Legislature(2005 - 2006)
03/27/2006 08:59 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB418 | |
| HB492 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 27, 2006
8:59 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Norman Rokeberg
COMMITTEE CALENDAR
HOUSE BILL NO. 418
"An Act relating to a mining production tax; relating to the
mining license tax; relating to production royalties on
minerals; relating to exploration incentive credits; and
providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 492
"An Act relating to the transfer of the state's interest in
certain gas to the Alaska Retirement Management Board for the
purpose of satisfying the unfunded accrued actuarial liability
of the state and employers of teachers in the state to state
retirement systems; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 418
SHORT TITLE: MINING PROD. & LICENSE TAXES/ROYALTIES
SPONSOR(S): REPRESENTATIVE(S) SEATON
02/01/06 (H) READ THE FIRST TIME - REFERRALS
02/01/06 (H) W&M, RES, FIN
02/22/06 (H) W&M AT 9:00 AM CAPITOL 106
02/22/06 (H) Heard & Held
02/22/06 (H) MINUTE(W&M)
02/24/06 (H) W&M AT 9:00 AM CAPITOL 106
02/24/06 (H) Heard & Held
02/24/06 (H) MINUTE(W&M)
02/27/06 (H) W&M AT 9:00 AM CAPITOL 106
02/27/06 (H) Heard & Held
02/27/06 (H) MINUTE(W&M)
03/01/06 (H) W&M AT 9:00 AM CAPITOL 106
03/01/06 (H) Heard & Held
03/01/06 (H) MINUTE(W&M)
03/06/06 (H) W&M AT 9:00 AM CAPITOL 106
03/06/06 (H) <Bill Hearing Canceled>
03/22/06 (H) W&M AT 9:00 AM CAPITOL 106
03/22/06 (H) Heard & Held
03/22/06 (H) MINUTE(W&M)
03/27/06 (H) W&M AT 9:00 AM CAPITOL 106
BILL: HB 492
SHORT TITLE: NATURAL GAS ROYALTIES TO FUND PERS/TRS
SPONSOR(S): FINANCE BY REQUEST
03/15/06 (H) READ THE FIRST TIME - REFERRALS
03/15/06 (H) W&M, FIN
03/20/06 (H) W&M AT 9:00 AM CAPITOL 106
03/20/06 (H) Heard & Held
03/20/06 (H) MINUTE(W&M)
03/22/06 (H) W&M AT 9:00 AM CAPITOL 106
03/22/06 (H) Scheduled But Not Heard
03/27/06 (H) W&M AT 9:00 AM CAPITOL 106
WITNESS REGISTER
IAN LAING, Staff
to Representative Paul Seaton
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Explained the differences between the
existing Mining License Tax and the proposed committee
substitute (CS), Version S.
DICK MYLIUS, Acting Director
Division of Mining, Land and Water
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: During the hearing of HB 418, answered
questions.
NELS TOMLINSON, Economist
Tax Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: During the hearing of HB 418, answered
questions.
JOHANNA BALES, Excise Audit Manager
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: During the hearing of HB 418, answered
questions.
REPRESENTATIVE MIKE KELLY
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented information and questions on HB
492, on behalf of the House Finance Committee, sponsor by
request, of which he is a member.
BRIAN ROGERS, Chair
Planning and Development Committee
Board of Regents
University of Alaska
Fairbanks, Alaska
POSITION STATEMENT: During the hearing of HB 492, provided
information.
BOB SHEFCHIK, Chief of Staff
Mayor's Office
Fairbanks North Star Borough
Fairbanks, Alaska
POSITION STATEMENT: During the hearing of HB 492, provided
information.
MIKE BARNHILL, Assistant Attorney General
Labor and State Affairs Section
Department of Law (DOL)
Juneau, Alaska
POSITION STATEMENT: During the hearing of HB 492, answered
questions regarding the possible legal implications.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 8:59:28 AM. Representatives
Weyhrauch, Moses, and Seaton were present at the call to order.
Representatives Gruenberg, Samuels, and Wilson arrived as the
meeting was in progress.
HB 418-MINING PROD. & LICENSE TAXES/ROYALTIES
8:59:44 AM
CHAIR WEYHRAUCH announced that the first order of business would
be HOUSE BILL NO. 418, "An Act relating to a mining production
tax; relating to the mining license tax; relating to production
royalties on minerals; relating to exploration incentive
credits; and providing for an effective date." [Before the
committee was the proposed committee substitute (CS) for HB 418,
Version 24-LS1456\S, Chenoweth/Bullock, 3/22/06, which had been
adopted as the work draft on 3/22/06].
9:00:01 AM
IAN LAING, staff to Representative Paul Seaton, Alaska State
Legislature, on behalf of Representative Seaton, sponsor of HB
418, provided a brief summary of the bill's intent which is to
determine whether a better return on investment, for the
exploitation of the resources in the mining industry, can be
expected without harming [future] investment by the industry.
He informed the committee that the mining industry currently
pays federal, municipal, and state taxes. He listed the major
taxes on the state level that are primarily affected by the
bill: the Mining License Tax; royalties for mineral and coal;
and claim rentals on state land. He then directed the
committee's attention to the revised table in the committee
packet [labeled "State Revenue Collected through Major Taxes and
Fees on Mining - FY 98-03"] and explained that it now includes
figures through fiscal year 2004 (FY 04).
MR. LAING then highlighted some of the key differences between
the existing Mining License Tax and Version S. One of major
differences, he said, is that of changing the current "percent
depletion" method of the Mining License Tax to a "cost
depletion" one. A mining company would no longer be allowed to
annually deduct a percentage of gross even after its costs have
been recouped, he clarified, because by using a cost depletion
method, only a percent of a mining company's development
expenses, equal to the percent of the total ore body that is
mined, would be an allowable deduction. He noted that this
change will [largely] tend to apply to the larger mines that
have a general idea of what the ore body is. However, he
remarked that the bill does allow some flexibility for smaller
operations with insufficient resources to determine the
consistency of the ore body. He went on to explain that the
current Mining License Tax, after deductions are applied, is
calculated as a percentage of net income. Yet in Version S, he
highlighted that these percentages have all been raised by 2
percent of net income with an additional tax bracket of 11
percent for income over $500,000. Additionally, he said,
Version S would eliminate the deduction of indirect expenses
which again would apply to much larger mining operations.
MR. LAING informed the committee that the most substantial
change proposed in Version S is made to mineral royalties. He
noted that every other rights holder in the state - from Native
corporations to the university and Mental Health Trust lands -
charges a mining royalty. This royalty, he explained, is quite
different than the current 3 percent of net income the state
calculates and charges under the [Mining License Tax]. Version
S would implement a new royalty that charges 3 percent of "net
smelter return" (NSR) which changes the royalty from a profits
tax to one based on the actual mineral value. He listed some of
the allowable deductions with the NSR tax: return from the
smelter, transportation expenses, smelting fees and penalties.
In response to Chair Weyhrauch, he explained that a
"nonsmeltable" is any "mineral that occurs in its native state."
He deferred to Department of Natural Resources (DNR) for a more
thorough definition, explaining that he is unaware of any
mineral mined in Alaska that would be considered nonsmeltable.
MR. LAING then turned the discussion to coal royalties and
informed the committee that Version S proposes that the 5
percent adjusted gross value, currently in regulation, not only
be put into statute but also adopted as the minimum royalty.
Furthermore, he noted that the rate allows for the deduction of
transportation costs from the point at which the coal is weighed
and loaded, to its point of sale. He opined that this would be
of no substantial difference to the industry because it only
adopts what's currently established in regulation.
9:11:05 AM
CHAIR WEYHRAUCH asked how "the point at which it is weighed"
differs from "mine mouth."
MR. LAING said that "mine mouth" is somewhat of a misnomer and
has no specific definition. He explained that not until the
coal is extracted, transported to a crusher, crushed, and loaded
for transport is its value assessed and an adjusted gross value
assigned. Then directing the committee's attention to rents for
coal and minerals, he highlighted that Version S proposes the
same rates currently in regulation - $3.00 for coal and $3.30
for minerals - be adopted as the minimum, with ties to the
Anchorage Consumer Index, and adjusted as needed every 10 years.
9:13:22 AM
REPRESENTATIVE SEATON further clarified what is meant by
"depletion." He said that currently depletion can be done one
of two ways: by cost or by a [percent] of gross value of the
minerals. He explained that Version S focuses on the cost
method which allows for costs to be depleted, however,
subtracting the amount for mined minerals is not.
9:14:18 AM
REPRESENTATIVE WILSON, referring to the Mr. Laing's mention of
coal rental rates being tied to the Anchorage Consumer Index,
inquired as to whether this is currently done or a proposed
change.
MR. LAING stated his understanding that it's the minerals rent
that's currently tied to the Anchorage Consumer Index; Version S
applies this to coal rent as well.
9:14:54 AM
REPRESENTATIVE SEATON indicated that the proposed rates, though
tied to the "Consumer Price Index," would only be adjusted every
ten years. He clarified that it's not meant to be an annual
increase in the rents.
9:15:22 AM
MR. LAING added that if the Anchorage Consumer Price Index were
applied to the coal value at the time it was adopted, it would
total $5.25 and does account for inflation.
9:16:31 AM
DICK MYLIUS, Acting Director, Division of Mining, Land and
Water, Department of Natural Resources (DNR), in response to
Chair Weyhrauch, explained that he has heard general concern
from the industry as to what the possible impacts might be on
future development should the current taxing structure change.
He said, however, that he has not received any specific feedback
on [Version S]. In further response to Chair Weyhrauch, he
opined that it was beyond his division's capability to analyze
how the changes to the current tax structure would change the
economics to the industry.
9:18:10 AM
REPRESENTATIVE SEATON inquired as to whether Mr. Mylius
perceives the additions [to the rents] on coal are "basically
just putting in statute the minimums of what [is currently done]
in regulations, except for changing the ... reassessment period
from 20 years to 10 years."
MR. MYLIUS stated his agreement in as far as it pertained to
coal fees currently in regulation. In further response to
Representative Seaton, he agreed that the cost method of
depletion is one of two methods currently used; however, his
division has not yet evaluated the effects of changing to this
method alone.
9:19:40 AM
REPRESENTATIVE WILSON requested Representative Seaton provide
further explanation on the possible depletion methods.
REPRESENTATIVE SEATON explained that currently, the [mining
industries] can either deplete based on costs put into a project
or can subtract from taxes a percent of the minerals no longer
in the field. He stated his understanding that many of the
larger mining operations deduct a "huge part" of taxes because
they "used up more of the minerals [which] are no longer there
to take." The proposed tax change in Version S, he clarified,
allows the depletion of costs as a deduction, however, not the
depletion of minerals removed from the ground.
9:21:06 AM
CHAIR WEYHRAUCH inquired as to whether there is a depletion
allowance for oil in federal law.
REPRESENTATIVE SEATON expressed his belief that there is no oil
depletion allowance at the state level.
9:22:12 AM
NELS TOMLINSON, Economist, Tax Division, Department of Revenue
(DOR), summarized those questions asked by the committee at a
previous hearing on HB 418, and then answered by Dan Stickel and
Johanna Bales from the DOR Tax Division, in a memo dated March
3, 2006. In regard to the possible impact of the bill on tax
revenues should the Pogo and Kensington mines be excluded from
the analysis, he directed the committee's attention to the
charts on page two of the memo that summarize the effect. He
relayed that revenue increases [from the proposed tax change]
would be approximately $1 to $4 million smaller per year than
what was previously determined in the department's original
fiscal note. As for "an estimate of the deductions taken from
gross revenue to arrive at a taxable income," he listed the 2004
totals for the industry as a whole: the depletion allowance
amounted to 18 percent of gross income; the direct mining
expenses were approximately 52 percent of gross income; and
indirect mining expenses amounted to 6 percent of gross income.
9:25:07 AM
The committee took an at-ease from 9:25 a.m. to 9:28 a.m.
9:28:00 AM
CHAIR WEYHRAUCH inquired as to whether the "Schedule A" Mr.
Tomlinson referred to is based on the aggregate of the tax
returns from the companies.
MR. TOMLINSON said this is correct.
9:28:31 AM
REPRESENTATIVE SEATON inquired as to whether the memo before the
committee is based on the original bill and not Version S.
MR. TOMLINSON said this is correct.
CHAIR WEYHRAUCH asked Representative Seaton how Version S would
affect the analysis provided in the memo.
REPRESENTATIVE SEATON expressed his belief that it would be a
considerable change. He explained that upon hearing industry
concerns regarding a tax based on gross as proposed in the
original bill, Version S was drafted to return to the original
structure of the mining tax, eliminating some of the problems of
indirect costs. These changes would affect the percentages
shown on the charts in the memo by reducing the amounts of
revenue, he said. Should Version S move from this committee, he
remarked, a new fiscal note would be prepared prior to the bill
hearing in the House Resources Standing Committee.
9:29:42 AM
REPRESENTATIVE WILSON asked Mr. Tomlinson whether DOR could
provide the committee with [a revised fiscal note] in response
to changes proposed in Version S.
MR. TOMLINSON expressed that this would be possible.
9:30:05 AM
CHAIR WEYHRAUCH requested that the possible impacts to the
mining industry be addressed.
9:30:18 AM
JOHANNA BALES, Excise Audit Manager, Tax Division, Department of
Revenue (DOR), confirmed that the information in the memo
"really doesn't apply anymore to [Version S]." She informed the
committee that she applied the changes [proposed in the Version
S] to the income in 2004 and estimated, by denying the use of
percentage depletion, that there would be a $7 million increase
in the Mining License Tax. By applying the new tax rate shown
on page 9 of Version S, she explained that the current tax rate
is adjusted up by 2 percent, with a new tax rate of 11 percent
added and the use of a graduated tax rate denied. Based on
these changes, she relayed that there would be an increase of an
additional $7 million a year with an overall impact on revenue
estimated at $14 million per year.
9:32:10 AM
REPRESENTATIVE SEATON noted that in the original bill, revenues
were "graduated in under the gross tax" to where revenues for
2011 or 2012 were projected to be approximately $30 to $45
million. However, he explained that in Version S, the increase
would be approximately $15 million "because it doesn't grade
in." He summarized that although this amount is not nearly as
much as those generated in the original bill, it would still be
an increase to the current tax revenues of approximately $8
million.
9:33:28 AM
MR. TOMLINSON directed the committee's attention to the third
question addressed in the March memo which read:
Has any economic analysis been performed that might
indicate at what point the tax burden on the mining
industry becomes onerous?
MR. TOMLINSON explained that DOR has not yet done such an
analysis and is unable to tell the exact impact on the industry
at this time. He relayed that the department does "know that
increasing the tax is going to ... slightly decrease the
profitability [to the mining industry]" and perhaps cause mines
to leave a little more ore in the ground. Additionally, he said
that although a company on the verge of profitability might be
swayed by changes to the tax structure, DOR is not aware of any
company in the state at this particular stage of investment. He
then addressed the final question in the memo as to what the
mining industry pays the state in corporate income taxes. He
highlighted that the approximate tax liabilities of $133,000 in
FY 04 and $120,000 in FY 05 are actually far lower than can be
expected now that the mineral prices are much higher.
CHAIR WEYHRAUCH inquired as to whether the increase on mineral
prices from this year to last could be quantified.
MR. TOMLINSON directed the committee's attention to the
projections [derived from the tax changes proposed in the
original bill] on page 2 of DOR's fiscal note which show the
Mining License Tax revenues for FY 08 at approximately $20
million and for FY 09 at $18 million. Should mineral prices
return to their long-term average, he explained that tax
revenues of $5 million a year are projected from approximately
FY 08 to FY 11.
9:36:39 AM
REPRESENTATIVE WILSON requested clarification of the wording in
the March memo which reads, "[DOR] may receive zero or more than
one tax return from a company in a given fiscal year."
MR. TOMLINSON explained that this is a matter of timing and that
it's possible to receive two tax returns from one company within
the same fiscal year: one year's return submitted just after
the June 30 cutoff and the following year's return submitted
prior to its June 30 cutoff.
REPRESENTATIVE SEATON returned to Mr. Tomlinson's earlier
explanation of the projected changes in tax revenues for FY 08
and FY 09 given the possible fluctuations in mineral prices. He
inquired as to whether Mr. Tomlinson might have misinterpreted
Chair Weyhrauch's request for information on "corporate income
taxes" by instead provided the figures for "Mining License Tax"
revenues.
MR. TOMLINSON confirmed that he had mistakenly quoted figures
for the Mining License Tax, not those for corporate income tax.
Although he said that he does not have with him a set of
projections for corporate income for the mining industry, he
opined that it would be reasonable to take those Mining License
Tax numbers as surrogates for the increase [in mineral prices]
...."
9:39:18 AM
MS. BALES interjected to note that one difference between the
Mining License Tax and corporate income taxes is that the former
is based on the mining activity in the state as opposed to the
latter tax that uses a "waters-edge" basis. She explained that
everything a corporation does is dictated by its activity in the
United States. She opined that it's difficult to predict that
significant increases in the Mining License Tax will actually
result in matching increases in corporate taxes because there
are many more variables involved. She further clarified that a
single [corporate] taxpayer could report different industries
and activities. As per the request of Chair Weyhrauch, she
defined "waters edge" as meaning activity "within the United
States" [versus worldwide]. Unlike the oil and gas
corporations, she explained that all other industry corporations
"look at all their activity that's conducted in the United
States, ... take a percentage of their activity in Alaska, and
they allocate all of their income from activities in the United
States."
9:41:10 AM
REPRESENTATIVE SAMUELS inquired as to how many mines in Alaska
paid corporate income taxes and asked whether these taxes came
solely from the Red Dog Mine.
MS. BALES highlighted that there are approximately 180 mining
taxpayers, however, she estimated that less than a quarter of
those are organized as C Corporations filing corporate tax
returns. She said that the remainder file either as individual
royalty owners, S Corporations, or partnerships. In further
response to Representative Samuels as to whether the corporate
income taxes paid are equally distributed, she relayed that only
a few pay the corporate income tax based on the activity that
they have. "The larger mines are held by corporations and there
are just a few of those," she said.
REPRESENTATIVE SAMUELS asked whether one could assume this trend
[to incorporate] would continue over the next couple of years
[or], whether the currently incorporated mines would [just]
expect to pay a little more.
MS. BALES said the [latter] would be a correct assumption.
9:43:41 AM
CHAIR WEYHRAUCH, having determined there was no further
testimony, announced that the bill would be held over.
HB 492-NATURAL GAS ROYALTIES TO FUND PERS/TRS
9:44:10 AM
CHAIR WEYHRAUCH announced that the final order of business would
be HOUSE BILL NO. 492, "An Act relating to the transfer of the
state's interest in certain gas to the Alaska Retirement
Management Board for the purpose of satisfying the unfunded
accrued actuarial liability of the state and employers of
teachers in the state to state retirement systems; and providing
for an effective date."
9:45:35 AM
REPRESENTATIVE MIKE KELLY, Alaska State Legislature, presented
HB 492 as a member of the House Finance Committee, sponsor by
request. He referred to the discussion of the challenges to HB
492 at the recent meeting with the Alaska Retirement Management
Board (ARMB). He summarized some of the main challenges as
being the valuation of the gas interest - particularly in
advance of a gas pipeline being built - and the risk as to
whether the asset could easily meet some of the early payout
requirements.
9:47:27 AM
BRIAN ROGERS, Chair, Planning and Development Committee, Board
of Regents, University of Alaska, informed the committee that
the regents advanced this concept of the transfer of a major
asset [proposed in HB 492], to balance the systems' liabilities
in an effort to address the unfunded liability in the Public
Employees' Retirement System (PERS) and Teachers' Retirement
System (TRS). He relayed that one of the few assets the state
has of sufficient value, and which could produce income in
roughly the same timeframe as the needs of the system, is the
natural gas assets in Prudhoe Bay. He noted that [using this
asset] would free up current funds to meet other state needs
while attempting to match the cash flows. He remarked that
currently there is no model of these cash flows and opined one
is needed to ensure that the pay out is roughly in line with the
cash needs of the system. At the recent meeting with the ARMB,
he said it became clear that the valuation is the most
substantial challenge to this particular asset. The regents
recommendation, he highlighted, is that the state attempt to
have the Department of Natural Resources (DNR) transfer assets
roughly approximating the $5 billion set out in the bill, and
that the ARMB obtain an independent, third party valuation to
meet its fiduciary responsibility in seeing that asset and
liabilities are balanced. He said he is aware that some believe
there are constitutional problems to the bill due to a possible
dedication of funds. The regents have expressed their belief
that this involves "a transfer of assets and not a dedication of
the revenues from those assets." He suggested some additional
legal analysis would be useful to the committee.
9:50:45 AM
REPRESENTATIVE SEATON asked for further clarification on Mr.
Roger's comment regarding "freeing up current funds to meet
other needs."
MR. ROGERS explained:
In the FY 07 budget, approximately $125 million will
be the aggregate cost to state government, local
government, school districts, and the university for
the 5 percent increase in the PERS and TRS rates. So,
if we freeze rates at current levels, as the bill
calls for during the valuation process, that $125
million can either ... represent a reduction to the
spending or can represent funds available for other
purposes. If we look at the projections as they were
prior to Friday, once rates hit their top point, the
annual cost to state, local, school district, and
university is just over $400 million per year that
would be deposited into the funds over the next 30
years to the extent that the passage of an asset
transfer allows the freezing of the rates, or even a
roll back of the rates to the normal cost rates, that
$400 million is available for other purposes.
REPRESENTATIVE SEATON referred to the information provided in
the March 22, 2006 memo from Susan Taylor of DOR's Treasury
Division, to Tom Boutin, DOR's Deputy Commissioner in which it's
explained that the cost of assets [such as mineral rights] shall
be capitalized as incurred. Additionally, Representative Seaton
said the memo specifies that according to the Governmental
Accounting Standards Board (GASB), the cost of the recorded
asset would be zero. He asked Mr. Rogers whether the effect of
these two points wouldn't "be the same as just saying 'we're not
going to reduce the unfunded liability and make any payments
into it'."
MR. ROGERS relayed that this is correct for purposes of the
"booked value" of the assets being transferred: it will be
booked at a zero value because the acquisition cost is zero.
However, for purposes of calculating the unfunded liability, he
explained that it's the "market value of assets" being
considered rather than the historical value. Furthermore, he
continued, it's the market value of the gas assets that the
actuaries would need to determine when they address the
remaining unfunded liability. He said that it is this
determination which [the regents] believe requires an
independent appraisal.
9:54:25 AM
CHAIR WEYHRAUCH, in noting that the resource [identified in HB
492] is limited to gas, inquired as to why other assets are not
considered: coal, rental-producing residential properties, or
those state lands being developed, leased, and payments made to
the ARMB.
MR. ROGERS explained that it is challenging to find other assets
that equate to the same kind of value. He relayed that any oil
resources of value are already being produced and "spoken for in
the state budget." He said that those oil reserves not yet
producing might be considered, however, these are included in
the budget process as well. Given the interest in gas and the
movement toward a gas pipeline, he opined that "we're finally at
a point where the gas assets are approaching a real value that
can be determined as opposed to a much more speculative value."
9:56:57 AM
REPRESENTATIVE KELLY requested clarification from Mr. Rogers on
his approach to assigning some value to the gas asset regardless
of no pipe in sight [as opposed to] the GASB approach which
assigns a zero value until the gas is actually rushing through
the pipe.
MR. ROGERS relayed that those oil and gas properties commonly
bought and sold in the industry are not sold at book value but
rather at an amount a buyer is willing to pay to a willing
seller. The gas on the North Slope, even if currently stranded,
does have value, he opined, and one to which an appraiser could
assign a market value. He stated his belief that whereas GASB
does require entries to be kept at cost, the state's actuaries
would consider market values when determining funding ratios for
the unfunded liability. He remarked that "on a book basis, the
state would continue to show a deficit, but on a computed
actuarial basis of the funding ratio, [the state] would be
moving it up toward the 100 percent level."
REPRESENTATIVE KELLY opined that the method Mr. Roger's
suggested - that of the state transferring a rough estimate of
the reserves from DNR into the ARMB and then assigning an
appraised value - is somewhat of a "trust us" approach. He
inquired as to whether the state could "get a handle on the
value" prior to the asset being transferred.
MR. ROGERS suggested that the legislature could obtain an
independent appraisal of the value and that this alternate
approach might result in a closer approximation [in value] than
one DNR might assign. He expressed his belief that [the
unfunded liability] is a long-term problem requiring a long-term
fix and should not be rushed.
10:01:09 AM
REPRESENTATIVE SAMUELS opined that with reserves taxes,
expansion lease revokes, and different political factions
"trying to scuttle any deal that might come forward," it would
be difficult to [assign] a net present value to the gas pipeline
scenario "until things play out a little bit [more]." He
remarked that an additional consideration might be that of
lawsuits resulting from passed legislation on either the gas
pipeline or a reserves tax. He highlighted that even at the
point the Federal Energy Regulatory Commission (FERC) has
"project sanction," when booking the value of a resource for
company shareholders is allowed, isn't "enough for GASB."
Furthermore, should a gas deal be ratified by the legislature
and signed by the governor, it would still be five or more years
of design and permitting work before the project is sanctioned.
MR. ROGERS stated his agreement that the issue of timeline is
important and opined that following the correct solution at the
right time with any legislation, such as HB 492, involves a
major fiscal action. As to the issue of project sanction, he
expressed his belief that a value can still be assigned to an
asset, regardless of whether one has been assigned by GASB or
the industry. "While that value may not be able to appear on
your books, it can be part of your long-term plan," he said. He
relayed that knowing there is a project "that is moving to
sanction and has a likelihood of development, would allow an
appraiser to apply that probability of success to a reasonable
value." He noted that there are other assets to PERS and TRS
with similar valuation challenges, particularly as they move
into private equities, and opined that there are multiple ways
to address this.
10:07:42 AM
REPRESENTATIVE SEATON highlighted that 75 percent of the payouts
to the PERS and TRS systems are anticipated to be from interest
earned on deposited money for assets that are earning interest
in the fund. Then considering the book reserves of a gas asset
that is as yet not interest-bearing and would not be generating
income until it comes online, he asked Mr. Rogers how not to
deplete those assets that are interest-bearing and currently
used to pay off the past PERS and TRS service costs.
MR. ROGERS informed the committee that the concern regarding the
funding ratio could be offset by two effects. The first, he
clarified, is that the proposed legislation provides for a
freeze at the current rates with annual payments directed toward
paying the past service liability. Additionally, he said, there
would be some cash coming in every year from employers for the
past service liability. Secondly, he explained that to the
extent that the valuation of the gas resource is transferred, a
discounted cash flow method is used with an appropriate discount
rate applied. He highlighted that every year closer to the gas
flowing, its value would appreciate; it would not be cash
income. Given that it will be at least 10 years until the
income flows, the actual asset in nominal dollars that is likely
to be transferred, will be significantly in excess of the $5
billion laid out in [HB 492], he said, and would increase in
value over time.
10:12:03 AM
REPRESENTATIVE SEATON asked if he were correct in understanding
that Mr. Rogers is not referring to $5 billion worth of gas
assets, but rather to the transfer of what's anticipated to be
$10 billion worth of gas assets should it come on line in nine
years.
MR. ROGERS said that this is correct and added that with some of
the income being earned beyond that time, the total value would
likely be somewhat higher than that.
10:12:53 AM
REPRESENTATIVE KELLY noted two criticisms of the bill: the
asset placement being such that it would be difficult to receive
the federal government's portion of benefit costs on projects;
and that some interpret the proposed solution as a way to
postpone debt payment and therefore requiring that future
generations pay the debt.
MR. ROGERS said that although there may eventually be a future
solution to this, he did not know of a method whereby the state
can avoid picking up a portion of the federal share. From the
university's standpoint, he relayed that it has been losing its
competitiveness for federal funding because the benefit rate it
can [afford to] offer does not compare with that offered by the
competition. He explained that one effect this has is that the
university is not able to acquire some of the grants and
contracts that would hypothetically pay some of this liability.
Secondly, he said the federal government's ability to pay is
self-limiting for major portions of the university because of
having to reduce the level of staffing within a fixed grant or
contract. Either challenge, he opined, is minor compared to the
significant challenge that school districts, municipalities, the
university, and state face in addressing the "relentless
increase in the rates." As for the criticism that suggests the
bill postpones payment of the debt, he expressed his belief that
it does match "current assets with current liabilities."
10:17:26 AM
BOB SHEFCHIK, Chief of Staff, Mayor's Office, Fairbanks North
Star Borough, referred to discussions on HB 492 at previous
committee meetings and at the recent ARMB meeting. He informed
the committee that he would characterize the reception toward
this proposed legislation as being positive regarding its
creative approach to solving a sizeable problem, to one that is
skeptical toward the details of how or even if it will work. He
said he identified two threshold hurdles: requests for more
thorough analysis of possible constitutional challenges, and
requests to pencil out the cash flows "to really show that bills
will be paid without eating into the corpus of the funds that
are already there."
REPRESENTATIVE WILSON noted the possibility that some other
energy source might be discovered causing gas prices to drop and
leaving future generations with an unfunded liability with no
way to pay for it.
MR. SHEFCHIK said he agreed with the possibilities of gas prices
being volatile and depressed for a period of time. He commented
that in doing the cash analysis for either the retirement funds
or the state budget, one would want to look at a high, medium,
and low range of net prices on gas. In answer to questions
regarding whether [this legislature] may result in future
generations having to pay the debt, he pointed out that the
proposed legislation provides [merely] a different mechanism for
paying the debt over the same 25-year period at which it is
currently amortized. He expressed his belief that the intent to
pay off the debt is unchanged.
10:22:18 AM
REPRESENTATIVE KELLY expressed his hope that Mr. Shefchik would
address the "fed funding question, problem, opportunity" in
addition to the "burden on the payroll of ... over 50 percent
now and in the other case, approaching 40 percent of wages."
10:23:17 AM
REPRESENTATIVE SEATON, in noting that all the gas income would
initially be routed to the general fund [anyway], questioned
whether the bill is simply another way whereby the state would
"pick up the entire expense [of the $15.6 billion future
liability]," transferring funds to the PERS/TRS accounts, and
keeping the employers at their same rate.
MR. SHEFCHIK clarified that the intent of the bill is not to
maintain or pare back [employer] rates. He said that assuming
there is an approximated match between assets and past service
liability, the ARMB would instead determine rates that gravitate
to the normal cost rate of approximately 13.5 percent. He
explained that this setting of rates by the ARMB would only
occur during the "transition year" after which time the board
would continue with its fiduciary responsibility of ensuring
that assets and revenues [sufficiently] meet liabilities. He
stated that he would somewhat agree with the possibility of the
generated gas revenues becoming general fund revenues, to then
be transferred by the state to the ARMB, but this would only be
part of the picture and not a total absolution of how bills will
be paid.
REPRESENTATIVE SEATON relayed that there is some question as to
whether the bill will actually fix the current rates and that it
does not recognize that the PERS system is not currently paying
the normal cost. He said that he does not quite understand how,
under the scenario proposed in the bill, the employers would be
paying any portion of the past service cost given that the ARMB
can't book a value [for the gas asset]. Furthermore, he
questioned whether the rates could change until a value is
actually booked or unless the "legislature comes in and says ...
'we are going to set the rates at below the actuarially computed
costs assuming that we'll have value in this asset in the
future'."
MR. SHEFCHIK said that this is not [the intent of the
legislation], that he understands the question posed by
Representative Seaton, and will address it in the written
explanations he is preparing.
10:27:44 AM
REPRESENTATIVE KELLY opined that if the valuation has been
accurately determined, it is important not to think that the
present value of either cash or gas interest be treated any
differently from one another. To this point, he added that
whether the state adds $7 billion in cash to the fund or $7
billion in gas interest to the fund, it is still a matter of
working with the present value that will hopefully grow over
time. He said the hope would be that the gas asset would grow a
greater amount than cash, would be valued conservatively, and
match cash investments. He then highlighted that within only a
year, the liability has grown from $5.7 billion to approximately
$7 billion - a growth that completely consumes any excess in
this year's revenue. "It completely chewed it up," he said. He
opined that some are opposed to simply having the state write
checks to pay off the debt but expressed his hope that the
[legislature] continues to grapple with alternate ways to
address the liability, "because it is massive."
10:30:57 AM
MR. SHEFCHIK, in response to Chair Weyhrauch, informed the
committee that he would provide them with a written analysis of
the issue at hand.
10:31:45 AM
MIKE BARNHILL, Assistant Attorney General, Labor and State
Affairs Section, Department of Law (DOL), expressed his belief
that the main purpose of the bill is to relieve employers of
liability for past service costs. In noting that it's the
ARMB's charge to examine all possible ideas to solve the debt
problem, he opined that the route proposed by the bill is not
the sole solution. He informed that committee, however, that
the most serious issue with the legislation is one related to
dedicated funds. He provided the committee with background
information on this issue:
In 1975, our office issued an opinion that interpreted
the Alaska constitution's prohibition on dedicated
funds and it said, "It's our conclusion that the
dedication of any source of public revenue - tax,
license, rental, sale, bonus royalty, royalty, or
whatever - is limited by the state constitution to
those existing when the constitution was ratified or
required for participation in federal programs."
MR. BARNHILL highlighted that it is the source of the revenue
that is at issue and not necessarily the revenue itself. He
cited an example of a recent Alaska Supreme Court ruling
involving the securitization of the tobacco settlement where it
was determined that funds were not dedicated because the state
has never relied on tobacco lawsuit settlements in the past as a
"traditional" source of revenue. In noting that the state has
relied almost entirely on oil and gas royalties and taxes since
1977, he opined that this is "obviously" a traditional source of
revenue. Regardless of whether a distinction can be made that
[the gas asset] is "a future gas interest reduced to present
value," he expressed his uncertainty as to how the court would
rule [on HB 492]. If the legislature attempts to pass this
bill, "we would try our hardest to defend it because that's what
we do," he said.
CHAIR WEYHRAUCH interjected to ask whether [DOL] could first
recommend to the governor that he sign the legislation because
it is constitutional.
MR. BARNHILL said he would not recommend it because it appears
to be more like a "traditional source of revenue" than a tobacco
lawsuit settlement and because the state has "extensively relied
on oil and gas revenues." If the legislation is passed this
year and it goes into litigation, it could take three to four
years for the Alaska Supreme Court to issue a decision - a delay
that might cost [the state] as much as $1.6 billion. He
repeated that should the state pass this legislation, DOL would
defend it, but opined that "it's a particularly risky strategy."
REPRESENTATIVE SEATON sought confirmation of his understanding
that the problem is the "source of the revenue," not the
dedication of money. He asked whether money that is
appropriated and then put into an account would fall under the
same criteria.
MR. BARNHILL confirmed that the legislature can certainly
appropriate money from the general fund to the pension funds on
an annual basis.
CHAIR WEYHRAUCH remarked that to say any source of revenue, that
is a non-traditional source, shall be transferred to the ARMB
for payment of past service liabilities would be an interesting
policy question.
10:38:30 AM
MR. BARNHILL said that under the tobacco securitization case,
the route Chair Weyhrauch suggested could certainly be explored.
10:38:44 AM
REPRESENTATIVE KELLY inquired as to whether the annual
appropriation of funds to the unfunded liability would result in
making the monetization, and use of that as a security
instrument in the fund, worth less in value.
MR. BARNHILL remarked that perhaps two different issues are
being addressed: valuing an asset on a net present value basis
and securitizing or monetizing the asset on a net present value
basis. He opined that there isn't any constitutional problem
with putting all of a securitized or monetized asset into the
general fund to be appropriated on an annual basis by the
legislature if a way can be found to securitize it consistent
with the Alaska Statehood Act.
10:41:15 AM
REPRESENTATIVE SAMUELS expressed his belief that just as with
the timber industry, Alaska has never relied on gas. He said
that at some point in the future, not only would a gas pipeline
be built, but Alaska would be extremely dependent on gas
revenues. He asked Mr. Barnhill if he differentiated between
the hydrocarbons.
MR. BARNHILL highlighted that whereas Alaska has received Cook
Inlet gas royalties since 1959 or earlier, it has received no
significant amount of North Slope gas royalties to date. As to
whether the courts would make any geographical distinctions, he
said that although he is uncertain, he would bet they would
likely not do so.
10:42:46 AM
MR. ROGERS, in response to Chair Weyhrauch, said he would work
with Mr. Shefchik to prepare written responses to some of the
issues raised.
REPRESENTATIVE KELLY reminded Chair Weyhrauch that an amendment
was drafted to include the municipalities in the bill and asked
whether it be put on hold.
CHAIR WEYHRAUCH requested Representative Kelly distribute the
amendment to the committee members to be discussed at a future
point in time.
REPRESENTATIVE SAMUELS returned to his earlier mention of the
potential conflict between the long-term interests of the ARMB
and the state, and requested that Mr. Rogers and Mr. Shefchik
address this issue as well. In response to Chair Weyhrauch, he
further clarified that the DNR commissioner could be "in-between
a rock and a hard place" with the possibility of the governor
and the ARMB having conflicting agendas.
[HB 492 was held over.]
10:44:49 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
10:44 a.m.
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