Legislature(2003 - 2004)
05/06/2003 09:01 AM Senate FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
May 06, 2003
9:01 AM
TAPES
SFC-03 # 77, Side A
SFC 03 # 77, Side B
SFC 03 # 78, Side A
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:01 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Robin Taylor
Senator Ben Stevens
Senator Donny Olson
Senator Lyman Hoffman
Also Attending: SENATOR TOM WAGONER; REPRESENTATIVE MIKE HAWKER;
REPRESENTATIVE CARL MORGAN; REPRESENTATIVE MIKE CHENAULT; LOREN
GERHARD, Southeast Conference;
Attending via Teleconference: From an offnet location: SARA
FISHER-GOAD, Alaska Industrial Development and Export Authority;
KEVIN BANKS, Division of Oil and Gas, Department of Natural
Resources; MIKE NUGENT, General Manager, Agrium; From Anchorage:
KEVIN PEARSON, Anchorage Economic Development Corporation, and
ARDOR Director; SUE COGSWELL, Price William Sound Economic
Development District; WANETTA AYERS, Executive Director, Southwest
Alaska Municipal Conference; From Fairbanks: JANET DAVISON,
Community Research Center, Fairbanks North Star Borough; KATHRYN
DODGE, Economic Development Coordinator, Fairbanks North Star
Borough; DEB HICKOK, President and Chief Executive Officer,
Fairbanks Convention and Visitors Borough, and member, Economic
Development Commission of the Fairbanks North Star Borough; JIM
DODSON, Chair, Fairbanks Economic Development Corporation
SUMMARY INFORMATION
SB 177-PERS/TRS COLA FOR ACTIVE DUTY MILITARY
The bill reported from Committee.
HB 203-AIDEA DIVIDENDS TO STATE
The Committee heard from the sponsor and the Alaska Industrial
Development and Export Authority. The bill was held in Committee.
HB 79-AK REGIONAL ECONOMIC ASSISTANCE PROGRAM
The Committee heard from the sponsor and representatives from
economic development organizations. A committee substitute was
adopted and the bill was reported from Committee.
HB 57-ROYALTY GAS CONTRACTS
The Committee heard from the sponsor of this bill and a companion
Senate bill, the Department of Natural Resources, and industry
representatives. The bill was held in Committee.
HB 170-MOTOR VEHICLE REGISTRATION FEES
This bill was scheduled but not heard.
SENATE BILL NO. 177
"An Act relating to cost-of-living benefits for retired
members in the public employees' retirement system and the
teachers' retirement system who are called to active military
duty; and providing for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken reminded the Committee of discussions on the
feasibility of incorporating the provisions of SB 26 with this
bill. He informed that "fiscal complications" are involved and
therefore each bill would be considered independently.
Co-Chair Green offered a motion to report SB 177 from Committee
with individual recommendations and accompanying fiscal note.
There was no objection and SB 177 MOVED from Committee with fiscal
note #1 from the Department of Administration.
HOUSE BILL NO. 203
"An Act relating to the definitions of 'net income' and
'unrestricted net income' for purposes of calculating the
dividends to be paid to the state by the Alaska Industrial
Development and Export Authority; and providing for an
effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this bill "clarifies the definition of
'net income' in regards to the annual dividend that AIDEA [Alaska
Industrial Development and Export Authority] pays to the State. If
passed, in FY 04 AIDEA dividend would raise somewhere between $9
and $18 million."
REPRESENTATIVE MIKE HAWKER testified on behalf of the House Finance
Committee that this bill addresses a "circumstance encountered" in
AIDEA operations and financial reporting in relation to the
statutory net income of the Authority. Under the provisions of
current statute, he informed that, AIDEA would not contribute "it's
regular" dividend to the State general fund in FY 04. He explained
that current statute provides that AIDEA "shall distribute to the
State a judgmental determination between 25 and 50 percent of its
net income" to the State general fund for "general purposes".
Representative Hawker specified that the definition of "net income
subject to distribution" is the purpose of this legislation, noting
the accounting of net income by AIDEA is "somewhat different than
what the State believes [should be] subject to the dividend
calculation." He explained that current statute exempts inter-
government transfers, capital contributions and grants; opining,
"Clearly, those items that are not part of the operating results of
AIDEA that should be subject to some kind of a dividend."
Representative Hawker shared that this bill proposes including the
"write-down of fixed or hard assets, [i.e.] previous investments
that one would call impairment losses" to the income items not
utilized in the calculation of net income for dividend
distribution. He exampled the write-off in the past year of
substantial investments in the Alaska Seafood International (ASI)
processing plant in Anchorage as well as the Healy Clean Coal
project. He reminded that these investments were made by AIDEA
"many years ago" and that the write-down of those assets had no
affect on the cash flow of the Authority, nor its ongoing
operations during the reporting year. He elaborated that the
investments had not provided a cash return to AIDEA for a number of
years.
Representative Hawker instructed, "these types of impairment losses
are not uncommon; they are to be anticipated in operating an
operation like AIDEA." However, he expressed concern with the
ability of AIDEA to utilize write-downs of past investments as a
devise to avoid payment of a dividend. He noted that AIDEA
currently has $789 million unrestricted net assets, $356 million of
which is unrestricted cash and investments. Therefore, he surmised
this legislation would "facilitate a steady, regular, recurring and
predictable dividend from AIDEA," to the benefit of financial
planning for the State. He furthered that the provisions of this
legislation would not impose an egregious restriction on the
Authority's net income. Rather, he opined, it would provide a
"stable environment" for relations with the Authority's debtor
agencies, lenders, "the financial community and the State and the
Nation as a whole."
Representative Hawker predicted this legislation would result in an
additional $18 million AIDEA dividend for FY 04, which he
considered "appropriate at this time".
Senator Bunde asked if the provisions of this legislation would
comply with generally accepted accounting principles (GAAP).
Representative Hawker replied that this bill would reconcile the
difference between GAAP, the required procedure by which AIDEA
reports financial statements, to a statutory definition of net
income, whereby the Legislature would create a dividend policy.
This policy, he said, would "modify the accountant's definition of
the all inclusive net income to exclude these particular items." In
his professional opinion, as a Certified Public Accountant, he
assured this would be in accordance with GAAP.
Co-Chair Wilken referenced a letter of opposition to this bill
dated April 1, 2003, from AIDEA.
Senator Olson wanted to know why AIDEA opposes this legislation.
SARA FISHER-GOAD, Alaska Industrial Development and Export
Authority, testified via teleconference from an off net location
about the Board's primary concern with the precedence a statutory
change to dividend calculations could set in creating a situation
whereby AIDEA could not pay a dividend.
Senator Olson asked the sponsor if this legislation would result in
the Authority investing in "less than profitable" ventures.
Representative Hawker asserted this would not affect the investment
policy of AIDEA. He recalled legislation passed the prior session,
which significantly redefined net income and unrestricted net
income and was precipitated by "the accounting world's change in
its presentation of financial statements". He characterized the
current legislation is a "finalization" of the changes made in the
earlier legislation and actually a "housekeeping" matter than a
policy direction. He surmised it would not encourage AIDEA to
operate in a manner other than the most prudent and in best
interest of the State.
Senator Taylor asked why the losses on investments, which have been
occurring for some period of time, are only recently reported as
such. He questioned whether the reasons are political. He compared
the practice to the recent national events involving the alleged
dubious accounting practices of the Enron Corporation. He
contended that the previous gubernatorial administration reported
the value of the seafood plant and the clean coal project as higher
than their actual worth. He therefore asked if the current
Murkowski Administration corrected the accounting procedures and
subsequently wrote down the losses.
Representative Hawker was unable to speak to the motives of actions
taken by AIDEA. However, he spoke to the practice of preparing
financial statements, which involves judgment decisions,
particularly judgments to the "realizability" of the value of
assets. He further informed that the impaired value of "long lived"
assets has been a matter of controversy due to inconsistencies. As
a result, he noted, accounting standards have been changed in the
past several years.
Senator Taylor asked if the State regularly audits AIDEA. If so, he
questioned why auditors had not identified the losses in the past
and subsequently require the Authority to account for them. He
pointed out that AIDEA had the ability to pay dividends to the
State during the previous administration.
Ms. Fisher-Goad spoke to a trigger mechanism that determines when
impairment losses are recognized. She informed that losses for the
Healy Clean Coal project have been written down once prior to the
occasion of the previous fiscal year. She noted that because ASI
underwent a process of refinancing and restructuring, the
impairment loss was not "recognized" until the previous fiscal
year. She stated that AIDEA produces audited financial statements
each year and that each legislator should receive copy of the
report.
Senator Taylor requested that financial auditors within the
Division of Legislative Finance review the financial statements. He
was concerned why the losses were not reflected earlier. He assured
he supports the legislation.
Co-Chair Wilken listed considerable discussion on the two projects
as well as pending federal legislation to "bail out" the clean coal
project as possible factors in the timing of the write-downs.
Co-Chair Wilken pointed out that the fiscal note amount indicates
an indeterminate cost to implement this legislation; however the
accompanying analysis estimates the cost to be between $8 million
and $9 million. He asked if a more definitive figure was available.
He also wanted an estimate of future revenues to the State as a
result of the changed dividend amounts.
Representative Hawker responded that the fiscal note is
indeterminate because the statute provides a "range upon which the
dividend may be judgmentally determined." The range, he said, is
between 25 to 50 percent of net income. He calculated a possible
dividend of $9,058,000 at 25 percent and $18,170,000 at 50 percent.
He was unaware of any disputes to the accuracy of these figures.
Co-Chair Wilken surmised that in a year that AIDEA unrestricted net
assets and/or investments was unfavorable, the State has the option
of not receiving a dividend.
Representative Hawker affirmed and clarified that current statute
provides that the legislature would be "statutorily post scribed
from taking any cash from AIDEA."
Senator Taylor suggested that with statutory change, AIDEA could be
liquidated and approximately $700 million deposited into the State
general fund.
Co-Chair Green asked for a definition of impairment losses.
Representative Hawker qualified that accounting terms are defined
similar to the manner in which attorneys define legal terms. He
described impairment loss as an investment in a "tangible hard
asset," such as a building, that has a "productive capacity", i.e.
would generate a return when utilized, but is no longer capable to
do so and subsequently "pay for itself". He exampled a building
fire as an event that could result in an impairment loss because
the value of the building would be less than the investment. He
specified that a major fire would be considered a catastrophic
impairment loss. He furthered that other events could result in an
impairment loss, telling of the investment in a coal loading
facility, with the return on investment dependent upon a contract
for the use of that facility. If the contract is not renewed, he
pointed out, the value of the facility is impaired and an
impairment loss results. He stated that an impairment loss is
reported in financial statements as an estimate of the reduction in
value.
Co-Chair Green referenced a portion of the sponsor statement [copy
on file], which reads as follows.
Under current statute there will be no AIDEA income available
for a dividend in fiscal 2004 as a result of impairment losses
recognized on the Healy Clean Coal Project and Alaska Seafood
International. Still, AIDEA has $789 million in unrestricted
net assets and $356 million of unrestricted cash and
investments from which a dividend could be paid. The dividend
formula proposed in House Bill 203 would make $9 to $18
million of this money available for a dividend to the State in
FY 04.
Co-Chair Green next directed attention to a handout titled
"Management Discussion and Analysis" [copy on file], which compares
assets and liabilities of FY 02 and FY 03. This information is
contained on page 13 of the AIDEA 2002 Annual Report [portions of
which are on file.] She asked if the unrestricted net income and
unrestricted cash figures cited in the sponsor statement reflect
the FY 03 amounts shown on the Analysis, and how the amounts
compare to previous years.
Representative Hawker replied that the amounts listed in the
sponsor statement reflect the amounts current as of June 30, 2002.
For comparison purposes, he referenced page 16 of the AIDEA 2002
Annual Report, titled "Balance Sheet" [copy on file]. He stated
that the figures are based on a two year "back trailing
calculation".
Co-Chair Green requested historical information from 2001 and 2002
for comparison purposes. She wanted to know whether a trend exists
in the "status of AIDEA".
Representative Hawker listed the cash and equivalence component for
FY 02 as $14,415,000; FY 01 as $28,600,000; and FY 00 $27,400,000.
He next listed the current investment securities amounts for FY 01
as $400,000,000 and $352,000,000 for FY 00. He stated that the
reductions were as a result of the write off of the impairment loss
from the two facilities.
Co-Chair Wilken asked the unrestricted net assets of FY 00
Representative Hawker answered $856 [million], qualifying this
amount is an "approximation, recognizing the change in format." He
furthered that the amount in FY 01 was $877 [million], and $789
[million] in FY 02.
Senator Taylor asked whether this legislation must be passed to
ensure the State receives a dividend from AIDEA in the upcoming
fiscal year.
Co-Chair Wilken affirmed.
Senator Olson referenced the June 30, 2002 Balance Sheet and asked
the percentage of AIDEA earnings derived from the Red Dog Mine and
how this legislation would affect that operation.
Representative Hawker deferred to AIDEA
Senator B. Stevens directed attention to pages 20 and 21 of the
AIDEA 2002 Annual Report titled, "Notes to Basic Financial
Statements" [copy on file]. He pointed out note (1) Organization
and Operations, lists the initial AIDEA bond obligation of $85
million for the Healy Clean Coal Project and $48 million for ASI,
totaling $133 million. He noted the write-down of the loss in these
investments is $93 million and he asked if additional write-downs
would occur for the balance of approximately $41.6 million invested
in these projects.
Representative Hawker again deferred to AIDEA.
Senator B. Stevens continued to page 26 and (7) Net Investment in
Direct Financing Leases, Notes and Development Projects [copy on
file] and cited a portion as follows.
The components of the Authority's net investment in direct
financing leases at June 30, 2002 are (stated in thousands):
Minimum lease payments receivable $824,645
Less unearned income (495,031)
Less impairment loss (25,600)
Net investment in direct financing leases
$304,014
Senator B. Stevens surmised the unearned income represents lease
payments or finance payments not collected. He requested an
explanation of the impairment loss in this context as it appeared
to be recorded as a payment not received rather than as an asset.
Representative Hawker explained the two investments made into these
projects, one into a hard asset, the other financing leases for
operations. He furthered that the second investment essentially
created a loan to provide funding to support the project. In this
instance, he said the asset is a loan to be repaid in the form of a
lease. The unearned income, he stated, represents the repayment of
the loan and the impairment loss represents a further reduction in
the value of the investment that would not be recouped.
Senator B. Stevens clarified two forms of impairment losses were
realized, one in the value of the asset, the other in the value of
future revenues from that investment.
Representative Hawker affirmed and noted the loss of value to the
State in this asset is manifested in the leases.
Ms. Fisher-Goad addressed the remaining $41.6 million invested in
the Healy and ASI projects that had not been written down to date.
She first clarified that no bonds were issued for the investment in
ASI.
Senator B. Stevens asked if AIDEA therefore purchased the facility
outright without bond financing.
Ms. Fisher-Goad affirmed. She explained that the value of ASI, for
the purpose of reporting an impairment loss, was determined by
calculating the "alternative use value" of the building.
Co-Chair Wilken again asked the status of the $41.6 million, and
whether it would be reported as an impairment loss in future
financial statements.
Ms. Fisher-Goad was not prepared to answer to the future of the two
projects. She noted that impairment losses were reported for the
projects, but emphasized that assets continue to depreciate and are
reported as such regardless of whether an impairment loss occurs.
Senator B. Stevens noted the potential that impairment losses on
these investments would be reported in future financial statements
would influence his support of this legislation because such write-
downs could impede the Authority's ability to pay a dividend to the
State.
Co-Chair Wilken understood that AIDEA recognizes $133 million in
asset value, and although $91 million has been written down, the
remainder of the investment has not yet "been dealt with".
Representative Hawker rephrased the question to AIDEA: He asked in
the context of future prospects, what is the current book value of
the coal project and of the ASI investments, and the prospects for
further impairment recognitions in future fiscal years.
Ms. Fisher-Goad repeated that she was not prepared to provide the
current book value of these assets nor whether the Authority
expects future impairment loss recognition.
Co-Chair Wilken requested this information be provided to the
Committee.
Ms. Fisher-Goad stated she would provide this information later in
the week.
Senator B. Stevens also requested information regarding the
impairment losses reported over the past five years. He indicated
language on page 14 of the AIDEA 2002 Annual Report, titled
"Management's Discussion and Analysis" [copy on file] referencing a
$10,419 impairment loss recorded in FY 01 for the Skagway Ore
Terminal. He expressed interest in the frequency of impairment loss
reporting by AIDEA.
Ms. Fisher-Goad would provide this information the following day.
Co-Chair Green also requested information regarding the
unrestricted cash investments and unrestricted net assets for the
same five years.
Ms. Fisher-Goad noted significant accounting changes were
implemented the previous year, cautioning that comparison would be
difficult.
Senator Taylor remarked that this legislation provides that if
impairment losses are recognized and allowed as an exclusion from
net income, a dividend would be available to the State in the
current fiscal year. He opined this issue is more important than a
determination of impairment losses in past years. Therefore, he
emphasized the importance of this legislation. He commented that
although he appreciated that the recording of the impairment
losses, as well as changing accounting principles, have "cleaned up
the books". However, he stressed his "attitude toward AIDEA" and
the asset base, is unchanged. He preferred to report the bill from
Committee and address the questions later in the process.
Co-Chair Wilken noted adequate time remained in the legislative
session to address this bill.
Co-Chair Wilken agreed this bill would provide a revenue source
that should be implemented.
SFC 03 # 77, Side B 09:48 AM
Co-Chair Wilken ordered the bill HELD in Committee.
HOUSE BILL NO. 79
"An Act extending the termination date of the Alaska regional
economic assistance program; and providing for an effective
date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken explained that this bill sponsored by the House
Community and Regional Affairs Committee would reauthorize "the
Alaska Regional Economical Assistance Program, better known as
ARDOR [Alaska Regional Development Organization], for five years
until July 1, 2008. He announced he prepared a committee substitute
that would change the extension date to one year.
REPRESENTATIVE CARL MORGAN, Chair, House Community and Regional
Affairs Committee, read talking points into the record as follows.
The Alaska Regional Development Organizations (ARDOR) Program
is the State's contribution to regional initiatives for
developing Alaska's economy.
There are currently 13 ARDORS statewide.
The Legislature first created the ARDOR Program in 1988.
The ARDOR Program provides a network of organizations to plan
and support economic development at the regional level.
Board members participation reflects a local commitment.
Each ARDOR, with 15-20 members, constitutes 150 plus local,
civic minded individuals who volunteer their time to achieve a
stronger economic base in their region.
The ARDOR Program is providing a return for the State's
investment.
The State provides $620,000 in grant funds. The ARDORs [have]
used these grant funds to leverage over $3 million in other
funds.
House Bill 79 extends this successful program to July 1, 2008.
Representative Morgan noted each ARDOR receives over $47,000 in
State funding.
Co-Chair Wilken spoke to a proposed committee substitute to extend
the commission for one year instead of the five years provided in
the bill.
Co-Chair Green moved for adoption of HB 79, 23-LS0493\D as a
working draft.
Co-Chair Wilken objected to speak to the changes proposed in the
committee substitute. He pointed out the $620,000 cost to the State
to fund this program. He indicated the 2003 annual report submitted
to the Legislature by ARDOR [copy not provided], is unclear whether
each regional organization is successful. He noted the Southeast
Regional Conference demonstrates success and an ability to measure
that success; however, he commented that others are "a little lax
as to where and what they're spending their money on and whether
indeed there's any results."
Co-Chair Wilken referenced a letter dated April 11, 2003 from
himself to Commissioner Blatchford of the Department of Community
and Economic Development [copy on file], suggesting elimination of
the ARDOR Program in FY 05. However, rather than eliminating the
program, Co-Chair Wilken informed the Committee of his intention to
review the matter during the legislative interim to ensure funds
allocated to the program are used wisely.
Co-Chair Wilken next directed attention to a letter to the House
Community and Regional Affairs Committee from the Alaska Municipal
League, dated February 20, 2003 [copy on file]. He informed this
letter also requests implementation of performance measures.
Co-Chair Wilken surmised the Department is agreeable to this
intent. Therefore, he suggested extending the program only one year
to allow for review of the findings the following legislative
session. He assured that if no problems are identified, the program
could be extended further.
Senator Olson requested the opinion of sponsor regarding the
proposed committee substitute.
Representative Morgan qualified that he had not reviewed the
proposed committee substitute and that he had no control over the
will of the Senate Finance Committee.
Senator Olson shared the co-chair's concerns about accountability;
however he attributed this to the maturing process of the
participants. He questioned the "wisdom" of a one-year termination
date.
Co-Chair Wilken reiterated this change would focus effort on
"developing the worth of the $650,000 expenditure." He suggested
all or a portion of these funds might be better spent elsewhere.
Regardless, he said the expenditures should be reviewed and the
findings "embodied" in the FY 05 budget.
Senator Olson asked the amount of federal funding involved in the
program.
Representative Morgan replied that the State appropriation garners
over $13 million annually.
There was no objection and the committee substitute, Version "D",
was ADOPTED as a working draft.
KEVIN PEARSON, Anchorage Economic Development Corporation, and
ARDOR Director, testified via teleconference from Anchorage in
favor of extending the ARDOR Program. Although the ARDOR Program
provides a small percentage of the funding for economic development
activities in Anchorage, he emphasized the sole reliance on these
funds by outlying communities. He was also concerned with the
"message" an extension of only one-year would portray to investors.
Mr. Pearson charged that the onus is on the Legislature as to what
information is needed to measure the program's success and justify
the expenditure. He furthered that the program is successful and
information is available to demonstrate this.
SUE COGSWELL, Price William Sound Economic Development District,
testified via teleconference from Anchorage about the participation
in the ARDOR program since 1991 and as an economic development
district since 2001. She told of projects to build a seafood
processing plant in Valdez, an economic development summit held in
Cordova and the hope for additional economic growth.
WANETTA AYERS, Executive Director, Southwest Alaska Municipal
Conference (SWAMC), testified via teleconference from Anchorage in
favor of reauthorization of the ARDOR Program on behalf of the 54
communities and 131 members of the Conference. She informed that
the Conference was formed in 1986 and earned ARDOR designation in
1989. She reported that State funding comprises 22 to 25 percent of
the Conference's budget during the past several years; federal
funding comprises approximately 25 percent; and over 50 percent of
the funding is derived from earned income. She noted that as a
designated economic development district, SWAMC saves the
communities of Southwestern Alaska "hundreds of thousands of
dollars, if not millions" annually by reducing the local match
requirement for federally funded projects. She furthered that the
SWAMC allows area communities to be more efficient and in a "better
position to take advantage of market opportunities".
Ms. Ayers told the Committee that in FY 02, SWAMC was selected by
the US Congress to administer a $30 million stellar sea lion
mitigation fund. She noted that little direction was provided in
the enabling legislation, although review of other mitigation
programs, the SWAMC board established three goals: achieve the
soonest possible distribution of fund to those directly impacted
but federal fisheries closures and restrictions, to minimize
administrative costs to one percent or less, and develop a
negotiated settlement process that has widespread support from the
communities, businesses and individuals most impacted. She reported
that all three objectives were achieved. She stated this is one
example of accomplishments ARDOR groups could realize.
Ms. Ayers opined that a one-year extension rather than a four-year
extension of the program would be "an indication of the State's
lack of commitment to economic development." She stressed the need
for an on-going commitment.
Co-Chair Wilken assured that if review of the ARDOR Program
determines that the expenditures are justifiable, he would support
increased funding for the program.
JANET DAVISON, Community Research Center, Fairbanks North Star
Borough, testified via teleconference from Fairbanks about her job
duties in monitoring economic development activities in the Borough
and measuring "gains and losses" in the community. She suggested
the Entrepreneurial Statement report she produces is a "starting
place" for measuring the success of economic development efforts.
She stressed that the funds allow for economic development efforts
is rural communities. She spoke to the benefits of the ARDOR
Program and the economic development opportunities it continues to
provide in both urban and rural communities.
KATHRYN DODGE, Economic Development Coordinator, Fairbanks North
Star Borough, testified via teleconference from Fairbanks that
economic development is a long-term commitment and does not
demonstrate results overnight. She remarked that a five-year
extension of the ARDOR Program would send a message of commitment.
She expressed that the Fairbanks ARDOR Program "compels" the
community to focus on economic development and encourages the
development of public and private partnerships in the "pursuit of
future economic development for the Borough and for the State."
Ms. Dodge described the local program's development of a
comprehensive economic development strategy and the subsequent
increased momentum and prioritization of projects. She stated the
local ARDOR Program obtained $331,000 in economic development
grants secured using the $44,000 State appropriation during the
past year. She gave examples of expenditures of these funds,
including assistance commercial fish processors in the region,
hosting public safety regional training ranges and development
efforts to create a cold weather testing industry.
DEB HICKOK, President and Chief Executive Officer, Fairbanks
Convention and Visitors Borough, and member, Economic Development
Commission of the Fairbanks North Star Borough, testified via
teleconference from Fairbanks that she understood the hard budget
decisions faced by the Committee, but stressed that economic
development is important. She spoke to the opportunity for "grass
roots" or "bottom up" economic development. She attested to the
success of the ARDOR Program in Fairbanks and the resulting
"heightened climate of economic development" since inception of the
program. She described the history of the organization, now
operating under the direction of professionals and receiving a
larger percentage of funding from the Borough. She disagreed with
Co-Chair Wilken's proposal for one-year extension, as this is too
short a goal for measurement.
JIM DODSON, Chair, Fairbanks Economic Development Corporation,
testified via teleconference from Fairbanks that the Corporation is
a recipient of funding from the Fairbanks North Star Borough. He
encouraged support of original version of the bill. He spoke to
measurable results in economic development and stressed the need
for economic development opportunities in the State. He pointed
out that additional funds would be needed in the future. He
supported a five-year extension of the ARDOR Program.
Senator Olson asked the potential increase or decrease of federal
funds received if the Program were extended one year rather than
five.
Co-Chair Wilken suspected no impact.
LOREN GERHARD, Southeast Conference testified in Juneau, that the
$47,000 appropriation to the ARDOR Program provides one-third of
unencumbered funding for the Conference, which is leveraged
approximately ten-to-one to receive federal funds and other grant
program funding. He stated that all of the funds are used for
improving economic opportunities in the Southeastern region.
Outside Juneau, he pointed out, the region is suffering
economically, and remarked that the ARDOR Program is a cost-
effective way to ensure that regions are addressing economic
development specific to each region.
Co-Chair Wilken opined that the report prepared by the Southeast
Conference is superior to the reports submitted by the other ARDOR
Programs. He expressed that this report would be used as an example
in efforts to improve the Program.
Senator Olson asked the impact a shorter termination date would
have on the Southeast Conference.
Mr. Gerhard replied that it would not affect the Program and the
receipt of federal funds, although it could effect planning for
future projects. He emphasized the benefits of the ability to
utilize the State appropriation as unencumbered funds to leverage
federal funding.
Senator Taylor offered a motion to report HB 79, 23-LS0493\D from
Committee with individual recommendations and accompanying fiscal
note.
Without objection, SCS HB 79 (FIN) with the $650,000 fiscal note #2
from the Department of Community and Economic Development, MOVED
from Committee.
CS FOR HOUSE BILL NO. 57(FIN)
"An Act amending the manner of determining the royalty
received by the state on gas production as it relates to the
manufacture of certain value-added products."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill "allows the Department of Natural
Resources commissioner to adjust the value of the State's royalty
share for gas used by a manufacturer for agricultural chemicals."
He noted a proposed committee substitute "Version C" was submitted
to the Committee by the sponsor. He requested a presentation of the
bill and a comparison of "Version C" to the House Finance committee
substitute [referred to as "Version X"].
REPRESENTATIVE MIKE CHENAULT, Sponsor, explained this bill "adds
certainty to in-State value-added manufacturing". Currently, he
informed, royalty prices are calculated in four different ways
which causes problems for manufacturers because the price of gas is
uncertain, as well as the royalty owed on that gas. He explained
that four years after the sale of product, an audit could determine
that the price was considerably higher, costing the manufacturer $4
to $5 million in additional royalties. He stated this legislation
would permit manufacturers to negotiate the price of the gas to
allow the manufacturers to sell it at a price that allows for a
profit.
SENATOR TOM WAGONER clarified this legislation pertains to the
"price of the State royalty share of gas".
Senator Bunde commented that residents of the Kenai Peninsula
oppose the level of State spending; however, this legislation
proposes increased State funding. He understood the need to support
viable industry. He asked the estimated cost to the State.
Representative Chenault cited the fiscal note, which predicts the
cost to be between zero and $11,5 million in lost royalty payments.
He listed the factors, including the negotiations reached by the
commissioner, employment opportunities and tangible benefits to the
communities.
Senator Taylor asked the version the sponsor supports.
Representative Chenault responded that the proposed committee
substitute, Version "C" mirrors Senate companion legislation and
reflects a compromise agreed upon by the Senate.
Senator Wagoner reiterated Version "C" is the preferred version.
Senator Taylor moved for adoption of CS HB 57, 23-LS0303\C as a
working draft.
Without objection the committee substitute was ADOPTED as a working
draft.
Senator Taylor revisited the potential cost to the State.
Senator Wagoner clarified the maximum $11.5 million predicted loss
of royalty revenues would occur over a period of several years.
Senator Taylor asked if this estimate is based on the provisions of
committee substitute Version "C" or the House Finance committee
substitute.
Representative Chenault replied Version "C".
Co-Chair Wilken noted a draft fiscal note, dated 5/5/03, addresses
the provisions in Version "C".
Senator Hoffman expressed concern that chemical fertilizing plants
nationwide are currently failing because the methane gas used in
stock feed is worth more than the finished product. He questioned
therefore the benefits of this legislation to provide jobs.
Representative Chenault could not speak to businesses elsewhere
failing, but stressed the economic impact the loss of jobs on the
Kenai Peninsula that would occur if the local facility failed. He
informed that personnel layoffs are currently under consideration,
although he attributed this to new ownership and because the plant
is operating at 70 percent of capacity.
Senator Hoffman asked if the sponsor would consider a shorter time
period for a negotiated price to minimize the loss of royalty
revenues.
Representative Chenault indicated he would have to give the matter
consideration before offering support.
Co-Chair Wilken referenced page 2 of the draft fiscal note, which
details the potential loss of royalties over the five-year period.
Co-Chair Wilken asked for an explanation of the current process and
why the royalty rate changes. He also asked for additional
information on the impact on the State general fund.
Representative Chenault remarked that this bill would not affect
current contracts for gas supplies. He explained the existing
process whereby the State and the producer negotiate a royalty
amount without input of the manufacturer. He stated that upon
review after four years, the State could determine that the
negotiated royalty was not a "fair price".
Co-Chair Wilken asked for an example of the producers in this
context.
Representative Chenault exampled Unocal and Marathon, noting that
all gas producers are involved in the royalty negotiation.
Co-Chair Wilken clarified the producer negotiates a long-term
contract for the "price of that feed stock" with the State.
Senator Wagoner told the Committee that the previous owner of the
manufacturing plant also discovered and produced the gas.
Currently, he said, Union Oil produces the gas, and Agrium operates
as the manufacturer.
Co-Chair Wilken next clarified the States receives 12.5 percent in
royalty from Unocal, the producer, which sells that gas to Agrium.
Representative Chenault affirmed and continued that the State could
conduct an audit of the royalty price negotiated with Unocal and
subsequently could determine that Unocal paid less than the worth
of the gas.
Co-Chair Wilken understood an agreement of the price was
negotiated.
Representative Chenault reiterated the existence of four different
methods to calculate the royalty amount. As a result, he stated the
State could determine additional payment is required, at which
point, Unocal would collect the funds from Agrium.
SFC 03 # 78, Side A 10:36 AM
Co-Chair Wilken asked if retroactive price adjustments are a
condition of the agreements between Unocal and Agrium.
Representative Chenault affirmed.
Representative Chenault reiterated this legislation would not
impact current contracts, however in future contract negotiations
Agrium, i.e. the manufacturer, would participate in negotiations
and the royalty price would remain at the negotiated amount for the
term of the contract.
Co-Chair Wilken asked if Unocal were able to receive a higher price
from the sale of gas to a buyer other than Agrium, whether the
difference would be assessed to Agrium.
Senator Wagoner told of the contract providing that Unocal would
supply gas to Agrium at a negotiated price. He noted one exception
is increased utility demand during winter months.
Representative Chenault emphasized this legislation would provide
assurances that under the terms of future contracts, the
manufacturer would pay the negotiated royalty price.
Co-Chair Wilken asked if new contracts would be implemented in FY
05 and FY 06.
Representative Chenault informed that one long-term contract is in
effect currently and that the remainder of the gas purchases are
subject to "spot market". He stated that the manufacture is
attempting to purchase an adequate supply of gas to operate the
facility.
Senator Wagoner furthered this legislation allows the commissioner
to negotiate profit sharing with Agrium if determined to be in the
best interest of the State.
KEVIN BANKS, Division of Oil and Gas, Department of Natural
Resources, testified via teleconference from an offnet location,
that leases negotiated since statehood are market-value leases. He
explained that the royalty value is subject to an evaluation using
four different measures to determine the market value of the
royalty. He noted that some leases in other states are gross
proceeds leases, which provides that the royalty paid by the lessee
is equal to the amount that the lessee sold the gas. He stated the
sale price of the gas is one of the four measurements utilized for
determining market value of royalty in Alaska and that the State is
allowed to consider the price between the lessee and its customers
compared to the market value as measured by other mechanisms.
Therefore, he pointed out, the sale price and the royalty price
could differ under the provisions of the lease agreement if the
market value is higher.
Mr. Banks stated that determinations of higher royalty amounts are
often made after an audit and after the initial royalties have been
paid. In these instances, he said, the lessee is required to pay
additional royalty amounts two or more years later.
Mr. Banks pointed out that gas supply contracts commonly allow the
lessee and its customer to agree to an "excess royalties" term. He
exampled contracts between gas producers operating in Cook Inlet
and utility companies include this provision.
Mr. Banks outlined the fiscal note estimates the amount of gas that
would be sold to Agrium and other entities, such as utilities, in
the future, not including gas currently under contract. He stated
the fiscal note assumes that a royalty contract would provide for
the State to collect additional royalties in the event the market
value is determined higher.
Co-Chair Wilken asked if an audit calculates the price of gas if it
were sold to a utility company, compared to the price charged
Agrium, and collects the difference from Agrium. He asked if this
legislation eliminates this review and stipulates that the value of
gas sold to utility companies has no bearing on the royalty amount
due from Agrium.
Mr. Banks affirmed.
Co-Chair Wilken clarified that this bill establishes a procedure by
which the royalty price is determined through negotiation, and
asked which parties are involved in these negotiations.
Mr. Banks replied the suppliers and Agrium negotiate and that the
State has no involvement.
Co-Chair Wilken asked if the State is therefore relinquishing the
utility value, or alternative customer value of gas sold to Agrium,
and for the benefit of fertilizer production on the Kenai
Peninsula.
Mr. Banks affirmed. He pointed out that Version "C" provides that
the commissioner has the discretion to set a royalty price for
between $2 and $2.43, as exampled in the draft fiscal note. He
stated that under normal circumstances the value is $2.43 and the
contract value is $2.00.
Co-Chair Wilken asked how the commissioner would determine the
actual amount.
Mr. Banks replied the commissioner must ensure that the contract
price is not unreasonable low, and that the prospective reduction
in royalty receipts would be balanced by employment opportunities
in the fertilizer manufacturing plant.
Senator Hoffman asked how often during six-year term of the
contract would the commissioner make a determination of the royalty
amount, once or more often.
Mr. Banks explained the process, whereby each lessee would submit
an application to commissioner and provide the terms of a contract
with Agrium listing the negotiated prices. He said this information
would be used in calculating the royalty and would occur only once
in the life of the contract.
Co-Chair Wilken announced the bill would no report from the
Committee during this hearing.
MIKE NUGENT, General Manager, Kenai Nitrogen Operations, Agrium,
testified via teleconference from an offnet location that this
legislation is "one piece of a pie, which could provide producers
in Cook Inlet with stability, and Agrium with certainty of what the
are to manufacture the products we sell." He informed that natural
gas is the major raw material used to develop products.
Mr. Nugent asserted the nitrogen facility is one of few major
value-added manufacturing operations in Alaska, is the second
largest producer of nitrogen products in the United States, and
that six-percent of the total nitrogen products are produced in
North America. He listed the Pacific Rim countries that import
Agrium products, including Korea, Taiwan, Mexico, and Thailand, and
the need to be competitive in world markets. He remarked that the
company currently is competitive because of the facility's location
close to markets, the highly skilled workforce and the stable
political climate; unlike the competitors located in Russia,
Indonesia, Saudi Arabia and Venezuela. However, he pointed out
these countries enjoy "extremely low" natural gas prices, which
puts Agrium at a disadvantage. He stated this legislation would
lessen the disadvantage.
Mr. Nugent informed that this bill would allow the commissioner to
accept the price negotiated by the producer and the manufacturer,
Agrium, as the amount by which royalties would be calculated.
Mr. Nugent pointed out the fiscal note does not reflect economic
impacts provided by Agrium, including wages, purchase of goods and
services, taxes and new development to Alaska, and instead only
considers the price of natural gas. He stated that the analysis is
based on forecasts, which involve several variables that are
difficult to predict, such as volume, price and ownership. He
furthered that the analysis assumes that the facility is operated
at full capacity.
Mr. Nugent shared that the facility is not operating at full
capacity because Cook Inlet suppliers are unable to deliver
adequate natural gas supplies. He stated the plant is currently
operating at 75 percent of capacity, which results in lower revenue
for the State of approximately $2 million if 2003. He warned that
unless able to fund producer to supply a large quality of natural
gas at a competitive price, Agrium could eventually fail as a
business and the State and local communities would receive no
revenues from the operation.
Mr. Nugent told of repeated discussions with producers in Cook
Inlet in which the primary concerns were the additional royalty
charges the producer is subject to. He cited a letter to the City
of Kenai from Aurora Power Resources, Inc. dated February 11, 2003,
which reads as follows [copy on file].
Aurora Gas, LLC is aggressively pursuing the development of
natural gas producing properties, primarily on the West side
of Cook Inlet. Oil and gas exploration and development is a
high cost, high-risk endeavor. As a producer looking for to
market our natural gas there is a great hesitation to enter
into a gas sales agreement with a purchaser, such as Agrium,
because it adds yet another layer of risk to a producer. A
producer selling gas to Agrium runs the risk, in fact the
probability, that certain years after selling its gas to
Agrium, the State will assert a claim that royalty needs to be
paid on a higher value than the arms length negotiated
contract price. This additional royalty, plus interest accrued
at a higher-than-market rate, would have to be born by the
producer and/or by the purchaser.
It is for this reason that Aurora Gas, LLC and its natural gas
marketing affiliate, Aurora Power Resources, Inc. strongly
endorse this legislation and the concept that royalty should
be paid on the basis of arms length negotiated contract
prices. Accordingly, we salute and support the draft
resolution in support of HB 57 and urge the Kenai City Council
to adopt same.
Mr. Nugent spoke of the increased difficulty of development of
natural gas reserves caused by the unknown State royalty values.
Senator Taylor noted he was absent during portions of the testimony
asked why the chair intended to hold the bill in Committee.
Co-Chair Wilken indicated questions related to the fiscal note.
Senator Bunde referenced Mr. Nugent's testimony asserting that the
fiscal note does not take into account taxes collected from Agrium
in determining the cost of this legislation. He requested further
information on this matter, specifically what taxes.
Co-Chair Wilken instructed the sponsor to provide a detailed
sponsor statement explaining the bill.
Co-Chair Wilken ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 10:59 AM
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