HB 331-TAX CREDIT CERT. BOND CORP; ROYALTIES  2:32:24 PM CO-CHAIR TARR announced that the final order of business would be HOUSE BILL NO. 331, "An Act establishing the Alaska Tax Credit Certificate Bond Corporation; relating to purchases of tax credit certificates; relating to overriding royalty interest agreements; and providing for an effective date." REPRESENTATIVE BIRCH related his and his constituents' support of the bill which would honor the state's commitments and positively affect the state's economy. He urged the committee to act expeditiously. The committee took a brief at ease. 2:35:12 PM MIKE BARNHILL, Deputy Commissioner, Department of Revenue (DOR), directed attention to two slides entitled, "COMPANY X Tax Credits: Potential Impact of HB331/SB176." He informed the committee the slides are examples of the estimates DOR provided to each tax credit holder; however, the figures provided on the slides are de-identified and thus do not represent any one of the 37 companies who hold tax credit certificates. One slide reflects figures for fiscal year 2019 (FY 19) through FY 24, and the second slide reflects figures for FY 19 through FY 31. 2:36:50 PM KEN ALPER, Director, Tax Division, DOR, explained the purpose of the slides is to show how a company with $50 million in 2016 credits and $50 million in 2017 would be paid off. The slide illustrating figures for FY 19-FY 24 was prepared as if HB 331 was enacted; the slide illustrating figures for FY 19-FY 31 was prepared as if HB 331, amended to fund a smaller, alternative appropriation, was enacted. 2:37:53 PM The committee took an at-ease from 2:37 p.m. to 2:39 p.m. 2:39:32 PM MR. ALPER restated the slides are a hypothetical example of information that was twice provided by DOR to each of the 37 impacted companies. He first directed attention to the slide illustrating figures for FY 19-FY 24 and gave an example of a company with $50 million in the "first pool" of 2016 credits and $50 million in the "second pool" of 2017 credits. If $184 million were appropriated in FY 19, it would represent about 45 percent of the $400 million in total 2016 tax credits, and credit holders would be paid approximately $0.45 on each $1. Thus, the example company would be eligible for $23 million in FY 19; in FY 20, a statutory appropriation of $168 million would pay an additional 40 percent, and the example company would get $21 million. The FY 21 appropriation of $168 million would be split to pay off the last of the 2016 credits and the first of the 2017 credits. Further, FY 22 and FY 23 appropriations would continue to pay off the example company's share of the 2017 pool, as affected by the number of years the discounts rates are applied, until FY 24. Mr. Alper said the columns on the slides labeled Face Value show what the example company expects to get paid; the columns labeled Discount Rates show the money the example company would receive under the terms of HB 331 and HB 331, amended. He concluded the example company, depending on its discount rate, would be offered either $85 million or $91 million if it chose to relinquish $100,000 million in credits and participate in the program. He directed attention to the slide illustrating figures for FY 19-FY 31 and explained the figures on this slide reflect a forthcoming amendment which would lower the appropriation schedule and base the schedule on a percentage of the actual taxes received, rather than the "raw" tax calculations, thus the appropriations would be in the $40 million to $60 million range. The example company would not receive 2016 credits until FY 25-FY 26, due to more years affected by its discount rate. In this situation, the credit holders would receive dramatically less, and the state would borrow less. 2:44:27 PM REPRESENTATIVE PARISH asked, "Which of these two scenarios, would you say, more accurately reflects, or more closely reflects, the net present value of these credit assets to the companies?" MR. ALPER stated the credit holders' internal economics and valuing are unknown to DOR; however, he expressed his belief the companies are anticipating a statutory appropriation, similar to what the state has appropriated in the last two years. REPRESENTATIVE PARISH surmised the tax credit holders are amenable to [the proposals shown on both slides]. MR. ALPER recalled testimony from a representative of one of the banks that holds debt that is guaranteed by the tax credits owed to one of the credit holders: from the bank's perspective, the reduced appropriation schedule would enable a company to pay off its debt to the bank. However, from the perspective of the company, a reduced appropriation would not repay the company that did the [exploration] work, and he provided an example. Mr. Alper said, "So, I think you would get a different answer if you had a representative of the actual explorer up here, rather than their banker." In further response to Representative Parish, he said the companies [holding tax credit certificates] would like an amount that would enable them to continue in business. MR. BARNHILL restated the administration is seeking a fair balance between various interests through its introduction of HB 331; however, if the forthcoming amendment were to be adopted, HB 331 would no longer be fair. He remarked: We're trying to find a way, not only to clear the decks, but clear the decks in a way that accomplishes a variety of purpose. Paying off the tax credit holders is certainly one of those purposes, but, just as important, is attempting to reestablish the state's credibility, with respect to the oil and gas industry. And restore ... Alaska, in the perspective of the oil and gas industry, as a place to come and invest money .... 2:49:30 PM REPRESENTATIVE BIRCH expressed support for HB 331 as introduced. He asked how many businesses are impacted by the inability of the state to fulfil its obligation to pay the tax credits. MR. ALPER said there are 37 companies - approximately 20 of which received cash in 2017 for pro rata shares of 2016 credits - that have credits. There are new companies with 2017 credits, some of which are very small and received $10,000 or less, such as some of the working interest partners within the Point Thomson Unit. REPRESENTATIVE BIRCH observed the affected businesses are largely Alaska businesses with Alaskan employees. He returned attention to the discount rates shown on the slides and noted one tier would incentivize investment in Alaska and restore Alaska's credibility. MR. ALPER expressed his hope that both discount rates would help restore Alaska's credibility; the lower rate rewards reinvestment because to qualify for the lower rate a company would have to spend all of its appropriation on "qualified capital expenditures" - which are capital expenditures upstream of the point of production in its oilfields - within the next two years. He provided an example. REPRESENTATIVE BIRCH restated his support for the bill. 2:53:28 PM CO-CHAIR JOSEPHSON surmised the forthcoming amendment may cause [small, independent, oil and gas industry businesses] to either sell their assets under the current statute or suffer foreclosure. MR. BARNHILL agreed. REPRESENTATIVE PARISH gave an example of a small multimillion- dollar oil and gas company with a marginal oilfield and asked whether said company could be prevented from "agreeing to an overriding royalty interest and then pulling up stakes the next year." MR. ALPER stated if that were the intent, the company would be lying to the Department of Natural Resources (DNR) because the overriding royalty interest is a negotiated agreement. 2:55:41 PM REPRESENTATIVE PARISH moved Amendment 1, labeled 30-GH2863\A.2, Nauman, 4/6/18, which read [original punctuation provided]: Page 13, line 14: Delete "before the application of any tax credits" CO-CHAIR JOSEPHSON objected. REPRESENTATIVE PARISH explained Amendment 1 would return the language in HB 331 to the current statutory language, which does not make any reference to the application of tax credits, and would give DOR the option to follow a repayment schedule based on actual taxes received. Amendment 1 would reduce the risk to the state, reduce the amount of debt incurred by the state, and bring appropriations closer to the real market value of the assets. Further, Amendment 1 would constrain subsidies paid to multinational interests. REPRESENTATIVE BIRCH expressed his opposition to Amendment 1. REPRESENTATIVE RAUSCHER questioned whether this was another situation in which "they roll the dice again and invest in Alaska." REPRESENTATIVE PARISH said, "... they decided to invest in Alaska, sure, they, presumably read their, their contracts, I certainly hope that they did. I have nothing but respect for people and their ability to serve their rational self-interest. Where it gets murky is when you start moving around other people's money." He assured the committee [HB 331] contemplates spending - not the oil industry's money because tax credits [are not money] - money that belongs to the people of Alaska. Further, Amendment 1 would balance the interests of the industry with those of Alaska in an equitable way. 2:59:52 PM MR. BARNHILL recalled the original intent of the tax credit program was for the state to invest alongside the oil and gas industry to expand the exploration and development of oil and gas resources. [HB 331] seeks to create a cycle of new investment and new production that would result in new revenue to the state for the benefit of its citizens; however, Amendment 1 signals industry that Alaska is not competitive with other oil and gas basins around the world. He urged the committee to consider the long-term ramifications of Amendment 1. CO-CHAIR TARR noted several of the state's current problems, that are related to the tax credit program, may have been avoided. She said her concern is if the state's financial situation does not improve, and HB 331 is enacted - because nonpayment of debt secured by bonding would downgrade the state's financial position - payments on the bonds would be elevated and prioritized over other programs such as healthcare and education. REPRESENTATIVE TALERICO related he had considered offering an amendment, however, he carefully reviewed previous testimony on the bill presented by representatives of the Department of Law and DOR. After revisiting Sections 3-11, he stated his preference to move the bill, without amendments, to the House Finance Committee for further review and additional expert testimony. 3:04:32 PM REPRESENTATIVE PARISH withdrew Amendment 1. Representative Parish moved Amendment 2, labeled 30-GH2863\A.3, Nauman, 4/9/18, which read [original punctuation provided]: Page 6, line 25: Delete "1.5" Insert "two" Page 13, line 24: Delete "of 10 percent a year" Insert "based on the true interest cost plus seven percent" Page 13, lines 29-30: Delete "1.5 percent and is less than ten percent applies each year" Insert "two percent" Page 14, lines 3-4: Delete "1.5 percent and is less than ten percent applies each year" Insert "two percent" CO-CHAIR TARR objected. REPRESENTATIVE PARISH cautioned HB 331 exposes the state to a good degree of risk. If the state's true cost of interest rises, that would erode the incentive for companies to participate in the proposal, and for meeting the four requirements for a discounted rate. He pointed out if the distance between the higher discount rate and the state's rates close, it will reduce the incentive to reinvest in Alaska. Amendment 2 would also increase the differential that covers the state's risk, in the event of a drop in oil prices, by increasing the difference to the true cost of borrowing from 1.5 percent to 2 percent. 3:07:11 PM REPRESENTATIVE BIRCH asked for an assessment of Amendment 2 by the representatives from DOR. MR. BARNHILL advised the first change brought by Amendment 2 increases the "cushion" from 1.5 percent to 2 percent. He said Amendment 2 does not provide additional protection to the state if there is a drop in the price oil; in fact, the 1.5 percent added to the true interest cost is designed to replicate the state's opportunity cost of capital, which is about 5 percent, and reflects the rate of earnings garnered from earnings reserve accounts, general funds, and the constitutional budget reserve. He opined 1.5 percent is sufficient for the purpose of HB 331 due to the long-term nature of the bill. The second change made by Amendment 2, which would increase the default discount rate for participants, is not an issue of protecting the state, but is "tipping that balance more in the state's favor. We picked 10 percent intentionally to, kind of, be a median point if you will. ... We'd prefer not to do that at this point in time." REPRESENTATIVE PARISH stated a drop in the price of oil would dramatically affect the state's opportunity cost by changing the schedule of repayment under the existing statute. 3:11:29 PM MR. ALPER remarked: I think what Representative Parish is referring to is we're sort of locking in the payment schedule at the bonding moment. We are going to make them a one-time offer, we're going to give them a bunch of money based on what the schedule of payments would be if our spring 2018 forecast comes in true. If, in fact, the price of oil is lower ... that schedule would decline, and those companies would actually be getting less, so they'd be benefitting, so to speak, from the structure in the bill. Likewise, if the price of oil were to be higher than forecasted in the spring, they would be losing out by taking the offer at this point cause it turned out the scheduled payments would have been higher than anticipated. So yes, to the extent that is true, it's exaggerated a little bit by increasing the, the interest rate, the, the spread. [HB 331 was held over.]