ALASKA STATE LEGISLATURE  HOUSE COMMUNITY AND REGIONAL AFFAIRS STANDING COMMITTEE  April 9, 2013 8:04 a.m. MEMBERS PRESENT Representative Gabrielle LeDoux, Co-Chair Representative Benjamin Nageak, Co-Chair Representative Neal Foster Representative Bob Herron Representative Lora Reinbold Representative Harriet Drummond MEMBERS ABSENT  Representative Kurt Olson COMMITTEE CALENDAR  HOUSE BILL NO. 181 "An Act relating to the accounting for money received by the state from the mining license tax, mining lease payments, and royalties from mining on state tide and submerged land seaward of a municipality, and the availability of that money for appropriation to certain boroughs and municipalities outside of a borough." - HEARD & HELD HOUSE BILL NO. 166 "An Act relating to the bulk fuel revolving loan fund." - HEARD & HELD PREVIOUS COMMITTEE ACTION  BILL: HB 181 SHORT TITLE: MINING LICENSE REVENUE; REVENUE SHARING SPONSOR(s): REPRESENTATIVE(s) FOSTER 03/20/13 (H) READ THE FIRST TIME - REFERRALS 03/20/13 (H) CRA, FIN 04/09/13 (H) CRA AT 8:00 AM BARNES 124 BILL: HB 166 SHORT TITLE: BULK FUEL REVOLVING LOAN FUND SPONSOR(s): REPRESENTATIVE(s) FOSTER 03/15/13 (H) READ THE FIRST TIME - REFERRALS 03/15/13 (H) CRA 04/09/13 (H) CRA AT 8:00 AM BARNES 124 WITNESS REGISTER PAUL LABOLLE, Staff Representative Foster Alaska State Legislature Juneau, Alaska POSITION STATEMENT: Reviewed the changes between HB 181 and Version U. DENISE MICHELS, Mayor City of Nome Nome, Alaska POSITION STATEMENT: Testified in support of HB 181. PAUL LABOLLE, Staff Representative Foster Alaska State Legislature Juneau, Alaska POSITION STATEMENT: Presented HB 166 on behalf of the sponsor, Representative Foster. SCOTT RUBY, Director Division of Community & Regional Affairs Department of Commerce, Community & Economic Development POSITION STATEMENT: During hearing of HB 166, answered questions. ACTION NARRATIVE 8:04:53 AM CO-CHAIR BENJAMIN NAGEAK called the House Community and Regional Affairs Standing Committee meeting to order at 8:04 a.m. Representatives Foster, Herron, Olson, Reinbold, Drummond, LeDoux, and Nageak were present at the call to order. HB 181-MINING LICENSE REVENUE; REVENUE SHARING  8:05:51 AM CO-CHAIR NAGEAK announced that the first order of business would be HOUSE BILL NO. 181, "An Act relating to the accounting for money received by the state from the mining license tax, mining lease payments, and royalties from mining on state tide and submerged land seaward of a municipality, and the availability of that money for appropriation to certain boroughs and municipalities outside of a borough." 8:05:59 AM CO-CHAIR LEDOUX moved to adopt CSHB 181, Version 28-LS0649\U, Bullock, 3/25/13, as the working document. CO-CHAIR NAGEAK objected for purposes of discussion. 8:06:29 AM REPRESENTATIVE FOSTER, speaking as the sponsor of HB 181, explained that in 2011 the Department of Natural Resources (DNR) conducted an offshore mineral lease sale off the coast of Nome. The sale prompted a spike in demand for docking space at the Nome harbor; space that the harbor doesn't have and can't afford to build. From 2011 to 2012, the total dockings increased from 271 to 436. While the state received revenue from this increase in dockings, there was no framework to help the city with the new infrastructure necessary to accommodate the increase in traffic. This legislation would help provide the necessary framework. 8:07:34 AM PAUL LABOLLE, Staff, Representative Foster, Alaska State Legislature, began by explaining that the original intent of HB 181 was to apply only where offshore lease sales were located within municipal boundaries. However, HB 181 didn't accomplish the aforementioned, and thus Version U was necessitated and specifies that [the offshore lease sales] have to be within a municipality rather than seaward of a municipality. He then directed attention to the map section, particularly the map entitled "Nome Beach Public Mining Areas" that specifies the actual property corners. The map illustrates that within the municipality the property corners go to the three-mile limit into state waters and that's the property within the box on the slide entitled "2011 Nome Offshore Lease Sale Tract Location Map," which shows all the offshore leases that were available in 2011. Although only a small portion of those are being captured, the point is to limit it to municipal boundaries in order to limit the scope of the legislation. A memorandum from Legislative Research Services dated March 29, 2013, specifies that HB 181 only applies to Nome. Mr. LaBolle relayed that Esther Tempel, DNR, told him that although DNR is neutral on the legislation at this point, it did like Version U better than the original version because of the narrower scope of Version U. 8:11:05 AM CO-CHAIR LEDOUX asked whether it's likely the administration will have opinions on HB 181 as it moves through the process. MR. LABOLLE answered that the administration may have an opinion [about various aspects], but isn't likely to get overly excited about the legislation as it merely grants authority and doesn't make the administration expend funds. He noted that any funds expended would have to be expended through the legislature. CO-CHAIR LEDOUX surmised then that the legislation merely gives the administration the authority to appropriate funds to make up for the fact that things are happening in a municipality's offshore area. MR. LABOLLE explained that under Section 1, 50 percent of a mining lease sale or the collection of mineral mining lease sales taxes is set aside and placed in the permanent fund. The remaining 50 percent that is generally placed in the general fund (GF) would, under Version U, be split evenly such that 25 percent would be placed in the GF and 25 percent would be placed in a fund from which the legislature could appropriate at the request of the commissioner [of DNR]. In further response to Co-Chair LeDoux, Mr. LaBolle specified that the 25 percent that is placed in the fund from which the legislature could appropriate at the request of the commissioner would function as would any other non-dedicated fund that is expendable by a simple majority vote. CO-CHAIR LEDOUX questioned what HB 181 achieves if this is something the legislature can already do. MR. LABOLLE clarified that the legislation establishes a framework by which DNR would track the lease sales and mining taxes within those municipal boundaries. Therefore, [DNR] would know how much to request and whether to request it from the legislature. In this particular case, the lease sales drove docking demand at the Port of Nome as illustrated by the chart entitled "Port Vessel Traffic by season." The chart illustrates that docking demand grew from 271 total dockings in the harbor in 2011 to 436 total dockings in the harbor in 2012. CO-CHAIR LEDOUX inquired then as to why the municipality didn't just increase docking fees for vessels above a certain length as that would've likely captured the larger commercial vessels and not the local vessels. MR. LABOLLE deferred to city personnel, but noted that most of these vessels are small dredges, 10-20 feet in length. Furthermore, although the municipality could increase the docking fees, it doesn't provide the capital necessary to dredge out the harbor. 8:16:10 AM REPRESENTATIVE HERRON inquired as to the intent of the co-chairs with HB 181. He then noted that the last time he was in Nome was the end of August, which is a really busy time for the gold miners and the community. He opined that [HB 181 and the discussion thus far] hardly explains what is going on in the community. In the middle of July the Pacific Northwest Economic Region (PNWER) is having its annual summit at which there will be 200-300 legislators from Canada as well as legislators from Oregon, Washington, Idaho, and Montana for a total of about 600 people in Anchorage. The day after the summit there is a day trip to Nome to view the activities of the Bering Sea Gold television show. Since it's difficult to capture the impact of the aforementioned on Nome, Representative Herron suggested the committee hold HB 181 and visit Nome to understand the goal of HB 181 and the relationship [the community] has with the growing [gold mining] industry and economy. Such a visit will provide a better understanding of how DNR can't even comprehend the impact to the community. For instance, prior to Nome stopping DNR, DNR was issuing permits to people who would come to Nome to mine for gold with no idea and no preparedness. However, DNR stopped after there were already 88 dredges in Nome, which is a huge impact on the community. 8:19:28 AM REPRESENTATIVE REINBOLD characterized visiting Nome as an excellent idea. She then noted that she really likes that Nome is using its local resources to build its infrastructure. Therefore, HB 181 seems necessary and she related her support for it. She then inquired as to how much [the gold miners] will be taxed and whether that will impact the attraction to gold mining in the area. MR. LABOLLE clarified that HB 181 doesn't impact the tax structure at all as the tax remains the same. The legislation just takes the tax captured from the department and splits it into the permanent fund and the general fund (GF). Of the general fund portion, 50 percent is placed into a separate account that can be appropriated by the legislature. 8:21:01 AM REPRESENTATIVE FOSTER thanked Representative Herron for highlighting the difficulties Nome is currently having and [through] PNWER the Arctic access issues that will impact the Nome port also. Since the Nome port is only going to get busier, the more people can be educated about the problem the better. Representative Foster relayed that Nome supports economic development and embraces mining, which has a rich history in Alaska. 8:22:09 AM CO-CHAIR NAGEAK opined that a visit to Nome is a great idea and inquired as to when would be the best time to visit. 8:22:59 AM REPRESENTATIVE HERRON remarked that he would rather House Community and Regional Affairs Standing Committee visit Nome than the House Finance Committee. He recalled that the day after the PNWER summit is July 19th when PNWER delegates can make the trip. CO-CHAIR NAGEAK said that the committee could work with the sponsor and the City of Nome to plan a visit. 8:24:23 AM DENISE MICHELS, Mayor, City of Nome, related support for HB 181 and a visit from the committee. She told the committee that the best time for a visit would be after June. In order to give the committee an idea of situation in Nome, Mayor Michels related that in 2011 there were only 39 dredges, however, last year after opening lease sales there were 88 dredges, 30 support vessels, and 2 research ships. Last year there were more than 120 vessels in the harbor for suction dredging alone. 8:25:15 AM CO-CHAIR LEDOUX agreed that visiting Nome is a great idea in order for the committee to know the communities for which it makes decisions. 8:25:42 AM CO-CHAIR NAGEAK removed his objection to the adoption of Version U. [No further objection was stated and Version U was treated as before the committee.] 8:26:07 AM REPRESENTATIVE REINBOLD asked if it's acceptable with the sponsor to hold HB 181. REPRESENTATIVE FOSTER deferred to Mayor Michels. MS. MICHELS said that although she would like HB 181 to be retroactive, she understands that isn't possible. Since she hasn't heard when the next state lease sales would be she said that holding HB 181 wouldn't be a problem as long as "we keep on top of it for the next season." 8:27:39 AM CO-CHAIR NAGEAK opened public testimony. 8:28:36 AM MAYOR MICHELS read the following letter of support: With the high prices for precious metal and the state DNR-sponsored lease sales, we've experienced an influx of offshore placer mining. These miners have provided a boost to our local merchants and the economy, at the same time they've impacted our city services. Even though the City of Nome normally funds services with a variety of revenue sources like property or sales tax, [Nome spent] revenues to cover the cost for an additional staff at $60,000. We also purchased land at $85,000 and did design for mooring to aid in the congestion with this increase in dredges at $217,000. So, overall the city has spent, on its own, over $302,000 to expand our port facilities to support the gold dredging fleet. Also, other impacts are we have an increase in staff doing oil spill cleanup because of all the vessels there. So, there's additional resources that we've been using. We are a mining community and we do support this economic opportunity and we support this potential solution for a portion of the revenue shortfall that may be possible with the reallocation of the mining license tax. It applies to all mining operations regardless of land status, size, or location. Presently, there is no uniform mechanism to allocate portions of the revenue back to communities that are impacted, such as Nome, by resource development. Such a revenue sharing model is effective in the state fishing industry and similar programs have been successful in revenue sharing from the oil and gas industry in the Gulf of Mexico. Sharing portions of the state revenue from mining development with local communities in a predictable fashion would reduce the need for local government to impose their own targeted taxes on the industry and allows for local communities to provide services to the entities in the communities. 8:30:51 AM CO-CHAIR NAGEAK related his understanding that there are two seasons of gold mining, and thus there is activity almost year round in front of the port. Therefore, he surmised that the City of Nome is impacted in the winter time. MS. MICHELS replied yes, adding that currently there are approximately 17 miners doing under the ice mining. 8:31:48 AM CO-CHAIR NAGEAK, upon determining no one else wished to testify, closed public testimony. 8:31:58 AM REPRESENTATIVE FOSTER related his appreciation to the committee for hearing HB 181 and the desire to increase the existing infrastructure to accommodate increased economic development in the mining area. 8:32:24 AM CO-CHAIR NAGEAK announced that HB 181 would be held over and that staff would work with the sponsor, Representative Herron, and the City of Nome to determine the dates and logistics of the committee's visit to Nome. 8:33:21 AM REPRESENTATIVE HERRON said it was only a suggestion to visit Nome in July after the PNWER summit. He then stated that until one visits Nome, one won't know the scale of what's occurring with gold mining, which he likened to the gold rush at the turn of the century. REPRESENTATIVE DRUMMOND said that initially she was wondering if the scope of the situation could be witnessed by video rather than expending the funds for the committee to travel to Nome. However, now she understands that perhaps a visit is in order, and thus she will consider it. CO-CHAIR NAGEAK echoed earlier comments that until one views the scope of the situation in person, one doesn't understand how busy it is in Nome. REPRESENTATIVE HERRON reiterated the need to see the situation in person and characterized it as an investment in making decisions for communities and regions that are impacted by economic impacts. Furthermore, he suggested that the expense of the committee traveling to Nome will be small relative to the impact of moving HB 181 forward. 8:38:45 AM CO-CHAIR LEDOUX opined that the intention behind HB 181 is excellent. Nome, she further opined, needs something in terms of assistance to develop the necessary infrastructure. However, she questioned whether this legislation provides the necessary funding stability as it will only be a year-to-year appropriation. REPRESENTATIVE FOSTER confirmed that the primary focus of HB 181 is to meet the initial infrastructure needs of Nome, but acknowledged that there could be the potential [for more]. He requested comment from Mayor Michels. MAYOR MICHELS characterized the mechanism within HB 181 as a more stable source of revenue sharing as she only sees it increasing as the [lease sales] are a positive economic driver for the state. 8:40:57 AM CO-CHAIR NAGEAK restated that HB 181 would be held over. HB 166-BULK FUEL REVOLVING LOAN FUND  8:41:14 AM CO-CHAIR NAGEAK announced that the final order of business would be HOUSE BILL NO. 166, "An Act relating to the bulk fuel revolving loan fund." 8:41:29 AM REPRESENTATIVE FOSTER, speaking as sponsor of HB 166, explained that HB 166 addresses who qualifies for the bulk fuel revolving loan fund. Currently, the bulk fuel revolving loan fund applies to communities with populations that fall below 2,000, but doesn't make a distinction between communities that are on or off the road system. This legislation maintains the aforementioned for communities connected by the road system, but also allows for communities with populations that are less than 4,000 to qualify as well. The legislation also increases the maximum amount requested [from the bulk fuel loan] from $750,000 to $1,500,000. 8:42:32 AM PAUL LABOLLE, Staff, Representative Foster, Alaska State Legislature, highlighted that communities with a population of less than 4,000 only qualify if the community is located off the interconnected state road system otherwise the population cap of 2,000 remains. Therefore, that expansion in population would capture those living off the Rail Belt. 8:43:01 AM CO-CHAIR LEDOUX inquired as to what communities the [expansion] would include. MR. LABOLLE referred to the list entitled "All incorporated places in State of Alaska." The green highlights in the list are those communities with a population above 2,000 but below 4,000 [and not on the interconnected state road system] that would be included were HB 166 to pass. Those communities are Cordova, Dillingham, Kotzebue, Nome, Petersburg, and Wrangell- Petersburg, Seward, and Wrangell. REPRESENTATIVE FOSTER pointed out that the population specifications are a policy call. Representative Foster noted that although he may have considered a higher population cap that would include Barrow, he took into consideration that Barrow has natural gas and the bulk fuel revolving loan program is likely not used in Barrow. CO-CHAIR NAGEAK acknowledged that is the case for Barrow. REPRESENTATIVE DRUMMOND inquired as to why Seward is included since it is located on the road system. MR. LABOLLE clarified that the list highlights per population and doesn't take into consideration whether the community is on the road system. He agreed that Seward would not be included under the provisions of HB 166. 8:45:42 AM REPRESENTATIVE DRUMMOND requested an explanation of the bulk fuel revolving loan fund. MR. LABOLLE explained that it's a capitalized fund from which money is loaned to communities at a low interest rate of 4 percent for the purchase of fuel. Those communities pay back into the fund, and thus it's a self-sustaining loan program; it's very similar to the various Alaska Housing Finance Corporation (AHFC) programs. 8:46:30 AM REPRESENTATIVE DRUMMOND surmised then that communities use the bulk fuel revolving loan fund to purchase fuel and over the winter as [residents] use the fuel and pay for it, the community pays back the loan. MR. LABOLLE replied yes, adding that most rural communities purchase fuel prior to freeze up because flying in fuel after the freeze is cost prohibitive. 8:47:41 AM REPRESENTATIVE REINBOLD inquired as to the current discount and what a standard loan would be at this time. 8:47:59 AM SCOTT RUBY, Director, Division of Community & Regional Affairs, answered that it would be what commercial banks would charge. Because many of these communities are in a unique situation, they have to purchase large amounts of fuel. He related that with many of these loan programs, the smaller communities don't have the ability to go to a bank and capitalize a large loan of $600,000-$750,000. Under the previous iteration of [the bulk fuel revolving loan fund] AEA charged a market rate that varied between 4-6 percent. Last year, when reviewing the interest rate, it was determined not to penalize communities for borrowing to provide fuel for their residents. Therefore, 4 percent was determined to be a rate that was low enough to be sustainable while still paying all the costs of the program. 8:49:57 AM REPRESENTATIVE REINBOLD inquired as to what the communities would pay if they sought a loan from a bank. MR. RUBY responded that he didn't know, but did recall that Akiachuk did borrow from a bank in past years and offered to provide that information to the committee. REPRESENTATIVE REINBOLD asked if the division is well-funded and would be able to cover this legislation were it to pass. MR. RUBY, referring to the document entitled "Effects of HB 166 on Bulk Fuel Loan Accounts," informed the committee that although six new communities would qualify for loans under [the bulk fuel loan account or the bulk fuel bridge loan account], it's likely that three of them wouldn't seek loans from the loan fund because they can receive large amounts of fuel periodically delivered by barge. The three that might participate in the [bulk fuel loan program] would be Dillingham, Kotzebue, and Nome. He then informed the committee that if all the loans were funded it could potentially amount to $10 million more needed to capitalize the fund, which would cover the cost of the potential loans as well as provide a buffer to avoid running out of funds. Without the aforementioned capitalization, the division will have to scrutinize applicants such that those that can fund it would either be denied or reduce the amount that they could borrow in order to ensure that the funds are available for those with the most necessity. 8:52:18 AM REPRESENTATIVE REINBOLD asked whether this legislation will have any impact on power cost equalization (PCE) or the Low Income Home Energy Assistance Program (LIHEAP). MR. RUBY replied yes because it subsidizes the cost of the fuel. He pointed out that one of the primary borrowers of this is electric utilities. If [the proposal in HB 166] reduces the cost of the fuel [for communities that used the bulk fuel revolving loan] over other possibilities, it would have a direct relationship on PCEs because one of the pieces of the calculation is the cost of fuel. REPRESENTATIVE REINBOLD inquired then as to whether there could be cost shifting. MR. LABOLLE characterized it more as saving shifting rather than cost sharing because while the fund would need to be capitalized, it would be a separate appropriation. Furthermore, it's a self-sustaining fund into which a community pays back. Therefore, if a new community uses the fund and reduces its fuel costs, when the utility starts to burn fuel to make electricity it's burning cheaper fuel. Although the consumer won't see a lower electric rate, the PCE subsidy would decrease and would save funds. For example, if the cost of generating power is $.30 and PCE rates were $.20 to the consumer, PCE would be in place at a 10 percent subsidy. In fuel savings, if $.25 per Kilowatt hour (KWh) power can be generated, they will pay $.20 and PCE will only have to pay $.05. 8:54:47 AM CO-CHAIR LEDOUX asked what the interest rate is. MR. RUBY specified that for loans under the bulk fuel loan account, the interest rate is 4 percent for the first-time borrowers who are in good standing. There is the option for those in good standing in the second year to receive a discount such that the interest rate is reduced to 3 percent. If the borrower continues to be in good standing there is a discount such that the interest rate is reduced to 2 percent. 8:55:21 AM CO-CHAIR LEDOUX inquired as to whether it's common for [communities] using the bulk fuel loan account to default. MR. RUBY answered that it isn't common. He pointed out that all of these loans are intended to be paid back in less than one year. There have been a couple of entities that have [applied] for financial hardship and paid back the loans over the course of more than one year or via a payment plan. Technically, there haven't been any defaults and all loans have been repaid, save those that are on multi-year re-payment schedules. CO-CHAIR LEDOUX asked whether the division would provide a loan to an entity that is in default [for a prior year's loan]. MR. RUBY said that in certain cases under the bulk fuel bridge loan program, the division has loaned funds to an entity that is in default the prior year in order to avoid the community turning off its electric utility. However, that has not been the case for [loans] for residential heating as it has primarily been the case for electric generation to keep the plant operating and to protect public facilities. 8:56:47 AM MR. LABOLLE explained that the increase from $750,000 to $1.5 million directly corresponds with the increase in the maximum population of the possible community on the system, which maintains it at $370 per person. He reiterated that the numbers, both the population and the loan amount, are starting points for which the committee's input would be appreciated. In response to Co-Chair Nageak, Mr. LaBolle said [changes] could be accomplished through the amendment process or the adoption of a committee substitute. 8:57:59 AM CO-CHAIR LEDOUX inquired as to how the sponsor decided on the $1.5 million. MR. LABOLLE explained that first the sponsor decided on the population of 4,000 as a place holder and then divided the current fund of $750,000 by the 2,000, which amounted to about $370 per person. That per person amount was then multiplied by the [population number of] 4,000, which amounted to $1.5 million. REPRESENTATIVE FOSTER said simply stated the population and the loan eligibility were doubled. Using Nome as an example, he offered that the company that does most of the residential heating has storage capacity of about 4 million gallons. If those tanks are filled twice, that's 8 million gallons and if the fuel costs $3.00 per gallon that amounts to about $24 million. Therefore, the increase to $1.5 million would be a small portion of what the community uses and doesn't even include the utilities. Still, Representative Foster expressed the need to periodically review the bulk fuel loan program and make adjustments to it more often than every 10 years in order to avoid large adjustments. 9:00:46 AM MR. LABOLLE pointed out that on the document entitled "All incorporated places in the State of Alaska" it only considered communities under 5,000. He noted that Bethel isn't included on the list because it has a population of 6,219, and thus Representative Herron may be interested in the population factor. 9:01:28 AM REPRESENTATIVE REINBOLD said she would like to hear from Representative Herron on the matter. 9:01:49 AM The committee took a brief at-ease. 9:02:20 AM CO-CHAIR NAGEAK announced that HB 166 would be held over. 9:02:42 AM REPRESENTATIVE FOSTER related his understanding that because this legislation may have financial implications, it may be referred to the House Finance Committee. However, the House Finance Committee won't take up HB 166 this session. Therefore, he offered to consult with Representative Herron and revisit this legislation next session. 9:03:13 AM REPRESENTATIVE DRUMMOND questioned then whether in the meantime there will be a handful of communities that won't have access to the revolving loan fund or will have access at a higher rate or to commercial loans. MR. LABOLLE stated that all communities on the list have access through commercial loan funds. 9:03:45 AM REPRESENTATIVE FOSTER noted that if all the communities took advantage of the loan, $10 million would be necessary. He expressed the need to avoid a situation in which a well- organized community such as Nome or Kotzebue files their application first and then there are no funds left for smaller communities, such as Teller, that really need the assistance. The aforementioned is another component that will be reviewed over the interim. MR. LABOLLE interjected that independent of the population parameters, there has been discussion regarding whether the $370 per person is realistic. 9:05:05 AM REPRESENTATIVE REINBOLD suggested that a committee visit to [Nome] should also include further education regarding the fuel and energy situation in the area. REPRESENTATIVE FOSTER said he would like to do so. 9:05:52 AM CO-CHAIR NAGEAK restated that HB 166 would be held over. 9:06:18 AM ADJOURNMENT  There being no further business before the committee, the House Community and Regional Affairs Standing Committee meeting was adjourned at 9:07 a.m.