Legislature(2017 - 2018)ADAMS ROOM 519
04/24/2018 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB331 | |
| Public Testimony | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 331 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 24, 2018
1:36 p.m.
1:36:24 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:36 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
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Jack McGee, Self/Attorney, Juneau; Joseph Geldhof,
Self/Attorney, Juneau; Don Bullock, Self, Juneau; Barbara
Huff-Tuckness, Director, Governmental and Legislative
Affairs, Teamsters Local 959, Juneau; Sheldon Fisher,
Commissioner, Department of Revenue; Ken Alper, Director,
Tax Division, Department of Revenue; Representative
Charisse Millett.
PRESENT VIA TELECONFERENCE
Chad Schaefer, Self, Soldotna; George Pierce, Self,
Kasilof; Doug Smith, CEO, ASRC Energy Services, Anchorage;
Cathy Duxbury, Self, Anchorage; James Squyers, Self, Rural
Deltana; Kevin Durling, Self, Anchorage; Galen Nelson,
Self, Anchorage; Vern Johnson, Self, Anchorage; Erin
Renfro, Self, Anchorage; Ben Anglen, Self, Anchorage;
Melonnie Amundson, Self, Anchorage; Dale Hoffman, Self,
Anchorage; Roger Demoss, Self, Prudhoe Bay; Jeanie Peirce,
Self, Kasilof; Jim Beckham, Deputy Director, Division of
Oil and Gas, Department of Natural Resources.
SUMMARY
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.
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."
1:37:12 PM
^PUBLIC TESTIMONY
1:37:43 PM
Co-Chair Foster OPENED public testimony. He announced
public testimony would be limited to three minutes per
testifier.
JACK MCGEE, SELF/ATTORNEY, JUNEAU, spoke about the Carr
Gottstein case, which was relevant to the question of
whether HB 331 created a state debt. He read from prepared
remarks:
The governor and the administration take the position
that the language in Section 37.18.030(b) removes all
doubt whether a bond issue issued by the corporation,
creates a state debt. We're told that this language
clearly means that it does not. I don't think that is
accurate and it's not accurate because of the supreme
court decision in Carr Gottstein. This case involves a
lease purchase agreement and the court held it did not
create a state debt. What's important is the reason it
gave. The reason it gave was this, because the lease:
1) contains a non-appropriation clause; 2) it limits
recourse to the leased property; and 3) it does not
create a long-term obligation binding future
generations or legislatures. In order to satisfy this
ruling, absent such language in a bond offering or the
bonds themselves, I think it will likely find the
corporation created a state debt (an obligation) that
has to be ratified by the majority of qualified
voters.
I don't think it's sufficient simply including
language in the legislation such as that that's found
in AS 37.18.030(b) unless the corporation is required
by statue to include non-appropriation language in the
bond offering and in the language itself. The issue
comes down to full disclosure to potential bond
purchasers.
Representative Ortiz asked Mr. McGee to elaborate further
on the Carr Gottstein case that included a non-
appropriation clause in the lease. He asked about the
impact of the non-appropriation clause.
Mr. McGee referenced page 2, subsection (b) of the bill and
read:
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.
Mr. McGee elaborated that "if that's all you have, and it's
not in the bond offering or issue, you have a problem of
full disclosure." He believed if the bill was contested,
the court would find it created a state debt and a majority
vote was needed.
Representative Ortiz asked if Mr. McGee believed HB 331
would need to include a non-appropriation clause in order
to avoid non-disclosure.
Mr. McGee answered that the clause in the bill would not be
sufficient to get past the Carr Gottstein ruling. He
detailed it should be included in the document in order for
a party that was thinking of buying the bonds to go in with
open eyes.
1:43:11 PM
Co-Chair Foster noted that Representative Pruitt had joined
the meeting.
Representative Wilson asked for verification that the
language would have to be on the bond in order for
potential purchasers to know whether or not it would be
coming back.
Mr. McGee answered in the affirmative. He added the issue
documents should contain the information as well.
Vice-Chair Gara asked if including the language in the bond
would resolve the constitutional issue. Mr. McGee replied
that the language he had read could probably use a bit of
clarity. He stressed the importance of clear language.
Vice-Chair Gara hoped the administration would take a look
at Mr. McGee's suggestion.
Representative Guttenberg explained that the state's
outside bond counsel had been online during the recent
Saturday meeting. He recalled that the individual had
disagreed with the legislature's attorneys regarding the
constitutional issue. He recalled the counsel had been
secure in his interpretation that the bill was
constitutional as written. He wondered if Mr. McGee
believed part of the counsel's interpretation was including
or excluding the language.
Mr. McGee responded that if it was included it would be
included in the bill section on bond terms; however, it was
not included there. He believed the counsel was operating
under the assumption that putting the detail in the
legislation would be sufficient. He disagreed with that
opinion.
1:45:34 PM
JOSEPH GELDHOF, SELF/ATTORNEY, JUNEAU, spoke against the
bill. He provided detail about his professional career as
an attorney. He asked if it really had come to not meeting
the state's obligations and needing to borrow a substantial
sum of money to pay off tax credits. He discussed that for
30 years the state had been wrestling with tax policy and
spending. He believed there were some huge issues
remaining. He pointed out that the concept of borrowing to
meet past obligations was a new discussion. He did not
think there was any question they were talking about
floating a debt instrument. He remarked it was possible to
include language specifying the borrowing would not be
debt, but he believed that was a conclusion that was not
supported by critical analysis. He elaborated that the
state's constitution required votes for general obligation
debt instruments. He believed someone was desperately
trying to find a workaround.
Mr. Geldhof remarked that there was frequent debate in the
legislature that it was not possible to cut or tax the
state's way into a sound fiscal situation. He underscored
that it was not possible to borrow the state's way into a
financial situation. He characterized the bill's proposal
as a clever workaround. He wondered if the state was going
to start borrowing finances like Illinois or treating its
finances like Venezuela. He believed the bill measure was
unconstitutional as proposed. He asked the committee to
take its own attorneys into account. He believed the press
release from the Office of the Attorney General was a
"whistling past the graveyard opinion that says it's okay."
He thought the bill would put the state's finances into
deeper trouble.
1:49:26 PM
CHAD SCHAEFER, SELF, SOLDOTNA (via teleconference), spoke
in support of the bill. He believed the bill would provide
certainty for the state with payments that were not tied to
oil price or production. He encouraged the committee to
pass the bill to get more Alaskans working.
Representative Ortiz asked for Mr. Schaefer's affiliation.
Mr. Schaefer replied he is an Alaska resident.
1:51:07 PM
GEORGE PIERCE, SELF, KASILOF (via teleconference),
testified against the bill. He did not believe there was
need for a bond debt on Alaskans. He stressed that the
state was in deficit. He supported cuts to the budget. He
stated that since the passage of SB 21 the oil industry had
received $1.6 billion in per barrel tax deductions. He
believed Alaskans had been short-changed. He discussed that
new oil discoveries not on the books meant nothing. The
state had every right to pay the minimum credit obligation.
He believed paying credits in-full with bonds would reward
oil companies for not living up to their obligations to the
state. He believed the real crime was the legislature's
mismanagement of Alaska's finances. He stated that North
Dakota and Texas did not have to sell bonds to pay for
their debt. He believed those states taxed oil companies
two to three times more than Alaska. He thought the bill
represented major oil companies and not Alaskans. He stated
that [as a resident] he owned the resources and there were
no taxes on his resources. He believed a $1 billion bond
should be voted on by Alaskans - the people who own the
resources. He believed the legislature needed to quit
catering to oil companies and begin working for Alaskans.
1:53:45 PM
DON BULLOCK, SELF, JUNEAU, shared that he had prior
experience and contact with the laws underlying the bill.
He detailed that he had heard the testimony from the
Department of Law and by Legislative Legal Services. He
believed that Emily Nauman's letter from Legislative Legal
Services written to Co-Chair Seaton was much closer to the
truth than information provided by the Department of Law
(DOL). He referenced Article IX, Sections 8 and 11 of the
state constitution and noted that general obligation debt
had to be generally for capital projects and required a
vote of the people. Section XI talked about revenue bonds.
For example, if the Knik Arm bridge was built and bonded,
there would be a revenue flow from the project - the tolls
could be available for appropriation to pay for the bonds.
Mr. Bullock stated that the problem with the bill was that
the repayment of the bonds was based on future
appropriations. The only asset the corporation created by
the bill would have was what was appropriated. He reasoned
that in a way the state would not really gain anything
because under AS 43.55.028, the statute creating the credit
fund consisted of appropriations as well. Additionally, AS
43.55.028 clearly stated that the section did not create a
dedicated fund. Almost every designated fund in the General
Fund (GF) that was not dedicated would have that language.
He believed the structure of the bonds was questionably
constitutional.
Mr. Bullock spoke to an additional issue. He stated that
under AS 43.55.028 the legislature appropriated the money -
when the money was appropriated to buy the tax credit
certificates it was an appropriation that was not dedicated
(it may be designated) and as money became tighter and
tighter in the GF those type of appropriations had to
compete with other things like schools, the University, and
public safety. As long as an appropriation was for a valid
public purpose, appropriations from the GF were allowable.
He addressed a scenario where the state sold a bond that it
promised to pay back in the future with interest. In the
future, the state would have a discretionary appropriation
and the pressure of the bond contract. The contractual
relationship with the bond holders would add additional
pressure and possibly additional litigation between the
bond holders and state.
Mr. Bullock noted that committee had recently been told the
court system could order the legislature to appropriate the
money to pay any kind of litigation like that. The state
had a separation of powers - the legislature had the power
to appropriate money (the court could not do it and the
governor had to request the legislature to make an
appropriation). He stated that the issue had been seen in
the Kasayulie case pertaining to education funding in rural
areas. He detailed that the legislature had basically been
signaled to appropriate more money to bring some of the
standards up. He cited another case involving overcrowding
in prisons. The court had found that prisoners were
overcrowded, and more money had to be appropriated to
create more places to house prisoners. He reiterated that
the court could not appropriate the money. The Kasayulie
case had been settled when the former Parnell
Administration agreed to put requests into the budget for
additional school funding. In the case of general
obligation bonds, which were not used in HB 331, there
could perhaps be a court order to liquidate some assets
because those type of bonds had the full faith in credit.
Mr. Bullock believed the best opinion the legislature had
was the non-partial opinion by legislature's own attorneys.
The question of constitutionality raised a possible
challenge to the bill. He was also concerned about another
sense of entitlement based on the contract against the GF.
1:59:45 PM
Mr. Bullock believed the foundation of the bill was built
on sand. He stated that AS 43.55.023 and AS 43.55.025
create the opportunity for tax credits. Statutes directed
companies to apply to the state to receive a tax credit. He
stated there were three ways the tax credits could be used.
He likened credits to an income tax return where credits
could be taken to reduce tax liability dollar-for-dollar.
He noted it was different than a deduction because it was
an actual reduction in tax. The credits were issued in
return for the desired activity or investment taking place
- the person holding the credits could hold them until they
could use them, they could sell them to another taxpayer,
or they could be presented to the state for payment. There
was no dedicated fund to pay those taxes. A source was
identified; a certain percentage of the production taxes
were received. He stated that when things were good there
were higher production taxes whatever percentage went into
the fund would be higher. At the same time, there were lean
times - when production taxes went down there was less
available from the identifiable fund source.
Mr. Bullock underscored there was no requirement for the
taxes to be put into a credit fund - the funds were
discretionary. The discretion to appropriate money would be
the same as the discretion if the bill passed to fund the
bonds. He thought the bill had been characterized as an
obligation of the state to pay the bonds. He stressed that
at best it was discretionary. He clarified he was not
saying there were not any impacts or that people did not
expect to be paid. He remarked that when the state had the
money it bought everything on the shelf; in the past it had
paid the full amount to companies. However, it did not
amend the law that reasonable expectation would be that the
state would always buy "them" because there was no
dedicated fund or requirement.
Mr. Bullock continued that tax credit certificates were
issued with a face value that did not gain interest or
grow. He shared that he had a zero-interest loan on his car
and had no incentive to prepay. The credits were a
liability to the state, which was something necessary to
consider - potentially every credit issued would reduce
future tax payments to the state. He added that the credits
did not expire. He equated it to the risk of a gift card -
some people never used them and others did. He explained
that credits could be sold to a company that could use
them. For example, a company could discount the sale of
credits to a taxpayer - there were limitations on how the
credits could be applied - and there would be a future
reduction in tax. He continued that if the state had the
money and could negotiate the outstanding credits, perhaps
it could bid against the other taxpayers. For example, if
another buyer was going to offer less for the credits, the
state would be ahead if it could offer 80 percent of the
value of the credit because the treasury would not lose the
money. The trouble was, if the state did not have the
money, it would have to wait. He did not believe the bill
was the way to go. The liability for payment on the bonds
and future appropriations was worse than looking at the
credits owed now.
2:04:51 PM
Representative Wilson asked if the bill would be
constitutional if it included putting language on the bonds
that read "good luck, we hope you get paid."
Mr. Bullock did not believe putting the language on the
bonds mattered. He elaborated that the laws would still be
on the books if the language was not on the bonds. The
current law had discretionary language and did not always
allow bills to include the terms "must" and "shall" instead
of "may." Part of the problem with the credits was they had
been assigned with the expectation the legislature would
appropriate the assignments, which was where the concern of
financial lenders resided. He stated that whether the
credits would be purchased was based on the state's ability
to purchase the credits.
Representative Wilson spoke to a proposal that in order for
the state to pay the credits there would be some sort of
requirement for increased development. She asked Mr.
Bullock whether he did not believe it was a good tradeoff
to potentially help the state's economy versus less
development.
Mr. Bullock answered that any kind of state money into the
economy was always beneficial; however, the law did not
allow for that. The law provided the credit and perhaps a
purchase by the state based on available money. He stated
it was always good to spread the money, which was part of
the issue of the Permanent Fund Dividend where state money
went out to help the economy. The state's major industry
was in oil and gas - the state took a balanced approach
between what it gave up and what it could expect in the
future. He had testified in the past that when the state
decided to an act of deduction or credit it was effectively
making an investment of state money. He recommended
identifying what the state expected in conjunction with the
credit and whether it was a good outlay. Especially a
targeted credit going towards incentivizing production. He
added that some of the credits were received for dry holes,
but at least that meant companies were out exploring.
Representative Wilson asked if there would be legality
issues attaching certain work being done on money being
paid to companies, especially when they had completed
projects.
Mr. Bullock answered that the expectation of qualifying for
the credit was to receive a credit. There was nothing
binding saying they would be paid, which would be
dedicating future revenue at some point to buy the credit.
Representative Wilson clarified that she was speaking about
a proposal to require companies to reinvest in order to get
the larger amount of money for the credits.
Mr. Bullock believed it would be acceptable because it
would be like settling it. The state did not have the money
to appropriate to buy the credit, but it would offer a
company a discount. The credit would be discounted in a
smaller way if the company made a commitment to keep
working. He stated it was like getting another credit or
another deduction; it was an incentive to go forward. He
liked the idea of the overriding royalty - another thing
that would contribute to the government part of the state.
2:09:15 PM
Representative Guttenberg thanked Mr. Bullock for all of
his work for the legislature in the past. He stated that
the state's current relationship with the credits was as a
sovereign and a taxpayer. He believed the bill would change
the structure to a commercial relationship between two
parties. He asked if the state lost anything if the
relationship changed.
Mr. Bullock asked for clarity on the two parties.
Representative Guttenberg explained he was referring to the
state entering into a contractual relationship with the
industry.
Mr. Bullock replied that he did not believe so. He detailed
the state wore two hats - it was the resource owner (it
received royalty payments) and it was the tax collector.
Those things would not change. He continued that if the
state got into the overriding royalty situation, it would
have an additional interest in production. He clarified it
was not the same as the royalty the state generally
received, which came off the top as payment for something.
He provided an example. He did not believe it changed the
relationship with the state - it would continue to be a
resource owner and tax entity.
Co-Chair Foster recognized Representative Charisse Millett
in the audience.
Vice-Chair Gara thanked Mr. Bullock for all of his years of
service. He appreciated the testimony.
2:12:05 PM
Co-Chair Seaton asked if the major problem with the bill
would be solved if there was a revenue stream associated
with the bond.
Mr. Bullock answered in the affirmative. The idea of
revenue bonds was there was an identifiable source.
Conceivably if there was an overriding royalty as part of
the deal, it could be a revenue source. He speculated
anything could be bonded for a price - as the risk
increased, the interest in buying the bonds would be less,
but the interest the state would have to pay to sell the
bonds would be higher. An identifiable revenue source
provided some comfort to the bond buyers - a buyer could
reason that it was a good contract with overriding
royalties on known fields that would continue to produce.
He stated that revenue bonds were authorized under Article
IX, Section 11 of the state constitution; the bond buyer
could look at the source. He detailed that the state did
everything it could to meet its legal obligations. He
mentioned constraints like the dedicated fund. Under the
bill, a bond buyer would have to speculate about whether
there would be money for future appropriations. Depending
on the extent of the revenue shortage, the buyers may not
get paid.
Co-Chair Seaton asked an overriding royalty would have to
be designated to the [AS 43.55] .028 fund. He wondered if
it would present dedication problems. He wondered whether
revenue would have to generate to the corporation or GF as
long as revenue was being generated.
Mr. Bullock affirmed that it would raise dedication
problems. He elaborated that the state's revenue was sacred
apart from for specific exceptions in Article IX, Section 7
regarding dedicated funds. There were several cases about
limitations and dedication including the recent Permanent
Fund Dividend case and the University lands case. He highly
recommended reading the latter case summary regarding anti-
dedication clause rules. He spoke to the importance of
caution. He discussed that the constitution had been
written in the 1950s when the state's population had been
much smaller. He continued that the state had known its
government would have to survive somehow. He shared that
Alaska and Georgia were the only states with anti-
dedication provisions, which gave the legislature maximum
flexibility. Some states were handicapped by dedication
after dedication.
2:16:01 PM
Co-Chair Seaton provided a scenario where the overriding
royalty was perceived as a revenue stream to the GF. He
asked if the language specifying the revenue may be
appropriated to the [AS 43.55] .028 fund satisfied the
appropriation power and produced a revenue stream.
Mr. Bullock could not comment on the question. He stated it
was a nontraditional revenue stream. He reported the case
closest to the dedicated fund issue was Meyers v. Alaska
Housing Finance Corporation. He detailed the case was
related to a tobacco settlement. Effectively the state sold
an asset (the right to future income that would be paid by
the tobacco companies) and the legislature appropriated the
money from the sale. He detailed that because the money was
to be received over time, it raised the dedicated fund
issue; however, because it was the sale of an asset
followed by an appropriation, the court allowed it. He
noted it had been a close case; he did not know if the same
outcome would occur if the issue arose again.
Representative Pruitt asked if it was possible for the
state to sell a share of future royalties to a corporation.
Mr. Bullock answered that the Permanent Fund had been
created with a dedication of royalties that could not have
been done without a constitutional amendment. He detailed
that because royalties were a cash flow based on the
state's ownership, it would violate the dedicated fund
prohibition.
2:18:40 PM
BARBARA HUFF-TUCKNESS, DIRECTOR, GOVERNMENTAL AND
LEGISLATIVE AFFAIRS, TEAMSTERS LOCAL 959, JUNEAU, spoke in
support of the bill. She spoke to the amount work the small
independent contractors had done over the past couple of
years during a time of reduced work opportunity and the
backing off of the credits reimbursement. The organization
believed there was a work opportunity here. She stressed
the small independent contractors had done a good job
working with Nanuq Inc. and AFC [Alaska Frontier
Contractors]. The independents included ENI, Caelus,
Armstrong, Repsol, and Brooks Range. Over the past couple
of years, the companies had worked closely with Alaskan
contractors; Teamsters members had enjoyed much of that
work opportunity. She added there could be more work
opportunity. Unfortunately, the opportunity to discuss
local hire was not included in the bill, but the
organization commended the administration for what it
believed was an innovative way to allow for some of the tax
credits through the bonding process. She underscored the
importance of jobs to the Alaskan economy. She added that
the industry jobs paid good money.
2:21:23 PM
DOUG SMITH, CEO, ASRC ENERGY SERVICES, ANCHORAGE (via
teleconference), testified in support of the bill. He
provided detail about the company that had 85 percent
Alaska hire. He remarked on the confusing nature of the
issue. He reported he had a large meeting that night with
other Alaska businesses to discuss the issue and he needed
clarification. He explained the company's understanding of
the oil credit obligation by the state to oil companies. He
wanted to know if he was obligated as a resident to pay the
credits annually over time. If so, if the bond deal would
allow the state to pay the credits up front at a discount
and not cost Alaskans any more in the long run than it
would eventually pay and hopefully generate economic
activity in the process, he needed to understand how it was
not good for every Alaskan.
Mr. Smith clarified that most of the oil companies holding
the tax credits were not large. One of the tax credit
holders was the Arctic Slope Regional Corporation (ASRC).
He provided detail about millions of dollars in investment.
He stressed that equipment the company had spent millions
on would be covered by the bill and reduced utility costs
in Interior Alaska by 30 percent. The investors did not
only include oil companies - he listed Ahtna as an example.
He spoke to anchored high rates of Alaska hire and
employing companies also experiencing the tax problem. He
believed the resource belonged to Alaskans too, but in 1958
the state had $54 million in its Permanent Fund and as of
Monday it contained $64 billion. He underscored that the
state did not get there without co-investing and developing
by oil companies. The bottom line was, the state had
benefitted from development of its resources.
Mr. Smith stated that under Alaska's Clear and Equitable
Share (ACES) the state had taken more money from industry
and had implemented a credits system for balance. The state
had enjoyed many years of extra money coming in. He
referenced the past energy dividend to all Alaskans by
former Governor Sarah Palin. He stated that the state had
put its word behind the obligations. He stressed the
state's word had to be worth something. The state needed to
stand behind the credits and ensure it was getting value
for the deal. He spoke to the need of getting people back
to work. The organization's support for the bill was about
Alaskans and Alaskan paychecks. He asked for clarification
on whether the state would ever pay the debt with or
without the bill.
2:26:13 PM
CATHY DUXBURY, SELF, ANCHORAGE (via teleconference),
testified in support of the bill. She agreed with the prior
testifier. She did not understand the testimony pertaining
to constitutionality. She stressed that the bottom line was
that the state owed the credits to oil companies. She
believed the liability made Alaska look unstable. She did
not understand what made the legislature think it was okay
to not pay the money back. She supported the bill.
2:27:57 PM
JAMES SQUYERS, SELF, RURAL DELTANA (via teleconference),
spoke in opposition to the bill. He referenced all of the
concern about statutory obligations regarding oil and gas
credits; however, he saw no concern for the statutory
obligation to recognize the unpaid Permanent Fund Dividend
(PFD) in the past few years. He wondered where the
discussion was to bond for the unpaid PFD obligation. He
asked how oil and gas credits became a preferred creditor
over the PFD debt. He wanted to hear whether the House's
proposal for the statutory minimum on the credits could be
supported at $49 million versus $184 million (the
difference between the House and Senate amounts). He spoke
about a cash flow triage where the state could not afford
the statutory minimum. He recommended bonding for the
agreed upon statutory minimum instead of binding the state
to a more rigid payoff schedule. He stated that if the dog
were wagging its tail, the legislature would be working
towards a sustainable budget number, cutting and tucking as
necessary. He believed the tail was wagging the dog in the
legislature. He surmised that if the legislature decided to
bond for the oil and gas credits, it should bond the same
amount to pay off the statutory PFD obligation. He reasoned
it would be immediately injected into the state's depressed
economy with a multiplier of 1.4.
2:29:35 PM
KEVIN DURLING, SELF, ANCHORAGE (via teleconference),
testified in support of the bill. He shared that he had
made a living in the oil and gas industry. He stressed that
the state had agreed to a financial commitment to oil
companies. Subsequently, the companies had spent money in
Alaska, hired Alaskans, developed resources, and located
additional resources. Since the state had stopped meeting
its commitment, the companies could not go out to bring
more resources to market. He believed that getting the
bonding done on the front end would result in $150 million
in interest savings for the state. Companies that could
raise funding were paying three times the market rate to
get the funds. He believed if the same was true in the
housing market it would dry up. He strongly supported the
bill and meeting the state's obligations.
2:31:30 PM
GALEN NELSON, SELF, ANCHORAGE (via teleconference), spoke
in favor of the bill. He shared that in the past few years
he had seen countless friends and family members lose jobs
or moving to other states for work. He spoke to constraints
put on small companies that were in the state to do
business and employ Alaskans. He had seen the amount of
work that could be done with an influx in capital in the
oil industry. He stated that when money was not paid it
meant companies had to lay people off and shut down
projects. He thought it was sad to think he may need to
move from Alaska to support his family.
2:33:08 PM
VERN JOHNSON, SELF, ANCHORAGE (via teleconference),
testified in support of the bill. He agreed with testimony
given by Mr. Smith, Mr. Durling, and Mr. Nelson. He had
moved to Alaska 18 years earlier to work in the oil
industry. He had seen a dramatic shift over the past
several years, especially when the state had pulled support
for the small companies by shutting down tax credits. He
supported turning the situation around, which would help
investment and getting Alaskans back to work. He reported
that the slowdown in payment had impacted him, his family,
business associates, friends, and other. He had seen many
friends get laid off or have to move to the Lower 48 to
find work in the oil field.
2:34:30 PM
ERIN RENFRO, SELF, ANCHORAGE (via teleconference), spoke in
support of the bill. She worked in the oil industry. She
had seen many friends lose their jobs because of the
downturn and because the state had pulled back its
obligation to pay the credits. She believed the sooner the
credits were paid, investment would begin again, and
Alaskans could get back to work.
2:35:31 PM
BEN ANGLEN, SELF, ANCHORAGE (via teleconference), spoke in
favor of the bill. He stressed that the state had made a
commitment to pay the tax credits to oil companies that had
made investments in Alaska. He elaborated that companies
could be cash-poor and in debt to large financial
institutions. He thought it was unbelievable the state
would not pay what it had committed to without any
specified payment schedule going forward. The issue was
hurting the state's reputation in the investment community.
Paying the credits or providing a payment schedule would
increase future investment by the oil industry and would
increase jobs in the state.
2:37:24 PM
MELONNIE AMUNDSON, SELF, ANCHORAGE (via teleconference),
testified in support of the bill. She worked for the oil
industry. She had seen many negative impacts of not paying
the tax credits including job loss and the postponement of
projects. She believed the bill was a win-win for the state
and Alaskans. She wanted to get Alaskans back to work.
2:38:15 PM
DALE HOFFMAN, SELF, ANCHORAGE (via teleconference), spoke
in support of the bill. He shared that he worked for Caelus
Energy Alaska. He had seen the impacts the situation had at
Caelus - many people had lost their jobs and there were
individuals eager to get back to work. He believed the bill
would get oil investment back on track in Alaska.
2:39:01 PM
ROGER DEMOSS, SELF, PRUDHOE BAY (via teleconference),
testified in favor of the bill. He had seen people working
in the oil industry get laid off. He thought the bill was a
win-win for the state. He wanted to see some projects start
up.
2:39:41 PM
JEANIE PEIRCE, SELF, KASILOF (via teleconference), spoke
against the bill. She believed the issue should be taken to
the state residents for a vote. She reminded the committee
the oil companies had been paid handsomely to extract oil
in the state. She stated the bill was about paying the
minimum or the maximum. She stressed that the state could
not afford to pay the credits at the present and she did
not believe companies had lived up to their obligations.
She remarked that the state had not been receiving the bang
for its buck since the passage of SB 21. She emphasized
that the PFD had been ripped off from people who were in
bad times. She continued that the rate of people on welfare
had increased and the state could not afford the credits to
save a few jobs. She opined that the jobs were being thrown
away by companies that wanted the credits to be paid. She
wondered if the state was paying for less than it got. She
thought there was something wrong when everyone had to be
propped up.
Co-Chair Seaton thanked Ms. Peirce for calling.
Co-Chair Foster CLOSED public testimony. He reviewed the
schedule for the remainder of the meeting.
Representative Wilson asked if there was any additional
written testimony besides two letters in the packets.
Co-Chair Foster replied in the negative.
Co-Chair Foster transitioned the meeting to a discussion on
the overriding royalty interest agreement and qualified
capital expenditures in Section 10 of the bill with the
Department of Natural Resources (DNR).
2:43:33 PM
JIM BECKHAM, DEPUTY DIRECTOR, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES (via teleconference), spoke
to the overriding royalty interest portion of the bill. He
explained that the department would evaluate an additional
agreement with an applicant. According to the bill there
were seven or eight provisions that would have to be met
and considered by the division in determining whether the
overriding royalty interest or additional payment would
meet the requirements of the lesser discount rate. The
department would probably exercise the evaluation on a
case-by-case basis because not all companies, leases, and
production are the same. The work would be done by the DNR
commercial analyst in the division's Commercial Section and
it would work with the Department of Revenue (DOR) to
determine whether what DNR found met DOR's requirements for
the lesser discount rate.
Co-Chair Foster asked Mr. Beckham to comment on the
qualified capital expenditures.
2:45:23 PM
AT EASE
2:46:06 PM
RECONVENED
Representative Guttenberg asked about the end of Section 10
on page 14. He referred to language in the section and
asked what the meaning of commitment to the department
meant in the case of the bill.
Mr. Beckham responded that he had not had an opportunity to
look at what the commitment to the department would be. He
interpreted the language to mean the commitment to give the
department an overriding royalty interest in an amount and
form that met the requirements of the eight criteria DNR
was required to evaluate.
Representative Guttenberg asked Mr. Beckham to provide
information regarding the criteria.
Mr. Beckham answered that the criteria DNR was supposed to
evaluate for an offer of an overriding royalty interest
included the anticipated cost for the issuance
administration of the bonds, the production or projected
production from the lease or leases subject to the proposed
agreement, the value or projected value of the oil produced
from those leases, the timing of the production (when
production would occur and what the rates would be), and
the likelihood of production from the lease if not
currently under production. The department also had to
consider the existence and burdens of other interests on
the lease or leases being proposed - whether there were any
other overriding royalty interests, any other expenses,
liens, or claims to the leases, and any other information
submitted with the offer or requested to be considered by
the department.
2:48:30 PM
Representative Guttenberg asked if there was any oversight
aside from the executive branch. He wondered if all of the
agreements fell under the umbrella of confidentiality.
Mr. Beckham replied a certain amount of information would
be subject to confidentiality agreements (e.g. a company's
financial reports and any other internal information that
could be considered proprietary). He believed after the
evaluation had been conducted by the Commercial Section,
coming out with a certain percentage or payment rate based
on the evaluation (including timing and amount) would be
public information.
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
highlighted that within HB 331 the word "department" when
not otherwise defined, referred to DOR. Section 2, page 14
pertaining to overriding royalty interest, specifically
referred to DNR. Section 3 pertained to DOR and the
commitment where the credit holder/applicant would make a
commitment to DOR that it intended to invest over a 24-
month period, an amount equal to or greater than the amount
they were receiving in the payment, which would allow them
to qualify for the lower discount rate.
2:51:01 PM
Representative Guttenberg remarked that qualified capital
expenditures were terms of art under tax law. He spoke to a
situation where the commercial interests of the credit
holder diverged from the state's (the state's interest was
in production), but the credit holder was still qualified
for qualified capital expenditures under the tax code. He
asked how to reconcile something that may qualify under the
tax code but was not in the state's best interest. He asked
if there was a place where the state could challenge it.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
confirmed that qualified capital expenditure was a term of
art in tax statute. He stated it was the origin of the old
20 percent capital credit from the PPT [Petroleum
Production Tax] and ACES tax regimes in AS 43.55.023(o). An
expense had to meet two criteria to be a qualified capital
expenditure: 1) it had to be a lease expenditure (a broader
definition meaning an upstream spend on the oil field), and
2) it was a depreciable expenditure under certain criteria
of the IRS code (a capital expenditure). As written it was
the only restriction on what it may be in the bill.
Previously the state had said that for the most part, the
credit holders were oil companies that had discovered
something and had intent of bringing the resource into
production. He believed the capital expenditures the
companies would be embarking on would be the sort of thing
he believed the legislature would want - developing oil
towards production. It was difficult to imagine some other
cost the companies may pursue that would not meet that
criteria; however, it was fair to say that the bill did not
restrict that from happening. He continued that if there
was a desire to include some brackets or limitations, the
appropriate place would be on page 14, subsection (m)(3).
Representative Guttenberg remarked that when someone was
working on the North Slope and it was all upstream it was
hard to imagine there would not be a difference at some
point.
Mr. Alper answered that DOR had an internal conversation
about the issue. He explained that if the bill was meant
for the long-term it would be a larger concern. He
elaborated that with the bonding program, the great bulk of
all of the decisions would be made in the first few months
based on existing expenses and credits. He agreed that in 5
to 10 years there would be demobilization costs and late-
stage maintenance costs; however, those issues did not come
into play for the decisions specific to the bill and
repurchase effort.
2:55:00 PM
Representative Wilson provided a scenario where a company
already had a plan filed with DNR that may have changed
because it did not have the money to follow through. She
wondered if the company could use the existing plan as long
as it fell underneath what a capital expenditure would be
or whether they would be required to rewrite the plan.
Alternatively, she wondered it DOR would require a plan.
Commissioner Fisher answered that the company would present
a plan that would be a commitment for the 24-month period
after the plan was submitted. He detailed that while DOR
and DNR collected certain information, it was difficult to
define it as a baseline. The department's proposal, which
was reflected in the bill, would look forward to the
commitment without respect to what preexisting plans may
have been in the past.
Representative Wilson was trying to figure out what it [the
plan] looked like. She wondered if it was a one-page
document. She used Petro Star as an example - the company
was going to do the asphalt portion, which would be fairly
easy and would have included plans. She believed a plan was
already required for leases to show when a company was
going to move forward with development.
Commissioner Fisher replied that the department had not
prescribed any particular document size. He imagined it
would be fairly detailed and would describe the work a
company intended to do over a period of time. He imagined
most companies would have the material already for their
internal work. He continued that the companies would attach
a cost or budget as well. The department would look for
whether the company had sources of capital and could
reasonably make the commitment because it had secured
commitments from lenders or other investors. Based on that
information the department would allow the company to
qualify for the reduced rate.
2:57:32 PM
Representative Wilson asked what would happen if the
weather was poor or for some other reason the company was
unable to follow through with its plan.
Commissioner Fisher replied there had been discussion there
would be some sort of consequence if the companies did not
follow through with the plan. He believed an amendment may
be drafted in that regard. The department was comfortable
with the notion that the company may have to pay back
whatever decrement they did not invest so that they did not
receive a benefit. The department was not looking for
massive penalties, but there would be a true-up if the
companies did not spend the expected amount.
Representative Wilson stated the company would have to earn
the benefit twice. She did not want the companies to have
to pay for something that was not their fault. She was
uneasy about some of the items being in regulation and what
it could possibly look like.
Co-Chair Foster asked the committee if it had additional
questions for Mr. Beckham.
Representative Wilson did not understand the overriding
royalty interest. She asked if the department could put
something in writing with a hypothetical example. She
understood they did not want to give any confidential
information. She did not know if there would be a loss of
funding or whether the state would get more funding.
Mr. Beckham would follow up in writing.
Co-Chair Seaton asked for the information to be sent
through the co-chairs.
3:00:27 PM
Vice-Chair Gara thought the majority of the legislature
would like to find a way to pay off the tax credits more
quickly. He believed the bond bill represented a good faith
effort to try to do that. His mind was not yet made up. He
did not think there were any legislators who did not
believe the credits were a state obligation. He did not
think it helped the state's ability to attract business
when the argument was given that the state had not honored
its commitments. He clarified that the state had honored
its commitments. He acknowledged that it may not have been
as quickly as some would like. He reiterated that the
legislature had paid the statutory due amounts. He did not
believe the discussion did not help the state's ability to
attract business. He asked the administration to spread the
word that the state had honored its statutory commitments.
He remarked that if the state continued to pay 10 percent
of the revenue it got from oil production taxes, it would
take 20 years at $40 million per year. He believed the
state needed to do better than that, but he reasoned it was
what people had signed up for. The state would try to do
better than what people had signed up for. He did not
believe it helped the state's business climate.
Commissioner Fisher believed the sentiment was fair. He
remarked that he had probably been personally guilty of
making some of the statements. The attempt of the bill was
to balance a number of perspectives. The underpinning of
the bill was based on the view that the state had an
obligation over time and therefore inviting or asking the
industry to take a discount was a reasonable request
because it was an obligation over time. He speculated that
he and Vice-Chair Gara probably disagreed about some of the
differences, but he appreciated Vice-Chair Gara's comments.
He would try to be more mindful about the issue.
Co-Chair Foster asked if there was anything more
Commissioner Fisher wanted to put on the record before
moving on.
Commissioner Fisher referenced statements that the bill was
about debt and debt had to follow within certain criteria
within the constitution. He referenced the Carr Gottstein
v. State case and spoke to the distinction between debt and
constitutional debt. He read from the Alaska Supreme Court
case findings:
When taken together, this court finds that the
foregoing Alaska cases and the cases cited by the
Alaska Supreme Court define constitutional debt as a
term of art used to describe an obligation involving
borrowed money where there's a promise to pay whether
funds are available or not.
Commissioner Fisher stated in other words that it was not
subject to appropriation, which was the administration's
basic premise. He did not mean to reopen the debate, but he
wanted to highlight that the Alaska Supreme Court had made
a distinction between constitutional debt (that had certain
requirements and a process that had to be approved by the
legislature and voters and the consequence of some fairly
strict obligations to pay) versus other forms of debt that
did not fall into the same bucket.
3:06:22 PM
Representative Guttenberg referenced public testimony by
Mr. McGee about what would be in the issuance of the bonds
regardless of the constitutionality of the question. He
looked at page 4 of the bill that specified "nothing in
this section creates a debt or liability to the state." He
asked how it would impact someone looking to purchase
bonds.
Commissioner Fisher answered that the bond obligation and
documents would specify (in multiple places) the money was
subject to appropriation by the legislature. He clarified
that the language was included not because the
administration thought there was a constitutional
requirement to do so, but because securities laws require
that all material facts be disclosed.
Representative Guttenberg stated there was a comment
earlier that many of the things "that we've opened here"
may increase the cost of the issuance of the bonds. He
asked if "this" would be one of them.
Commissioner Fisher answered that subject to appropriation
debt was typically a bit more expensive than a general
obligation bond, which had been factored into DOR's
estimate on the cost of the debt. The 3.7 percent estimate
based on current market conditions was for subject to
appropriation debt. He explained that if it was general
obligation bond debt it would be less.
Representative Guttenberg spoke about the signed lease
agreement the state had signed with the remodeler of old
Legislative Information Office [in Anchorage]. The state
had paid a premium in the lease agreement because it had
been included in the lease. He remarked that "now we're
going from $35 or $40 million to $800 - $900 million." He
surmised it seemed it would be a risky thing in a state
without a stable fiscal climate to enter into purchasing
those bonds. He was trying to determine how much it would
cost.
3:09:10 PM
Commissioner Fisher answered that it would be less than 0.5
percent increase in debt rate. The marketplace had
contemplated that. He noted that Deven Mitchell, Executive
Director, Alaska Municipal Bond Bank Authority, Department
of Revenue had testified there was an appreciation that the
bonds represented a commitment to the marketplace. He
believed the administration was taking the bonds as a very
serious commitment and while it was subject to
appropriation, the administration expected that money would
be appropriated. He recognized appropriation was up to the
legislature, but there would be substantial consequences to
the state's credit rating if the money was not
appropriated.
Mr. Alper elaborated it was important to recognize the 3.6
and 3.7 percent [cost of debt] figures were estimates. He
furthered that if the discussion about constitutionality
had injected uncertainty into the market and the state
found it actually needed to give 4 percent, it would find
its way through the formula and would result in a lower
amount paid to the companies based on the total interest
cost plus 1.5. The state was not really exposed in the
deal, but the tax credit holders would receive an
incrementally smaller payment.
Representative Ortiz referenced the legal opinion from
Legislative Legal Services and the public testimony by
three attorneys and asked whether it would be a leap of
faith to pass the bill because its constitutionality was in
question.
3:11:58 PM
Commissioner Fisher wanted to be respectful of the opinion
the legislature received, but he did not believe the bill's
constitutionality was in question. He detailed that the
state had issued the same kind of debt many times prior to
and after statehood. He referenced earlier testimony that
DOL was an advocate for the governor. He clarified that DOL
had held the same position for many years under
administrations with varying political persuasions. He
understood the administration could not get an attorney
general (AG) opinion to the legislature in the available
timeframe due to the time the process took. He detailed
that an AG opinion was almost quasi-law in terms of its
standing. He believed the committee had heard the state's
bond counsel testify that counsel needed the AG opinion in
order to issue their opinion. For the state to issue bonds,
it required an opinion from outside bond counsel (there was
a certain amount of liability the counsel assumed by
providing the opinion). Outside counsel had communicated
they would require an AG opinion. He reiterated that he
wanted to be respectful, but he did not believe there was a
constitutional issue.
Vice-Chair Gara stated that if the AG and bond counsel
determined the bill was constitutional, he was willing to
go with that. He remarked that it was not relevant that the
state had issued the same type of debt in the past if it
had never been challenged. He continued that it was
relevant if the issue had been challenged and there had
been a supreme court ruling. He reasoned that issuing the
debt and not having it be challenged did not create
precedent. He underscored that precedent mattered.
Commissioner Fisher answered that [the past] was relevant
because it appeared legislators and administrators who had
been closer to the constitutional convention and the
meaning that the drafters ascribed to the words, had issued
the same kind of debt. He agreed it was not dispositive,
but he believed it had some persuasive reasoning if people
close to the drafting of the constitution believed it was
legal.
Vice-Chair Gara stated that the constitutional history was
fascinating, and he had read the constitutional minutes. He
remarked when there was a body of people who agreed with
something at the convention it gave significant weight when
interpreting the constitution. There were also times when
one person had said something that was not necessarily
reflective of the intent of others. He had not read the
constitutional history on the issue. He was not necessarily
convinced by that argument at present.
HB 331 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster clarified that the amendment deadline was
Wednesday at 5:00 p.m. He recessed the meeting [note: the
meeting never reconvened].
ADJOURNMENT
3:18:00 PM
The meeting was adjourned at 3:18 p.m.
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