Legislature(2017 - 2018)SENATE FINANCE 532

05/08/2018 09:30 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 331 TAX CREDIT CERT. BOND CORP; ROYALTIES TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Department of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 212 REAA & SMALL MUNI SCHOOL DISTRICT FUND TELECONFERENCED
Moved SCS CSHB 212(FIN) Out of Committee
                 SENATE FINANCE COMMITTEE                                                                                       
                        May 8, 2018                                                                                             
                         9:35 a.m.                                                                                              
9:35:09 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 9:40 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Gary Stevens                                                                                                            
Senator Natasha von Imhof                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Tim Mearig, Facilities Manager,  Department of Education and                                                                    
Early  Development;  Representative  Neal  Foster,  Sponsor;                                                                    
Sheldon  Fisher, Commissioner,  Department  of Revenue;  Ken                                                                    
Alper, Director, Tax Division,  Department of Revenue; Deven                                                                    
Mitchell,  Executive Director,  Alaska  Municipal Bond  Bank                                                                    
Authority, Department of Revenue.                                                                                               
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Douglas Goe, State Bond  Council, Public Finance Department,                                                                    
Orrick; Peter  Clinton, ING Capital, New  York City; Rebecca                                                                    
Logan,  The  Alaska  Support Industry  Alliance,  Anchorage;                                                                    
Kara Moriarty, Alaska Oil and Gas Association, Anchorage.                                                                       
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
CSHB 212(RLS)                                                                                                                   
     REAA & SMALL MUNI SCHOOL DISTRICT FUND                                                                                     
                                                                                                                                
          SCS CSHB 212(FIN) was REPORTED out of committee                                                                       
          with a "do pass" recommendation and with one new                                                                      
          fiscal impact note from the Department of                                                                             
          Education and Early Development.                                                                                      
                                                                                                                                
CSHB 331(FIN)                                                                                                                   
     TAX CREDIT CERT. BOND CORP; ROYALTIES                                                                                      
                                                                                                                                
          CSHB 331(FIN) was HEARD and HELD in committee for                                                                     
          further consideration.                                                                                                
                                                                                                                                
CS FOR HOUSE BILL NO. 212(RLS)                                                                                                
                                                                                                                                
     "An  Act relating  to funding  for school  construction                                                                    
     and  major   maintenance;  relating  to   the  regional                                                                    
     educational attendance area  and small municipal school                                                                    
     district fund; and providing for an effective date."                                                                       
                                                                                                                                
9:36:01 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon read the title of the bill.                                                                                  
                                                                                                                                
9:36:15 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:36:40 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Vice-Chair   Bishop  MOVED   to  ADOPT   proposed  committee                                                                    
substitute  for   CSHB  212(FIN),  Work   Draft  30-LS0741\E                                                                    
(Laffen,  5/7/18).  There  being  NO OBJECTION,  it  was  so                                                                    
ordered.                                                                                                                        
                                                                                                                                
Co-Chair MacKinnon noted that  the Committee Substitute (CS)                                                                    
included an  amendment that had  been proposed  the previous                                                                    
day.                                                                                                                            
                                                                                                                                
Co-Chair MacKinnon  directed attention to a  new fiscal note                                                                    
from the Department of Education  and Early Development, OMB                                                                    
Component 2737.  The fiscal note showed  an appropriation of                                                                    
$323,000 in  FY 19; $24,000 in  FY 20; and $15,000  in FY 21                                                                    
through  FY 24.  The  fiscal  note was  in  response to  the                                                                    
addition of  standardization of energy components  that were                                                                    
discussed the previous day.                                                                                                     
                                                                                                                                
TIM MEARIG, FACILITIES MANAGER,  DEPARTMENT OF EDUCATION AND                                                                    
EARLY DEVELOPMENT,  stated that  the fiscal  note identified                                                                    
elements in  the bill that  had been  worked on by  the Bond                                                                    
Reimbursement  and Grant  Review Committee  and a  report to                                                                    
the legislature  dated December 2017. He  directed attention                                                                    
to Section 4  of the bill, which reflected the  cost for the                                                                    
need for  expertise for  analysis and  consulting pertaining                                                                    
to energy  and standards systems research.  The cost totaled                                                                    
$295,015; $1000 of which was an annual update.                                                                                  
                                                                                                                                
Mr. Mearig  continued, and noted  that Sections 1  through 3                                                                    
had  costs associated  with the  implementation of  elements                                                                    
related  to the  re-use  of school  design.  There would  be                                                                    
regulations associated  with the  model school  standard. He                                                                    
stated  that  travel costs  for  the  review committee  were                                                                    
anticipated  for two  meetings in  the first  two years  and                                                                    
included in the fiscal note.                                                                                                    
                                                                                                                                
Vice-Chair  Bishop  commented  that   there  could  be  cost                                                                    
savings  through inquiring  about the  University of  Alaska                                                                    
Fairbanks housing.                                                                                                              
                                                                                                                                
9:40:55 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  NEAL  FOSTER,   SPONSOR,  indicated  he  was                                                                    
supportive of  the changes  to the  bill. He  reflected that                                                                    
the  changes would  add major  maintenance  to the  Regional                                                                    
Educational  Attendance Area  School  Construction Fund,  in                                                                    
addition  to new  school construction.  He thought  the bill                                                                    
was  a good  way  to keep  costs  down through  preventative                                                                    
maintenance.                                                                                                                    
                                                                                                                                
Senator  Micciche reflected  on the  potential savings  from                                                                    
the bill,  and thought it  was a worthwhile  investment, and                                                                    
would hopefully  be a model  for school construction  in the                                                                    
future.                                                                                                                         
                                                                                                                                
Vice-Chair Bishop MOVED  to report SCS CSHB  212(FIN) out of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal  note. There being NO  OBJECTION, it was                                                                    
so ordered.                                                                                                                     
                                                                                                                                
SCS CSHB 212(FIN)  was REPORTED out of committee  with a "do                                                                    
pass"  recommendation and  with one  new fiscal  impact note                                                                    
from the Department of Education and Early Development.                                                                         
                                                                                                                                
9:42:45 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:46:12 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
CS FOR HOUSE BILL NO. 331(FIN)                                                                                                
                                                                                                                                
     "An Act establishing the  Alaska Tax Credit Certificate                                                                    
     Bond Corporation; relating to  the issuance of bonds by                                                                    
     the  Alaska Tax  Credit  Certificate Bond  Corporation;                                                                    
     relating to  purchases of  tax credit  certificates and                                                                    
     refunds and  payments of tax  credits; relating  to the                                                                    
     oil  and gas  tax credit  fund; relating  to overriding                                                                    
     royalty   interest   agreements;   providing   for   an                                                                    
     effective  date  by  repealing the  effective  date  of                                                                    
     secs. 2, 5,  8, 10, 31, 37, and 40,  ch. 3, SSSLA 2017;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
9:46:12 AM                                                                                                                    
                                                                                                                                
Co-Chair MacKinnon directed attention to the bill.                                                                              
                                                                                                                                
SHELDON FISHER, COMMISSIONER,  DEPARTMENT OF REVENUE, stated                                                                    
he would  present HB 331  and provide context.  He mentioned                                                                    
the  companion   bill  that  had  been   introduced  by  the                                                                    
governor.  He discussed  the presentation  "State of  Alaska                                                                    
Department of Revenue - HB331:  Oil & Gas Tax Credit Bonds,"                                                                    
(copy on file).                                                                                                                 
                                                                                                                                
Commissioner  Fisher showed  slide  2,  "Bill Objective  #1:                                                                    
Critical   component   to   Governor's   economic   stimulus                                                                    
package":                                                                                                                       
                                                                                                                                
     From 2015    2017, private  sector jobs are  down ~3.8%                                                                    
     (9,200 jobs.)                                                                                                              
     ? Oil and Gas industry jobs are down ~30.8%                                                                                
     ? For 2018, ISER forecasts  year over year losses of an                                                                    
     additional 0.7%                                                                                                            
     This  bill  will  both  provide  an  initial  boost  of                                                                    
     funding and  resolve the uncertainty  surrounding these                                                                    
     payments.                                                                                                                  
     ?  Provide $700  million or  more economic  stimulus in                                                                    
     2018 to the oil and gas sector                                                                                             
     ? Resolve the uncertainty  hanging over this sector and                                                                    
     allow small producers to plan                                                                                              
         ? Seeks to unfreeze Alaska credit markets                                                                            
          ? Seeks to incentivize new spending in Alaska                                                                       
          ? This could mean substantial numbers of new jobs                                                                   
                                                                                                                                
9:49:17 AM                                                                                                                    
                                                                                                                                
Commissioner Fisher  turned to slide 3,  "Bill is Structured                                                                    
to Balance Competing Interests":                                                                                                
                                                                                                                                
     The Balance:                                                                                                               
     ?  The  Credit holders  to  pay  for  the cost  of  the                                                                    
     borrowing                                                                                                                  
     ?  Provides Small  Producers  certainty  and cash  they                                                                    
     need to invest                                                                                                             
     ?  Maintains the  state's credibility  by acknowledging                                                                    
     our part in creating this situation                                                                                        
                                                                                                                                
     State Fiscal Budget                                                                                                        
     ?Forecasted FY 19 deficit of ~$300M after PF Draw                                                                          
     ?Deficit increases $155M without this program                                                                              
                                                                                                                                
    Maintain State Credibility Support Small Producers                                                                          
      The state  encouraged investment based on  promises of                                                                    
     support                                                                                                                    
                                                                                                                                
     Support Small Producers                                                                                                    
     Strategic interest in maintaining small producers                                                                          
     ?Bank lending has essentially stopped                                                                                      
                                                                                                                                
Commissioner  Fisher  noted  that  the  credit  program  was                                                                    
initiated in  part by  the legislature,  in part  to attract                                                                    
smaller producers  to the state  to increase  production and                                                                    
competition.  The   slide  also  showed  an   excerpt  of  a                                                                    
promotional   brochure  used   by   DOR   at  oil   industry                                                                    
conferences.                                                                                                                    
                                                                                                                                
9:51:11 AM                                                                                                                    
                                                                                                                                
Commissioner Fisher reviewed slide 4,  "Oil & Gas Tax Credit                                                                    
Background":                                                                                                                    
                                                                                                                                
     2003:  First   oil  &  gas   tax  credits   created  to                                                                    
     incentivize new exploration.                                                                                               
     Credits could only offset the company's taxes                                                                              
                                                                                                                                
     2006:   Transferable   tax  credits   introduced   with                                                                    
     transition to profits-based tax                                                                                            
     New  credits  for  capital expenditures  and  operating                                                                    
     losses  expanded  incentives  to  include  small  field                                                                    
     developers                                                                                                                 
    State repurchases authorized, with caps and limits                                                                          
                                                                                                                                
     2007:  Oil  & Gas  Tax  Credit  Fund established,  with                                                                    
     statutory  formula  tied  to  production  tax  revenue.                                                                    
     Annual per-company caps eliminated                                                                                         
                                                                                                                                
     2010:   Cook  Inlet   Recovery  Act   incentivized  new                                                                    
     production  to offset  gas  shortages in  Southcentral.                                                                    
     New incentive tied to drilling costs                                                                                       
     Because of  minimal Cook Inlet taxes,  credits were not                                                                    
     expected to be supported by new revenues                                                                                   
                                                                                                                                
     2013: SB  21 eliminated capital credit  on North Slope,                                                                    
     replaced  with  per-barrel  credit tied  to  price  and                                                                    
     production                                                                                                                 
                                                                                                                                
     2016-17  HB247  and  HB111 wind  down  cashable  credit                                                                    
     programs                                                                                                                   
                                                                                                                                
Commissioner  Fisher summarized  that  the repurchase  being                                                                    
contemplated  was  based  on addressing  historical  credits                                                                    
that had been  earned prior to 2017. He thought  there was a                                                                    
general consensus that  the state owed the  amounts, and the                                                                    
bill was an intent to  address the matter in a comprehensive                                                                    
way that was beneficial to all parties.                                                                                         
                                                                                                                                
9:52:24 AM                                                                                                                    
                                                                                                                                
Commissioner Fisher showed slide 5, "Oil & Gas Tax Credit                                                                       
Background":                                                                                                                    
                                                                                                                                
     Oil & Gas Tax Credits Have Helped Heat Alaskans' Homes                                                                     
          ? Incentivized Hilcorp to take over aging Cook                                                                        
          Inlet assets and extend field life                                                                                    
          ? Brought new companies into Alaska, (Bluecrest,                                                                      
          Furie, etc.) to look for gas                                                                                          
          ? Southcentral gas supply shortage essentially                                                                        
          solved                                                                                                                
          ? Threat of brown-outs gone                                                                                           
          ? Protected energy security of tens of thousands                                                                      
          of Alaskans                                                                                                           
                                                                                                                                
     Oil & Gas  Tax Credits Have Created  Potential for More                                                                    
     Production                                                                                                                 
          ? New fields potentially mean new oil: Pikka,                                                                         
          Nuna                                                                                                                  
          ? Governor's economic stimulus goal                                                                                   
               o More revenue from production equals                                                                            
               o New jobs, new royalties, new revenues for                                                                      
              schools and government services                                                                                   
               o Economic ripple effect                                                                                         
                                                                                                                                
                                                                                                                                
9:53:20 AM                                                                                                                    
                                                                                                                                
                                                                                                                                
Commissioner Fisher discussed slide 6, "Oil & Gas Tax                                                                           
Credit Background: The Challenge":                                                                                              
                                                                                                                                
     ? Historically (FY08-15), the State paid tax credits                                                                       
     annually as presented                                                                                                      
          o FY16-FY18 state unable to pay all pending tax                                                                       
          credits                                                                                                               
          o FY2016 veto set total payment at $500 million                                                                       
          o    FY2017-18    appropriations   at    statutory                                                                    
          calculation ($30 million & $77 million)                                                                               
     ? The O&G Tax Credit Fund statute (AS 43.55.028) sets                                                                      
     out a formula for computing the appropriation to the                                                                       
     fund for cash payment of tax credits                                                                                       
          o  The formula  is based  on a  percentage of  the                                                                    
          profits  tax  calculation  (AS  43.55.011)  before                                                                    
          application  of credits,  based  on the  projected                                                                    
          oil price for the coming year                                                                                         
     ? At a projected price of $60 or higher, the statutory                                                                   
     formula is                                                                                                                 
     10% of the tax calculation                                                                                                 
     ? At a projected price of less than $60, the statutory                                                                   
     formula is                                                                                                                 
     15% of the tax calculation                                                                                                 
     o Most recent FY19 forecast, per the Spring RSB                                                                            
     Update, is $63/bbl                                                                                                         
                                                                                                                                
Commissioner Fisher mentioned the nuance that the statutory                                                                     
formula had a hinge at $60/bbl oil price. If the projected                                                                      
price was above, //                                                                                                             
                                                                                                                                
9:55:11 AM                                                                                                                    
                                                                                                                                
Commissioner Fisher displayed slide 7, "Oil & Gas Tax                                                                           
Credit Background: The Challenge":                                                                                              
                                                                                                                                
Annual statutory appropriation schedule per Spring forecast                                                                     
                                                                                                                                
Estimated Statutory                                                                                                             
Payment ($mm)                                                                                                                   
FY19 FY20 FY21 FY22 FY23 FY24                                                                                                   
$184 $168 $168 $167 $170 $89*                                                                                                   
(note: based  on credits held  to-date, all will be  paid by                                                                    
FY2023; *final forecasted credits in FY2024)                                                                                    
? Impact of reducing payments to the Statutory Formula                                                                          
o Exploration and development in some cases halted                                                                              
o  Some  banks have  frozen  supply  of further  credit  for                                                                    
Alaska oil and gas exploration                                                                                                  
?  Reduction   below  this  figure  without   passage  of  a                                                                    
replacement  program  such as  in  this  bill could  further                                                                    
depress development                                                                                                             
                                                                                                                                
9:57:05 AM                                                                                                                    
                                                                                                                                
Commissioner  Fisher reviewed  slide 8,  "Proposed Solution:                                                                    
Issue  Bonds and  use  proceeds  to pay  off  Tax Credits  -                                                                    
Credit holders  cover the cost  of borrowing by  accepting a                                                                    
discount on credits":                                                                                                           
                                                                                                                                
     Example:  Assume Credit  holder has  $100M in  Credits:                                                                    
     $50  million issued  in 2016  + $50  million issued  in                                                                    
     2017                                                                                                                       
                                                                                                                                
     Program offers two alternative discount rates                                                                              
       5.1% represents the State's cost of borrowing                                                                            
          ? Estimated 3.6% Total Interest Cost +1.5%                                                                          
     ? 10%  is mid-point  between State's cost  of borrowing                                                                    
     and the credit holder's                                                                                                    
     Weighted Average Cost of Capital (WACC)                                                                                    
                                                                                                                                
     10% is  the Base Rate.  To qualify for the  lower rate,                                                                    
     the Credit Holder must:                                                                                                    
     ? Agree to an Overriding Royalty Interest (ORRI)                                                                           
     ?  Commit to  reinvest the  money in  Alaska within  24                                                                    
     months                                                                                                                     
     ? Agree  to early waiver of  confidential seismic data,                                                                    
     or                                                                                                                         
     ? Have Refinery or Gas Storage Credits                                                                                     
                                                                                                                                
     The  Discount  is  applied to  each  year  of  payments                                                                    
     starting in Year 2                                                                                                         
                                                                                                                                
                                                                                                                                
Co-Chair MacKinnon handed the gavel to Co-Chair Hoffman.                                                                        
                                                                                                                                
10:00:26 AM                                                                                                                   
                                                                                                                                
Senator von Imhof  asked if the four bullet  points on slide                                                                    
8 were an "or" scenario rather than an "and" scenario.                                                                          
                                                                                                                                
Commissioner   Fisher  confirmed   that  the   bullets  were                                                                    
alternatives.                                                                                                                   
                                                                                                                                
Senator von  Imhof asked  if the  Commissioner Fisher  had a                                                                    
chance to discuss //                                                                                                            
                                                                                                                                
Department  of Revenue  considered that  the department  had                                                                    
worked through the  mechanics to address //  He thought that                                                                    
the majority //                                                                                                                 
                                                                                                                                
10:02:00 AM                                                                                                                   
                                                                                                                                
Commissioner  Fisher  showed  slide 9,  "Proposed  Solution:                                                                    
Issue  Bonds and  use  proceeds  to pay  off  Tax Credits  -                                                                    
Credit holders  cover the cost  of borrowing by  accepting a                                                                    
discount on credits":                                                                                                           
                                                                                                                                
     COMPANY X Tax Credits: Potential Impact of HB331/SB176                                                                     
     REVISED April 2018 - appropriation schedule per Spring                                                                     
     forecast                                                                                                                   
     Total certificates in "2016" basket $50,000,000                                                                            
     Total certificates in "2017" basket $50,000,000                                                                            
     Total conditional 2017 certificates $0                                                                                     
     Total $100,000,000                                                                                                         
                                                                                                                                
     At the forecasted oil price and resulting statutory                                                                        
     formula, this theoretical company would expect to                                                                          
    receive all their credit payments over five years.                                                                          
     Participating in the bond program would cost them                                                                          
     between 8.5% and 15.2% of face value.                                                                                      
                                                                                                                                
The  slide   also  showed  a  table   entitled  'Anticipated                                                                    
Prorated Payments and Estimated Discounted Value.'                                                                              
                                                                                                                                
Commissioner  Fisher explained  that  slide 9  had showed  a                                                                    
fictitious company that // He drew attention to //                                                                              
                                                                                                                                
Commissioner Fisher  noted that  the greater amount  of time                                                                    
//                                                                                                                              
                                                                                                                                
Co-Chair  Hoffman   handed  the   gavel  back   to  Co-Chair                                                                    
MacKinnon.                                                                                                                      
                                                                                                                                
10:05:40 AM                                                                                                                   
                                                                                                                                
Senator von  Imhof thought  slide 9  was helpful.  She asked                                                                    
about  cash  flow, and  asked  if  the bill  offered  credit                                                                    
holders a lump sum. //                                                                                                          
                                                                                                                                
Commissioner  Fisher  stated  that  the  way  the  bill  was                                                                    
structured, it  was an  option to  have a  lump sum.  He had                                                                    
communicated  a fair  amount  with  credit-holders over  the                                                                    
previous 90  days, and had  highlighted the options  as well                                                                    
as a personalized  estimates of what the //  He relayed that                                                                    
no  credit-holders   had  expressed   an  interest   in  not                                                                    
participating in the proposed program.                                                                                          
                                                                                                                                
Commissioner   Fisher  continued   addressing  Senator   von                                                                    
Imhof's question. He  pondered the question of  how much the                                                                    
state should  be appropriating.  He believed  the department                                                                    
had aggressively asked companies, and ///                                                                                       
                                                                                                                                
10:08:21 AM                                                                                                                   
                                                                                                                                
Senator von Imhof  asked if it was an option  to take a lump                                                                    
sum or  payments over time.  She wondered if the  bonds were                                                                    
sold //                                                                                                                         
                                                                                                                                
Commissioner Fisher  stated that  subsequent slides  and Mr.                                                                    
Alper would  delve in  to the  matter further.  He explained                                                                    
that the passage of the  bill would result in the department                                                                    
//                                                                                                                              
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
looked at  the column on the  left of slide 9,  which was //                                                                    
He informed that //                                                                                                             
                                                                                                                                
10:10:05 AM                                                                                                                   
                                                                                                                                
Senator Micciche  considered that  the tax  credit liability                                                                    
was a  zero-interest debt, and  the bill would allow  for //                                                                    
He checked for understanding.                                                                                                   
                                                                                                                                
Commissioner Fisher  thought the  description was  fair, but                                                                    
stated  that  the  cash-back would  cover  interest  in  the                                                                    
future. He stated that the  bill was not designed to benefit                                                                    
the  state  monetarily,  but  did not  //  The  program  was                                                                    
designed to  keep the state  control and allow  companies to                                                                    
//                                                                                                                              
                                                                                                                                
Senator Micciche thought that  the program provided pay-back                                                                    
to companies at a lower rate  than could be borrowed, and //                                                                    
He  wanted   to  clarify  that  the   discount  covered  the                                                                    
interest, and also //                                                                                                           
                                                                                                                                
Commissioner Fisher concurred.                                                                                                  
                                                                                                                                
10:12:36 AM                                                                                                                   
                                                                                                                                
Commissioner Fisher showed slide 10, "What the Bill Does":                                                                      
                                                                                                                                
     Five Essential Parts of HB331:                                                                                             
     1.  Creates  the  Alaska Tax  Credit  Certificate  Bond                                                                    
     Corporation,  with   various  powers   and  authorities                                                                    
     defined                                                                                                                    
     2. Amends  existing provisions of the  tax credit fund,                                                                    
     AS 43.55.028, to conform the  existing program with the                                                                    
     new bonding alternative                                                                                                    
     3.  Creates   new  subsections   in  AS   43.55.028  to                                                                    
     establish   the   process    for   offering,   valuing,                                                                    
     discounting, and purchasing credit certificates                                                                            
     4. Authorizes  the Department  of Natural  Resources to                                                                    
     negotiate  overriding royalty  interests  (ORRIs) as  a                                                                    
     mechanism to obtain a reduced discount rate                                                                                
     5. Repeals  the delayed sunset  of the tax  credit fund                                                                    
     itself, so  as to avoid complex  conforming language in                                                                    
     the  future. This  does not  change the  elimination of                                                                    
     new cashable tax credits                                                                                                   
                                                                                                                                
Commissioner Fisher stated that slide  10 was intended to be                                                                    
a concise bill analysis.                                                                                                        
                                                                                                                                
Mr.  Alper  stated that  the  slide  was  intended to  be  a                                                                    
sectional analysis for  the bill. // He used  the example of                                                                    
a // The bond payments were exempted //                                                                                         
                                                                                                                                
Mr. Alper continued his remarks on slide                                                                                        
                                                                                                                                
10:15:17 AM                                                                                                                   
                                                                                                                                
Vice-Chair Bishop could  not find a timeline  // He wondered                                                                    
//                                                                                                                              
                                                                                                                                
Mr. Alper  stated that the  negotiation was not  explicit in                                                                    
the bill, and it was expected that //                                                                                           
                                                                                                                                
Senator  Micciche  thought  the  different  deals  could  be                                                                    
negotiated //                                                                                                                   
                                                                                                                                
Mr. Alper  answered in the  affirmative, and added  that DOR                                                                    
would be expected to calculate a risk factor //                                                                                 
                                                                                                                                
Mr. Alper continued to address slide 10, and //                                                                                 
                                                                                                                                
10:17:52 AM                                                                                                                   
                                                                                                                                
Senator Micciche asked  to go back to slide  9, and observed                                                                    
the credits  // He asked if  there was value assumed  to the                                                                    
state //                                                                                                                        
                                                                                                                                
Mr. Alper thought  it was important that to  the extent that                                                                    
credits were  sold to  major producers,  // The  state would                                                                    
continue  to //  The program  would  put a  floor under  the                                                                    
value. A company distress //                                                                                                    
                                                                                                                                
Senator Micciche  pointed out  that the  value to  the state                                                                    
was likely //                                                                                                                   
                                                                                                                                
Commissioner   Fisher   agreed   with   Senator   Micciche's                                                                    
suggestion. He stated  that one of the features  of the bill                                                                    
was that  a credit-holder had to  // There were a  number of                                                                    
features //                                                                                                                     
                                                                                                                                
10:20:22 AM                                                                                                                   
                                                                                                                                
Commissioner Fisher addressed  slide 11, "Proposed Solution:                                                                    
Issue  Bonds and  use  proceeds  to pay  off  Tax Credits  -                                                                    
Credit holders  cover the cost  of borrowing by  accepting a                                                                    
discount on credits":                                                                                                           
                                                                                                                                
     ?Step 1: Secure commitment from Credit Holders to                                                                          
     participate in Program.                                                                                                    
     ? Provide definitive statement of proceeds available                                                                       
     under the program.                                                                                                         
     ?   Interested   credit    holders   make   irrevocable                                                                    
     commitment.                                                                                                                
     ?Step 2: Issue Bonds                                                                                                       
     ? First issuance (for existing certificates):                                                                              
     o Face Value: $807mm (for the purposes of this                                                                             
     analysis, we are assuming no credits will be sold to                                                                       
     major producers to offset taxes)                                                                                           
     o Bond Issuance: $683mm-$738mm, could be issued as                                                                         
     soon as August 2018                                                                                                        
     ? Future issuances, for anticipated certificates                                                                           
     o  Face  Value:  $130-180mm (est.),  issued  in  August                                                                    
     2019-August 2021                                                                                                           
                                                                                                                                
                                                                                                                                
10:21:30 AM                                                                                                                   
                                                                                                                                
Commissioner Fisher  spoke to slide 12,  "Proposed Solution:                                                                    
Issue  Bonds and  use  proceeds  to pay  off  Tax Credits  -                                                                    
Credit holders  cover the cost  of borrowing by  accepting a                                                                    
discount on credits":                                                                                                           
                                                                                                                                
     Step  3: Purchase  Tax  Certificates  at Fair  Discount                                                                    
     Rate                                                                                                                       
     Two options:  10% discount rate or  discount rate equal                                                                    
     to state cost of capital                                                                                                   
     (approx. 5.1%)                                                                                                             
     ? Option 1: 10% rate  no strings attached                                                                                  
     o Balances State's and credit holders' interests                                                                           
     o Greater than  State's cost of capital,  less than tax                                                                    
     credit holders' cost of capital                                                                                            
     o Covers State's costs of financing                                                                                        
     ?  Option   2:  5.1%  rate  (approx.State's    cost  of                                                                    
     capital)  strings attached                                                                                                 
     o Tax credit  holder can get lower  discount rate (less                                                                    
     discount from  face value) in  exchange for any  one of                                                                    
     four options:                                                                                                              
     1. Overriding royalty of equivalent value                                                                                  
     2. Investment commitment of  equivalent value within 24                                                                    
     months                                                                                                                     
   3. Waiver of seismic data confidentiality waiver, or                                                                         
     4. Refinery / gas storage credit                                                                                           
                                                                                                                                
10:21:43 AM                                                                                                                   
                                                                                                                                
Commissioner Fisher addressed  slide 13, "Proposed Solution:                                                                    
Issue  Bonds and  use  proceeds  to pay  off  Tax Credits  -                                                                    
Credit holders  cover the cost  of borrowing by  accepting a                                                                    
discount on credits":                                                                                                           
                                                                                                                                
     Step 4: Discount Covers State's Bonding Costs                                                                              
     Bond terms are  not described in bill,  but current our                                                                    
     thinking is:                                                                                                               
     ? 10 year term for each bond issue                                                                                         
     ? All-in Cost of Funds (estimated) is 3.6%                                                                                 
     ? Back-loaded  debt service to match  projected profile                                                                    
     of state revenues                                                                                                          
     ?  For initial  bond  issue, years  1-2 interest  only;                                                                    
     years  3-5 year  increasing  debt  service; years  6-10                                                                    
     flat payment to fully pay off debt                                                                                         
     ? For  subsequent bond issues, years  1-9 interest only                                                                    
     with  balloon  payment  in  year   10.  These  will  be                                                                    
     comparably smaller issues                                                                                                  
     ?  Objective   with  each   purchase  option   is  cost                                                                    
     equivalency:                                                                                                               
     Present Value (PV) of total  debt service will be equal                                                                    
     to  or  less  than   PV  of  appropriations  under  the                                                                    
     statutory payment formula                                                                                                  
                                                                                                                                
Commissioner Fisher stated that the terms on the bottom of                                                                      
the slide were not defined in the bill, but //                                                                                  
                                                                                                                                
10:22:34 AM                                                                                                                   
                                                                                                                                
Commissioner Fisher spoke to slide 14, "Major Changes Made                                                                      
in the House":                                                                                                                  
                                                                                                                                
     ? 45-day  time limit  for constitutional  challenges to                                                                    
     the bond program                                                                                                           
     ? Reduce  calculation of  future appropriations  to the                                                                    
     tax credit  fund, and  expectation of  future payments,                                                                    
     to  companies  who  do  not  participate  in  the  bond                                                                    
     program                                                                                                                    
     ? Additional conditions and  information related to the                                                                    
     "reinvestment" provision  as a mechanism to  obtain the                                                                    
     lower discount rate                                                                                                        
          ? Maximize Alaska hire and use of Alaska                                                                              
          contractors                                                                                                           
          ? Move project towards production                                                                                     
          ?"Clawback" of incremental payment if investment                                                                      
          targets not met                                                                                                       
     ?  Repeal   of  delayed   sunset  of  "028"   fund  and                                                                    
     conforming changes,  which was  by HB111 set  to repeal                                                                    
     after the last credit is paid                                                                                              
     ? Stylistic rewrite due to  first CS of governor's bill                                                                    
     (LAW to Leg Legal)                                                                                                         
                                                                                                                                
Commissioner Fisher //                                                                                                          
                                                                                                                                
Mr. Alper added that the intent of the //                                                                                       
                                                                                                                                
10:26:45 AM                                                                                                                   
                                                                                                                                
Commissioner  Fisher   presented  slide  15,   "Benefits  of                                                                    
Program: Move  cost into periods where  state revenues match                                                                    
cash flow," which  showed a table entitled  'State of Alaska                                                                    
Debt Service  as a Percentage  of Unrestricted  General Fund                                                                    
Revenues.' He drew attention to  // He pointed out the total                                                                    
payment was $946  million. The total payment  under the bill                                                                    
would be a little over $1 billion, including //                                                                                 
                                                                                                                                
Co-Chair MacKinnon  referenced the // She  observed that the                                                                    
// She asked if the commissioner had run similar models //                                                                      
                                                                                                                                
Commissioner   Fisher  stated   that   the  department   had                                                                    
considered a series  of alternatives that it  could show the                                                                    
committee. He //                                                                                                                
                                                                                                                                
10:29:29 AM                                                                                                                   
                                                                                                                                
Commissioner Fisher thought one of  the benefits of the bill                                                                    
was four  or so years  with moderate payments,  during which                                                                    
the state  could work on  the state's fiscal  challenges. He                                                                    
thought the  // The  bill also  shifted payments  into years                                                                    
when  there was  an  expectation of  greater production.  He                                                                    
thought it was a greater like //                                                                                                
                                                                                                                                
Co-Chair    MacKinnon    appreciated   the    commissioner's                                                                    
explanation of timing of the  payments. She noted that there                                                                    
would also be a spike int eh actuarial //                                                                                       
                                                                                                                                
10:30:56 AM                                                                                                                   
                                                                                                                                
Senator  von  Imhof  expressed   concern  that  the  10-year                                                                    
amortization seemed  long. She thought that  there was merit                                                                    
to  the  //  She  thought  paying more  up  front  was  more                                                                    
fiscally prudent.  SHe considered  that shortening  the term                                                                    
by two or three years would //                                                                                                  
                                                                                                                                
Mr. Alper  clarified that  the structure  of the  bonds were                                                                    
not hard-coded  in the bill,  but rather were  structured //                                                                    
He reminded that there needed to be control of the //                                                                           
                                                                                                                                
Vice-Chair Bishop stated that there  was nothing in the bill                                                                    
that prevents //                                                                                                                
                                                                                                                                
10:32:42 AM                                                                                                                   
                                                                                                                                
Senator Micciche asked if the assumptions on slide //                                                                           
                                                                                                                                
Commissioner Fisher turned to slide 15, and stated that //                                                                      
                                                                                                                                
Mr. Alper noted that slide 15  [NOT SURE WHERE THESE 3 LINES                                                                    
GO, THEY GOT MOVED INADVERTANTLY!:( ]                                                                                           
                                                                                                                                
                                                                                                                                
Commissioner  Fisher jumped  to  slide 17,  "Impact on  debt                                                                    
capacity  and  credit rating,"  which  showed  a table  that                                                                    
depicted debt  capacity. He drew  attention to the  far left                                                                    
// He  referenced Co-Chair MacKinnon's comments  on PERS and                                                                    
TRS. He noted that all of the figures //                                                                                        
                                                                                                                                
Commissioner Fisher  continued to  address slide  17, noting                                                                    
that  //  Under the  structure  of  the  bill, there  //  He                                                                    
emphasized  that  he  would be  amendable  to  changing  the                                                                    
structure  of the  bill  depending upon  the  wishes of  the                                                                    
legislature. He  asserted that  the structure  flattened the                                                                    
obligation of the state, which  was part of the logic behind                                                                    
the structure  of the bill.  He would be pleased  to receive                                                                    
guidance from the legislature.                                                                                                  
                                                                                                                                
10:35:35 AM                                                                                                                   
                                                                                                                                
Co-Chair MacKinnon observed that //                                                                                             
                                                                                                                                
Vice-Chair Bishop thought the //                                                                                                
                                                                                                                                
Co-Chair MacKinnon  informed that  CCS //  with a  POMV draw                                                                    
had just passed from  Conference Committee. She thought that                                                                    
it would be nice to see the slide //                                                                                            
                                                                                                                                
Co-Chair MacKinnon //                                                                                                           
                                                                                                                                
10:37:05 AM                                                                                                                   
                                                                                                                                
DEVEN  MITCHELL, EXECUTIVE  DIRECTOR, ALASKA  MUNICIPAL BOND                                                                    
BANK  AUTHORITY,  DEPARTMENT  OF REVENUE,  stated  that  the                                                                    
policy of the Alaska Municipal  Bond Bank Authority was that                                                                    
//                                                                                                                              
                                                                                                                                
Mr.  Mitchell  continued  to  address  Co-Chair  MacKinnon's                                                                    
question.  He  suggested  that  the //  He  noted  that  the                                                                    
department  had  been  noting   the  debt  affordability  of                                                                    
PERS/TRS in  its analysis, but  had not considered  the debt                                                                    
affordability of //                                                                                                             
                                                                                                                                
Mr.  Mitchell  stated that  as  the  state considered  using                                                                    
other sources  of revenue, it should  provide more stability                                                                    
to annual revenue.  It had been his position that  the // He                                                                    
thought incorporating //                                                                                                        
                                                                                                                                
Co-Chair MacKinnon thought it was positive news that //                                                                         
                                                                                                                                
10:40:19 AM                                                                                                                   
                                                                                                                                
Mr. Alper addressed slide 18, "Fiscal Note Discussion":                                                                         
                                                                                                                                
     The  Department of  Revenue has  three separate  Fiscal                                                                    
     Note for HB331                                                                                                             
     ? OMB Component 121:  Appropriates annual agent fees of                                                                    
     $2,500  to the  Treasury Division  beginning in  FY2020                                                                    
     (UGF)                                                                                                                      
     ?  OMB Component  3211:  Appropriates estimated  FY2019                                                                    
     debt  service payment  for  bond  program ($27  million                                                                    
     UGF)                                                                                                                       
     ?  OMB  Component  123: Appropriates  estimated  FY2019                                                                    
     bond  proceeds  to  the   Commissioner  of  Revenue  to                                                                    
     purchase outstanding tax credits at a discounted value                                                                     
     ($737.9 million DGF; new fund code 1253)                                                                                   
     ? The numbers  in the second and third  Notes are based                                                                    
     on assumptions:                                                                                                            
          o All $807 million in certificates outstanding on                                                                     
          1/1/18 participate in the program                                                                                     
          o All achieve the reduced discount rate of 5.1%,                                                                      
          maximizing the payout                                                                                                 
     ?  No  expected  regulations,  no  recurring  staff  or                                                                    
     operating costs                                                                                                            
                                                                                                                                
Mr. Alper //                                                                                                                    
                                                                                                                                
10:41:59 AM                                                                                                                   
                                                                                                                                
Commissioner Fisher showed slide  19, "Conclusion: Oil & Gas                                                                    
Tax Credit Solution":                                                                                                           
                                                                                                                                
Governor's   economic   stimulus:  We   expect   substantial                                                                    
reinvestment in Alaskan projects                                                                                                
Support  Small  Producers  -  Unfreeze  pending  development                                                                    
projects                                                                                                                        
? Current  bank financing  to fields generating  tax credits                                                                    
is frozen in some cases                                                                                                         
? Need to pay off  credits so projects under development can                                                                    
be completed                                                                                                                    
? State  has a strategic  interest in  maintaining viability                                                                    
of small producers as it increases competition in the basin                                                                     
Need to Re-establish Alaska as a Premier O&G E&P Basin                                                                          
?   Alaska  has   reputational  issues   re:  oil   and  gas                                                                    
exploration and development that need to be                                                                                     
addressed now                                                                                                                   
? Alaska is highly prospective                                                                                                  
   Alaska  is  a   stable  environment  in  which  long-term                                                                    
projects can be mutually successful                                                                                             
More Revenue from Production is the Goal                                                                                        
?  Future royalties  equals: jobs,  funding for  schools and                                                                    
gov't services, economic growth                                                                                                 
Move cost into periods that match cash flow                                                                                     
A healthy and growing Alaska economy benefits all Alaskans!                                                                     
                                                                                                                                
10:43:16 AM                                                                                                                   
                                                                                                                                
Co-Chair MacKinnon  stated that  there had been  a questions                                                                    
as to the constitutionality of the bill //                                                                                      
                                                                                                                                
DOUGLAS GOE, STATE BOND  COUNCIL, PUBLIC FINANCE DEPARTMENT,                                                                    
ORRICK (via  teleconference), offered that his  office // He                                                                    
referenced  the  // He  considered  that  as the  court  had                                                                    
considered constitutional  debt. The  majority of  the cases                                                                    
were very clear, and Alaska's case was  //                                                                                      
                                                                                                                                
Mr.  Goe informed  that  there  were two  cases  that //  He                                                                    
considered if  the debt  was subject  to the  legislature to                                                                    
appropriate the  debt. He  // The  vast majority  of Supreme                                                                    
Courts  //  A  second  category was  often  referred  to  as                                                                    
revenue  debt  or  //  If   the  debt  was  payable  from  a                                                                    
particular  revenue  source  and   there  was  otherwise  no                                                                    
recourse to the GF of the state, it was an exception.                                                                           
                                                                                                                                
Mr.  Goe opined  that  the bill  was  carefully crafted  and                                                                    
constitutional. // He  was prepared to say that  if the bill                                                                    
was adopted by the legislature //                                                                                               
                                                                                                                                
10:48:47 AM                                                                                                                   
                                                                                                                                
Mr. Goe considered the element in the bill that put a 45-                                                                       
day period on any challenges to  the bill. He thought it was                                                                    
important  for the  state to  be able  to manage  its fiscal                                                                    
affairs and //                                                                                                                  
                                                                                                                                
10:49:48 AM                                                                                                                   
                                                                                                                                
PETER   CLINTON,   ING   CAPITAL,   NEW   YORK   CITY   (via                                                                    
teleconference),  stated   that  ING  Capital  had   been  a                                                                    
financier of many tax credits over the //                                                                                       
                                                                                                                                
                                                                                                                                
Mr. Clinton  thought the bill  to a certain extent  was very                                                                    
consistent with  // He stated  that ING Capital  had several                                                                    
large corporate relationships in Alaska, and //                                                                                 
                                                                                                                                
10:52:36 AM                                                                                                                   
                                                                                                                                
Mr. Clinton  continued his remarks,  and thought it  was not                                                                    
unusual to //                                                                                                                   
                                                                                                                                
Mr. Clinton  added that  // He thought  it was  a preferable                                                                    
outcome to //                                                                                                                   
                                                                                                                                
10:56:22 AM                                                                                                                   
                                                                                                                                
Mr. Clinton wanted  to make it clear that the  process was a                                                                    
professional approach to  the problem that he  had seen many                                                                    
times in the industry. //                                                                                                       
                                                                                                                                
10:57:20 AM                                                                                                                   
                                                                                                                                
REBECCA  LOGAN,   THE  ALASKA  SUPPORT   INDUSTRY  ALLIANCE,                                                                    
ANCHORAGE (via  teleconference), testified // She  read from                                                                    
a  letter authored  by the  AHTNA Corporation,  and from  //                                                                    
(copy on file ????) //                                                                                                          
                                                                                                                                
10:59:53 AM                                                                                                                   
                                                                                                                                
KARA  MORIARTY, ALASKA  OIL AND  GAS ASSOCIATION,  ANCHORAGE                                                                    
(via teleconference), testified in  support of the bill. She                                                                    
noted  that  the association  was  //  She stated  that  her                                                                    
comments  were reflective  of the  entire membership  // She                                                                    
thought there had been negative  impacts // She believed the                                                                    
state  should  honor  all outstanding  tax  credits  //  She                                                                    
thought  the bill  was an  innovative  approach to  repaying                                                                    
credits through  a bonding mechanism.  She thought  the bill                                                                    
would provide a level of certainty for members and //                                                                           
                                                                                                                                
11:02:44 AM                                                                                                                   
                                                                                                                                
Co-Chair   MacKinnon   discussed   the  schedule   for   the                                                                    
afternoon.                                                                                                                      
                                                                                                                                
11:03:30 AM                                                                                                                   
                                                                                                                                
Commissioner   Fisher   expressed   appreciation   for   the                                                                    
committee and the legislature for its consideration of the                                                                      
bill. He thought the bill was //                                                                                                
                                                                                                                                
Co-Chair MacKinnon stated that the Senate had followed the                                                                      
progress of the bill in the other body.                                                                                         
                                                                                                                                
CSHB 331(FIN) was HEARD and HELD in committee for further                                                                       
consideration.                                                                                                                  
                                                                                                                                
//                                                                                                                              
                                                                                                                                
ADJOURNMENT                                                                                                                   
11:04:45 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 11:04 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
HB 331 (FIN) Sectional SFIN CS-O.pdf SFIN 5/8/2018 9:30:00 AM
HB 331
HB331 Credit Bonds for SFIN 5-8-18.pdf SFIN 5/8/2018 9:30:00 AM
HB 331
HB 331 Support Schoffmann.pdf SFIN 5/8/2018 9:30:00 AM
HB 331
HB 331 Support Logan.pdf SFIN 5/8/2018 9:30:00 AM
HB 331
Hb 331 Support Nason.pdf SFIN 5/8/2018 9:30:00 AM
HB 331
HB 331 Support Duxbury - Copy.pdf SFIN 5/8/2018 9:30:00 AM
HB 331
HB 331 Support Duxbury.pdf SFIN 5/8/2018 9:30:00 AM
HB 331
HB 331 Support Christensen.pdf SFIN 5/8/2018 9:30:00 AM
HB 331
HB 331 Support Droop.pdf SFIN 5/8/2018 9:30:00 AM
HB 331
HB 331 Support Kissee.pdf SFIN 5/8/2018 9:30:00 AM
HB 331
HB 331 Support Stokes.msg SFIN 5/8/2018 9:30:00 AM
HB 331
HB 331 Support Meyrs.msg SFIN 5/8/2018 9:30:00 AM
HB 331
HB 331 Public Testimony Clemenz.pdf SFIN 5/8/2018 9:30:00 AM
HB 331