Legislature(2003 - 2004)
03/23/2004 09:04 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
March 23, 2004
9:04 AM
TAPES
SFC-04 # 54, Side A
SFC 04 # 54, Side B
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:04 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice-Chair
Senator Ben Stevens
Senator Lyman Hoffman
Senator Fred Dyson
Senator Donny Olson
Also Attending: SENATOR SCOTT OGAN; SENATOR BERT STEDMAN;
Attending via Teleconference: From Anchorage: HAROLD HEINZE, Chief
Executive Officer, Alaska Natural Gas Development Authority; From
Fairbanks: KEVIN WALSH, Certified Public Accountant, Walsh,
Kelliher and Sharp;
SUMMARY INFORMATION
SB 271-NATURAL GAS DEVEL AUTHORITY PROJECTS
The Committee heard from the sponsor and the Alaska Natural Gas
Development Authority. The bill moved from Committee.
SB 300-ATTORNEY'S LIEN
The Committee heard from the sponsor and a certified public
accountant. An amendment was adopted and the bill moved from
Committee.
SB 322-SALMON ENHANCEMENT TAX
The Committee heard from the sponsor. The bill was held in
Committee.
SENATE BILL NO. 271
"An Act amending the purpose of the Alaska Natural Gas
Development Authority to include planning, developing,
constructing, managing, or operating an economically viable
gas pipeline project from the North Slope of Alaska by a route
that parallels the Trans Alaska Pipeline System or the Alaska
Highway; authorizing evaluation of opportunities for private
sector involvement in the project; amending requirements
related to the Authority's preparation of a development plan;
and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, sponsored by Senator Ogan,
"expands the responsibility of the Alaska Natural Gas Development
Authority to include the review of the economic viability of a gas
pipeline that parallels the Trans Alaska Pipeline."
SENATOR SCOTT OGAN testified that he introduced this legislation
after spending time last summer with Senator Dyson at various
meetings in Canada. Senator Ogan stated that in his capacity as
chair of the Energy Conference, he traveled through Western Canada
to lobby the province of British Columbia to join the Conference.
He relayed that he learned that the Trans Canada pipeline would
have adequate capacity to transport natural gas were a pipeline
constructed in Alaska to the Canadian border.
AT EASE 9:07 AM / 9:07 AM
Senator Ogan opined that Alaska "must have all possible tools in
the toolbox" in its efforts to develop natural gas resources. He
reminded of ongoing negotiations between the Murkowski
Administration and Mid America Group. He was unsure of the status
of these negotiations, but understood an agreement would be reached
for stranded gas development.
Senator Ogan indicated this legislation would allow consideration
of constructing a tax-free natural gas pipeline in Alaska to the
Canadian border. He preferred that the private sector undertake
this project, but in the event it does not, he said this
legislation would provide an opportunity for the State to undertake
the project.
Senator Ogan asserted that a primary focus of the Energy Council is
determining how the US would deal with the upcoming energy
shortage. He commented on the inability to obtain a permit to
construct a nuclear power site and the near impossibility to obtain
a permit to operate a coal burning facility. He reported that the
supply of natural gas available in the Lower 48 is unable to meet
demand and subsequently the costs have increased. As a result of
these factors, he expressed this is the appropriate time for Alaska
to pursue development of natural gas resources for distribution to
other states.
Senator Ogan warned that if Alaska does not take advantage of this
opportunity immediately, entities from other countries would. He
cited that by the year 2020, the US would import between 11 and 24
percent of its liquefied natural gas from other countries. He noted
this estimate includes an assumed 4.5 billion cubic feet of natural
gas produced in Alaska. He told of "offshore" facilities under
construction, some of which are undertaken by producers also
operating in Alaska.
Senator Ogan spoke of producers' preference to ship natural gas
from tidewaters because the expense of approximately $2.5 billion
is less than the proposed $7 or $8 billion project in Alaska.
However, he did not deem this to threat the ability to construct a
natural gas pipeline in Alaska.
Senator Ogan informed that a shared effort is the only feasible way
to finance a natural gas pipeline in Alaska.
Senator Ogan pointed out this bill would extend the termination
date of the Alaska Natural Gas Development Authority until January
1, 2005. He also noted the addition of subsection (12) to the
uncodified law enacted in Section 5(a), 2002 General Election
Ballot Measure 3, contained in Section 4 of the bill to read as
follows.
(12) an evaluation of the opportunities for private
sector involvement in the planning, development, construction,
management, and operation of the gas transmission pipeline
project.
Senator Ogan had understood the omission of this language in the
original ballot initiative was an oversight. He commented to his
"comfort" in adding this language. He asserted, "Usually government
is good at fixing things until they're broke." He asserted
construction of a pipeline is not an appropriate role for
government and that private industry should finance such a project.
However, he remarked that involvement of government could garner
better financial terms for private entities. He surmised that Trans
Canada, Mid America Group, or a producer could take advantage of
these financing opportunities.
Co-Chair Green asked if the extension of the termination date to
January 1, 2005 would be adequate. She understood concerns
regarding time constraints.
Senator Ogan agreed this is an "aggressive date". He noted current
law provides that the Authority is terminated one year following
the first meeting of the Board of Directors, which occurred in June
2003. However, he stressed the immediate need to secure a
commitment to construct a pipeline. He again warned that if not
done in Alaska, natural gas supplies for the U.S. would come from
elsewhere.
Co-Chair Green requested a map showing the current proposed route
of a natural gas pipeline and how a pipeline route, as proposed in
this legislation would differ.
Senator Ogan did not have maps with him, but described the proposed
route paralleling the Alaska-Canada Highway from Delta to the
Canadian border.
Co-Chair Green requested maps be provided to her.
Senator Olson asked if the proposed pipeline to the Canadian border
would be tax-free and asked for clarification.
Senator Ogan affirmed. He explained that if the government owned
the pipeline, through, the Alaska Natural Gas Development
Authority, as a quasi-public private corporation, the pipeline
would be tax exempt. He compared the Authority to the Alaska Rail
Road Corporation, in that its assets are not taxable. He qualified
that an agreement with affected communities for payment in lieu of
taxes would be necessary. He noted such arrangements are expected
for the current proposed pipeline route. He surmised the private
sector would want to take advantage of this tax-exempt status. He
furthered that the State would receive a higher return because
royalties are calculated after tariffs and taxes are deducted from
the transportation costs. He remarked that any efforts to reduce
transportation costs would result in higher profit and earnings for
the State.
Senator Hoffman asked about the need to acquire right of way access
to lands in which the pipeline would traverse.
Senator Ogan replied that a significant portion of the land
involved is Tetlin-owned and that possibly other lands owned by
Doyon Limited located near Tok could be affected. He noted the need
to acquire rights of way, but pointed out the myriad of landowners
in other areas of the state.
Co-Chair Wilken clarified that Senator Ogan's reference to natural
gas supplied from "offshore" sources does not relate to operations
in the Gulf of Mexico for example, but rather from countries other
than the United States.
Senator Ogan affirmed.
Co-Chair Wilken referenced a report "Alaska Natural Gas Development
Authority Benefits to Alaskans" issued in September 2003 [copy not
provided]. He asked how the information in this report differs from
the report required of the Alaska Natural Gas Development Authority
by the ballot initiative of 2002 and referenced in Section 4 of
this bill.
Senator Ogan did not know.
HAROLD HEINZE, Chief Executive Officer, Alaska Natural Gas
Development Authority, testified via teleconference from Anchorage
that the Authority's motives as a public corporation are to
maximize benefits to Alaska. Therefore, he stated, the Authority is
"willing to do or not do lots of things." He explained the
Authority has "no particular interest" in participating in the gas
development business unless "very identifiable benefits" to
Alaskans are involved. He exampled that of all the rhetoric
pertaining to development and transportation of Alaskan natural gas
pipeline, the Authority is the only party addressing the issue of
delivering gas to the Cook Inlet area. Regarding specific
projects, he relayed that the Authority welcomes this legislation
because it allows the Authority to contribute to the "State's
overall team effort in the broadest sense and without any real
restriction." He cautioned, however, that this legislation should
not be construed as a directive to the Authority to pursue certain
actions. He spoke of the Authority's "unique financing abilities"
regarding taxes, debt, debt structure, interest rates and other
variables that could potentially lower the financing costs of any
project. He surmised this is an appropriate role for the Authority,
if it would assist in progressing the project.
Mr. Heinze stressed that the Authority never considered using State
funds to finance any natural gas pipeline project and rather that
funding should be from "the normal money sources that are available
to the private sector." He explained that State involvement allows
greater flexibility and lower interest rates for a private entity
funding the project. He remarked that if the Authority does not
"test" itself "against the normal market, we think the State could
make a very bad mistake."
Mr. Heinze reminded that the provisions of Ballot Measure 3,
creating the Authority specifically provide for a natural gas
pipeline from Prudhoe Bay to Valdez in the Prince William Sound
with a spur line from Glennallen into the Cook Inlet area. He noted
this bill broadens that perspective to allow the Authority to
consider a pipeline route following the Alcan Highway to the
Canadian border. He stressed the value of having this option to
allow the Authority to choose a route in the best interest of
Alaska.
Mr. Heinze informed that a route following the Alyeska Trans Alaska
Pipeline from Prudhoe Bay to Valdez has rights of way already
acquired though the pipeline corridor. He noted that the Yukon
Pacific Corporation has acquired right of ways from private
landowners for this route, which the Authority would acquire for a
natural gas pipeline. He also noted that under imminent domain
laws, private-owned lands could be acquired at fair market value.
He furthered that the portion of the route between Glennallen and
the Cook Inlet is largely located on State-owned land and as an
agency of State government the Authority could utilize these lands.
Mr. Heinze compared this to the proposed route along the Alaska
Canadian Highway, which would be located on a significant portion
of private-owned land and State-owned land. He understood that no
party has obtained rights of way for this route. He considered the
right of way issues in Alaska relatively minor in comparison to
lands in Canada located along the proposed route. He stated the
Trans Canada organization would have to address First Nations and
other landowner issues.
Mr. Heinze spoke to the proposed extension of the termination date
of the Authority. He noted the first meeting of the Board of
Directors was held on June 16, 2003 and according to current
statute, the Authority would expire one year from that date on June
13, 2004. He agreed that meeting this deadline would be
challenging, but assured it could be accomplished "within a couple
of months". He did not oppose an extension to the end of the year
2004, but informed that the Authority intends to complete its work
by the end of the 2004 summer.
Mr. Heinze reported that the Authority has not adopted a business
structure and must first investigate whether it should be
classified as a nonprofit organization, a corporation "with a very
low profit objective, a utility, or another status. He remarked
upon the "tremendous opportunity" the Authority had to become
exempt from federal income tax, to issue tax-exempt bonds, and
achieve favorable debt to equity ratios and low interest rates. He
stressed the importance of all issues combined. He expressed the
Authority's intent to hire a consulting firm to review and provide
advice as to how to provide the lowest cost of service.
Mr. Heinze addressed the issue of natural gas imported into the US.
He asserted "major forces at work around world working very
dynamically, looking at the United States as a place to move their
gas to." He stressed the importance of reaching a decision
regarding Alaska natural gas expediently. He agreed with Senator
Ogan that if efforts to develop and transport the resource from
Alaska were delayed, Alaska would be "left out of the game."
Mr. Heinze summarized that the Authority operates in the best
interest of Alaska, and would benefit from the ability to consider
all options.
Co-Chair Wilken again referenced the report " Alaska Natural Gas
Development Authority Benefits to Alaskans" and restated his
question about comparison of this report to the report required in
Section 4 of this bill.
Mr. Heinze replied the existing report is a compilation of a
"fairly large number " of Alaska consulting firms and reflects an
attempt to identify actions relevant for advancing the project. He
informed that since the report was issued, the Authority has
received only minimal funding and the recommendations of the report
would require approximately $2.5 million to implement. Therefore,
he informed, most of the recommended efforts have not been
undertaken. He noted that a benefit analysis that provides a
testing model should be finalized by the end of the month. He
predicted that all other aspects specified in the development plan,
including a revenue sharing plan with municipal governments, would
be addressed by the upcoming summer. He assured the Authority has a
"fairly good understanding" of possible projects and costs. He
summarized the report issued in September represents efforts the
Authority would have preferred be done, although funding and time
have been inadequate to undertaken them all.
Senator Olson asked the impact of this legislation on the existing
tax structures of the North Slope Borough, the Fairbanks North Star
Borough and other local governments.
Senator Ogan responded that if the Authority constructed a pipeline
were constructed from Prudhoe Bay to the Canadian border, the
pipeline would be tax-free. He noted the same status was envisioned
for a Prudhoe Bay to Valdez route and would require negotiation to
address local government concerns. He listed examples of increased
costs to local governments with the location of a pipeline in the
community from: school enrollment, wear and tear on local roadways
and emergency services.
Mr. Heinze remarked that in recognition of the increased costs, the
Authority is directed by the provisions of Ballot Measure 3, as
shown in Section 4 of the bill, to include a revenue sharing plan
with municipal governments in the development plan. He spoke of
intentions to recognize that despite exemption from taxation, the
Authority would be "morally obligated" to identify ways for local
governments to address the increased expenses and also to share in
the revenue generated.
Senator Olson surmised that this legislation has not been "accepted
with enthusiasm" by the North Slope Borough or the Fairbanks North
Star Borough.
Mr. Heinze replied that this bill does nothing to change the
Authority's tax status established in Ballot Measure 3. He
qualified that this bill "raises eyebrows" to this realization. He
emphasized that he has been forthright in expressing to local
government a willingness to identify ways to offset the impacts a
pipeline would have on the communities.
Senator Ogan stressed that the State has an "overwhelming" interest
in having an independent entity constructing the pipeline because
both producer and the State would share equal interest in
maintaining low tariffs. He remarked that a natural gas pipeline
would also benefit the State because it would encourage development
in other areas of the North Slope, such as the Foothills region. He
elaborated on the benefits to the State and to the North Star
Borough in the development of the Foothills resources. He
understood that Senator Olson has concerns with this legislation,
but Senator Ogan argued that revenues from the development of the
Foothills region would outweigh the tax exemption of the pipeline.
Senator Hoffman surmised this legislation should therefore include
a requirement of the Authority to include a plan for payment in
lieu of taxes for local governments.
Co-Chair Wilken asked if subsection 5(a)(5) of Ballot Measure 3,
contained in Section 4 of the bill would suffice. This language
stipulates that the Authority must include a plan for revenue
sharing it its development plan.
Senator Hoffman opined that this language is not specific enough to
assure that payment in lieu of taxes would be addressed.
Senator Ogan was unsure. He stated that the impact on local
governments must be considered and deferred to the Senate Finance
Committee as the appropriate entity to address the matter.
Mr. Heinze line 9, recalled that the ballot initiative was drafted
to model the Alaska Gasline Port Authority already in existence. He
defined the Alaska Gasline Port Authority as a consortium of three
local governments formed with the intent to export natural gas from
the North Slope, using a tax-exempt method and a revenue sharing
plan.
Senator Bunde pointed out the stipulation that the Alaska Natural
Gas Development Authority "must include" a revenue sharing plan
with municipal governments in its development plan. He surmised
this affords flexibility.
Co-Chair Green offered a motion to report the bill from Committee
with individual recommendations and previous fiscal note.
There was no objection and SB 271 MOVED from Committee with zero
fiscal note #1 from the Department of Revenue.
Co-Chair Wilken directed attention to information distributed to
members from the Department of Labor and Workforce Development
responding to issues that were raised during hearings the previous
week.
Senator Bunde commented that the largest portion of Alaska's
population is between the ages of 35 and 50, which he characterized
as the "working ages". He furthered that given no changes to
current trends the smallest portion of Alaska's population would be
aged 30 to 50 by the year 2015. He opined this should be understood
when considering efforts to create jobs and implement an income
tax. He pointed out that the smallest population age group would be
required to contribute the most.
SENATE BILL NO. 300
"An Act relating to an attorney's lien, to court actions, and
to other proceedings where attorneys are employed."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill sponsored by Senator Stedman,
"addresses a ruling by the Ninth Circuit Court of Appeals. The
Court held that Alaskans who win an award in court must pay federal
income tax on the award, including attorney fees, and then when the
plaintiff pays the attorney, the income is taxes a second time."
SENATOR BERT STEDMAN read the sponsor statement into the record as
follows.
SB 300 eliminates an unfair and potentially disastrous federal
income tax issue affecting Alaskan taxpayers and prevents the
IRS [U.S. Internal Revenue Service] from taxing two Alaskans
on the same income. SB 300 corrects this unjust treatment of
Alaskans under current 9th Circuit rulings.
Because of a peculiarity in Alaskan law, Alaskans who win in
court may pay federal income tax on phantom income. When
Alaskans file their federal tax return, they must report any
litigation recovery allocated to attorney fees as gross
income, even though they receive no economic benefit from
those fees. The federal government taxes that portion of the
prevailing side's award twice; once as income to the client
and again as income to the client's attorney. Incredibly,
there is no federal tax deduction to offset this inequity.
It's even possible for someone to win in court but come out
with a net loss after paying legal bills and taxes.
Under current Alaska lien law <AS 34.35.430>, attorneys have a
"subordinate lien" or ownership interest in the "cause of
action". Other states, Including Oregon, use different
language to specify that as long as an attorney has filed an
appropriate lien and is owed money by the winning client, all
fee awards or payments made to the client belong exclusively
to the attorney. In so vesting the attorney with the property
interests of the award, those states avoid the unfair tax
burden currently imposed on Alaskans. Instead, any portion of
an award retained to pay attorney costs, is not income to the
client.
SB 300 changes Alaskan law to prevent the IRS from taxing
Alaskans on income they don't receive. This bill recognizes
that court awarded fees which pass through to one's attorney
is income to the attorney. And as such, the attorney is
responsible for paying federal income tax on that portion of
their income.
Senator Stedman noted that when drafting statutes for the legal
system, Alaska mirrored the state of Oregon statutes in many ways
and that Oregon has this same inequity. He gave an example of a
case involving the wrongful termination of an employee, in which
that employee prevailed and received a "small" award in addition to
attorney fees. Under current statute, Senator Stedman pointed out
this employee would receive a net loss because the employee would
be required to claim the attorney fees as income and pay federal
taxes on that amount.
SFC 04 # 54, Side B 09:52 AM
Senator Stedman continued that many plaintiffs do not have adequate
resources to absorb the tax burden of this additional income, which
they did not receive.
Co-Chair Green referenced a letter dated February 6, 2004 to
Senator Stedman from Kevin Walsh, of Walsh, Kelliher and Sharp. She
asked if this legislation would only apply to cases heard in the
Alaska Court System or to cases before the Human Rights Commission
as well.
Senator Stedman understood this legislation applies only to the
award of attorney fees from court cases.
KEVIN WALSH, Certified Public Accountant, Walsh, Kelliher and
Sharp, testified via teleconference from Fairbanks in support of
this bill and about his 25 years experience and service as chair of
the IRS/CPA Liaison Committee and chair of the Tax Committee of the
Alaska Society of CPAs. He emphasized this bill was not sponsored
at the request of the Alaska Bar Association (ABA). He stated he
supports this bill because he was "tired of" the IRS becoming the
prime beneficiary of court settlements.
Co-Chair Green restated her question.
Mr. Walsh affirmed this legislation only relates to awards issued
as a result of a court case.
Senator Olson asked how this legislation would affect federal IRS
rules.
Mr. Walsh replied that the IRS considers property rights as
described in state laws. He stated that the Ninth Circuit Court of
Appeals held that the property rights were such that plaintiffs
must pay tax on their attorney fees under California law, Arizona
law and Alaska law. However, he noted that the Court found that the
state of Oregon laws were somewhat different and therefore provided
that the plaintiff's attorney is the only party liable for the
property rights taxes.
Senator Bunde clarified that the impetus of this bill is not the
Alaska Bar Association and asked the ABA position.
Mr. Walsh affirmed the ABA did not initiate this legislation,
commenting that all credit or blame falls to him. He qualified that
he asked the Association for assistance in drafting this
legislation; however, noted that the ABA does not take positions on
legislation. He relayed that the president of the Association has
indicated interest in the matter. He also informed that he
requested the opinion of the Alaska Legal Services Corporation,
which represents disadvantaged parties, but had not received a
reply. He wanted to ensure this legislation would not benefit
attorneys at the expense of taxpayers. He referenced an article
published in the Wall Street Journal [copy on file] regarding the
National Taxpayer Advocate, Nina Olson's attempt to have the US
Congress address the matter through federal law, although he stated
these efforts have been unsuccessful. However, he remarked that the
Alaska Legislature has the ability to change statute in a manner
that the federal Ninth Circuit Court of Appeals could affirm.
Senator Bunde never mind other discussion re tort reform they say
in it for benefit of the people.
Co-Chair Wilken referenced letters in support of this bill from the
Windfree Law Office and Cook Schuhmann and Groseclose, Inc.
Attorneys at Law [copies on file].
Senator Olson asked the reason for the language contained in the
bill as opposed to language changing existing statutes governing
property rights.
Mr. Walsh replied that he had requested the ABA provide him with
language identical to that adopted by the state of Oregon and ruled
adequate by the Ninth Circuit Court of Appeals.
Senator Olson cautioned this "remedy" might inadvertently provide a
loophole relating to property rights.
Co-Chair Wilken asked if the Senate Judiciary Committee had
discussed this possibility.
Senator Stedman replied it did not.
Co-Chair Wilken asked if Senator Olson wanted this bill held in
Committee to address this concern.
Senator Olson deferred to the sponsor and the co-chair.
Co-Chair Wilken suggested highlighting the issue with intent it be
addressed when the bill is considered in the House of
Representatives.
Co-Chair Green wanted assurance that in remedying the tax
consequence, this legislation would place the attorneys "in front
of" of plaintiffs regarding receipt of settlement payments.
Senator Stedman assured it would not allow such "front-running". He
stressed that the laws governing attorney's trust accounts are
"extremely tight" and this legislation would not grant the attorney
additional claim to a settlement.
Co-Chair Green asked if this requires that a client who receives a
settlement make payment to an attorney.
Senator Stedman described the "flow of funds" to a trust account
governed by the attorney then distributed to the client.
Co-Chair Green surmised if 100 percent of an award amount were paid
to the client who then fails to pay the attorney fees, the client
would not be required to pay taxes on that amount. She asked how
this could be justified.
Mr. Walsh responded that the individual receiving funds would be
taxed for the entire amount that person is entitled to. He
explained that an attorney could file a lien against the client if
not paid for services. He also noted that if an attorney chooses to
not collect a fee, the client would be liable for taxation on the
entire amount of a settlement.
Co-Chair Wilken noted this bill does not specify an effective date
and asked whether the sponsor would support an immediate effective
date.
Senator Stedman supported this.
AMENDMENT #1: This conceptual amendment adds a new Section 3 to the
bill providing for an immediate effective date of the provisions of
Sections 1 and 2.
Co-Chair Green moved for adoption.
Without objection the amendment was ADOPTED.
Co-Chair Green offered a motion to report the bill from Committee
as amended with individual recommendations and accompanying fiscal
notes.
There was no objection and CS SB 300 (FIN) MOVED from Committee
with zero fiscal notes #1 from the Department of Natural Resources,
#2 from the Alaska Court System, and #3 from the Department of Law.
SENATE BILL NO. 322
"An Act relating to the rate of the salmon enhancement tax."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, sponsored by Senator B. Stevens,
by request "authorizes regional aquaculture associations to hold
elections to change the tax rates for the salmon enhancement tax."
Senator B. Stevens testified that this legislation would provide
another option for regional aquaculture associations, which are
comprised of commercial fishers in the region and the hatcheries
operating in that region. Currently, he stated that statute
provides the ability for members of the associations to assess
themselves one, two, or three-percent. He noted those rates have
not changed since 1976.
Senator B. Stevens explained this bill would increase the allowable
rates from four to ten percent, and permit the associations to
"super access themselves" for the purpose of paying off debt, if
they so choose. He characterized this legislation as a
modernization of the salmon enhancement program. He stated this
legislation is an attempt to mitigate concerns of industry
participants relating to the percentages of "cost recovery versus
common property."
Senator B. Stevens referenced a spreadsheet titled "Alaska Hatchery
Commercial Common Property & Cost Recovery Return Data - 1993-2003"
[copy on file], showing the "cost recovery percentages" and
"commercial harvest percentages". He indicated that over several
years, the cost recovery percentage has averaged approximately 30
percent. He remarked that this demonstrates the declining value of
the fish produced, therefore forcing an increase in the number of
fish required to pay the operation costs of the hatcheries. He
reiterated this legislation would permit the members of an
association to opt to harvest a greater number of fish and increase
their assessment to generate revenue for hatchery operations. He
stressed that such a change could not be implemented without a
majority vote of the permit-holders in the region.
Senator B. Stevens informed that currently the commercial fishers
could pay no more than three-percent and thus forcing cost recovery
methods to cover a larger portion of the operating expenses.
Co-Chair Wilken referenced letters in opposition to this bill
[copies on file].
Senator B. Stevens addressed the letter from Kate File and agreed
she has a legitimate concern, although it is not germane to this
legislation. He explained this legislation does not pertain to the
cost recovery practices of non-profit hatcheries. He assured that
this bill only applies to those areas included in a regional
association, and that the members of the associations have the
authority to impose these taxes on themselves.
Co-Chair Wilken requested an explanation of cost recovery in the
context of this legislation.
Senator B. Stevens gave an example of a hatchery that produces ten
million fish with annual operating costs of $4 million. He
explained the current process whereby the hatchery contracts with
certain commercial fishers to catch and return five million fish to
the hatchery to pay the operating costs. The remaining five million
fish, he continued, are available for catch by other commercial
fishers and taxed at a rate of two percent to recover additional
costs. He stated this bill would "change the dynamics" and allow
the commercial fishers to assess a higher tax on their portion of
the harvest and thus reduce the number of fish reserved for
contracted harvesting and increase the number of fish available to
them for harvest.
Co-Chair Wilken citing the spreadsheet, noted that one third of the
hatchery produced fish are harvested for the purpose of paying
operating costs.
Senator B. Stevens affirmed, qualifying that the percentage varies
by region depending upon the number of hatcheries operating in a
region.
Senator Bunde pointed out that cost of producing fish increases
over time, although the price of fish varies. He surmised that
with a large debt service, a hatchery would have to take virtually
all the fish if produces to pay its operating costs. He stated this
bill offers the option to pay overhead costs down in years of
higher prices.
Senator Bunde commented that participation in associations is
optional for commercial fishers in some areas and there is concern
that fishers might not vote. He predicted that this legislation
could provide more incentive for participation if fisher's tax
assessments could change.
Senator Hoffman asked the percentage of hatcheries still producing
pink salmon.
Senator B. Stevens replied that most hatcheries are producing pink
salmon, with the largest productions in Prince William Sound. He
relayed that trends indicate the cost recovery percentages is
rising.
Senator B. Stevens listed the Northern Southeast Regional
Aquaculture Association (NSRAA), a region comprised of several
hatcheries, is an example of how this legislation could be
beneficial. He told how this association paid its costs down early,
and was able to limit the amount of cost recovery harvesting.
However, he pointed out that cost recovery has increased in recent
years due to lower fish prices. He explained this association could
chose to reduce the percentage of cost recovery harvesting by
paying a higher tax assessment. He stressed this would be a choice
determined by the members of the association through an election
process. He also noted that the association members could
subsequently reduce its taxes in the event of a market change and
increased prices. He opined this legislation provides "self
determination" within an association. He expressed this could allow
for the release of more fish for commercial harvest and change the
current trend of hatcheries catching a significant percentage of
the fish they produce to pay the operating expenses of the
hatchery.
Co-Chair Wilken asked how the cost recovery percentage is
determined. He noted the increase of the NSRAA cost recovery
percentage and asked if it was a result of increased debt.
Senator B. Stevens was uncertain of the NSRAA situation. He
detailed that each hatchery submits a plan to annually to the
regional planning team, which is approved by the board of directors
of the regional association.
Co-Chair Wilken asked why the Douglas Island Pink and Chum (DIPAC)
hatchery is not relevant to this legislation.
Senator B. Stevens replied DIPAC is a private nonprofit corporation
and is therefore not included in a regional aquaculture
association. He stated it operates only under the authority of its
board of directors and has no involvement from a regional planning
team. He noted this speaks to Ms. File's concern about increased
cost recovery percentages without input from area commercial
fishers.
Senator Hoffman asserted the more fish produced, the lower
percentages of cost recovery. He asked for affirmation that the
value of pink salmon is from roe.
Senator B. Stevens affirmed. He relayed discussions regarding the
declining value of pink salmon and subsequent increased production,
resulting in a downward cycle.
Senator Hoffman indicated this is his concern.
Senator B. Stevens agreed this is the reason this bill is
necessary. He detailed the price fluctuation for pink salmon over
20 years ranging between 80 cents per pound to the current eight
cents per pound. He referenced a graph titled, "Alaska Historical
Commercial Salmon Catches (all species) 1878-2003", prepared by the
Department of Fish and Game [copy on file], showing that hatchery
activities have contributed to an increased stabilized production
rate of almost 100 million fish annually statewide. However, he
pointed out that the value has diminished.
Co-Chair Wilken asked if the hatchery program was implemented in
1978.
Senator B. Stevens affirmed. He informed that most hatcheries in
Alaska had been State-owned, but currently most are either held by
an association or a non-profit corporation.
Senator Hoffman pointed out the supporting documentation for this
legislation does not indicate the percentages of hatchery salmon.
He understood the hatchery programs primarily operate in Prince
William Sound and Southeastern Alaska, although the largest fishery
is located in Bristol Bay.
Senator B. Stevens agreed the Bristol Bay fishery has the highest
value. He spoke to the price trends for sockeye salmon, which
average between 80 cents and $1.80 per pound.
Senator Hoffman countered that Senator Dyson would say that
increased production of pink salmon in Prince William Sound during
the 1980s and 1990s resulted in a flood of the market and impacted
the sockeye salmon fishery. He also noted other factors such as
farmed fish have impacted the fishery markets.
Senator Bunde added that foreign market crashes have had a
significant impact on the fishing industry. He commented on the
State trend of receding from the "hatchery business", while making
efforts to enter the "oil business'. He suggested this should be
considered.
Senator Bunde asked if the demand for cost recovery increases,
whether the Department of Fish and Game would be pressured to
facilitate cost recovery to limit fishing in distant waters to
allow more fish to return closer to the hatchery location.
Senator B. Stevens replied the matter would be a regional
management decision.
Co-Chair Wilken told of discussions to operate a fish hatchery in
Fairbanks to supply fish to Interior and Southeast Alaska, and
asked whether this hatchery would be included in the provisions of
this legislation.
Senator B. Stevens answered it would if it practiced cost recovery
and depending upon whether it produced fish for commercial harvest
or personal and subsistence use, as well as the volume of fish
produced. He added that such a hatchery would participate only if
it secured funding through the Fisheries Enhancement Revolving Loan
Fund. He indicated on a map showing the locations of hatcheries
within Alaska [copy on file]. He noted that hatcheries located at
Fort Richardson and Fort Elmendorf are not included, as they
produce fish for personal use.
Co-Chair Wilken understood the proposed Fairbanks hatchery was
intended to produce fish for personal and subsistence use.
Senator B. Stevens expressed he has discussed the hatchery issue
extensively, and that this is legislation is an option for those
regional aquaculture associations to utilize if they chose.
Co-Chair Green clarified this legislation would stipulate no
mandates.
Senator B. Stevens affirmed.
Co-Chair Wilken ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 10:36 AM
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