Legislature(2007 - 2008)SENATE FINANCE 532
05/03/2007 01:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| HB121 | |
| SB72 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 104 | TELECONFERENCED | |
| + | SB 72 | TELECONFERENCED | |
| + | HB 121 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
May 3, 2007
1:32 p.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
1:32:02 PM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Kim Elton
Senator Joe Thomas
Senator Fred Dyson
Senator Donny Olson
Also Attending: DAN DICKINSON, Certified Public Accountant,
Certified Management Accountant; REPRESENTATIVE PEGGY WILSON;
CLIFF STONE, Staff to Representative Peggy Wilson; TIM
GRUSSENDORF, staff to Co-Chair Hoffman; TAMMIE WILSON; KATHY
WASSERMAN, Alaska Municipal League; MIKE FORD, Alaska Native
Health Board;
Attending via Teleconference: From an offnet location: MIKE
BLACK, Director, Division of Community Advocacy, Department of
Commerce, Community and Economic Development; From Wrangell:
ROBERT PRUNELLA, Manager, City of Wrangell.
SUMMARY INFORMATION
SB 104-NATURAL GAS PIPELINE PROJECT
The Committee heard from a consultant. The bill was held in
Committee.
HB 121-WORKERS' COMPENSATION RECORDS
The Committee heard from the sponsor. A committee substitute was
adopted and the bill was held in Committee.
SB 72-COMMUNITY REVENUE SHARING
The Committee heard from the sponsor, the Department of
Commerce, Community and Economic Development, municipalities,
and a health care organization. A committee substitute was
adopted and the bill was held in Committee.
1:32:07 PM
CS FOR SENATE BILL NO. 104(JUD)
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments;
and providing for an effective date."
This was the seventeenth hearing for this bill in the Senate
Finance Committee.
1:32:14 PM
DAN DICKINSON, Certified Public Accountant, Certified Management
Accountant, continued his presentation from the previous meeting
utilizing a PowerPoint titled, "Presentation to the Alaska
Legislature Senate Finance Committee May 3, 2007" [copy on
file].
Page 41
Internal Rate of return
Step One: Model An Owned Project
[Spreadsheet calculating the internal rate of return of 21
percent over ten years on a capital expenditure of $20,000
and production of 1,000 units each year with operating
costs of 0.1 dollars and revenue of $5 for each unit.]
Page 42
Internal Rate of Return
Step Two: Model Capital Component of Tariff
Using PAYMENT function
[Spreadsheet related to the previous page that calculates a
ten percent interest rate on the loan to purchase the
equipment with annual payments of $3,254.91 and the loan
repaid in ten years.]
Mr. Dickinson used as an example a machine that produced
"widgets" in detailing the spreadsheets.
1:35:18 PM
Page 43
Internal Rate of Return
Step Three: Model Third Party Line with no FT but with
tariff
[Spreadsheet utilizing the data from the previous
spreadsheets to calculate an internal rate of return of
"#NUM!" over ten years with the annual tariff of $3,354.90,
annual revenues of $5,000 and subsequent annual cash flows
of $1,645.10.]
Mr. Dickinson derived the amount of the tariff by adding the
operating cost of $100 per year to the payment cost of $3,254.91
per year. The Excel software program would be unable to
calculate the internal rate of return from this data because "if
you just have a positive series of cash flows your rate of
return is infinite". In determining whether to "do something"
and "the answer is yeah you get money in every year then of
course the answer is yes you do it." Attempting to compare this
to "some other thing", given that "you're not capital
constrained, it didn't cost you anything" the conclusion would
be "you've got a series of positive cash flows that gives you an
infinite rate of return."
1:36:32 PM
Mr. Dickinson suggested that "essentially the underlying
calculation where you get those 80 and 90 percent rate of
returns on the pipeline are because you've essentially done this
calculation." This does not include whether the producer had
made a firm transportation (FT) commitment.
1:37:04 PM
Page 44
Step Four: Model Third Party Line with some additional
capital
[Spreadsheet identical to that of Page 43 except with a
negative cash flow (investment cost) of $100 in Year 0, and
a calculated internal rate of return of 1645%.]
Mr. Dickinson stated that this spreadsheet factors upstream
costs. He spoke to the 8 billion cubic feet (bcf) per day of gas
in Prudhoe Bay that was re-injected. This gas had been processed
and only required "a little bit of treatment and put it in the
pipeline." If producers agreed to ship this gas through a third
party-owned pipeline, but required that the pipeline must
traverse to the location of existing facilities and thus no
capital outlay would be required of the producers, the rate of
return to the producers would be infinite. The rate of return
would remain high if the producers incurred "a couple hook up
costs" as reflected in the spreadsheet.
1:38:10 PM
Page 45
Internal Rate of Return
Step Five: Model Third Party Line with some more additional
capital
[Spreadsheet identical to the previous with the exception
of a $2,000 investment cost and a recalculated internal
rate of return of 82 percent.]
Mr. Dickinson noted that the producers could invest more
capital, giving as an example the lease holdings at Point
Thomson. At that location the gas was not "ready to go into a
pipeline" and "billions of dollars of costs" would be necessary
to develop the entire field. In this instance the rate of return
would be lower.
1:38:23 PM
Page 46
Step Six: Model Third Party Line with yet more additional
capital
[Spreadsheet identical to the previous two pages with the
exception of an investment cost of $6,750 and a
recalculated internal rate of return of 21 percent.]
Mr. Dickinson explained this spreadsheet demonstrated "just how
much capital costs you'd have to put in to bring it back down to
a rate of return of 21 percent, which was what it was calculated
… on the original project."
1:38:38 PM
Mr. Dickinson expressed the following.
My point is, if you take the FT commitment and you say that
is zero effect on a producer's finances, and you compare
that to a situation in which the producer lays all the cash
out, you're [going to] get a position where you're [going
to] find that you create these absolutely fabulous rates of
return. And the answer is that's not an appropriate
analysis.
If that analysis were appropriate, then the State - we
could just end all this nonsense now. The State could step
forward and say we'll make the FT commitment if it really
doesn't affect our finances. If it doesn't affect our
credit rating, we can promise everyone that their [Alaska
Permanent Fund] dividends won't be affected, why not do it.
The State should step forward and do this risk-less thing
and do the FT commitment.
But if in fact making an FT commitment needs to be
reflected and needs to be dealt with to analyze a situation
correctly, then - it's not a question of if, it is
necessary to do that; if you don't, if you simply ignore
that FT commitment, you're not analyzing the situation
correctly.
1:39:49 PM
Page 47
FASB 47 Disclosure of Long Term Obligations (1981)
· This statement requires that an enterprise disclosure
its commitments under unconditional obligations that
are associated with suppliers' financing arrangements.
Such obligations often are in the form of take-or-pay
contracts and throughput contracts.
Mr. Dickinson identified FASB as the Financial Accounting
Standards Board. He read this provision of the Board into the
record explaining that it was written at a time when leasing
"and things like that first started appearing" as "off-sheet
balance financing". The FASB determined that the off-sheet
balancing information must be included in an entity's financial
reports to allow reviewers a "fair picture". Firm transportation
commitments were take-or-pay or "throughput" contracts.
1:41:07 PM
Page 48
FASB 47 Disclosure of Long Term Obligations (1981)
· Example 2
· 27. C Company has entered into a throughput agreement
with a natural gas pipeline providing that C will
provide specified quantities of natural gas
(representing a portion of capacity) for
transportation through the pipeline each period while
the debt used to finance the pipeline remains
outstanding. The tariff approved by the Federal Energy
Regulatory Commission contains two provisions, a
demand charge and a commodity charge. The demand
charge is computed to cover debt service,
depreciation, and certain expected expenses.
Mr. Dickinson announced he would bypass most language of FASB 47
and address Paragraph 27. He read the information into the
record. The example of C Company used by FASB was "absolutely
right on; … absolutely on point".
1:42:03 PM
Page 49
FASB 47 Disclosure of Long Term Obligations (1981)
· 27. (cont.) The commodity charge is intended to cover
other expenses and provide a return on the pipeline
company's investment. C Company must pay the demand
charge based on the contract quantity regardless of
actual quantities shipped, while the commodity charge
is applied to actual quantities shipped. Accordingly,
the demand charge multiplied by the contracted
quantity represents a fixed and determinable amount.
Mr. Dickinson continued reading Paragraph 27.
1:42:34 PM
Page 50
FASB 47 Disclosure of Long Term Obligations (1981)
· 28. C' disclosure might be as follows:
o C company has signed an agreement providing for
the availability of needed transportation
capacity through 1990. Under that agreement, the
company must make specified minimum payments
monthly. The aggregate amounts of such required
payments at December 31, 19X1 is as follows (in
thousands):
Mr. Dickinson began reading Paragraph 28 to the Committee.
1:43:08 PM
Page 51
FASB Disclosure of Long Term Obligations (1981)
· 28 (cont.)
· 19X2 $5,000
· 19X3 5,000
· 19X4 5,000
· 19X5 4,000
· 19X6 4,000
· Later years 26,000
· Total 49,000
· Less: Amount representing interest (9,000)
Total at present value $40,000
Mr. Dickinson noted how this information relates to the previous
page.
1:43:25 PM
Page 52
FASB Disclosure of Long Term Obligations (1981)
· 28 (cont.)
· In addition the company is required to pay additional
amount depending on actual quantities shipped under
the agreement. The companies total payments under the
agreement were (in thousands) $6,000 in 19W9 and
$5,000 both in 19X0 and in 19X1.
Mr. Dickinson told of this additional requirement.
1:43:32 PM
Page 53
Contractual Commitments
[Page taken from an annual financial statement of BP
detailing Expected payments by period under contractual
obligations and commercial commitments, and Unconditional
purchase obligations payments due by period.]
Mr. Dickinson directed attention to the Unconditional purchase
obligations payments due by period.
1:43:56 PM
Page 54
BPs 2003 20(f)
· Unconditional purchase obligations (d)
· (d) Represents any agreement to purchase goods or
services that is enforceable and legally binding and
that specifies all significant terms. The amounts
shown include arrangements to secure long-term access
to supplies of crude oil, natural gas feedstocks and
pipeline systems.
· Obligations set out for five years, after five years
and in total
Mr. Dickinson read this information, noting it provided an
explanation of the information contained on BP's financial
statement shown on Page 53. Any FT commitment made by the
company would be reflected in this section of its financial
statements. The company was obligated to disclose the
commitments to provide a "fair accounting" of its financial
position under the rules of the FASB.
1:44:54 PM
Page 55
Why does this matter?
· Moody' Investors Service
· Authors (or "Contacts"):
· Barbara Havlicek, Kevin Stoklosa, Greg Jonas, Laura
Levenstein, Pamela Stumpp, Michel Madelain, Trevor
Pijper, Wofgang Draak, Waylon Iserhoff, Brian Cahill,
Thomas Keller, Takohiro Morita
· The Analysis of Off-Balance Sheet Exposures, A Global
Perspective
· July 2004
Mr. Dickinson informed that FASB's intent was to ensure that
those evaluating financial statements "are getting a fair look
at what the company is doing." Moody Investment Services was
employed to evaluate the financial condition of a company by
parties interested in investing in that company.
1:45:36 PM
Page 56
Moody's Rating Methodology
· Take-Or-Pay Contracts
· Take or pay contracts are another form of purchase
commitment typically found in the … energy industry. …
Such contracts can be problematic if market conditions
and raw material prices change or if the price of the
end product drops. Regardless of whether [or] not the
contract becomes problematic, Moody's factors payments
under take-or-pay contracts into the analysis of
future cash flows and may also adjust the balance
sheet if necessary. (Havlicek page 7)
Mr. Dickinson noted this statement was cited from The Analysis
of Off-Balance Sheet Exposures, A Global Perspective. He read it
into the record then explained that analysis of an FT commitment
was not solely based on gas prices.
1:46:32 PM
Page 57
Why does this matter?
· Standard & Poor's
· Authors (and "Analytical Contacts"):
· Solomon B. Samson, Scott Sprinzen, Emmanuel Cubois-
Pelerin, Kenneth C. Pfeil
· Corporate Ratings Criteria
· 2006
Mr. Dickinson spoke to the policy of Standard & Poor in
analyzing FT commitments.
1:46:44 PM
Page 58
Standard and Poor's Rating Methodology
· Off balance-sheet financing
o Analysis of liabilities is not limited to those
shown on the company's balance sheet. Off
balance-sheet items factored into the leverage
analysis include the following:
ƒOperating leases
ƒGuarantees, debt of joint ventures and
unconsolidated subsidiaries
ƒTake-or-pay contracts and obligations under
throughput and deficiency agreements…
o (Samson pgs. 28-29)
Mr. Dickinson read this information into the record.
1:47:07 PM
Page 59
Standard and Poor's Rating Methodology
· Various methodologies are used to determine the proper
adjustment value for each off-balance-sheet item. In
some cases, the adjustment is straightforward. For
example, the amount of guaranteed debt can simply be
added to the guarantor's liabilities. Other
adjustments are more complex or less precise.
(Samson pg. 29)
Mr. Dickinson continued reading, noting this represented the
manner in which Standard and Poor analyzed off balance-sheet
items.
Mr. Dickinson remarked, "The point is, one way of dealing with
this IRR … if you sign a FT commitment, you capitalize the
present value of that, you stick that in the cash flow." He was
unsure if this practice would be appropriate in the FT
commitments made for the Alaska natural gas pipeline. However,
accounting rules required that this information must be
disclosed because "it's absolutely critical to understand a
company's finances." Those utilizing such a disclosure must
employ "their judgments" to "correctly analyze how to best do
it." He guaranteed that "in almost every case, ignoring it is
not the way to do it." A rate of return generated by ignoring
this "seems fabulous" but possibly "may need to include that FT
commitment and figure out just what that FT commitment means."
1:48:19 PM
Page 60
Closing Thought:
· E.C. Capen and D.F. Casey The Economics of Creative
Financing
Society of Petroleum Engineers 11664 (1983)
Mr. Dickinson cited from this article, which was published at
the time that awareness was given to off balance-sheet
financing. He opined, "In a journal not known for its humor,"
this article attempted to address how companies internally "deal
with those projects".
1:48:48 PM
Page 61
Closing Thought:
· Now and then, someone comes in and announces that he
has discovered the businessman's equivalent to the
Fountain of Youth - a corporate money tree. The person
will instruct us that his pet project (PP) need not
compete for cash in the budgeting process because he
has found a benefactor, Mr. S. Claus, willing to put
up the money at not cost save some "small monthly
payments" to be worked out later. These payments
should come from PP's profits and represent no real
drain in the company.
Mr. Dickinson read this quote from the article, defining the
monthly payments as tariff payments.
1:49:23 PM
Page 62
Close of Closing Thought
· To be sure we seldom see requests as blatant as
portrayed above, but we nevertheless sense some
misunderstandings about how to evaluate projects that
have alternatives to outright purchase of goods and
equipment. Has the old maxim of prohibiting free
lunches somehow been set aside with regard to so
called creative financing? No, more likely the lunch
costs more than normal, but we're not always sure who
pays. (Capen & Casey pg. 241)
Mr. Dickinson continued reading from the article.
1:49:46 PM
Mr. Dickinson summarized as follows.
The point I'm trying to make with this quotation and with
the other development is this is an error that folks make
when they look at IRR. It's supposed to be based on cash
flows, but you need to look at opportunity costs, you need
to look at everything when you're doing that analysis. To
answer the specific question that I was asked, I believe
this was not done in the material that you were presented
and that's why you see rates of return of 20, 30, 40, 50
percent. I don't think this project generates those kinds
of rates of return. I hope this analysis showed the way to
correctly analyze it and probably get a more appropriate
rate of return.
1:50:35 PM
Senator Elton asked if analyses of the liability of an FT
commitment factors in a negative netback. He understood that
liability would only exist in the event of a negative netback.
1:51:13 PM
Mr. Dickinson corrected that the payments would still be
required in situations that did not involve a negative netback,
such as an "interruption in the flow" in which the full amount
could not be tendered.
1:51:53 PM
Senator Elton surmised that a pause in flow created a negative
net back.
1:52:08 PM
Mr. Dickinson affirmed.
1:52:10 PM
Senator Elton asked if Standard and Poor or Moody's Investor
Service evaluations must include the possibility "that you get
to a negative netback" and subsequently a value or "judgment
call" was made.
1:52:39 PM
Mr. Dickinson affirmed, citing the publication of Moody's
Investment Service reference to "whether it's troubled or not
you need to analyze it correctly". He hypothesized that the
credit worthiness of a company that made multiple FT commitments
would be "no longer as high" and would experience "balance sheet
impairment". A credit guarantee that was never used would have
zero cost; however, the credit worthiness "under various
circumstances" must be considered. The cost to a company in
underwriting debt was "precisely the cost of balance sheet
impairment".
1:53:47 PM
Mr. Dickinson recalled the situation in the 1980s at the time
that the matter was "controversial", companies asserted they
only undertook projects expected to be profitable, that the cost
of the lease would be covered by the revenue generated, and
therefore the FT commitments did not require disclosure. The BP
financial statement in which following the disclosure of the
unconditional purchasing obligations a notation was made stating
that the risk associated with the contracts was "discussed in a
separate item". The separate explanation would likely claim that
in the event that gas prices remained at the current rate, $5
payments on the FT commitments would not be necessary.
Mr. Dickinson analogized that if the only risk was "simply that
it's not going to be paid" the State should assume that risk.
Issuing a "financial instrument - signing a contract that says
'we're [going to] make these payments for the next 20 years'
that represents a real cost to a company" as an "actual
impairment".
1:55:09 PM
Senator Elton had been told that the analysis conducted by
Anthony Scott of the Department of Natural Resources utilized
the same assumptions as used by ConocoPhillips. Senator Elton
asked if Mr. Dickinson had conducted an analysis utilizing his
own assumptions.
1:55:50 PM
Mr. Dickinson admitted he had not conducted an analysis. He did
not advocate that the "off balance-sheet" must be disclosed, but
rather that they could not be ignored. Capital costs and other
expenses would be the same in both analyses.
1:56:50 PM
Senator Elton had been pressured to not "trust" Mr. Scott's
analysis; however it was based on the same data and utilized the
same "approach" as ConocoPhillips analysis. Additionally, no
other analyses had been presented to contradict Mr. Scott's.
1:57:27 PM
Mr. Dickinson countered that for "a fly and a human being … 97
percent of the DNA are the same, but the other three percent is
critical". He guaranteed that the ConocoPhillips' analysis would
not predict the same rate of return as analysis "that suggests
ignoring the financial obligations, leases or other
commitments". This was the critical difference.
Mr. Dickinson stated that he was not a commercial credit analyst
and suggested asking such an analyst "how this works". He
acknowledged that he did not provide an "alternative answer" to
the analysis prepared by Mr. Scott, informing that he had not
been requested to do so.
1:58:40 PM
Senator Thomas spoke to the upstream risk concerns. The
confirmed reserves of 35 trillion cubic feet (tcf) had been
known "for a long time" and 150 - 200 tcf of reserves was
estimated to exist in the North Slope region. He surmised that
confirming a portion of the estimated reserves would reduce the
risk. He asked the impact on the risk of the project if 60 tcf
of reserves was confirmed to exist in the "developed area, from
the Alpine field eastward".
1:59:36 PM
Mr. Dickinson responded that "part of issue" was the length of
the FT commitments, whether ten, 15 or 20 years. A lender or
creditor would consider the affect of increased confirmed
reserves if the FT commitments were 20 or 25 years. The existing
confirmed reserves of 35 tcf were sufficient for shorter term FT
commitments. He agreed that the amount of confirmed reserves was
"one of the three or four main" contributors to the risk level,
and was a factor that "increases over time" and would be
"sensitive to the length of the FT commitment". More confirmed
reserves "makes everybody happier." However he posed, "but then
are you trying to do an expansion, get it in sooner or will it
play out in longer life and flesh out the outer years of the
commitment". This was the primary factor in accessing the risk.
AT EASE 2:01:06 PM
The bill was HELD in Committee.
2:03:28 PM
CS FOR HOUSE BILL NO. 121(L&C) am
"An Act relating to release of information in individual
workers' compensation records; and providing for an
effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Stedman announced his intention to report the bill from
Committee at this hearing.
2:03:59 PM
Co-Chair Hoffman offered a motion to adopt SCS CS HB 121, 25-
LS0501\M, as a working document.
There was no objection and HB 121, Version "M" was ADOPTED as a
working document.
2:04:26 PM
REPRESENTATIVE PEGGY WILSON, sponsor of the bill, testified it
would address workers' privacy, and prevent identity theft and
discrimination in the workplace. Currently, names, addresses,
telephone numbers, e-mail addresses, social security numbers and
other identifying information of workers who had filed workers'
compensation claims could be obtained from the Division of
Workers' Compensation by any requestor. This was not acceptable
given the increasing incidences of identity theft.
2:05:47 PM
Senator Thomas asked if the provisions of this legislation would
"treat" the workers' compensation system differently than the
Alaska Permanent Fund and other systems that hold identifying
information.
2:06:03 PM
Representative Wilson answered it would not.
2:06:18 PM
Senator Olson asked about opposition to the bill.
2:06:23 PM
Representative Wilson told of members of the House of
Representatives expressing support for continuing to allow
access to names and addresses of those who filed a workers'
compensation claim.
Senator Olson asked the reason.
Representative Wilson understood the intent was to allow
attorneys to access names and addresses of those workers. She
had confirmed that the provisions of this bill would continue to
allow attorneys involved in litigation on a claim to access the
identifying information.
2:07:00 PM
Senator Huggins clarified that access to the information would
not be allowed without the worker's permission.
2:07:14 PM
Representative Wilson indicated in the affirmative.
2:07:19 PM
Senator Elton asked whether this legislation would impede child
support enforcement efforts to compile employment records for
the purpose of collecting child support payments.
2:07:35 PM
Representative Wilson was unsure.
2:07:38 PM
CLIFF STONE, Staff to Representative Peggy Wilson, testified
that the language of subsection (b)(1) of AS 23.30.107 amended
in Section 1 on page 1, line 14 provided that the prohibition
would not apply to "… a governmental agency …". Therefore, the
identifying information could be shared with another State
agency. Typically, the information shared was limited to names
and addresses; social security numbers were released only for
the purpose of identifying a specific "John Q. Smith".
2:08:22 PM
Senator Elton assumed that all governmental agencies could
secure the workers' compensation information, including for
example the child support enforcement agency of the State of
Washington.
Mr. Stone affirmed.
AT EASE 2:08:56 PM / 2:09:10 PM
Co-Chair Stedman announced the bill would be HELD in Committee.
2:09:42 PM
CS FOR SENATE BILL NO. 72(CRA)
"An Act relating to the community revenue sharing program;
and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Stedman announced intention to not report this bill
from Committee at this time.
2:10:12 PM
Co-Chair Hoffman offered a motion to adopt CS SB 72, 25-
LS0506\M, as a working document.
Without objection, CS SB 72, Version "M" was ADOPTED as a
working document.
2:10:33 PM
Co-Chair Stedman indicated spreadsheets were distributed that
indicated the impact of this legislation to each incorporated
and unincorporated municipal government in the state.
2:10:46 PM
Co-Chair Hoffman commented that the passage of SB 185 relating
to the establishment of a "cost share" system to address the
unfunded liability of the Public Employees Retirement System
(PERS) and the Teachers Retirement System (TRS), "made
tremendous progress" in reducing the potential bankruptcy of
many local governments. At a cost to the State of approximately
$66 million, contribution rates for certain governments would be
significantly reduced, while the rates of others would increase
somewhat. He collaborated with Senator Olson in an attempt to
achieve parity through the State revenue sharing program for
those communities that had previously experienced a lesser or no
unfunded liability.
2:12:05 PM
Senator Olson, sponsor of the bill, testified he introduced this
legislation on behalf of the Alaska Municipal League. The
original version "presented the League's views on how the
municipalities throughout the state, from the largest to the
smallest, would share in the revenues from our mineral wealth".
He appreciated Co-Chair Hoffman's decision to retain much of the
intent of the original version of the bill and commended the
effort to "provide equity for the state's help with
municipalities, especially related to the PERS and TRS costs."
This committee substitute was "a gigantic step forward in
bringing financial stability to our struggling cities and
communities."
2:13:00 PM
TIM GRUSSENDORF, Staff to Co-Chair Hoffman, detailed the
committee substitute. Section 1 of the committee substitute
would amend AS 29.60 by adding a new Article 11. Community
Revenue Sharing Program., and accompanying new sections.
Mr. Grussendorf informed that Section 29.60.850. Community
revenue sharing fund., on page 1 line 6, would establish the
community revenue sharing fund by a transfer each fiscal year of
the lesser of $50 million or "an amount equal to three percent
of the money received by the State during the immediately
preceding fiscal year from all mineral lease rentals, royalties,
royalty sale proceeds, federal mineral revenue sharing payments,
and bonuses." The funding source would not include revenue from
petroleum taxes.
Mr. Grussendorf stressed that the community revenue sharing fund
would not be a dedicated fund and that appropriation from the
fund for community revenue sharing payments by the Legislature
was optional.
2:14:43 PM
Mr. Grussendorf explained Section 29.60.855. Community revenue
sharing payments for communities., on page 2 line 4. Five
percent of the "available balance" of the community revenue
sharing fund would be allocated directly to unincorporated
communities. Each unincorporated community would receive a
minimum of $25,000 unless sufficient funding was not available,
in which case the amount would be equally divided between all
communities. In the event that excess funds were available, the
funds would be distributed per capita amongst the communities in
amounts not to exceed $50,000. The maximum amount an
unincorporated community could receive from this program would
be $75,000. The limit was intended to ensure that payments to an
unincorporated community did not exceed the amount of payments
made to any incorporated municipality.
Mr. Grussendorf referenced an untitled spreadsheet that listed
all unincorporated communities and the calculation of the
distribution of the funding to each [copy on file].
2:16:03 PM
Mr. Grussendorf next outlined the provisions of Section
29.60.860. Community revenue sharing payments for municipalities
and reserves., on line 20, utilizing an untitled spreadsheet
that listed all boroughs and municipalities and calculations of
distribution of the funding to each [copy on file]. He stated
that 95 percent of the amount appropriated for community revenue
sharing payments would be allocated for incorporated
municipalities. Each organized borough would receive $250,000
and each municipality would receive $75,000 as a "base payment
value". This information was contained in the third column,
labeled Municipal basic Local Government Support, of the
spreadsheet.
Mr. Grussendorf noted that subsection (b)(1) on line 29 would
stipulate that the basic payment values be reduced on a pro rata
basis in instances in which insufficient funds were available to
allocate the full base rate.
2:17:12 PM
Mr. Grussendorf furthered that subsection (b)(2) on page 3, line
1 contained a provision to increase the base payment values on a
per capita basis in the event excess funds were available. The
amounts for each municipality and borough were shown in the
fourth column labeled "Per Capita Distribution @ $43.27" of the
spreadsheet. The second column, "2005 Population", listed the
census population for each community.
2:17:25 PM
Mr. Grussendorf reviewed the provision of subsection (c) on line
4, which reduced the amount allocated as the base payment value
for certain boroughs and municipalities by specified
percentages. The reductions correlated with the appropriations
made through the provisions of SB 185 relating to assistance for
communities with PERS unfunded liabilities. Payments on the
liabilities were established for each PERS contributor as a
percentage of the contributor's employee salaries. Statutory
changes made by SB 185 would establish the percentage, or
contribution rate, for each PERS contributor at 22 percent. The
discrepancy resulting from those communities that had a higher
contribution rate would be funded by the State and by those
contributors that previously had a contribution rate of less
than 22 percent.
Mr. Grussendorf pointed out that each community that enjoyed a
decrease in the contribution rate was subject to the reduction
to the community revenue sharing payment and was listed in the
subsection along with the corresponding percentage of the
reduction. This information was also reflected on the
spreadsheet in the fifth column labeled "State Assistance pay to
get to 22%" listing the percentage, and in the sixth column "%
state PERS Contrib * Per Capita Distribution" listing the dollar
amount.
Mr. Grussendorf utilized the Municipality of Anchorage as an
example to demonstrate the calculations. The base payment value
was $250,000 and the per capita distribution for the community
of 278,241 residents was $12,039,488.07. The combined amounts
equaled $12,289,488.07. The previous PERS contribution rate was
61.76 percent, which was reduced to 22 percent for the
Municipality with "State assistance" providing funding for the
remaining 39.76 percent. The amount of the base payment value
plus the per capita distribution provided for in this
legislation, multiplied by 39.76 percent, equaled $4,886,517.59,
which was then deducted from the base payment value plus per
capita distribution amount to establish the total revenue
sharing payment of $7,402,970.48 for the Municipality. This
amount was listed in the eighth column labeled, "total revenue
with PERS adjustment".
Mr. Grussendorf qualified that the total deductions taken in the
revenue sharing program of $5.6 million differed from the actual
amount of $66 million that the State provided to offset the
contribution rate reductions to these communities. He assured
that the calculation of the amount for each community subjected
to the reduction "across the board, it's the same type of
deduction; for the same percentage".
2:19:08 PM
Mr. Grussendorf then described the redistribution of the funding
reductions to those communities that either did not participate
in the PERS system or did participate but had contribution rates
lower than 22 percent before implementation of SB 185. The $5.6
million total reductions were distributed amongst the eligible
communities on a per capita basis and were listed in the ninth
column, labeled "Redistribution of PERS adjustment per-capita
(88.18)" of the spreadsheet.
2:19:47 PM
Mr. Grussendorf noted the tenth column, "Total Rev. Sharing
Payment", totaled the basic payment value and the per capita
distribution plus the per capita redistribution for those
communities eligible for the redistribution. This column also
carried forward the amounts of the eighth column for the
communities that received a reduction.
2:20:17 PM
Mr. Grussendorf redirected attention to the State funding
provided on behalf of the PERS unfunded liability of those
communities that would have experienced contribution rates
higher than 22 percent. The actual amount provided for each
community was listed in the eleventh column labeled "State
Assistance pay to get to 22%". This figure was added to the
community's adjusted revenue sharing payment to achieve the
"Total State PERS Assistance & Revenue Sharing" shown in the
twelfth column. The funding provided to reduce Municipality of
Anchorage's contribution rate by 39.76 percent was $26,218,049,
which, added to the adjusted total revenue sharing payment,
totaled $33,621,019.48.
Mr. Grussendorf stated that the thirteenth and final column of
the spreadsheet was labeled "Percent share of Total State
Assistance and Revenue Sharing" and listed the percentage of the
total revenue sharing appropriation each community received. The
Municipality of Anchorage received 30.20 percent.
2:20:51 PM
Mr. Grussendorf continued explaining the committee substitute,
addressing Section 29.60.865. Eligibility., on page 4 line 27.
This language was the same as that utilized in other statutes to
establish the definition of unincorporated community. The State
must verify that an infrastructure existed that would be able to
receive and expend the funding. The community of Metlakatla
qualified as a "reserve".
2:21:24 PM
Mr. Grussendorf informed that the method to determine the
population of a community would be the same as previous methods
and was provided for in Section 29.60.870. Determination of
population., on page 5 line 12.
2:21:38 PM
Mr. Grussendorf alluded to the definitions specified in Section
29.60.879. Definitions., on line 21.
2:21:48 PM
Senator Olson asked how the eligibility requirements would be
applied for a community that had a lien filed against it,
particularly those filed by the federal Internal Revenue Service
(IRS).
2:22:05 PM
Mr. Grussendorf did not have an answer to the question.
2:22:15 PM
Senator Huggins, noting that the per capita calculations would
be based on data from the 2005 census, asked if this census
contained the most updated information available.
2:22:33 PM
Mr. Grussendorf answered it was the most reliable source of
population estimates. "Problems" with the 2006 census data had
arisen rendering it unreliable.
2:22:47 PM
Senator Huggins pointed out that the population of some
communities had significantly increased or decreased since the
2005 census was taken.
2:23:02 PM
MIKE BLACK, Director, Division of Community Advocacy, Department
of Commerce, Community and Economic Development, testified via
teleconference from an offnet location that the agency had been
responsible for distribution of funding through the previous
revenue sharing plan. He supported revenue sharing and this
legislation was an improvement to other plans. He also supported
the inclusion of assistance to unincorporated communities. He
pointed out that the population of unincorporated communities
located within a borough would be included in the population
count of that borough. He supported the fairness relative to the
assistance provided for the PERS and TRS unfunded liability.
Mr. Black identified the relevance of liens filed against funds
allocated to certain local governments, particularly those with
"debt issues". An attachment filed by the federal Internal
Revenue Service (IRS) would result in the IRS securing the
revenue sharing funds. Primacy over debt owed to other parties
was less clear.
2:25:21 PM
ROBERT PRUNELLA, Manager, City of Wrangell, testified via
teleconference from Wrangell that he had not received the
spreadsheets. He would provide written comments after reviewing
the information.
Co-Chair Stedman assured he would speak with the witness at a
later time.
2:26:11 PM
TAMMIE WILSON, resident of the Fairbanks North Star Borough,
testified in Juneau in appreciation of this legislation. The
Borough as well as the City of Fairbanks needed this funding,
given property tax issues. She favored it's consideration of the
PERS and TRS cost sharing plan over other proposals because it
was "easier to understand" than multiple bills would be. She
preferred that the funding would be provided every year,
although she understood that revenue sharing payments would be
lower or would not be made in years the State received less
revenue.
2:27:02 PM
KATHY WASSERMAN, Alaska Municipal League, testified in Juneau
that she had understood that public testimony would not be heard
until the following day. She requested additional time to
distribute the committee substitute and accompanying information
to members and permission for members to comment at a future
hearing.
2:27:50 PM
Co-Chair Stedman reiterated that the bill would not be reported
from Committee at this hearing.
2:27:58 PM
MIKE FORD, Alaska Native Health Board, testified in Juneau in
support of the bill, opining that the committee substitute
reflected "a good step forward". He explained the relevance of
this bill to the Board. Lack of revenue for municipalities and
unincorporated communities affected health care.
2:29:19 PM
Senator Thomas clarified unincorporated communities would
receive a base rate of $25,000 plus additional funding if
available and that the maximum per capita adjustment would be
$50,000.
2:29:58 PM
Senator Olson appreciated the efforts made in developing this
legislation. The communities which he represented could utilize
the funding as "they feel like they're out their withering on
the vine".
2:30:18 PM
Senator Elton understood the minimum and maximum payments an
unincorporated community could receive. He predicted that if
less than $50 million was available in a given year for this
program, the $75,000 maximum payment would not be reached. The
proposed appropriation made in this bill was $48 million.
2:30:51 PM
Mr. Grussendorf identified two communities, Deltana and Tok, in
which the per capita adjustment calculations would be more than
$50,000 if the limit was not established and the program was
funded to the maximum amount of $50 million. These communities
would have received higher payments than some municipalities.
2:31:32 PM
Co-Chair Hoffman remarked that the maximum payment amount was
intended as incentive for those larger communities to
incorporate.
2:31:53 PM
Senator Dyson requested an overview of the fiscal notes,
specifically identification of those relevant to the committee
substitute.
2:32:18 PM
Mr. Grussendorf reported that all the fiscal notes before the
Committee were not applicable and that updated fiscal notes
would be prepared. The cost for Fiscal Year 2008 (FY 08) would
be $48.1 million and future appropriations would be a maximum of
$50 million annually. The appropriations would be deposited into
a "pool" with the Legislature determining the amount of annual
allocations in a manner "they see fit for that fiscal year".
2:32:58 PM
Co-Chair Stedman ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 2:33:36 PM
| Document Name | Date/Time | Subjects |
|---|