. She  wanted the                                                                    
public to  understand that the state  had already benefitted                                                                    
from the oil industry in the  past. She remarked that it had                                                                    
led to  years with  higher capital and  unfortunately higher                                                                    
operating budgets as  well. She wanted to be  careful not to                                                                    
put more obligations on industry that had held up its own.                                                                      
Representative  Pruitt  asked  for clarification  about  the                                                                    
amount of  credits compared to  what the  state's production                                                                    
tax  would   be.  He  thought   the  Revenue   Sources  Book                                                                    
projection with  the governor's numbers  would be  around 45                                                                    
percent of production tax.                                                                                                      
Mr. Alper answered  that the larger number may  have been an                                                                    
FY 18  number - he would  need to follow up.  He agreed that                                                                    
under the FY  19 forecast, the number was  about 45 percent.                                                                    
He detailed that $184 million  (the state's determination of                                                                    
the statutory number owed) was  a percentage of $410 million                                                                    
(the production  tax forecast for  FY 19). He  concluded the                                                                    
number was roughly 40 to 45 percent.                                                                                            
Representative   Pruitt  believed   it   was  an   important                                                                    
clarification.  He  added  the state  received  royalty  and                                                                    
corporate income tax as well.                                                                                                   
Co-Chair Foster  moved to  the constitutionality  portion of                                                                    
the meeting. He  relayed the committee had  received a legal                                                                    
opinion from Legislative Legal Services  and an opinion from                                                                    
the Attorney  General's Office.  He asked  Legislative Legal                                                                    
Services to address the committee.                                                                                              
3:40:09 PM                                                                                                                    
AT EASE                                                                                                                         
3:41:26 PM                                                                                                                    
Co-Chair  Foster  referenced  a Legislative  Legal  Services                                                                    
document dated April 13, 2018.                                                                                                  
EMILY NAUMAN,  DEPUTY DIRECTOR, LEGISLATIVE  LEGAL SERVICES,                                                                    
noted the agency  had authored more than  one legal opinion.                                                                    
She asked for  the author of the  memorandum Co-Chair Foster                                                                    
was referring to.                                                                                                               
3:42:08 PM                                                                                                                    
AT EASE                                                                                                                         
3:42:23 PM                                                                                                                    
Co-Chair Foster  referenced an April 13,  2018 memorandum to                                                                    
Co-Chair Seaton [authored by  Emily Nauman] from Legislative                                                                    
Legal Services (copy on file).                                                                                                  
Ms. Nauman introduced herself.                                                                                                  
JERRY  LUCKHAUPT,   REVISOR,  LEGISLATIVE   LEGAL  SERVICES,                                                                    
explained that  the agency's purpose was  to identify issues                                                                    
and  concerns   to  help  the   legislature  when   it  made                                                                    
decisions. The  agency's concern  with HB  331 was  based on                                                                    
the  financial   provisions  of  the   state's  constitution                                                                    
including   the   dedicated   funds  clause,   the   general                                                                    
obligation  debt provisions  of Article  IX, Section  8, and                                                                    
other debt  provisions in Sections  10 and 11.  The agency's                                                                    
concern   was  also   based  on   the  discussions   of  the                                                                    
constitutional  framers at  the time  of the  provisions had                                                                    
been created and the reasons  they sided for the provisions.                                                                    
Additionally, the concern was based  on the decisions of the                                                                    
Alaska Supreme  Court. He detailed  there were six  or seven                                                                    
supreme court  decisions that touched on  the provisions and                                                                    
the state  was still  feeling out what  the sections  of the                                                                    
constitution  all  mean.  There   had  been  discussion  and                                                                    
litigation over  the years about  what the  provisions mean.                                                                    
The agency's  concern was  also based  on the  past actions,                                                                    
prior  acts,   session  laws,  and   bills  passed   by  the                                                                    
legislature in comparison to what HB 331 would do.                                                                              
Mr. Luckhaupt shared that the  agency's big concern was that                                                                    
the  approach in  the legislation  appeared to  be different                                                                    
than the approach  the legislature had taken in  the past to                                                                    
authorize debt. While the bill  appeared to be modeled after                                                                    
the pension obligation  bonds approved nine or  ten years in                                                                    
the past (none  of which had been issued),  the approach [in                                                                    
HB 331]  was slightly different. The  past approach involved                                                                    
pension obligation bonds - the  state was going to issue the                                                                    
bonds and  through arbitrage and  funding the  state's costs                                                                    
would  have been  decreased slightly.  The bonds  would have                                                                    
been backed  by contracts  that the Pension  Obligation Bond                                                                    
Corporation  would enter  into with  municipalities and  the                                                                    
state  to repay  the bonds.  The agency's  concern [with  HB                                                                    
331]  was  the only  possible  repayment  seemed to  be  the                                                                    
appropriations   the   legislature   would   make   to   the                                                                    
corporation by itself.                                                                                                          
Mr.  Luckhaupt returned  to  Article IX,  Section  8 of  the                                                                    
state's constitution  specified that no state  debt shall be                                                                    
contracted  unless  authorized  by  law and  ratified  by  a                                                                    
majority of the  voters. At the time of  the constitution it                                                                    
had been limited to capital  improvements. The provision had                                                                    
been successfully  amended once with regards  to housing for                                                                    
veterans.  He noted  that in  2017 the  people voted  down a                                                                    
proposal to  allow the issuance  of general  obligation debt                                                                    
for  student scholarships.  There had  also been  other past                                                                    
proposals  to allow  general obligation  debt. He  explained                                                                    
that general  obligation debt allowed someone  to come after                                                                    
the  assets of  the state  - a  debtor could  use the  court                                                                    
system to seize property of the state to fulfill the debt.                                                                      
Mr. Luckhaupt  continued that Article  IX, Section  10 dealt                                                                    
with interim  borrowing and specified  that the  state could                                                                    
borrow  all of  the money  it needed  to as  long as  it was                                                                    
repaid by  the next fiscal  year. The language was  to cover                                                                    
situations where receipts coming  in had not been sufficient                                                                    
to  meet payments  going  out and  where  balancing out  was                                                                    
3:48:13 PM                                                                                                                    
Mr.  Luckhaupt  stated  that [Article  IX]  Section  11  was                                                                    
listed in the constitution  as exceptions. The section dealt                                                                    
with restrictions  on contracting debt. Article  IX, Section                                                                    
8 specified  that no  state debts  shall be  contracted. The                                                                    
same language  was used under exceptions  - the restrictions                                                                    
on  contracting debt  did not  apply to  debt incurred  by a                                                                    
public  corporation   or  enterprise  of  the   state  or  a                                                                    
political subdivision  of the state where  the only security                                                                    
for  the debt  was the  revenues of  the corporation  or the                                                                    
Mr. Luckhaupt  noted that  political subdivisions  were also                                                                    
included, but that was not  important for the purpose of the                                                                    
current   conversation.  Legislative   Legal  Services   was                                                                    
concerned  that the  provision specified  the only  security                                                                    
for the debt was the  revenues of the public corporation. In                                                                    
the  past  with  pension  obligation bonds  there  had  been                                                                    
contracts, but  nothing had ever  been done. In  prior years                                                                    
when  former Governor  Walter Hickel  had  bought the  "spam                                                                    
can" building  [in downtown Juneau]  and the prison,  at the                                                                    
time the  state had certificates of  participation and lease                                                                    
purchases. The  Carr v. Gottstein  case had made its  way to                                                                    
the Alaska Supreme  Court - the court had  ruled that leased                                                                    
purchase agreements  were not  debt under  the constitution.                                                                    
Prior  to  Carr v.  Gottstein,  the  supreme court,  in  the                                                                    
Chefornak  case   [Village  of   Chefornak  v.   Hooper  Bay                                                                    
Construction, 1988]  specified that constitutional  debt was                                                                    
debt  evidenced by  paper (bonds  or other  notes) providing                                                                    
for  the repayment  of  money. He  concluded  that the  bill                                                                    
would  issue  bonds,  which appeared  to  be  constitutional                                                                    
Ms.  Nauman  provided  more   specifics.  She  believed  the                                                                    
administration  would  rely  on   the  finding  in  Carr  v.                                                                    
Gottstein  that  simply  because   a  bond  was  subject  to                                                                    
appropriation  that   it  did  not  equal   debt  under  the                                                                    
constitution.  She stated  that  Carr v.  Gottstein did  not                                                                    
open and  close the  issue. She detailed  that the  case had                                                                    
been about  a lease  purchase, which had  been distinguished                                                                    
from bonds in  several places. There were  multiple cases in                                                                    
Alaska  that  specifically  used  bonds  as  an  example  of                                                                    
constitutional   debt.  She   continued   that  bonds   were                                                                    
discussed  explicitly   in  the   constitutional  convention                                                                    
minutes  and within  the constitution,  which specified  the                                                                    
restrictions  on  debt did  not  apply  to the  issuance  of                                                                    
revenue  bonds.  It  appeared  to  her  that  bonds  were  a                                                                    
different type  of instrument -  a borrowing of money  - and                                                                    
there was not  a case that resoundingly  provided a solution                                                                    
to the problem.                                                                                                                 
Ms. Nauman continued  there were many other  states that had                                                                    
come  down indicating  subject to  appropriation bonds  were                                                                    
not  part of  borrowing  limits.  Alaska's constitution  was                                                                    
written with  the knowledge of that,  which was acknowledged                                                                    
in the  constitutional convention minutes. She  believed the                                                                    
government's authority  was rooted  in the  constitution and                                                                    
she had  not found  anything in the  constitution specifying                                                                    
bond debt  was permitted.  She was not  willing to  say that                                                                    
the subject  to appropriation debt was  not permissible. She                                                                    
explained that  her memorandum specified that  the issue was                                                                    
a big question  mark for her. She did not  have any tools or                                                                    
case law  providing ultimate clarity.  She wished  she could                                                                    
provide the clarity, but she did not have it to give.                                                                           
3:53:52 PM                                                                                                                    
Mr.  Luckhaupt  continued  that  Alaska's  constitution  was                                                                    
different and  had been drafted in  the 1950s - it  had been                                                                    
completed  before  Alaska's   statehood.  He  explained  the                                                                    
drafters  had looked  to the  issues taking  place in  other                                                                    
states  and  did  not  want  some of  the  issues  that  had                                                                    
occurred, especially  back East,  where states  had multiple                                                                    
dedicated funds  and money  was tied up  going to  the state                                                                    
transportation commission  (or something)  and there  was no                                                                    
money  for   other  state  services.  Most   states  allowed                                                                    
dedicated  funds, but  Alaska did  not.  He elaborated  that                                                                    
most  states had  limits on  the amount  of debt  they could                                                                    
have at  a given time.  For example, 1,  2, or 5  percent of                                                                    
their  assessed  valuation.  He explained  that  Hawaii  had                                                                    
drafted its constitution at the  same time as Alaska and had                                                                    
included a  monetary limit  on the amount  of debt  it could                                                                    
have. Alaska's drafters had decided  to limit what the state                                                                    
could have general obligation debt  for and had specifically                                                                    
provided an exception for debt  from public corporations and                                                                    
enterprises  that   were  secured  by  their   revenues.  He                                                                    
believed  it  implied  that   the  public  corporations  and                                                                    
enterprises had  some revenues of  their own. He  relayed it                                                                    
was what the state had in the past.                                                                                             
Vice-Chair Gara  remarked on all  of the hours spent  on the                                                                    
opinions  provided by  Legislative  Legal  Services and  the                                                                    
Attorney General's Office. He  provided a scenario where the                                                                    
answer did not  become clear to the  committee after hearing                                                                    
all  of the  testimony.  He  asked if  there  was  a way  to                                                                    
include something that would get  an expedited supreme court                                                                    
review  of the  question, so  it would  not linger  for many                                                                    
Mr. Luckhaupt  answered that unfortunately  there was  not a                                                                    
provision in the state's constitution  allowing the state to                                                                    
seek  advisory   opinions  from   the  supreme   court.  The                                                                    
provisions existed in  a number of other states,  but not in                                                                    
Vice-Chair  Gara asked  for confirmation  there was  nothing                                                                    
the legislature could  include in the bill that  would get a                                                                    
quicker  review. He  asked for  verification  that it  would                                                                    
still be up to the court  under the rules the court followed                                                                    
for accepting a case for review.                                                                                                
Mr. Luckhaupt did not believe  anything of that nature would                                                                    
be successful.  Some of  the issues  as approached  over the                                                                    
years had  gone to the  supreme court -  it was part  of the                                                                    
process of a young state  to discover what the provisions of                                                                    
the  constitution   meant.  The  drafters  could   not  have                                                                    
envisioned every  scenario that  would arise in  the future.                                                                    
He  mentioned  a  situation  where   someone  brought  up  a                                                                    
declaratory judgement action. He  referenced the past Meyers                                                                    
v. State case pertaining to  tobacco bonds. He detailed that                                                                    
a person  concerned about the  issue had brought a  law suit                                                                    
and alleged the  state could not issue the  tobacco bonds it                                                                    
had issued at the time.                                                                                                         
3:58:45 PM                                                                                                                    
Representative Wilson  asked if retirement bonds  would fall                                                                    
under  the  same   issue  as  the  bonds   in  the  proposed                                                                    
Ms.   Nauman  answered   that  she   had   not  been   asked                                                                    
specifically to  look into pension obligation  bonds and she                                                                    
was  not an  expert in  that  area. She  clarified that  her                                                                    
legal  opinion   was  limited   to  HB   331.  It   was  her                                                                    
understanding there  was some sort  of revenue  intended for                                                                    
the    corporation,    which    was    the    distinguishing                                                                    
Mr.   Luckhaupt    elaborated   that    the   distinguishing                                                                    
characteristic [of the pension  obligation bonds] was a plan                                                                    
for  contracts with  the corporation,  contracting with  the                                                                    
Department  of Administration  or other  to issue  the bonds                                                                    
and receive  payments in the  future, which would  have been                                                                    
appropriations.  The contracts  would also  be entered  into                                                                    
with municipalities. In exchange,  in theory, there would be                                                                    
a lower amount  they would have to pay in  the future as the                                                                    
bonds were issued the state  would explore the arbitrage and                                                                    
make some  money. That  language was  different than  the HB                                                                    
331 language.                                                                                                                   
Representative  Wilson she  surmised that  with the  pension                                                                    
obligation bonds  or the particular retirement  and benefits                                                                    
corporation, money  went to  the corporation  because people                                                                    
pay  into retirement.  She did  not believe  there would  be                                                                    
revenue  going  into  the  corporation  under  HB  331  with                                                                    
exception to the  $800 million. She inferred  there would be                                                                    
no revenue going into the corporation to help pay for it.                                                                       
Ms.  Nauman agreed.  She referred  to her  memorandum, which                                                                    
discussed  the  classic  definition of  revenue  bonds  (the                                                                    
phrase  revenue  bonds was  used  under  Section 11  of  the                                                                    
state's constitution) pertained to  capital projects where a                                                                    
state corporation  was established  to build a  bridge bonds                                                                    
for the  funds to build  the bridge  relies on the  tolls of                                                                    
the  bridge to  repay the  bonds.  She imagined  it was  the                                                                    
thought of the  framers when they had  included the language                                                                    
in the constitution.                                                                                                            
4:01:41 PM                                                                                                                    
Representative  Pruitt used  the University  as a  real-life                                                                    
example. He asked if the  University was able to spend money                                                                    
without appropriation by the legislature.                                                                                       
Mr.  Luckhaupt answered  that  the legislature  appropriated                                                                    
the money  to the University  in its budget.  The University                                                                    
had some  funds the  legislature had appropriated  into that                                                                    
the  University  was  then able  to  spend  without  further                                                                    
appropriation,  including  some  bonds  the  University  had                                                                    
Representative  Pruitt  referenced  the  $37.5  million  the                                                                    
University  had   put  into  the  University   of  Alaska  -                                                                    
Fairbanks  engineering building.  He did  not recall  that a                                                                    
general  obligation  bond had  been  voted  on allowing  the                                                                    
University to  use the  funds on the  building. He  asked if                                                                    
Mr.  Luckhaupt  was  indicating  the  University  had  money                                                                    
available  to  pay  for   the  building.  Alternatively,  he                                                                    
wondered if  the University  would not  have the  ability to                                                                    
pay the  bond back  unless the legislature  appropriated the                                                                    
money  (even though  it  was  in a  block  grant that  would                                                                    
include UGF, certain DGF such as tuition).                                                                                      
Mr.  Luckhaupt   answered  that   the  legislature   had  to                                                                    
appropriate  every year  because  of  the state's  dedicated                                                                    
funds clause.  He explained it  was slightly  different than                                                                    
the  idea  [in  HB  331] of  appropriating  for  bonds.  The                                                                    
University  is  a  public  corporation  of  the  state  with                                                                    
revenues of its  own. The fact the state  had to appropriate                                                                    
to the University  just like it appropriated  to other state                                                                    
departments was not relevant. He  underscored that the state                                                                    
could  not  have  dedicated  funds  except  for  those  that                                                                    
existed at statehood or for  those required as participation                                                                    
in  a  federal  program.  That  funding  occurred  annually.                                                                    
However,  to actually  provide that  the only  revenue of  a                                                                    
public   corporation   was   the   appropriations   of   the                                                                    
legislature  from  regular tax  revenues,  it  would be  the                                                                    
portion  of  the  Legislative Legal  Services  opinion  that                                                                    
talked about  what revenues were,  the general  tax revenues                                                                    
of  the state  would be  the  only revenue  provided to  the                                                                    
corporation. Other  public corporations and  enterprises had                                                                    
their  own revenues.  The University  had  its own  revenues                                                                    
including  the  endowment and  tuition.  The  fact that  the                                                                    
University relied  on a  General Fund  appropriation because                                                                    
those  revenues  were  not  sufficient to  pay  all  of  the                                                                    
services of the University, was  not relevant in his mind to                                                                    
the corporation that would be created by HB 331.                                                                                
4:05:35 PM                                                                                                                    
Mr.  Luckhaupt  provided  an example  pertaining  to  state-                                                                    
issued  sport fisheries  bonds.  He detailed  the issue  had                                                                    
been  identified as  a public  enterprise of  the state.  He                                                                    
elaborated  that  the enterprise  brought  in  revenues -  a                                                                    
special fee  had been added  to every sport  fishing license                                                                    
to increase  sport fishing  opportunities around  the state.                                                                    
He  explained they  had been  financed through  a series  of                                                                    
bonds.  He cited  the  Knik Arm  bridge  project as  another                                                                    
example. He detailed  that the bridge would  have tolls, but                                                                    
the tolls  were not  projected to cover  the entire  cost of                                                                    
the bonds.  He elaborated that the  legislature had provided                                                                    
Knik Arm with substantial funds  for the project to spend as                                                                    
it  needed. He  continued that  an Anchorage  parking garage                                                                    
had been  created as  a public enterprise  of the  state and                                                                    
had its own revenues being used to pay back the bonds.                                                                          
Representative Pruitt  provided a scenario where  he went to                                                                    
the bond market  to get a bond. He stated  the payment would                                                                    
be based  on "x"  revenues such  as the  cost of  parking or                                                                    
other. He thought that because  the state could not dedicate                                                                    
funds it  meant that the state  did not have the  ability to                                                                    
bond  for almost  anything it  had bonded  for. He  reasoned                                                                    
that if  it was  not allowable to  dedicate parking  fees to                                                                    
the parking  garage, the  bond would not  be a  revenue bond                                                                    
and  an  appropriation would  be  required.  He thought  the                                                                    
scenario violated  what Mr. Luckhaupt had  highlighted - the                                                                    
state  could   not  do  revenue   bonds  if  it   meant  the                                                                    
legislature had to appropriate for them.                                                                                        
4:08:17 PM                                                                                                                    
Mr. Luckhaupt  answered that  he would have  to look  at the                                                                    
bonds again. He had looked at  some of the bonds in the past                                                                    
and the state had identified  that revenue would be provided                                                                    
and subject  to appropriation because  it had to  be subject                                                                    
to  appropriation under  Alaska's  constitution. The  person                                                                    
who chose to  purchase the bonds had to  decide whether they                                                                    
were secured  enough. He  was referring  to the  language in                                                                    
the  state's constitution  that talked  about that  a public                                                                    
corporation  or enterprise  may issue  revenue bonds,  which                                                                    
was  not considered  debt  of  the state;  it  was not  debt                                                                    
covered by  the constitution  - it was  an exception  if the                                                                    
sole security for the debt  came from revenues of the public                                                                    
corporation.  In  the  past the  legislature  had  tried  to                                                                    
structure   the  issued   debt   instruments   to  have   an                                                                    
identifiable  revenue source  that  was  different than  the                                                                    
general tax  revenues of  the state. The  crux of  the issue                                                                    
for Legislative  Legal Services was  that in the case  of HB                                                                    
331 it did not appear there  was a revenue source other than                                                                    
general tax revenues of the state.                                                                                              
4:10:07 PM                                                                                                                    
Representative  Pruitt  spoke  to   his  concern  about  the                                                                    
argument by  Legislative Legal Services. He  stated that the                                                                    
argument had the  potential to tear down a  large portion of                                                                    
the way the state currently  managed its debt. He referenced                                                                    
the argument that bonding had to  go before voters or it had                                                                    
to be revenue from a  corporation. He cited the University's                                                                    
$300 million and explained the  University had not specified                                                                    
that revenues it  received would go to  particular items. He                                                                    
stated items had  been backed based on the  faith and credit                                                                    
of the  state to  continue appropriating to  the University.                                                                    
He asked  if Legislative  Legal Services was  concerned that                                                                    
it  was changing  the way  the state  would manage  debt and                                                                    
would prevent  the state  from operating the  way it  had in                                                                    
the past.                                                                                                                       
Mr. Luckhaupt  replied that he  did have concerns  with some                                                                    
of the state's existing debt.  The situation was not unique.                                                                    
He remarked  that the  bill took the  issue further  and the                                                                    
legal  opinion had  taken the  issue  further than  concerns                                                                    
raised by  the agency in the  past. The agency's job  was to                                                                    
advise  the  legislature  on   the  constitution  and  about                                                                    
concerns  that may  be in  a bill.  The agency  believed the                                                                    
bill  was different  than previous  iterations of  debt. The                                                                    
agency had identified what it  believed was a distinguishing                                                                    
factor based on the language  of the constitution. He stated                                                                    
that the  constitutional framers had put  the information in                                                                    
to avoid obligating the state's full faith and credit.                                                                          
Ms.  Nauman elaborated  that  if all  of  the revenues  were                                                                    
subject to appropriation it would  mean that any of the debt                                                                    
under discussion  would be outside of  the constitution. She                                                                    
had   to  believe   the   constitutional  provisions   meant                                                                    
something  and were  there to  operate as  a restriction  in                                                                    
some way on the state's ability  to act. She believed it was                                                                    
necessary to  read the  two sections  together. She  was not                                                                    
sure what the resolution was;  there was not a specific case                                                                    
or article of the constitution that provided the answer.                                                                        
Co-Chair Foster asked to hear from the administration.                                                                          
Representative  Pruitt wanted  to understand  why the  issue                                                                    
was arising  now if the  practice had been done  for seventy                                                                    
years.  He  stated  that  no one  had  ever  challenged  the                                                                    
practice in court. He surmised  that perhaps it was the goal                                                                    
to have the supreme court to  make a ruling to eliminate the                                                                    
ambiguity. He stated that the  issue had not been brought up                                                                    
in the past  and it had been practiced in  some capacity. He                                                                    
believed  Legislative Legal  Services was  arguing that  the                                                                    
practice had not been used in  the past. He wondered why the                                                                    
issue arose at this point in time.                                                                                              
4:15:15 PM                                                                                                                    
Ms. Nauman agreed  that the question had  not been answered.                                                                    
She noted  that Alaska was  a relatively new state.  She did                                                                    
not  know what  legal  opinions had  been  given with  other                                                                    
bills that may have proposed  a structure similar to HB 331.                                                                    
She had been  told by the administration that  it had looked                                                                    
into the  issue and had  resolved it. She stated  that until                                                                    
she saw a  case or some language  that definitively provided                                                                    
the answer - it may be a  supreme court case - she could not                                                                    
advise it was a certainty.                                                                                                      
Representative Pruitt  believed that if Alaska  did not have                                                                    
precedent  through case  law it  should  be reviewing  cases                                                                    
from  other states.  He thought  32 states  used subject  to                                                                    
appropriation as  well. There  was case  law in  some states                                                                    
and  he believed  they had  largely  ruled in  favor of  the                                                                    
concept under discussion.                                                                                                       
Ms.  Nauman answered  in the  affirmative. She  had reviewed                                                                    
other states  and confirmed that  a majority of  the states,                                                                    
but not all, had fallen on  the other side of the issue. She                                                                    
added   that   Alaska's   constitution   was   fundamentally                                                                    
different than most of the other states.                                                                                        
Mr.  Luckhaupt  added that  the  state's  supreme court  had                                                                    
looked at other similar  issues. The progression had started                                                                    
with   DeArmond  [DeArmond   v.  Alaska   State  Development                                                                    
Corporation,  1962]  where  bonds  had been  issued  by  the                                                                    
Alaska State  Development Corporation. Someone had  sued and                                                                    
claimed  the bonds  were illegal  in Alaska.  The bonds  had                                                                    
only  been  secured by  the  revenues  of the  Alaska  State                                                                    
Development Corporation. He  elaborated that the corporation                                                                    
had  been issuing  loans to  businesses and  the loans  were                                                                    
repaid  to  the  state.  The supreme  court  had  ruled  the                                                                    
practice did not constitute general  obligation debt and was                                                                    
allowed  under  Article  IX,  Section   11  of  the  state's                                                                    
constitution. Then came the Walker  v. Alaska State Mortgage                                                                    
Association  [1966]  case,  which  preceded  Alaska  Housing                                                                    
Finance  Corporation (AHFC)  and  the  Alaska State  Housing                                                                    
Authority (ASHA)  (the two entities  had merged  into AHFC).                                                                    
Another example was  the Meyers v. AHFC  case, where someone                                                                    
has  sued  because  of  the tobacco  bonds.  The  state  had                                                                    
received  a lump  sum payment  in a  settlement; the  Alaska                                                                    
Supreme  Court had  ruled it  had not  been the  general tax                                                                    
revenues of the  state being pledged or given  to the public                                                                    
corporation.  There  had  been  no  dedicated  funds  clause                                                                    
problem.  He  continued  that  the  public  corporation  had                                                                    
received a  sum of money  from the state in  annual payments                                                                    
for the  lawsuit settlement and  the public  corporation had                                                                    
then issued  bonds. In that  case, the court ruled  that the                                                                    
bonds had been  issued by a public corporation  with its own                                                                    
Mr.  Luckhaupt communicated  there had  been decisions  over                                                                    
time, but  Legislative Legal Services believed  the bill was                                                                    
different than  what had  been looked at  in the  past where                                                                    
there had  been some attempt  to identify a  revenue source.                                                                    
He shared  that the  Legislative Legal Services  opinion did                                                                    
not go  beyond the  requestor unless  that person  shared it                                                                    
someone else.  It was  his 29th session  and he  had written                                                                    
myriad  opinions over  the years  and the  majority had  not                                                                    
gone beyond legislative  offices. He stated it  did not mean                                                                    
that the  legal opinion that  had been shared  was something                                                                    
new or  that the agency  was trying  to do something  to the                                                                    
bill. The only reason the  agency was discussing its opinion                                                                    
with the committee was due  to someone's decision to release                                                                    
4:21:04 PM                                                                                                                    
Mr. Luckhaupt shared that the  agency did not have an answer                                                                    
or  a  case  on  point.  Other  states'  constitutions  were                                                                    
different  than  Alaska's. The  agency  could  not say  that                                                                    
because of action  in another state such as  Indiana that it                                                                    
would  be  constitutional  in Alaska.  He  stated  that  the                                                                    
language  in Alaska's  constitution  had been  adopted by  a                                                                    
different  group and  in the  case of  Pennsylvania, it  had                                                                    
been   adopted   almost   80  years   after   Pennsylvania's                                                                    
4:22:00 PM                                                                                                                    
AT EASE                                                                                                                         
4:22:24 PM                                                                                                                    
Co-Chair Foster invited the administration  to the table. He                                                                    
listed documents  including a  memorandum from  Mr. Mitchell                                                                    
to DOR Commissioner  Sheldon Fisher dated April  16, 2018, a                                                                    
letter from  the Department  of Law  (DOL) and  Mr. Mitchell                                                                    
and  to  Senator  Cathy  Giessel  dated  March  2,  2018,  a                                                                    
document on frequently  asked questions of DOR,  and a press                                                                    
release by the Department of Law (copies on file).                                                                              
Vice-Chair Gara  appreciated the  document from DOL.  He did                                                                    
not  anticipate leaving  the room  with ultimate  clarity on                                                                    
who was right.                                                                                                                  
BILL  MILKS, ATTORNEY  V, CIVIL  DIVISION,  LABOR AND  STATE                                                                    
AFFAIRS ATTORNEY, DEPARTMENT OF LAW, introduced himself.                                                                        
MARY HUNTER  GRAMLING, ATTORNEY  V, CIVIL  DIVISION, NATURAL                                                                    
RESOURCES, DEPARTMENT OF LAW, introduced herself.                                                                               
DOUGLAS    GOE,     PARTNER,    ORRICK,     PORTLAND    (via                                                                    
teleconference), stated that he was online.                                                                                     
Co-Chair  Foster  asked if  Greg  Blonde  and Leslie  Krusen                                                                    
[additional Orrick  bond counsel] were online  with Mr. Goe.                                                                    
Mr. Goe believed they were online at different locations.                                                                       
Mr. Milks shared how DOL  had viewed constitutional debt for                                                                    
quite  some  time.  He  referenced   the  words  subject  to                                                                    
appropriation, which  had been used throughout  the hearing.                                                                    
The   bonds   proposed  in   the   bill   were  subject   to                                                                    
appropriation bonds,  not general  obligation bonds.  As the                                                                    
department  understood the  Alaska  constitution and  Alaska                                                                    
caselaw it was  the point where the road  divided. Under the                                                                    
state's constitution there  was constitutional debt (general                                                                    
obligation debt) in  Article IX, Section 8  that was limited                                                                    
for certain purposes and required  voter approval because it                                                                    
pledged the full faith and resources of the state.                                                                              
Mr. Milks  explained that regardless  of whether or  not the                                                                    
legislature wanted to appropriate  money or had appropriated                                                                    
money to  pay general  obligation bonds,  the bonds  must be                                                                    
paid, and the court could direct  that the money come out of                                                                    
the state treasury. Whereas, the  debt in HB 331 was subject                                                                    
to appropriation.  He believed it almost  immediately became                                                                    
apparent to him  that HB 331 did  not include constitutional                                                                    
debt  because it  was an  important obligation;  however, if                                                                    
someone purchased  a subject to  appropriation bond  and the                                                                    
issuer  did  not  make  a debt  payment,  unlike  a  general                                                                    
obligation bond where the court  would order payment, if the                                                                    
purchaser went to  court the court would rule  that the bond                                                                    
specified it was subject to  appropriation. He explained the                                                                    
point had  been the  key dividing  line for  DOL for  a long                                                                    
Mr. Milks  referenced the discussion  about legal  cases and                                                                    
relayed that DOL believed a  key case was Carr v. Gottstein.                                                                    
He  explained  that  the case  addressed  whether  debt  was                                                                    
always debt. He  stated that constitutional debt  was a term                                                                    
of art that describes  an obligation involving borrowing. He                                                                    
clarified that the  term did not describe  what the specific                                                                    
financial  instrument   may  have   been  that   created  an                                                                    
obligation   involving   borrowing.   He   elaborated   that                                                                    
constitutional  debt was  an obligation  involving borrowing                                                                    
where  there was  a promise  to  pay in  the future  whether                                                                    
funds were available or not.  The department believed it was                                                                    
the lynchpin  of the analysis.  The bill dealt  with subject                                                                    
to appropriation bonds and the  legislature would retain its                                                                    
power  to appropriate  the debt  service on  the bonds.  The                                                                    
bonds would be important obligations  as testified to by Mr.                                                                    
Mitchell;  however,  the  current discussion  dealt  with  a                                                                    
limited  and  specific  legal question.  He  furthered  that                                                                    
because the bonds  in HB 331 were  subject to appropriation,                                                                    
it had led  DOL to determine the bill was  proper and legal.                                                                    
Additionally, the  department had  worked with  bond counsel                                                                    
on the bill, which  had led DOL to the view  that HB 311 was                                                                    
almost  identical   to  pension  obligation   bond  statutes                                                                    
written ten years back.                                                                                                         
Mr.  Milks   reiterated  that  the  issue   was  subject  to                                                                    
appropriation.  He continued  that  the  Mr. Mitchell  could                                                                    
explain that  when a general  obligation bond  was purchased                                                                    
the  purchaser understood  that  the court  could order  the                                                                    
payment  (the discretion  was gone  from the  legislature in                                                                    
that  case),  but  the   purchaser  received  slightly  less                                                                    
interest than it would on subject to appropriation bonds.                                                                       
4:29:54 PM                                                                                                                    
Mr.  Milks   continued  that  there  had   been  substantial                                                                    
experience in  Alaska with  subject to  appropriation bonds.                                                                    
The  department's  view   was  the  constitution  identified                                                                    
constitutional  debt as  full faith  and  credit debt.  Even                                                                    
during the  period the framers had  written the constitution                                                                    
(prior  to  statehood),  the   territory  had  been  issuing                                                                    
revenue  bonds backed  up by  subject to  appropriation debt                                                                    
(the  territorial legislature's  annual appropriation).  The                                                                    
department believed the bonds in HB 331 were lawful.                                                                            
4:31:38 PM                                                                                                                    
Mr. Milks  relayed he  would ask bond  counsel to  provide a                                                                    
broader national  perspective. He  reported that  subject to                                                                    
appropriation bonds were sold  regularly from all states and                                                                    
municipalities;  the purchasers  made  assessments on  their                                                                    
interest  in  the  bonds.  He  addressed  the  opinion  from                                                                    
Legislative  Legal Services  that was  not saying  the bonds                                                                    
were unconstitutional,  but the  agency was not  prepared to                                                                    
say they were constitutional. He  noted that DOL had already                                                                    
presented  the bill  to the  Senate Resources  Committee and                                                                    
when  the  department  had  learned   of  the  memo  it  had                                                                    
vocalized  its   view  that  the   bonds  were   lawful  and                                                                    
constitutional.  He detailed  that  if the  bill passed  and                                                                    
bonds were  issued, DOL would  have to issue an  opinion. He                                                                    
referenced  the  pension  bonds that  had  been  proposed  a                                                                    
couple  of  years earlier  would  have  been backed  by  the                                                                    
annual appropriation of the legislature  to the Pension Bond                                                                    
Corporation.  He   elaborated  that   the  state   (not  the                                                                    
municipality)  would have  been responsible  for refinancing                                                                    
its  pension  debt.  He  stated  that  prior  mention  of  a                                                                    
contract was not really applicable.                                                                                             
Mr.  Milks  continued  that  DOL  had  to  certify  that  it                                                                    
believed the  bonds were lawful. Additionally,  bond counsel                                                                    
had to independently  look at Alaska law and  had to certify                                                                    
the   bonds  were   lawful.  He   stated  that   subject  to                                                                    
appropriation  was a  fundamental constitutional  principal.                                                                    
He  referenced   an  earlier  conversation  about   the  tax                                                                    
credits. He  elaborated there was a  statutory appropriation                                                                    
and  some disagreement  between the  two legislative  houses                                                                    
about  how much  to appropriate.  He agreed  that the  funds                                                                    
were subject  to appropriation.  He reported  DOL had  a big                                                                    
case in  the past year  that challenged a  statutory payment                                                                    
program and  the Alaska Supreme  Court had ruled  subject to                                                                    
appropriation. The department believed  that once subject to                                                                    
appropriation   was  included,   it   dealt   with  a   core                                                                    
constitutional principal.                                                                                                       
Mr. Milks  referenced a question  by Vice-Chair  Gara asking                                                                    
whether a provision  could be inserted in the  bill if there                                                                    
was  enough concern  about  the legality  of  the bonds.  He                                                                    
agreed that a provision could  be inserted. He shared that a                                                                    
colleague had pointed out a  provision in the Alaska Gasline                                                                    
Inducement Act  (AGIA) AS  42.90.420. In  DOL's view  it did                                                                    
not create a problem for the  court because it was not being                                                                    
asked to  issue an  advisory opinion.  He continued  that it                                                                    
set  a specific  statute of  limitations; the  timeframe had                                                                    
been set  at 90 days under  AGIA and it was  not unusual for                                                                    
states  issuing bonds  to put  a 60-day  or 30-day  limit so                                                                    
when  the entity  that  may issue  the  bonds issued  public                                                                    
notice to issue bonds, there  was a statutory provision that                                                                    
tried to  provide information  in the  event of  a potential                                                                    
Mr. Milks  asked Mr. Goe would  weigh in on how  the state's                                                                    
bond  counsel looked  at Alaska's  authority to  issue bonds                                                                    
and  how  the  nation  looked at  subject  to  appropriation                                                                    
4:36:21 PM                                                                                                                    
Mr. Goe  introduced himself as  a partner and vice  chair of                                                                    
public  finance  for  Orrick,  Herrington  &  Sutcliffe  LLP                                                                    
(Orrick); the firm  served as State of  Alaska bond counsel.                                                                    
He detailed  that without the firm's  unqualified opinion on                                                                    
bonds,  Wall  Street  would not  purchase  the  bonds.  Wall                                                                    
Street required an unqualified opinion  of bond counsel. The                                                                    
bonds   were   legal,   valid,  and   binding   obligations.                                                                    
Additionally, if  the bonds were  tax exempt they  were also                                                                    
exempt from federal  income tax. The firm  was privileged to                                                                    
be  the  leading bond  counsel  firm  nationally; by  dollar                                                                    
volume sometimes the firm was twice the next leading firm.                                                                      
Mr. Goe  outlined that  Orrick had  worked closely  with Mr.                                                                    
Milks   and   DOL   in   examining   the   memorandums   and                                                                    
constitutional deliberations prior to  Article IX, Section 8                                                                    
being put in the state's  constitution. The firm and DOL had                                                                    
also carefully  reviewed the Alaska  caselaw on  the issues.                                                                    
The firm had  concluded that the Carr v.  Gottstein case was                                                                    
the determinative case on the  issue; it was also consistent                                                                    
with the majority of cases  that had considered the question                                                                    
around  the country.  One of  the more  recent cases  on the                                                                    
subject was a 2003 case of  the New Jersey Supreme Court. In                                                                    
the Carr  v. Gottstein  case, the  Alaska Supreme  Court was                                                                    
with the majority of courts  in holding that debt subject to                                                                    
appropriation is  not constitutional debt. He  detailed that                                                                    
the specific  type of debt  limits applied  in constitutions                                                                    
and sometimes  applied in statute  and voter  approved city,                                                                    
borough, or  county charters. The question  that that always                                                                    
arose was what debt meant when there was a debt limitation.                                                                     
Mr.  Goe identified  that there  were  two broad  exceptions                                                                    
noted in  caselaw and legislative  counsel had noted  one of                                                                    
those,  which  was what  was  sometimes  called the  revenue                                                                    
bonds  exception  reflected in  Article  IX,  Section 11  of                                                                    
Alaska's constitution. He continued  that sometimes in state                                                                    
law it  was also referred  to as the special  fund doctrine,                                                                    
where there  was a source  of revenues or special  fund that                                                                    
was the  payment (not general  tax revenues);  therefore, it                                                                    
did not constitute debt.                                                                                                        
Mr. Goe detailed that the  other major exception was subject                                                                    
to  appropriation  debt.  As had  been  noted,  the  supreme                                                                    
courts,  under a  very broad  range of  state constitutions,                                                                    
had determined  that debt subject  to appropriation  was not                                                                    
constitutional debt. He noted  that subject to appropriation                                                                    
was not subject  to statutory limitations or  a charter debt                                                                    
limit if  it was the applicable  limitation being considered                                                                    
by  the court.  The  firm earned  its  reputation on  giving                                                                    
unqualified opinions,  which it  took very  seriously before                                                                    
being prepared to deliver. Based  on existing Alaska Supreme                                                                    
Court  precedent, Orrick  was comfortable  that  HB 331  was                                                                    
constitutional. He  continued that  if the bill  was enacted                                                                    
assuming the opinion  of DOL and customary  things, the firm                                                                    
expected to be  able to render its opinion to  the state and                                                                    
the bond  market that the  bonds would be valid  and binding                                                                    
obligations  of the  tax credit  bond corporation  and would                                                                    
not be  debts of the state.  He was available to  answer any                                                                    
4:42:23 PM                                                                                                                    
Mr.  Mitchell noted  that he  was  not an  attorney, but  he                                                                    
worked in the  municipal bond market on a  regular basis. He                                                                    
referenced examples given earlier  about the University, the                                                                    
potential  Knik Arm  crossing toll  revenue bond  structure,                                                                    
the  Goose Creek  Correctional Center  lease revenue  bonds,                                                                    
the  Alaska Native  Tribal  Health Consortium's  residential                                                                    
housing  building, the  Anchorage  jail,  the Seward  Spring                                                                    
Creek  Correctional facility,  and  the  Juneau court  plaza                                                                    
building. He  underscored that the  revenue pledged  for all                                                                    
of   the  examples   had  only   been  derived   from  state                                                                    
appropriation  in  some way.  He  emphasized  that no  other                                                                    
revenues  had  existed. He  stated  it  was the  same  thing                                                                    
contemplated by  HB 331. He referenced  the discussion about                                                                    
the Pension  Obligation Bond  Corporation. He  detailed that                                                                    
because  the  corporation  had the  ability  to  enter  into                                                                    
contracts  with  municipal  employers  for  the  purpose  of                                                                    
funding  unfunded liability  it may  be liable.  He stressed                                                                    
that  the  only employer  with  an  unfunded liability  that                                                                    
would benefit  was the  state based  on make  whole payments                                                                    
the state  had or the limits  at 22 percent or  12.5 percent                                                                    
of   payroll  within   the  two   systems   [PERS  and   TRS                                                                    
respectively]; the state was the only obligated party.                                                                          
Mr. Mitchell continued that the  same could be done with the                                                                    
HB 331  proposal. He  explained that  the bill  could direct                                                                    
the  holders  of   the  tax  credits  assign   them  to  the                                                                    
corporation. He explained it was  the same thing - the money                                                                    
would be  coming from  the General Fund  "no matter  how you                                                                    
slice it." He did not  believe the arguments made earlier in                                                                    
the meeting meshed well. He  understood the concern and that                                                                    
the language  was not a  hard declaration that there  was an                                                                    
issue with the constitution.  He stated that the declaration                                                                    
alone   in  the   bond  world   caused  concern.   From  his                                                                    
perspective, the dissenting  opinion [from Legislative Legal                                                                    
Services] was  troubling because  in the event  bond counsel                                                                    
provided an unqualified opinion  and the bond purchase moved                                                                    
forward, the purchaser may ask to be paid more.                                                                                 
Mr. Mitchell  believed that based  on past practices  of the                                                                    
state  and the  laws,  the issue  had  been interpreted  and                                                                    
defined  prior to  statehood. He  elaborated that  the bonds                                                                    
had to be approved by  the legislature, which had not always                                                                    
been  the case.  In the  past,  when ASHA  had issued  lease                                                                    
revenue bonds the state supported  through lease payments it                                                                    
had not  required legislative approval.  State law  had been                                                                    
tightened up since those early  years. Up until the Wildwood                                                                    
Correctional  facility had  been financed,  the state  could                                                                    
issue COPs [certificate of  participation] for real property                                                                    
for  up to  $5  million. He  explained it  had  been cut  to                                                                    
generally zero  because the administration  at the  time had                                                                    
gotten clever  and had  done a $4.9  million COP  to acquire                                                                    
the land  and a $4.9  million COP  to improve the  land. The                                                                    
legislature  had been  heavily  involved  in regulating  the                                                                    
financial tool since statehood.                                                                                                 
4:47:14 PM                                                                                                                    
Representative  Guttenberg corrected  that the  opinion from                                                                    
Legislative Legal Services was  not a dissenting opinion. He                                                                    
remarked  the state  had separation  of powers.  He did  not                                                                    
believe  Orrick   would  have   the  ability  to   issue  an                                                                    
unqualified   opinion   without   pointing  out   that   the                                                                    
legislative  attorneys  had  a  difference  of  opinion.  He                                                                    
reasoned in one  way or another it would cost  more money or                                                                    
hold the process  up until clarity came from  the courts. He                                                                    
asked if his assessment was accurate.                                                                                           
Mr.  Milks answered  that the  legislature  had the  opinion                                                                    
from Legislative  Legal Services staff and  DOL had provided                                                                    
analysis  to   the  Senate  Resources   Committee.  Attorney                                                                    
General  Lindemuth  intended  to  issue  a  formal  attorney                                                                    
general  opinion on  the topic  of subject  to appropriation                                                                    
Mr.  Goe restated  his understanding  of  the question.  The                                                                    
firm  took all  facts  and circumstances  into account  when                                                                    
delivering  its opinion.  The  firm  would certainly  prefer                                                                    
that there not be a  legislative legal opinion out there. He                                                                    
referenced Mr. Mitchell's comment  about whether the opinion                                                                    
would  be a  cost  to the  state because  the  state had  an                                                                    
obligation to  disclose all material  facts. He  believed it                                                                    
would  be the  case. Whether  the legislative  opinion would                                                                    
impact Orrick's  ability to deliver its  opinion remained to                                                                    
be  seen. If  the  attorney general  issued  a formal  legal                                                                    
opinion on  the case it would  aid Orrick in the  ability to                                                                    
deliver  an unqualified  legal  opinion.  He believed  there                                                                    
could  still be  a  cost  to the  state  of the  legislative                                                                    
counsel opinion  because under  federal securities  laws the                                                                    
state may  have an obligation  to disclose the  existence of                                                                    
the opinion and  the state may incur  higher interest costs.                                                                    
He believed that if Orrick  and DOL stepped up and delivered                                                                    
their  opinions,  the bond  market  would  still accept  the                                                                    
opinions and buy the bonds.                                                                                                     
Representative   Guttenberg  referenced   Vice-Chair  Gara's                                                                    
question about  an expedited hearing. He  noted that existed                                                                    
for  redistricting issues.  He asked  if the  administration                                                                    
was free  to ask the  courts for a declaratory  judgement in                                                                    
the case  of HB 331. He  asked if there was  some process to                                                                    
go forward.                                                                                                                     
Mr. Milks answered  that in response to a  question by Vice-                                                                    
Chair   Gara,  Assistant   Attorney  General   Gramling  had                                                                    
identified a  specific statute  of limitations  provision in                                                                    
AGIA. Some  other states  had a  similar provision  for bond                                                                    
bills to try  to get a quick opinion. He  clarified that the                                                                    
state was not looking for  litigation and DOL intended to go                                                                    
forward with a formal attorney general opinion.                                                                                 
4:53:15 PM                                                                                                                    
Representative Grenn read  from page 2, lines  19 through 22                                                                    
of the bill:                                                                                                                    
     The  bonds do  not constitute  a general  obligation of                                                                    
     the state and are not  state debt within the meaning of                                                                    
     art. IX, sec.  8, Constitution of the  State of Alaska.                                                                    
     Authorization  by  the  voters  of  the  state  or  the                                                                    
     legislature is not required.                                                                                               
Representative  Grenn  asked  about the  importance  of  the                                                                    
language.  Additionally,  he  inquired about  exceptions  in                                                                    
Article 11.                                                                                                                     
Mr.  Milks  answered  that  the language  in  the  bill  was                                                                    
important  to  clarify  that  the   bonds  were  subject  to                                                                    
appropriation. When  the bonds  were marketed and  bought in                                                                    
the future the language made  it clear they were not general                                                                    
obligation  bonds  of  the  State  of  Alaska.  Article  IX,                                                                    
Section 11  was an exception  to Section 8 (Section  8 dealt                                                                    
with  constitutional debt  - full  faith  and credit  debt).                                                                    
Permitted  constitutional debt  included general  obligation                                                                    
bond  debt   and  public   corporation  revenue   bonds.  He                                                                    
continued that subject to appropriation  bonds were not full                                                                    
faith and credit  - no one could go to  court (unlike a full                                                                    
faith and  credit bond) and  obtain a judicial order  to pay                                                                    
debt  service. He  referenced page  4, line  16 of  the bill                                                                    
that  included  the  statement  that  the  "legislature  may                                                                    
appropriate."   He   clarified    that   the   [subject   to                                                                    
appropriation]   were  still   important  obligations.   The                                                                    
department was  addressing the  narrow issue  of how  it saw                                                                    
the issue of constitutional debt.                                                                                               
4:56:02 PM                                                                                                                    
Representative  Pruitt referenced  testimony by  Legislative                                                                    
Legal   Services  that   Alaska   had   a  different   state                                                                    
constitution  than  other  states. He  asked  how  different                                                                    
Alaska's  constitution was  from  other states  in terms  of                                                                    
obligations. He  thought it was fascinating  that New Jersey                                                                    
had  used  the  Carr  v.  Gottstein  case  from  Alaska.  He                                                                    
understood that  it did not necessarily  mean something from                                                                    
New Jersey  would fit into  Alaska's framework. He  asked if                                                                    
there were enough similarities with  other states to help in                                                                    
discussions  if  the  particular  issue  went  to  court  in                                                                    
Mr.  Goe  replied  in the  affirmative.  He  believed  other                                                                    
states were  instructive in terms  of using it.  Other state                                                                    
constitutions  varied -  the  common  denominator among  all                                                                    
constitutions was the  use of the term  "debt." The question                                                                    
became how  one interpreted the  term debt. For  example, he                                                                    
considered  whether  housing  loans   for  veterans  was  an                                                                    
exception. Additionally, capital  improvements were commonly                                                                    
seen related  to state  debt limits.  He explained  that the                                                                    
relevant  question for  the conversation  at  hand was  what                                                                    
debt  meant for  constitutional purposes.  He believed  they                                                                    
could learn from other states on the issue.                                                                                     
Mr. Goe  elaborated that it  was Orrick's view and  the view                                                                    
of DOL  that the Alaska  Supreme Court had already  spoken -                                                                    
it had  considered a  broad range of  objections in  Carr v.                                                                    
Gottstein  case and  had come  down solidly  in ruling  that                                                                    
subject   to  appropriation   debt   did   not  qualify   as                                                                    
constitutional  debt  within  the  meaning  of  Article  IX,                                                                    
Section  8. He  believed it  was the  reason the  New Jersey                                                                    
Supreme  Court  had quoted  the  case  as standing  for  the                                                                    
principle (with the majority of  other supreme courts around                                                                    
the  country) that  subject to  appropriation  debt was  not                                                                    
debt within the meanings of the various constitutions.                                                                          
Representative Pruitt asked who would  argue the case on the                                                                    
state's behalf. Mr. Milks answered  that if a law was passed                                                                    
by   the  legislature   it   was   the  Attorney   General's                                                                    
responsibility to defend Alaska's laws.                                                                                         
5:01:14 PM                                                                                                                    
Representative  Wilson asked  that  when  people bought  the                                                                    
bonds if  they were  told that the  bonds were  worthless if                                                                    
the  legislature decided  not  to pay.  She believed  that's                                                                    
what had been indicated.                                                                                                        
Mr. Mitchell replied that [the  market] was told there was a                                                                    
risk of  failed appropriation. They were  also provided with                                                                    
the  history of  the state  and its  payment on  all of  its                                                                    
municipal market  subject to  appropriation pledges  and the                                                                    
importance of the  municipal capital market to  the State of                                                                    
Alaska  and  its  future  and the  ability  to  provide  for                                                                    
capital projects large and small.  The market would consider                                                                    
the negative  impacts that  would result  from a  failure to                                                                    
appropriate  and  would  need  enough  assurance  that  they                                                                    
believed the state  would pay. At the end of  the day credit                                                                    
was a buyer's belief that someone would repay them.                                                                             
Representative  Wilson  stated  that most  of  the  examples                                                                    
provided were  attached to buildings or  something tangible,                                                                    
whereas  the  bonds  in  HB  331 were  not.  She  asked  for                                                                    
verification   there  would   be  language   on  the   bonds                                                                    
specifying  there  was nothing  backing  them  and that  the                                                                    
paper  may be  worth more  than  the payment  the buyer  may                                                                    
Mr. Mitchell replied  yes. He noted that they did  not own a                                                                    
title position  on a  building if the  state failed  to pay.                                                                    
The state would lose access to  the building for a period of                                                                    
time and  then the  building becomes the  state at  the term                                                                    
lease whether the  state paid or not. There may  be a two or                                                                    
three-year  extension depending  on how  the lease  language                                                                    
was  written. The  other best  example of  a similar  entity                                                                    
being proposed was the  Pension Obligation Bond Corporation.                                                                    
There was an existing liability  of the state, there was not                                                                    
real property involved, the state  was going to enter into a                                                                    
contractual commitment to pay that  was going to be provided                                                                    
to  the public  corporation  in exchange  for  the lump  sum                                                                    
deposit  into  the retirement  trust,  and  the payment  was                                                                    
subject  to  appropriation.  There  were  no  PERS  employer                                                                    
payments backing  the bonds, it  was the state's  subject to                                                                    
appropriation  pledge; if  the  state  did not  appropriate,                                                                    
there would have been no recourse.                                                                                              
Representative Wilson  stated that the  difference discussed                                                                    
by  Legislative Legal  Services was  that in  order for  the                                                                    
bonds to be legal they  were associated with an organization                                                                    
taking other revenue in.                                                                                                        
Mr.  Mitchell clarified  that  the  Pension Obligation  Bond                                                                    
Corporation   had  no   right   to   employer  or   employee                                                                    
contributions that  went into the  trust. The  contract that                                                                    
would  have  been  the  basis   of  the  financing  was  the                                                                    
Department of  Administration entering into a  contract with                                                                    
a  pension obligation  bond corporation.  He explained  that                                                                    
pledge was  securitized, pledged  to the third  parties, and                                                                    
was subject  to appropriation. Once the  money was deposited                                                                    
into the trust it was gone.                                                                                                     
Vice-Chair  Gara   spoke  to  the  importance   of  a  clear                                                                    
legislative  record.  He  did not  know  which  opinion  was                                                                    
correct. He clarified that his  remarks were not intended to                                                                    
communicate  that  he  believed  the bill  was  or  was  not                                                                    
constitutional. He  believed there were good  faith opinions                                                                    
on both sides. He spoke  to the thoroughness that Ms. Nauman                                                                    
went through  in analyzing  [Article IX]  Sections 8  and 11                                                                    
[of the state constitution]. He  was disappointed he had not                                                                    
heard  much from  DOL  about the  sections.  He thought  the                                                                    
merits of the bill should be addressed.                                                                                         
5:06:01 PM                                                                                                                    
Representative Kawasaki  agreed and appreciated the  work by                                                                    
Legislative  Legal  Services.  He  had  asked  for  a  legal                                                                    
opinion  [from  DOL] but  had  been  referred to  the  press                                                                    
release.  He  hoped to  get  an  opinion from  the  attorney                                                                    
general. He would write his  questions down and would submit                                                                    
them. He asked who to direct the questions to.                                                                                  
Co-Chair  Seaton  asked  members  to  submit  the  questions                                                                    
through  the   chair.  He  remarked   that  the   issue  was                                                                    
difficult, and he  was glad the discussion  had occurred. He                                                                    
noted that  the next  meeting was currently  unscheduled. He                                                                    
recessed  the meeting  to a  call  of the  chair [note:  the                                                                    
meeting never reconvened].                                                                                                      
5:08:12 PM                                                                                                                    
The meeting was adjourned at 5:08 p.m.                                                                                          

Document Name Date/Time Subjects
HB331 Transmittal Letter.pdf HFIN 4/21/2018 1:00:00 PM
HB 331
HB 331 Sectional for H FIN.pdf HFIN 4/21/2018 1:00:00 PM
HB 331
HB331 Credit Bonds for HFIN 4-21-18.pdf HFIN 4/21/2018 1:00:00 PM
HB 331
HB 331FAQ on Constitutionality.pdf HFIN 4/21/2018 1:00:00 PM
HB 331
HB 331 Press Release - Tax Credit Bonds 4-18-18.pdf HFIN 4/21/2018 1:00:00 PM
HB 331
HB 331 Memo re Broad Interpretation of Debt.pdf HFIN 4/21/2018 1:00:00 PM
HB 331
HB 331 Revenue Law Letter re Const.pdf HFIN 4/21/2018 1:00:00 PM
HB 331
HB331 Credit Bonds for HFIN 4-21-18.pdf HFIN 4/21/2018 1:00:00 PM
HB 331
HB 331 Constitutionality of HB 331 (Bonding to pay Tax Credits).pdf HFIN 4/21/2018 1:00:00 PM
HB 331