Legislature(2003 - 2004)

03/23/2004 09:04 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     SENATE FINANCE COMMITTEE                                                                                 
                          March 23, 2004                                                                                      
                              9:04 AM                                                                                         
SFC-04 # 54, Side A                                                                                                             
SFC 04 # 54, Side B                                                                                                             
CALL TO ORDER                                                                                                               
Co-Chair Gary Wilken convened  the meeting at approximately 9:04 AM.                                                            
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice-Chair                                                                                                   
Senator Ben Stevens                                                                                                             
Senator Lyman Hoffman                                                                                                           
Senator Fred Dyson                                                                                                              
Senator Donny Olson                                                                                                             
Also Attending:  SENATOR SCOTT OGAN; SENATOR BERT STEDMAN;                                                                    
Attending via Teleconference:   From Anchorage: HAROLD HEINZE, Chief                                                          
Executive Officer,  Alaska Natural  Gas Development Authority;  From                                                            
Fairbanks:   KEVIN  WALSH,  Certified   Public  Accountant,   Walsh,                                                            
Kelliher and Sharp;                                                                                                             
SUMMARY INFORMATION                                                                                                         
SB 271-NATURAL GAS DEVEL AUTHORITY PROJECTS                                                                                     
The Committee  heard  from the sponsor  and the  Alaska Natural  Gas                                                            
Development Authority. The bill moved from Committee.                                                                           
SB 300-ATTORNEY'S LIEN                                                                                                          
The  Committee  heard  from  the  sponsor  and  a  certified  public                                                            
accountant.  An  amendment  was  adopted  and the  bill  moved  from                                                            
SB 322-SALMON ENHANCEMENT TAX                                                                                                   
The  Committee  heard  from  the  sponsor.  The  bill  was  held  in                                                            
     SENATE BILL NO. 271                                                                                                        
     "An  Act  amending  the  purpose  of  the  Alaska  Natural  Gas                                                            
     Development   Authority   to  include   planning,  developing,                                                             
     constructing,  managing,  or operating  an economically  viable                                                            
     gas pipeline project  from the North Slope of Alaska by a route                                                            
     that parallels  the Trans Alaska Pipeline System  or the Alaska                                                            
     Highway;  authorizing evaluation  of opportunities for  private                                                            
     sector  involvement   in the  project;  amending  requirements                                                             
     related to  the Authority's preparation of a  development plan;                                                            
     and providing for an effective date."                                                                                      
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair  Wilken  stated  this  bill,  sponsored  by  Senator  Ogan,                                                            
"expands the  responsibility of the  Alaska Natural Gas Development                                                             
Authority to include  the review of the economic viability  of a gas                                                            
pipeline that parallels the Trans Alaska Pipeline."                                                                             
SENATOR  SCOTT OGAN testified  that he  introduced this legislation                                                             
after  spending  time last  summer  with  Senator Dyson  at  various                                                            
meetings  in Canada.  Senator Ogan  stated that  in his capacity  as                                                            
chair of the Energy  Conference, he traveled through  Western Canada                                                            
to lobby the  province of British  Columbia to join the Conference.                                                             
He relayed  that he  learned that  the Trans  Canada pipeline  would                                                            
have adequate  capacity  to transport  natural gas  were a  pipeline                                                            
constructed in Alaska to the Canadian border.                                                                                   
AT EASE 9:07 AM / 9:07 AM                                                                                                       
Senator Ogan  opined that  Alaska "must have  all possible  tools in                                                            
the toolbox"  in its efforts  to develop  natural gas resources.  He                                                            
reminded   of   ongoing    negotiations   between   the    Murkowski                                                            
Administration  and Mid America Group.  He was unsure of  the status                                                            
of these negotiations,  but understood an agreement would be reached                                                            
for stranded gas development.                                                                                                   
Senator Ogan  indicated this legislation  would allow consideration                                                             
of constructing  a tax-free  natural gas pipeline  in Alaska  to the                                                            
Canadian  border. He  preferred that  the private  sector  undertake                                                            
this  project,  but  in  the  event   it  does  not,  he  said  this                                                            
legislation would provide  an opportunity for the State to undertake                                                            
the project.                                                                                                                    
Senator Ogan asserted that  a primary focus of the Energy Council is                                                            
determining  how  the  US  would  deal  with   the  upcoming  energy                                                            
shortage.  He commented  on  the inability  to  obtain  a permit  to                                                            
construct a nuclear power  site and the near impossibility to obtain                                                            
a permit to  operate a coal burning  facility. He reported  that the                                                            
supply of natural  gas available in  the Lower 48 is unable  to meet                                                            
demand and  subsequently the  costs have increased.  As a result  of                                                            
these factors, he expressed  this is the appropriate time for Alaska                                                            
to pursue development  of natural gas resources for  distribution to                                                            
other states.                                                                                                                   
Senator Ogan warned  that if Alaska does not take  advantage of this                                                            
opportunity  immediately, entities  from other  countries would.  He                                                            
cited that by  the year 2020, the US would import  between 11 and 24                                                            
percent of its liquefied  natural gas from other countries. He noted                                                            
this estimate includes  an assumed 4.5 billion cubic feet of natural                                                            
gas  produced in  Alaska.  He told  of "offshore"  facilities  under                                                            
construction,  some  of  which  are  undertaken  by  producers  also                                                            
operating in Alaska.                                                                                                            
Senator  Ogan spoke  of producers'  preference to  ship natural  gas                                                            
from tidewaters  because the expense  of approximately $2.5  billion                                                            
is  less than  the proposed  $7  or $8  billion project  in  Alaska.                                                            
However, he did  not deem this to threat the ability  to construct a                                                            
natural gas pipeline in Alaska.                                                                                                 
Senator Ogan informed that  a shared effort is the only feasible way                                                            
to finance a natural gas pipeline in Alaska.                                                                                    
Senator  Ogan pointed  out this  bill would  extend the termination                                                             
date of the Alaska  Natural Gas Development Authority  until January                                                            
1,  2005. He  also noted  the  addition of  subsection  (12) to  the                                                            
uncodified  law  enacted  in Section  5(a),  2002  General  Election                                                            
Ballot Measure  3, contained  in Section  4 of the  bill to  read as                                                            
                (12) an evaluation of the opportunities for private                                                             
     sector involvement  in the planning, development, construction,                                                            
     management,  and  operation of  the gas  transmission  pipeline                                                            
Senator Ogan  had understood  the omission  of this language  in the                                                            
original  ballot initiative  was an oversight.  He commented  to his                                                            
"comfort" in adding this  language. He asserted, "Usually government                                                            
is  good  at  fixing  things  until  they're   broke."  He  asserted                                                            
construction   of  a  pipeline  is  not  an  appropriate   role  for                                                            
government and that private  industry should finance such a project.                                                            
However,  he remarked that  involvement of  government could  garner                                                            
better financial terms  for private entities. He surmised that Trans                                                            
Canada, Mid  America Group,  or a producer  could take advantage  of                                                            
these financing opportunities.                                                                                                  
Co-Chair  Green asked if  the extension of  the termination  date to                                                            
January  1,  2005   would  be  adequate.  She  understood   concerns                                                            
regarding time constraints.                                                                                                     
Senator Ogan agreed  this is an "aggressive date".  He noted current                                                            
law provides  that the  Authority is terminated  one year  following                                                            
the first meeting of the  Board of Directors, which occurred in June                                                            
2003.  However,   he  stressed  the  immediate  need   to  secure  a                                                            
commitment  to construct  a pipeline.  He again  warned that  if not                                                            
done in Alaska,  natural gas supplies  for the U.S. would  come from                                                            
Co-Chair Green  requested a map showing  the current proposed  route                                                            
of a natural gas  pipeline and how a pipeline route,  as proposed in                                                            
this legislation would differ.                                                                                                  
Senator Ogan did not have  maps with him, but described the proposed                                                            
route  paralleling  the  Alaska-Canada  Highway  from Delta  to  the                                                            
Canadian border.                                                                                                                
Co-Chair Green requested maps be provided to her.                                                                               
Senator Olson asked if  the proposed pipeline to the Canadian border                                                            
would be tax-free and asked for clarification.                                                                                  
Senator Ogan  affirmed. He  explained that  if the government  owned                                                            
the  pipeline,   through,   the  Alaska   Natural  Gas  Development                                                             
Authority,  as  a quasi-public  private  corporation,  the  pipeline                                                            
would be tax  exempt. He compared  the Authority to the Alaska  Rail                                                            
Road Corporation,  in that its assets are not taxable.  He qualified                                                            
that an agreement  with affected communities for payment  in lieu of                                                            
taxes would  be necessary. He noted  such arrangements are  expected                                                            
for the  current proposed  pipeline route.  He surmised the  private                                                            
sector would  want to take advantage  of this tax-exempt  status. He                                                            
furthered  that the  State  would receive  a higher  return  because                                                            
royalties are  calculated after tariffs and taxes  are deducted from                                                            
the transportation  costs.  He remarked that  any efforts to  reduce                                                            
transportation costs would  result in higher profit and earnings for                                                            
the State.                                                                                                                      
Senator Hoffman asked about  the need to acquire right of way access                                                            
to lands in which the pipeline would traverse.                                                                                  
Senator  Ogan  replied  that  a  significant  portion  of  the  land                                                            
involved  is Tetlin-owned  and that  possibly other  lands owned  by                                                            
Doyon Limited located near  Tok could be affected. He noted the need                                                            
to acquire rights  of way, but pointed out the myriad  of landowners                                                            
in other areas of the state.                                                                                                    
Co-Chair Wilken  clarified that Senator Ogan's reference  to natural                                                            
gas supplied from  "offshore" sources does not relate  to operations                                                            
in the Gulf of  Mexico for example, but rather from  countries other                                                            
than the United States.                                                                                                         
Senator Ogan affirmed.                                                                                                          
Co-Chair Wilken referenced  a report "Alaska Natural Gas Development                                                            
Authority Benefits  to Alaskans" issued in September  2003 [copy not                                                            
provided]. He asked how  the information in this report differs from                                                            
the report required of  the Alaska Natural Gas Development Authority                                                            
by the  ballot initiative  of 2002  and referenced  in Section  4 of                                                            
this bill.                                                                                                                      
Senator Ogan did not know.                                                                                                      
HAROLD  HEINZE,   Chief  Executive   Officer,  Alaska  Natural   Gas                                                            
Development Authority,  testified via teleconference  from Anchorage                                                            
that  the  Authority's  motives  as  a  public  corporation  are  to                                                            
maximize benefits to Alaska.  Therefore, he stated, the Authority is                                                            
"willing  to  do  or  not do  lots  of  things."  He  explained  the                                                            
Authority has  "no particular interest" in participating  in the gas                                                            
development   business  unless  "very   identifiable  benefits"   to                                                            
Alaskans  are  involved.  He  exampled  that  of  all  the  rhetoric                                                            
pertaining to development  and transportation of Alaskan natural gas                                                            
pipeline, the  Authority is the only  party addressing the  issue of                                                            
delivering  gas  to  the  Cook  Inlet  area.    Regarding   specific                                                            
projects, he  relayed that the Authority  welcomes this legislation                                                             
because  it allows  the  Authority  to contribute  to  the  "State's                                                            
overall  team effort  in the  broadest  sense and  without any  real                                                            
restriction."  He cautioned, however,  that this legislation  should                                                            
not be construed  as a directive to the Authority  to pursue certain                                                            
actions. He  spoke of the Authority's  "unique financing  abilities"                                                            
regarding  taxes, debt,  debt structure,  interest  rates and  other                                                            
variables that  could potentially  lower the financing costs  of any                                                            
project. He surmised this  is an appropriate role for the Authority,                                                            
if it would assist in progressing the project.                                                                                  
Mr. Heinze stressed that  the Authority never considered using State                                                            
funds to finance  any natural gas  pipeline project and rather  that                                                            
funding should be from  "the normal money sources that are available                                                            
to the private  sector." He explained that State involvement  allows                                                            
greater flexibility  and lower interest  rates for a private  entity                                                            
funding  the project.  He remarked  that if the  Authority does  not                                                            
"test" itself  "against the normal market, we think  the State could                                                            
make a very bad mistake."                                                                                                       
Mr.  Heinze  reminded  that  the provisions  of  Ballot  Measure  3,                                                            
creating  the  Authority  specifically  provide  for a  natural  gas                                                            
pipeline  from Prudhoe  Bay to Valdez  in the  Prince William  Sound                                                            
with a spur line from Glennallen  into the Cook Inlet area. He noted                                                            
this  bill broadens  that  perspective  to  allow the  Authority  to                                                            
consider  a  pipeline  route  following  the Alcan  Highway  to  the                                                            
Canadian  border. He  stressed the  value of having  this option  to                                                            
allow  the Authority  to  choose a  route in  the  best interest  of                                                            
Mr. Heinze informed that  a route following the Alyeska Trans Alaska                                                            
Pipeline  from Prudhoe  Bay  to Valdez  has  rights  of way  already                                                            
acquired  though the  pipeline  corridor.  He noted  that the  Yukon                                                            
Pacific  Corporation  has  acquired   right  of  ways  from  private                                                            
landowners for  this route, which the Authority would  acquire for a                                                            
natural  gas pipeline.  He  also noted  that under  imminent  domain                                                            
laws, private-owned  lands could be  acquired at fair market  value.                                                            
He furthered  that the portion of  the route between Glennallen  and                                                            
the Cook  Inlet is  largely located  on State-owned  land and  as an                                                            
agency of State government  the Authority could utilize these lands.                                                            
Mr. Heinze  compared  this to the  proposed route  along the  Alaska                                                            
Canadian Highway,  which would be  located on a significant  portion                                                            
of private-owned  land and State-owned  land. He understood  that no                                                            
party has obtained  rights of way for this route.  He considered the                                                            
right of  way issues  in Alaska  relatively minor  in comparison  to                                                            
lands in  Canada located  along the  proposed route.  He stated  the                                                            
Trans Canada  organization would have  to address First Nations  and                                                            
other landowner issues.                                                                                                         
Mr. Heinze spoke  to the proposed extension of the  termination date                                                            
of  the Authority.  He  noted  the first  meeting  of  the Board  of                                                            
Directors  was  held on  June  16,  2003 and  according  to  current                                                            
statute, the Authority  would expire one year from that date on June                                                            
13,  2004.   He  agreed   that  meeting   this  deadline  would   be                                                            
challenging, but  assured it could be accomplished  "within a couple                                                            
of months".  He did not oppose an  extension to the end of  the year                                                            
2004, but informed  that the Authority intends to  complete its work                                                            
by the end of the 2004 summer.                                                                                                  
Mr. Heinze  reported that the Authority  has not adopted  a business                                                            
structure   and  must  first  investigate   whether  it   should  be                                                            
classified as  a nonprofit organization, a corporation  "with a very                                                            
low profit  objective,  a utility,  or another  status. He  remarked                                                            
upon  the "tremendous   opportunity"  the Authority  had  to  become                                                            
exempt  from federal  income  tax, to  issue tax-exempt  bonds,  and                                                            
achieve favorable  debt to equity ratios and low interest  rates. He                                                            
stressed  the importance of  all issues combined.  He expressed  the                                                            
Authority's intent  to hire a consulting firm to review  and provide                                                            
advice as to how to provide the lowest cost of service.                                                                         
Mr. Heinze addressed the  issue of natural gas imported into the US.                                                            
He  asserted  "major  forces  at  work  around  world  working  very                                                            
dynamically, looking  at the United States as a place  to move their                                                            
gas  to."  He  stressed  the  importance   of  reaching  a  decision                                                            
regarding  Alaska natural  gas expediently.  He agreed with  Senator                                                            
Ogan that  if efforts  to develop  and transport  the resource  from                                                            
Alaska were delayed, Alaska would be "left out of the game."                                                                    
Mr.  Heinze summarized  that  the  Authority  operates  in the  best                                                            
interest of Alaska,  and would benefit from the ability  to consider                                                            
all options.                                                                                                                    
Co-Chair  Wilken again referenced  the report  " Alaska Natural  Gas                                                            
Development  Authority   Benefits  to  Alaskans"  and  restated  his                                                            
question about  comparison of this report to the report  required in                                                            
Section 4 of this bill.                                                                                                         
Mr.  Heinze  replied the  existing  report  is  a compilation  of  a                                                            
"fairly large  number " of Alaska  consulting firms and reflects  an                                                            
attempt to identify  actions relevant for advancing  the project. He                                                            
informed  that  since  the report  was  issued,  the  Authority  has                                                            
received only minimal funding  and the recommendations of the report                                                            
would require  approximately $2.5  million to implement.  Therefore,                                                            
he  informed,  most  of  the  recommended   efforts  have  not  been                                                            
undertaken.  He  noted  that  a benefit  analysis  that  provides  a                                                            
testing  model should  be  finalized by  the  end of  the month.  He                                                            
predicted that all other  aspects specified in the development plan,                                                            
including a revenue  sharing plan with municipal governments,  would                                                            
be addressed by the upcoming  summer. He assured the Authority has a                                                            
"fairly  good understanding"  of  possible  projects  and costs.  He                                                            
summarized  the report issued  in September  represents efforts  the                                                            
Authority would  have preferred be  done, although funding  and time                                                            
have been inadequate to undertaken them all.                                                                                    
Senator Olson  asked the impact of this legislation  on the existing                                                            
tax structures of the North  Slope Borough, the Fairbanks North Star                                                            
Borough and other local governments.                                                                                            
Senator Ogan responded  that if the Authority constructed a pipeline                                                            
were  constructed  from Prudhoe  Bay  to  the Canadian  border,  the                                                            
pipeline would be tax-free.  He noted the same status was envisioned                                                            
for a Prudhoe  Bay to Valdez route and would require  negotiation to                                                            
address local  government concerns. He listed examples  of increased                                                            
costs to local  governments with the  location of a pipeline  in the                                                            
community from:  school enrollment, wear and tear  on local roadways                                                            
and emergency services.                                                                                                         
Mr. Heinze remarked that  in recognition of the increased costs, the                                                            
Authority  is directed  by the provisions  of Ballot  Measure  3, as                                                            
shown in Section  4 of the bill, to  include a revenue sharing  plan                                                            
with municipal  governments  in the  development  plan. He spoke  of                                                            
intentions  to recognize that despite  exemption from taxation,  the                                                            
Authority would  be "morally obligated"  to identify ways  for local                                                            
governments to  address the increased expenses and  also to share in                                                            
the revenue generated.                                                                                                          
Senator Olson surmised  that this legislation has not been "accepted                                                            
with enthusiasm"  by the North Slope Borough or the  Fairbanks North                                                            
Star Borough.                                                                                                                   
Mr.  Heinze  replied that  this  bill  does nothing  to  change  the                                                            
Authority's  tax   status  established  in  Ballot   Measure  3.  He                                                            
qualified that  this bill "raises eyebrows" to this  realization. He                                                            
emphasized  that  he has  been  forthright  in expressing  to  local                                                            
government  a willingness to identify  ways to offset the  impacts a                                                            
pipeline would have on the communities.                                                                                         
Senator Ogan stressed that  the State has an "overwhelming" interest                                                            
in having an  independent entity constructing  the pipeline  because                                                            
both  producer   and  the  State  would  share  equal   interest  in                                                            
maintaining  low tariffs.  He remarked that  a natural gas  pipeline                                                            
would also benefit the  State because it would encourage development                                                            
in other areas of the North  Slope, such as the Foothills region. He                                                            
elaborated  on the  benefits  to the  State  and to  the North  Star                                                            
Borough  in   the  development  of   the  Foothills  resources.   He                                                            
understood  that Senator Olson has  concerns with this legislation,                                                             
but Senator  Ogan argued that revenues  from the development  of the                                                            
Foothills region  would outweigh the tax exemption  of the pipeline.                                                            
Senator Hoffman  surmised this legislation should  therefore include                                                            
a requirement  of the  Authority to  include a  plan for payment  in                                                            
lieu of taxes for local governments.                                                                                            
Co-Chair  Wilken asked if  subsection 5(a)(5)  of Ballot Measure  3,                                                            
contained  in Section  4 of the  bill would  suffice. This  language                                                            
stipulates  that  the Authority  must  include  a plan  for  revenue                                                            
sharing it its development plan.                                                                                                
Senator Hoffman opined  that this language is not specific enough to                                                            
assure that payment in lieu of taxes would be addressed.                                                                        
Senator  Ogan  was  unsure.  He stated  that  the  impact  on  local                                                            
governments  must be considered and  deferred to the Senate  Finance                                                            
Committee as the appropriate entity to address the matter.                                                                      
Mr. Heinze line  9, recalled that the ballot initiative  was drafted                                                            
to model the Alaska Gasline  Port Authority already in existence. He                                                            
defined the Alaska  Gasline Port Authority as a consortium  of three                                                            
local governments formed  with the intent to export natural gas from                                                            
the North  Slope, using a  tax-exempt method  and a revenue  sharing                                                            
Senator Bunde  pointed out the stipulation  that the Alaska  Natural                                                            
Gas Development  Authority  "must  include" a  revenue sharing  plan                                                            
with municipal  governments  in its  development  plan. He  surmised                                                            
this affords flexibility.                                                                                                       
Co-Chair Green  offered a motion to  report the bill from  Committee                                                            
with individual recommendations and previous fiscal note.                                                                       
There was  no objection and  SB 271 MOVED  from Committee with  zero                                                            
fiscal note #1 from the Department of Revenue.                                                                                  
Co-Chair  Wilken directed  attention to  information distributed  to                                                            
members  from the  Department  of Labor  and  Workforce Development                                                             
responding to  issues that were raised during hearings  the previous                                                            
Senator  Bunde  commented  that  the  largest  portion  of  Alaska's                                                            
population is between the  ages of 35 and 50, which he characterized                                                            
as  the "working  ages".  He  furthered  that  given no  changes  to                                                            
current trends the smallest  portion of Alaska's population would be                                                            
aged 30 to 50 by the year  2015. He opined this should be understood                                                            
when considering  efforts  to create  jobs and  implement an  income                                                            
tax. He pointed out that  the smallest population age group would be                                                            
required to contribute the most.                                                                                                
     SENATE BILL NO. 300                                                                                                        
     "An Act relating to an attorney's lien, to court actions, and                                                              
     to other proceedings where attorneys are employed."                                                                        
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair  Wilken  stated this  bill  sponsored by  Senator  Stedman,                                                            
"addresses  a ruling  by the  Ninth Circuit  Court  of Appeals.  The                                                            
Court held that Alaskans  who win an award in court must pay federal                                                            
income tax on the award,  including attorney fees, and then when the                                                            
plaintiff pays the attorney, the income is taxes a second time."                                                                
SENATOR BERT STEDMAN read the sponsor statement into the record as                                                              
     SB 300 eliminates  an unfair and potentially disastrous federal                                                            
     income tax  issue affecting Alaskan taxpayers  and prevents the                                                            
     IRS [U.S.  Internal Revenue Service]  from taxing two  Alaskans                                                            
     on the  same income. SB 300 corrects  this unjust treatment  of                                                            
     Alaskans under current 9th Circuit rulings.                                                                                
     Because  of a peculiarity in  Alaskan law, Alaskans  who win in                                                            
     court  may  pay federal  income  tax  on phantom  income.  When                                                            
     Alaskans  file their federal  tax return, they must  report any                                                            
     litigation  recovery   allocated  to  attorney  fees  as  gross                                                            
     income,  even  though they  receive  no economic  benefit  from                                                            
     those  fees. The federal government  taxes that portion  of the                                                            
     prevailing  side's award  twice; once  as income to the  client                                                            
     and  again as  income  to the  client's  attorney. Incredibly,                                                             
     there  is no  federal tax  deduction to  offset this  inequity.                                                            
     It's  even possible for  someone to win  in court but  come out                                                            
     with a net loss after paying legal bills and taxes.                                                                        
     Under current Alaska  lien law <AS 34.35.430>, attorneys have a                                                            
     "subordinate  lien"  or ownership  interest  in  the "cause  of                                                            
     action".   Other  states,  Including   Oregon,  use   different                                                            
     language  to specify that as  long as an attorney has  filed an                                                            
     appropriate  lien and is owed money by the winning  client, all                                                            
     fee awards  or payments made  to the client belong exclusively                                                             
     to the attorney.  In so vesting the attorney  with the property                                                            
     interests  of  the award,  those states  avoid  the unfair  tax                                                            
     burden currently  imposed on Alaskans. Instead,  any portion of                                                            
     an award  retained to pay attorney costs, is  not income to the                                                            
     SB  300 changes  Alaskan  law to prevent  the  IRS from  taxing                                                            
     Alaskans  on income  they don't receive.  This bill  recognizes                                                            
     that court  awarded fees which  pass through to one's  attorney                                                            
     is  income  to the  attorney.  And  as such,  the  attorney  is                                                            
     responsible  for paying federal  income tax on that  portion of                                                            
     their income.                                                                                                              
Senator  Stedman noted  that when  drafting statutes  for the  legal                                                            
system, Alaska  mirrored the state  of Oregon statutes in  many ways                                                            
and that  Oregon has  this same inequity.  He gave  an example  of a                                                            
case involving  the wrongful  termination of  an employee,  in which                                                            
that employee prevailed  and received a "small" award in addition to                                                            
attorney fees.  Under current statute,  Senator Stedman pointed  out                                                            
this employee  would receive a net  loss because the employee  would                                                            
be required  to claim the  attorney fees as  income and pay  federal                                                            
taxes on that amount.                                                                                                           
SFC 04 # 54, Side B 09:52 AM                                                                                                    
Senator Stedman continued  that many plaintiffs do not have adequate                                                            
resources to absorb the  tax burden of this additional income, which                                                            
they did not receive.                                                                                                           
Co-Chair  Green  referenced  a  letter  dated February  6,  2004  to                                                            
Senator Stedman from Kevin  Walsh, of Walsh, Kelliher and Sharp. She                                                            
asked if  this legislation  would only apply  to cases heard  in the                                                            
Alaska Court System  or to cases before the Human  Rights Commission                                                            
as well.                                                                                                                        
Senator  Stedman understood  this  legislation applies  only to  the                                                            
award of attorney fees from court cases.                                                                                        
KEVIN  WALSH,  Certified  Public  Accountant,  Walsh,  Kelliher  and                                                            
Sharp, testified  via teleconference  from  Fairbanks in support  of                                                            
this bill and about his  25 years experience and service as chair of                                                            
the IRS/CPA Liaison Committee  and chair of the Tax Committee of the                                                            
Alaska Society  of CPAs. He emphasized  this bill was not  sponsored                                                            
at the  request of the  Alaska Bar Association  (ABA). He stated  he                                                            
supports this  bill because he was  "tired of" the IRS becoming  the                                                            
prime beneficiary of court settlements.                                                                                         
Co-Chair Green restated her question.                                                                                           
Mr. Walsh affirmed  this legislation  only relates to awards  issued                                                            
as a result of a court case.                                                                                                    
Senator Olson  asked how this legislation  would affect federal  IRS                                                            
Mr.  Walsh  replied  that  the  IRS  considers  property  rights  as                                                            
described in state  laws. He stated that the Ninth  Circuit Court of                                                            
Appeals  held that  the property  rights were  such that  plaintiffs                                                            
must pay tax  on their attorney fees  under California law,  Arizona                                                            
law and Alaska law. However,  he noted that the Court found that the                                                            
state of Oregon laws were  somewhat different and therefore provided                                                            
that  the plaintiff's  attorney  is the  only party  liable for  the                                                            
property rights taxes.                                                                                                          
Senator Bunde  clarified that  the impetus  of this bill is  not the                                                            
Alaska Bar Association and asked the ABA position.                                                                              
Mr.  Walsh affirmed  the  ABA  did not  initiate  this legislation,                                                             
commenting that all credit  or blame falls to him. He qualified that                                                            
he  asked   the  Association   for  assistance   in  drafting   this                                                            
legislation; however, noted  that the ABA does not take positions on                                                            
legislation.  He relayed that the  president of the Association  has                                                            
indicated  interest   in the  matter.   He  also  informed  that  he                                                            
requested  the opinion  of the  Alaska Legal  Services Corporation,                                                             
which  represents  disadvantaged  parties, but  had  not received  a                                                            
reply.  He wanted  to  ensure  this legislation  would  not  benefit                                                            
attorneys  at the  expense of taxpayers.  He  referenced an  article                                                            
published in  the Wall Street Journal  [copy on file] regarding  the                                                            
National  Taxpayer Advocate,  Nina Olson's  attempt  to have the  US                                                            
Congress address the matter  through federal law, although he stated                                                            
these efforts have been  unsuccessful. However, he remarked that the                                                            
Alaska Legislature  has the  ability to change  statute in  a manner                                                            
that the federal Ninth Circuit Court of Appeals could affirm.                                                                   
Senator Bunde  never mind other discussion  re tort reform  they say                                                            
in it for benefit of the people.                                                                                                
Co-Chair Wilken referenced  letters in support of this bill from the                                                            
Windfree  Law  Office  and  Cook  Schuhmann   and Groseclose,   Inc.                                                            
Attorneys at Law [copies on file].                                                                                              
Senator Olson  asked the  reason for the  language contained  in the                                                            
bill as  opposed to language  changing  existing statutes  governing                                                            
property rights.                                                                                                                
Mr. Walsh  replied that he  had requested  the ABA provide  him with                                                            
language identical to that  adopted by the state of Oregon and ruled                                                            
adequate by the Ninth Circuit Court of Appeals.                                                                                 
Senator Olson cautioned  this "remedy" might inadvertently provide a                                                            
loophole relating to property rights.                                                                                           
Co-Chair  Wilken  asked  if  the  Senate  Judiciary   Committee  had                                                            
discussed this possibility.                                                                                                     
Senator Stedman replied it did not.                                                                                             
Co-Chair  Wilken asked  if Senator  Olson wanted  this bill held  in                                                            
Committee to address this concern.                                                                                              
Senator Olson deferred to the sponsor and the co-chair.                                                                         
Co-Chair Wilken  suggested highlighting the issue  with intent it be                                                            
addressed   when  the   bill   is  considered   in   the  House   of                                                            
Co-Chair  Green   wanted  assurance   that  in  remedying   the  tax                                                            
consequence,  this legislation would  place the attorneys  "in front                                                            
of" of plaintiffs regarding receipt of settlement payments.                                                                     
Senator Stedman assured  it would not allow such "front-running". He                                                            
stressed  that the  laws  governing  attorney's trust  accounts  are                                                            
"extremely tight" and this  legislation would not grant the attorney                                                            
additional claim to a settlement.                                                                                               
Co-Chair Green  asked if this requires that a client  who receives a                                                            
settlement make payment to an attorney.                                                                                         
Senator Stedman  described  the "flow of funds"  to a trust  account                                                            
governed by the attorney then distributed to the client.                                                                        
Co-Chair Green surmised  if 100 percent of an award amount were paid                                                            
to the client  who then fails to pay  the attorney fees,  the client                                                            
would not  be required to  pay taxes on that  amount. She asked  how                                                            
this could be justified.                                                                                                        
Mr. Walsh  responded that  the individual  receiving funds  would be                                                            
taxed  for  the  entire  amount  that  person  is  entitled  to.  He                                                            
explained that  an attorney could file a lien against  the client if                                                            
not paid for services.  He also noted that if an attorney chooses to                                                            
not collect  a fee, the client would  be liable for taxation  on the                                                            
entire amount of a settlement.                                                                                                  
Co-Chair Wilken  noted this bill does not specify  an effective date                                                            
and asked whether  the sponsor would support an immediate  effective                                                            
Senator Stedman supported this.                                                                                                 
AMENDMENT #1: This conceptual  amendment adds a new Section 3 to the                                                            
bill providing for an immediate  effective date of the provisions of                                                            
Sections 1 and 2.                                                                                                               
Co-Chair Green moved for adoption.                                                                                              
Without objection the amendment was ADOPTED.                                                                                    
Co-Chair Green  offered a motion to  report the bill from  Committee                                                            
as amended with  individual recommendations and accompanying  fiscal                                                            
There was  no objection  and CS  SB 300 (FIN)  MOVED from  Committee                                                            
with zero fiscal notes  #1 from the Department of Natural Resources,                                                            
#2 from the Alaska Court  System, and #3 from the Department of Law.                                                            
     SENATE BILL NO. 322                                                                                                        
     "An Act relating to the rate of the salmon enhancement tax."                                                               
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair Wilken  stated this bill, sponsored by Senator  B. Stevens,                                                            
by request  "authorizes  regional aquaculture  associations  to hold                                                            
elections to change  the tax rates for the salmon  enhancement tax."                                                            
Senator  B. Stevens testified  that this  legislation would  provide                                                            
another  option for  regional aquaculture  associations,  which  are                                                            
comprised  of commercial fishers  in the  region and the  hatcheries                                                            
operating  in  that  region.  Currently,   he  stated  that  statute                                                            
provides  the ability  for  members of  the associations  to  assess                                                            
themselves  one, two, or  three-percent. He  noted those rates  have                                                            
not changed since 1976.                                                                                                         
Senator B. Stevens explained  this bill would increase the allowable                                                            
rates  from four  to ten  percent, and  permit the  associations  to                                                            
"super access  themselves"  for the purpose  of paying off  debt, if                                                            
they   so  choose.   He   characterized   this  legislation   as   a                                                            
modernization  of the  salmon enhancement  program.  He stated  this                                                            
legislation  is   an  attempt  to  mitigate  concerns   of  industry                                                            
participants  relating to the percentages  of "cost recovery  versus                                                            
common property."                                                                                                               
Senator B. Stevens referenced  a spreadsheet titled "Alaska Hatchery                                                            
Commercial Common Property  & Cost Recovery Return Data - 1993-2003"                                                            
[copy  on  file],  showing  the  "cost  recovery  percentages"   and                                                            
"commercial  harvest percentages".  He indicated  that over  several                                                            
years, the  cost recovery percentage  has averaged approximately  30                                                            
percent. He remarked  that this demonstrates the declining  value of                                                            
the fish produced,  therefore forcing  an increase in the  number of                                                            
fish  required to  pay the  operation costs  of  the hatcheries.  He                                                            
reiterated  this   legislation  would  permit  the   members  of  an                                                            
association to opt to harvest  a greater number of fish and increase                                                            
their assessment  to generate  revenue for  hatchery operations.  He                                                            
stressed  that such  a change  could not  be implemented  without  a                                                            
majority vote of the permit-holders in the region.                                                                              
Senator B.  Stevens informed that  currently the commercial  fishers                                                            
could pay no more than  three-percent and thus forcing cost recovery                                                            
methods to cover a larger portion of the operating expenses.                                                                    
Co-Chair  Wilken  referenced  letters  in opposition  to  this  bill                                                            
[copies on file].                                                                                                               
Senator B.  Stevens addressed the  letter from Kate File  and agreed                                                            
she has  a legitimate concern,  although it  is not germane  to this                                                            
legislation. He  explained this legislation does not  pertain to the                                                            
cost recovery  practices of non-profit  hatcheries. He assured  that                                                            
this  bill  only applies  to  those  areas included  in  a  regional                                                            
association,  and that  the  members of  the associations  have  the                                                            
authority to impose these taxes on themselves.                                                                                  
Co-Chair  Wilken requested  an explanation  of cost recovery  in the                                                            
context of this legislation.                                                                                                    
Senator B. Stevens  gave an example of a hatchery  that produces ten                                                            
million  fish  with  annual  operating   costs  of  $4  million.  He                                                            
explained the  current process whereby  the hatchery contracts  with                                                            
certain commercial fishers  to catch and return five million fish to                                                            
the hatchery to pay the  operating costs. The remaining five million                                                            
fish,  he continued,  are available  for catch  by other  commercial                                                            
fishers and  taxed at a  rate of two percent  to recover  additional                                                            
costs. He  stated this bill  would "change  the dynamics" and  allow                                                            
the commercial  fishers to assess  a higher tax on their  portion of                                                            
the  harvest  and  thus reduce  the  number  of  fish  reserved  for                                                            
contracted harvesting  and increase the number of  fish available to                                                            
them for harvest.                                                                                                               
Co-Chair Wilken citing  the spreadsheet, noted that one third of the                                                            
hatchery  produced  fish are  harvested for  the  purpose of  paying                                                            
operating costs.                                                                                                                
Senator B. Stevens  affirmed, qualifying that the  percentage varies                                                            
by region  depending upon  the number of  hatcheries operating  in a                                                            
Senator  Bunde pointed  out that  cost of producing  fish  increases                                                            
over time,  although the  price of  fish varies.   He surmised  that                                                            
with a large debt  service, a hatchery would have  to take virtually                                                            
all the fish if produces  to pay its operating costs. He stated this                                                            
bill  offers the  option  to pay  overhead costs  down  in years  of                                                            
higher prices.                                                                                                                  
Senator  Bunde  commented  that  participation  in  associations  is                                                            
optional for commercial  fishers in some areas and  there is concern                                                            
that fishers  might  not vote.  He predicted  that this legislation                                                             
could  provide more  incentive  for  participation  if fisher's  tax                                                            
assessments could change.                                                                                                       
Senator Hoffman  asked the percentage of hatcheries  still producing                                                            
pink salmon.                                                                                                                    
Senator B. Stevens  replied that most hatcheries are  producing pink                                                            
salmon, with  the largest  productions in  Prince William Sound.  He                                                            
relayed  that  trends indicate  the  cost  recovery  percentages  is                                                            
Senator   B.  Stevens  listed   the  Northern   Southeast   Regional                                                            
Aquaculture  Association  (NSRAA),  a region  comprised  of  several                                                            
hatcheries,  is  an  example  of  how  this  legislation   could  be                                                            
beneficial. He told how  this association paid its costs down early,                                                            
and  was able  to limit  the  amount of  cost  recovery harvesting.                                                             
However, he pointed  out that cost recovery has increased  in recent                                                            
years due to lower fish  prices. He explained this association could                                                            
chose  to reduce  the  percentage  of cost  recovery  harvesting  by                                                            
paying a higher  tax assessment. He stressed this  would be a choice                                                            
determined  by the members  of the association  through an  election                                                            
process.  He   also  noted  that   the  association  members   could                                                            
subsequently  reduce its taxes in  the event of a market  change and                                                            
increased  prices.   He  opined  this  legislation  provides   "self                                                            
determination" within an  association. He expressed this could allow                                                            
for the release  of more fish for commercial harvest  and change the                                                            
current  trend of hatcheries  catching a  significant percentage  of                                                            
the  fish  they  produce  to  pay  the  operating  expenses  of  the                                                            
Co-Chair  Wilken   asked  how  the   cost  recovery  percentage   is                                                            
determined.  He  noted  the  increase of  the  NSRAA  cost  recovery                                                            
percentage and asked if it was a result of increased debt.                                                                      
Senator  B.  Stevens  was  uncertain  of  the  NSRAA  situation.  He                                                            
detailed  that each  hatchery  submits  a plan  to annually  to  the                                                            
regional planning team,  which is approved by the board of directors                                                            
of the regional association.                                                                                                    
Co-Chair Wilken  asked why the Douglas Island Pink  and Chum (DIPAC)                                                            
hatchery is not relevant to this legislation.                                                                                   
Senator B. Stevens replied  DIPAC is a private nonprofit corporation                                                            
and  is   therefore   not  included   in  a   regional  aquaculture                                                             
association. He  stated it operates only under the  authority of its                                                            
board of directors  and has no involvement from a  regional planning                                                            
team. He  noted this speaks  to Ms. File's  concern about  increased                                                            
cost  recovery  percentages  without   input  from  area  commercial                                                            
Senator  Hoffman   asserted  the  more  fish  produced,   the  lower                                                            
percentages  of cost  recovery. He  asked for  affirmation that  the                                                            
value of pink salmon is from roe.                                                                                               
Senator B.  Stevens affirmed. He relayed  discussions regarding  the                                                            
declining value of pink  salmon and subsequent increased production,                                                            
resulting in a downward cycle.                                                                                                  
Senator Hoffman indicated this is his concern.                                                                                  
Senator  B.  Stevens  agreed   this  is  the  reason  this  bill  is                                                            
necessary.  He detailed the price  fluctuation for pink salmon  over                                                            
20 years  ranging between  80 cents per pound  to the current  eight                                                            
cents per pound.  He referenced a  graph titled, "Alaska  Historical                                                            
Commercial Salmon Catches  (all species) 1878-2003", prepared by the                                                            
Department  of Fish and Game [copy  on file], showing that  hatchery                                                            
activities  have contributed to an  increased stabilized  production                                                            
rate of  almost 100  million fish  annually  statewide. However,  he                                                            
pointed out that the value has diminished.                                                                                      
Co-Chair  Wilken asked if  the hatchery program  was implemented  in                                                            
Senator B.  Stevens affirmed.  He informed  that most hatcheries  in                                                            
Alaska had been  State-owned, but currently most are  either held by                                                            
an association or a non-profit corporation.                                                                                     
Senator Hoffman  pointed out the supporting  documentation  for this                                                            
legislation  does not indicate the  percentages of hatchery  salmon.                                                            
He understood  the  hatchery programs  primarily  operate in  Prince                                                            
William Sound and Southeastern  Alaska, although the largest fishery                                                            
is located in Bristol Bay.                                                                                                      
Senator B.  Stevens agreed the Bristol  Bay fishery has the  highest                                                            
value.  He spoke  to  the price  trends  for sockeye  salmon,  which                                                            
average between 80 cents and $1.80 per pound.                                                                                   
Senator  Hoffman  countered   that  Senator  Dyson  would  say  that                                                            
increased production  of pink salmon in Prince William  Sound during                                                            
the 1980s and  1990s resulted in a flood of the market  and impacted                                                            
the sockeye  salmon  fishery. He also  noted other  factors such  as                                                            
farmed fish have impacted the fishery markets.                                                                                  
Senator  Bunde  added  that  foreign   market  crashes  have  had  a                                                            
significant  impact on  the fishing  industry. He  commented on  the                                                            
State trend of  receding from the "hatchery business",  while making                                                            
efforts to  enter the "oil  business'. He  suggested this should  be                                                            
Senator  Bunde asked  if the  demand  for cost  recovery  increases,                                                            
whether  the Department  of  Fish  and Game  would be  pressured  to                                                            
facilitate  cost recovery  to  limit fishing  in  distant waters  to                                                            
allow more fish to return closer to the hatchery location.                                                                      
Senator  B.  Stevens   replied  the  matter  would   be  a  regional                                                            
management decision.                                                                                                            
Co-Chair Wilken  told of discussions  to operate a fish hatchery  in                                                            
Fairbanks  to supply  fish  to Interior  and Southeast  Alaska,  and                                                            
asked whether  this hatchery would be included in  the provisions of                                                            
this legislation.                                                                                                               
Senator B. Stevens  answered it would if it practiced  cost recovery                                                            
and depending  upon whether it produced fish for commercial  harvest                                                            
or personal  and  subsistence use,  as well  as the  volume of  fish                                                            
produced. He  added that such a hatchery  would participate  only if                                                            
it secured funding through  the Fisheries Enhancement Revolving Loan                                                            
Fund. He  indicated  on a map  showing the  locations of  hatcheries                                                            
within Alaska  [copy on file]. He  noted that hatcheries  located at                                                            
Fort  Richardson  and  Fort  Elmendorf  are not  included,  as  they                                                            
produce fish for personal use.                                                                                                  
Co-Chair  Wilken  understood  the proposed  Fairbanks  hatchery  was                                                            
intended to produce fish for personal and subsistence use.                                                                      
Senator B.  Stevens expressed  he has discussed  the hatchery  issue                                                            
extensively,  and that this  is legislation  is an option for  those                                                            
regional aquaculture associations to utilize if they chose.                                                                     
Co-Chair  Green  clarified  this  legislation   would  stipulate  no                                                            
Senator B. Stevens affirmed.                                                                                                    
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
Co-Chair Gary Wilken adjourned the meeting at 10:36 AM                                                                          

Document Name Date/Time Subjects