Legislature(2017 - 2018)ADAMS ROOM 519
04/21/2018 01:00 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB331 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 331 | TELECONFERENCED | |
| + | TELECONFERENCED |
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."
1:07:26 PM
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE (via
teleconference), thanked members for the hearing and for
all of their hard work. He relayed that the state had
struggled with addressing its financial challenges
originating with a substantial drop in oil prices. One of
the challenges was that the state could no longer afford to
pay its oil and gas tax credits, which had been the prior
practice. There was a general sense from the legislature
and the administration that the practice was not
sustainable. The state currently owed approximately $800
million in credits to companies that had invested in
Alaska. The pertinent question was how to address the
issue. He reported the administration's proposal [in HB
331] was atypical - it was not an increase in revenue or a
spending cut. The bill proposed the use of debt to pay off
the credits.
Commissioner Fisher stated that the proposal was slightly
unusual as it would use debt and ask credit holders to
accept a discount on the credits. The discount would pay
off the interest that would accrue on the debt; therefore,
the bill was generally cost neutral to the state - it
included a very modest benefit to the state. Paying the
credits was important to the state's economy and the oil
industry, which had been the source of most of the state's
funding. The administration believed the bill would provide
an opportunity to put Alaskans back to work, provide an
infusion of cash into an industry that was critical to the
state, and result in oil production more quickly than
expected.
Co-Chair Foster acknowledged Representatives Gary Knopp and
Lora Reinbold in the audience. He asked members to hold
their questions until the end of the presentation.
1:12:23 PM
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself. He introduced the PowerPoint
presentation titled "State of Alaska Department of Revenue
HB 331: Oil & Gas Tax Credit Bond Proposal" dated April 21,
2018 (copy on file). He highlighted others available for
questions. He began on slide 2 and relayed that one of the
primary objectives of the bill was to encourage economic
stimulus in the oil and gas sector. The uncertainty
regarding the tax credits had led to stalled projects and
frozen credit. There were a variety of ways of addressing
the owed tax credits. The administration supported
addressing the credits in a way that directly confronted
the uncertainty in the oil and gas sector, particularly
when it came to small oil and gas exploration companies.
The goal was to get the funds to companies to enable them
to payoff loans, begin to make new investment, and
hopefully bring new jobs and production to the state.
1:14:37 PM
Mr. Barnhill turned to slide 3 titled "Bill is Structured
to Balance Competing Interests." The administration
recognized there were numerous stakeholders involved and
its goal was to provide a solution that struck a balance
between the various perspectives and objectives. He pointed
to the red circle of arrows on slide 3 and reported the
administration recognized there were extreme fiscal
constraints in the state's budget due to the declining oil
price. The bill matched the cost of the debt service in a
cost neutral way to expected state cash flows. In the early
years there would be relatively small debt service payments
and in later years the payments would be higher because the
administration anticipated state revenues would increase
going forward. The administration wanted to support small
oil and gas exploration firms to produce new production and
to get them to redeploy capital into the state's oil and
gas basins and encourage projects that had been underway
when uncertainty arose regarding the tax credits.
Mr. Barnhill explained that the uncertainty regarding the
payment of the tax credits had eroded the state's
credibility in terms of a place that welcomes investment in
the oil and gas sector. He noted that Alaska competed with
other oil and gas basins worldwide and when companies
decided where to invest, they considered the credibility of
the location and the prospect for return on investment. He
pointed to a drawing of a moose on the right side of slide
3, which was meant to remind people that when the state
engaged in marketing the oil and gas tax credits (the
information dated to 2013), the state had made
representations there would be cash in the form of tax
credits representing an investment of the state alongside
exploring firms and producers. He believed it was helpful
to remember there had been expectations in place that would
help the companies achieve the state's goals of getting
small firms into the state exploring and producing oil in
new basins.
1:17:13 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
advanced to slide 4 and provided a 15-year history of tax
credits in Alaska. He began with 2003 when the legislature
passed an exploration incentive credit that was a
percentage of exploration cost. At the time, the state
still had gross revenue-based tax. The net profits tax was
already on the books by the time the Petroleum Production
Tax (PPT) legislation passed in 2006. Alongside PPT had
been the idea of transferrable credits and credits tied to
net operating losses (NOLs) for the first time, as part of
the net profits system and to a limited extent, the ability
of state repurchase. In 2007, the legislature passed
Alaska's Clear and Equitable Share (ACES), which included
tax changes and the Oil and Gas Tax Credit Fund. Also,
included in the ACES bill was the statutory formula that
had been significant topic of conversation in the past
several years - establishing that a percentage of the
production tax revenue (however defined) should go to the
fund annually to purchase the credits. The language had
been routinely ignored - the amount appropriated in
beginning in FY 08 and through FY 15 had been open-ended
language allowing the purchase of whatever was requested.
The language had been sitting in statute since the passage
of ACES in 2007.
Mr. Alper continued to review the historical oil and gas
tax credit background. He explained that 2010 greatly
expanded the scope of credits, primarily due to the Cook
Inlet Recovery Act that added the new 40 percent well
credit, new applicability of credits, and changed some of
the rules, which resulted in giving large credit subsidies
for Cook Inlet exploration, primarily targeted at the
utility gas (keeping lights on in Southcentral Alaska).
Additionally, credits for exploration in the Interior had
been increased. The passage of SB 21 had been a major
change to the tax system. The bill removed the North Slope
capital credit, increased the size of the NOL credit to
align with the base tax rate, and added the new per barrel
credits that were not cashable but represented a large
component of the current tax calculation (the credit was a
sliding scale for most production, tied to the price of
oil).
Mr. Alper continued that in recent years, as the state
entered a fiscal crisis and discovered the tax credit
regime was no longer affordable, two major pieces of
legislation had passed the legislature that were winding
down the program. In 2016, HB 247 was primarily known for
eliminating the Cook Inlet credits and locking in a very
low tax regime indefinitely in the Cook Inlet area. The
bill had also established a seven-year sunset on the new
oil benefits called gross value reduction (GVR) that were
part of SB 21. In 2017 the legislature had ended the
creation of new cashable credits (a cap and end had been
applied to the program) - there were still a few trickling
in, but there were now a finite number of tax credits that
the state needed to contemplate how to monetize and close
out. The purpose HB 331 was to close the book on that era
of tax credits.
1:20:44 PM
Mr. Barnhill advanced to slide 5 and addressed the benefits
of oil and gas tax credits to date. He detailed that tax
credits had been instrumental in resolving gas shortages in
the Cook Inlet/Railbelt region. The threat of brown-outs
was completely gone, largely due to the tax credits and the
investment the state made in developing gas resources in
Cook Inlet. Elsewhere on the North Slope there was
potential for new production from new areas including Pikka
and Nuna [fields]. He detailed that the opportunities were
exciting for Alaska and the purpose of HB 331 was to help
secure the potential for new production going forward.
Mr. Barnhill relayed that slide 6 and slide 7 included
statistics about the amount the state had spent in tax
credits and the result of the expenditure. The state had
spent $3.6 billion in total cash purchases through the end
of FY 18, $2.5 billion of the total had gone to producing
companies. The North Slope had 86 million barrels of oil to
date and Cook Inlet had produced 89 million barrels. The
bottom of slide 6 showed the outstanding tax credits and
their location. The North Slope balance was $514 million,
and the non-North Slope was $293 million.
Mr. Barnhill continued that on slide 7, which showed
anticipated production related to tax credit investments
for the next 10 years. Combining all of the numbers equaled
an annual potential of 129 million barrels of oil from the
North Slope and 20 million barrels of oil the Cook Inlet
region. The intent of the bill was to help secure the
state's existing investments in Alaska's oil and gas
resources. He reported positive news that the price of oil
had reached about $73 per barrel during the current week.
The administration wanted the companies currently exploring
with the goal of producing to have the ability to take
advantage of a rising price environment.
1:23:22 PM
Mr. Barnhill reviewed how the state arrived at its current
situation on slide 8. He reported that until recently, the
state had been able to pay all tax credits when presented.
He remarked there could be a long discussion on whether it
had been the original intention of the legislature or how
the legislature intended to pay the credits, but until the
price of oil collapsed in 2014 the state paid the credits
when presented. In FY 16 there had been a veto that reduced
the payment to $500 million. In FY 17 and FY 18 the payment
had been set at the Department of Revenue's (DOR) statutory
calculation amount. He explained that under AS [43.55] .028
the legislature was called upon to appropriate a certain
amount to the oil and gas tax credit fund; the amount
appropriated was based on the price of oil. He detailed
that if the price of oil was less than $60 [per barrel],
the statutory formula called on the legislature to
appropriate 10 percent of the value of the taxes levied
under the oil and gas production tax. If the price was
higher than $60 [per barrel] the legislature was called
upon to appropriate 15 percent of the taxes levied. The
administration recognized the statute was subject to
appropriation - the legislature could choose to appropriate
some, all, or none. He turned to an annual appropriation
schedule from the Revenue Sources Book on slide 9 that had
been produced by DOR based on the statute.
1:25:08 PM
Mr. Alper elaborated on the two tables on slide 9. The top
table presumed the statutory formula. He noted the asterisk
next to the FY 24 number [of $89] implied the actual
formula would be more than the number listed, but DOR
believed the amount listed was the only amount required to
finish paying the credits. The administration was aware of
the $807 million owed and an additional $140 million or so
working their way through the system. The last credit would
be paid in FY 24 if the price forecast held and the
legislature appropriated at the statutory schedule in FY
24. He explained that if a lower amount was appropriated,
it would impact those relying on the funds and could slow
continued exploration and development.
Mr. Alper highlighted that currently, many of the companies
could not access additional funds because they were
delinquent on existing debts that were in some cases
pledged by the expected tax credit payments. There was an
alternative way of calculating the formula depending on
whether the 10 or 15 percent was taken before or after the
application of tax credits against liability. The House's
version of the FY 19 operating budget was passed presuming
the smaller number in the schedule. He pointed to the table
on the bottom of slide 9 and detailed that the
appropriation would be much smaller at $40 million or $50
million per year and there would still be $700 million
remaining to be paid in FY 24. Under the alternative
formula, it would take 15-plus years to pay off the tax
credits instead of 6 years.
1:27:16 PM
Mr. Alper continued to slide 10 that included an example to
show how the formula envisioned in HB 331 would be applied.
The example used a theoretical company with $100 million in
tax credits, $50 million to be issued in 2016 and $50
million to be issued in 2017. The existing regulation
scheduled and ranked the credits based on time first; the
initial appropriations would pay off the 2016 credits in a
pro rata formula first and the 2017 credits second. He
explained that the more newer credits a company had, the
quicker it would receive its money, whereas later credits
would mean the company would receive its money later. The
example used a company with both types of credits. The bill
envisioned that, presuming the statutory appropriation
occurred, a company would receive a certain amount of money
per year for several years.
Mr. Alper detailed that the cash flow would be turned into
a value based on a net present value type discount rate.
The bill contained two different discount rate options. The
more advantageous to industry was a rate of approximately
5.1 percent and would be set at the time bonds were issued
based on the state's actual interest cost (total interest
cost to borrow the money plus 1.5 percent). The state's
interest cost was estimated at 3.6 percent. The companies
that did not choose to meet the threshold would receive a
10 percent discount rate. He elaborated that the 10 percent
rate had been chosen as a midpoint. The administration
recognized that the state's cost of capital was somewhat
lower at 3 to 5 percent, but many of the companies in
question had a cost of capital in the 15 to 17 percent
range - they were working in the private equity markets;
therefore, the state was offering something better than
what they could obtain from the markets, while still
advantageous to the state. The 10 percent base rate was
hard coded in the bill.
Mr. Alper explained that to qualify for the lower rate the
company would have to meet one of four criteria including:
agree to an overriding royalty interest, commit to reinvest
the money in Alaska, agree to early waiver of confidential
seismic data, or have refinery or gas storage credits. He
elaborated on the criteria and stated that if the state was
going to give a company $90 million, the company had to
make a commitment to invest the money in the next two years
in oil project capital expenditures. He explained that
seismic exploration work was held by the state and released
publicly ten years later; if the company agreed to give up
its ten-year exclusive confidential right to the seismic
data it would receive the better discount rate. He
highlighted that a small number of the credits were for
refinery expansion projects. He elaborated that because the
refinery projects did not neatly fit into other boxes, the
administration decided those companies would automatically
come in at the better discount rate. In general, the
refinery projects had lead to some type of economic
improvement for Alaska. For example, the asphalt plant in
North Pole was providing lower priced asphalt to the
Department of Transportation and Public Facilities and the
state was seeing immediate economic benefits. The discount
would be applied to each year of payments starting in the
second year. He likened it to a compound interest in
reverse.
1:31:05 PM
Mr. Alper turned to the graph on slide 11 and continued
with the theoretical example of a company with $100 million
in credits split between 2016 and 2017. He returned to the
statutory appropriation and explained that in FY 19 there
would be $184 million appropriated. He explained that if
there was a company with $50 million out of the approximate
$400 million in FY 16 credits, it would stand to receive
about $23 million out of the $184 million. Likewise, of the
$168 million appropriated in FY 20, the company would
receive about $21 million until it was paid in full in FY
23. He was speaking about the column titled "face value."
Mr. Alper continued to address the table on slide 11 and
pointed out the columns showing years discounted and
discount rates. He explained that starting in year 2, the
actual payment was reduced based at the 10 percent or 5.1
percent per year, compounding. The first year the discount
would be applied once, the second year it would be applied
twice, and so forth. The total effect was shown in the
totals at the bottom of each column. He explained that if
the theoretical company was able to get the 5.1 percent
discount rate, the state would be purchasing its $100
million credits for slightly over $91.5 million. With the
10 percent discount rate the company would receive just
under 85 cents on the dollar. He relayed it would be the
company's choice subject to its ability to offer something
to be deemed eligible to receive the better discount.
Participating in the program would cost the company between
8.5 percent and 15 percent of its face value.
Mr. Barnhill commented that every tax credit holder that
could potentially participate in the program had received
the table shown on slide 11 personalized with their own
numbers to see how they would be impacted.
Mr. Alper reported that for the most part the companies had
responded positively. He communicated that a substantial
majority had expressed interest in participating in the
program.
1:33:31 PM
Mr. Alper explained that slide 12 showed that the same
analysis applied if the lower statutory appropriation
mechanism was provided. In other words, instead of the $184
million in the coming year, the $41 million was plugged in
and applied in the subsequent year. The example showed that
rather than paying off the last of the company's credits in
FY 23, it would not get paid in full until FY 31. The same
$100 million face value would be received, but the discount
rates became much more onerous because of the compound
interest effect of waiting the additional number or years
to which the discount rate was applied. By FY 31, when the
company received its last $5 million, after 12 years of
discounting its value was only $1.6 million to $2.8
million. He pointed out the discount was dramatic.
Mr. Alper continued that even at the 5.1 percent discount
rate, the company would still be losing 27 percent of the
face value. At the 10 percent discount it would lose 44
percent of face value. There was a dramatic difference
between slides 11 and 12 based on the time factor and
presumed appropriation included in the formula. Although
there was some ambiguity and debate over what the current
statutory formula said, the bill would hardcode the
presumption of the larger formula. He detailed that if the
bill passed, there would not be a question over how the
numbers would be calculated. The bill would not change the
statutory appropriation formula, which would remain at the
will of the legislature. For the purpose of calculating
discount rates, the bill assumed the larger appropriation
schedule for the offers.
1:35:29 PM
Mr. Alper moved to slide 13 and explained that a multi-step
process would occur if the bill passed. First, DOR would
reach out to the companies to get a binding statement of
their intent to participate in the program. The interested
credit holders would make an irrevocable commitment. The
state needed the commitment in order to know what to borrow
from the market. He detailed the state would need to know
which companies would participate and which discount rate
they would qualify for. The known credits as of January
2018 was $807 million - those credits would qualify first.
Based on what portion came in at which discount rate, the
total bond issuance would be between $683 million and $738
million plus any financing fees paid to underwriters. The
administration's hope was to receive the bond issuance as
soon as August 2018.
Mr. Alper explained there were additional pending tax
credits not included in the $807 million. The first group
included the last NOL credits allowable under law. He noted
that HB 111 (passed in 2017) cut the NOL credits off in
mid-2017. He elaborated that the 2017 tax returns were
currently under review by the tax division and would mostly
be issued in July 2018. There were inevitably credits that
would trickle in late due to late applications. Other
remaining credits included refinery credits that sunset in
2020 and the credit to the Interior gas utility for its
primary gas storage tank in Fairbanks. He detailed that if
the gas utility work was completed by 2020, it would be
possibly the last cashable tax credit to come in. The
credits would be eligible for subsequent bond offerings
that would be issued in 2019, 2020, and possibly 2021. The
bill would sunset after 2021 and the state would no longer
have the ability to issue bonds.
1:38:05 PM
Mr. Alper explained the third step would be to purchase the
certificates (slide 14). The 10 percent rate fell in
between the state's and companies' cost of capital. The
5.12 percent rate would be pinned down in the last weeks -
the exact amount would not be known until the state went to
market. Companies would receive the lower rate if they
offered any one of four options:
1. Overriding royalty of equivalent value
2. Investment commitment of equivalent value within 24
months
3. Waiver of seismic data confidentiality waiver, or
4. Refinery / gas storage credit
1:38:44 PM
Mr. Alper discussed that borrowing money cost money. The
state would be paying interest to whoever purchased the
bonds. However, the interest the state would pay would be
less than the discounts received from buying the credits
from companies. The idea was that the state would breakeven
or make a small amount of money on the relative value
between what it gained from the discount and what it got
from the interest. There was no specific hardcoding of the
bonds in the bill, but the assumed formulas included a ten-
year payback where the first two years would be interest
only, the debt service would be increased in years three
through five, and a flat payment to fully pay off the debt
would occur in years six through ten. The rationale behind
the assumptions was that DOR saw the state's finances
improving in three to four years with the presumption of a
percentage of market value and improvements to the overall
fiscal situation. The department believed it would be in
the state's interest to push some of the larger costs into
the later years. Meanwhile, there would be short-term
budgetary gains from making the interest only payments in
the initial years.
Mr. Alper explained that the smaller subsequent bond issues
were structured with a ten-year system as well, but years
one through nine would be interest only and a balloon
payment would take care of the rest in year ten. He
reiterated that the administration was looking for cost
equivalency - it was not trying to make money off the backs
of the companies, but it was also not looking to pay out of
pocket for the debt service.
1:40:37 PM
Mr. Alper addressed a table showing anticipated cash flow
to the state before and after the proposed program (slide
16). The Cohorts 1 through 4 referred to the four bond
issues. Cohort 1 was the initial large bond that would take
place in the coming fall to pay off the $807 million. The
assumption in the table was that everyone would participate
and that everyone would receive the more advantageous 5
percent discount rate, which meant the maximum borrowing
and maximum payments on the state's part. He noted that the
statutory payment equaled $946 million. He detailed that if
the amount was turned into a net present value (meaning the
state's time was worth 5 percent per year) it would be
about $810 million. Meanwhile, the ten years of payments in
Cohort 1 were $27 million in the first two years, $61.6
million in the third year, and $123 million in future
years. Cohorts 2 through 4 were smaller and pertained to
the last credits that would trickle into the system. The
total payments for the first five years were lower than
they would be under the statutory formula.
Mr. Alper elaborated that until FY 24 the bond program
would have smaller payments than status quo. In the end,
the state would pay out slightly less than $1.1 billion,
but the present value of that cash flow with the 5 percent
discount was $782 million. In present value terms, even if
all companies participated and took the most advantageous
structure, the state would still gain about $27 million in
value versus the status quo.
1:42:45 PM
Mr. Alper moved to slide 17 and addressed the bill's impact
on debt capacity and credit rating. The administration
believed the bill's impact on the state's debt capacity
would be limited because the existing credits were an
obligation of the state that showed up on its balance sheet
as a liability. He noted that in some ways, the bill was a
restructuring of an existing debt. He explained it was
similar to the way the state made Public Employees'
Retirement System (PERS) and Teachers' Retirement System
(TRS) payments on behalf of local jurisdictions - it was
money owed that the state was buying down. The bill would
have a neutral to positive impact on the state's credit
rating, indicating a desire and plan to payoff obligations.
Mr. Alper reported that the bill would reduce the FY 19
payment of $184 million (8.1 percent of anticipated UGF
revenue) to $27 million in interest payments (1.1 percent
of UGF revenue). He elaborated the shift constituted a big
short-term improvement to the state's cash flow. He
explained that future payments would be flattened in a very
advantageous way.
Mr. Alper advanced to slide 18 and continued to address the
bill's impact on debt capacity and credit rating. The slide
included a table from the Revenue Sources Book showing
fiscal years [FY 18 through FY 27] and associated UGF in
addition to existing state debt service obligations for
things like general obligation bonds, state supported debt
service (e.g. Goose Creek Correctional Center debt), school
debt reimbursement, and expected statutory payment into
PERS and TRS. He noted that the numbers added up to roughly
20 percent per year of future unrestricted revenue (the
first gray column). The next two sets of columns were
"either/or" scenarios. The second gray column depicted the
statutory tax payments scenario where payments in the next
several years would be over 30 percent per year. The third
gray column showed the debt service scenario where there
would be smaller numbers in the present stepping up to
larger numbers in the future. He elaborated there would be
a sequence of numbers remaining around 25 percent over the
long-term, which would flatten out the state's obligations
and push a bit into future years.
1:45:51 PM
Mr. Alper concluded the presentation with slide 19. The
bill was part of the governor's economic stimulus plan. The
administration anticipated the bill would result in
substantial reinvestment in Alaskan projects nearly
immediately, which would lead to jobs and future oil in the
pipeline. Small producers had been encouraged to come to
Alaska, in part by tax credits. The bill would help
unfreeze pending development projects.
Mr. Alper stressed that the great majority of the companies
wanted to develop oil and gas they had discovered and were
trying to straighten out their finances to do so. The
credits needed to be paid off in order for companies to
complete their projects. The administration believed the
bill would help re-establish Alaska as a premier oil and
gas exploration and production basin. The goal was about
diversifying the North Slope - bringing new players into
Alaska to help provide some competition for the three major
companies that had largely dominated oil and gas production
for the last 40 years. The ultimate goal was more revenue
from production. The secondary benefit was moving the cost
of the tax credits into future years that better matched
the state's anticipated cash flow.
Co-Chair Foster indicated that he would open up the meeting
for questions. Following a question period, the committee
would discuss the constitutionality of the bill. He
reviewed the available testifiers.
1:49:13 PM
Vice-Chair Gara communicated that he had a huge amount of
respect for Mr. Alper and Mr. Barnhill, but he was upset by
the presenters' testimony about the state losing its
credibility (slide 3). He wanted to consider the bill
fairly. He stressed that from 2008 to 2015 the state paid
much more in tax credits than statutorily required. He
believed the state had still paid more than required in
subsequent years. He interpreted tax credit statute to
specify that the state owed 10 percent of the revenues it
took in from production taxes. He believed revenue meant
the money the state received, not the money it would have
received if it had a 35 percent tax, which was the way the
administration interpreted it. In any case and under any
circumstances, the state had paid more than required. He
was angered by the inference that legislators had somehow
risked the state's credibility by paying more than
required. He wanted to consider the bill on its merits but
did not appreciate that the presentation started out with
an accusation.
1:51:13 PM
Mr. Barnhill responded that the respect the administration
had for the legislature was mutual. He clarified that when
the administration reported there had been an erosion of
the state's credibility it was not an accusation; the
administration was merely reporting what it was hearing. He
reasoned that it may or may not be fair. All of the events
Vice-Chair Gara had articulated about the state going above
and beyond were true. He believed the oil and gas industry
understood why the payments had been reduced to the
statutory level - the price of oil had collapsed and there
had been a high degree of fiscal constraints, which had
taken the state quite some time to sort through. He
believed it was important for all Alaskans to recognize
that Alaska was in competition with oil and gas basins
worldwide.
Mr. Barnhill elaborated that boards of directors and owners
of companies had opportunities to go elsewhere and they
compared the relative prospectivity in Alaska with relative
prospectivity elsewhere. He continued that two years back
when the state had begun paying less than, there had been a
disruption of expectations. He understood the statute said
what it said, and the legislature operated accordingly;
nevertheless, he believed it was important to understand
the expectations were for a higher level of payment.
Primarily because there had been various projects under
development and close to development and bank loans had
been secured on the expectation that the money would be
coming faster regardless of the legislature's power to
appropriate some, all, or none. He clarified that it was
not an accusation, merely the facts. The last thing he
wanted was for someone to take offense or consider it was
their fault. He stated it was the nature of the beast;
there was no fault, it was just the fact. The goal was to
find a balanced solution that could work for multiple
stakeholders.
Mr. Alper added that in the early years it was not so much
that the state had paid more than it had to. In many of the
earlier years the state had very large amounts of
production tax revenue, upwards of $6 billion per year in a
couple of the years. Based on those amounts, the statutory
formula would have resulted in a very large number. The
department had determined what would have been appropriated
had the formula been followed. In the early years, the
state would have over-appropriated; it would have resulted
in more money in the fund than had been requested by
companies. He elaborated that it would have more or less
endowed a fund - the department had seen the fund reach up
to $700 million in its model.
Mr. Alper continued that starting in about 2013 the state
would have been drawing down the fund and buying credits
faster than new money would have been put in as the price
of oil began to decline. The fund would have hit zero in
about FY 15 and the state would have been pretty much in
the same place. He believed the issue was in expectation -
had the state gone this route, when it arrived at 2016 and
later, companies would have understood how the
appropriation worked. Whereas instead, companies had
developed the expectation the annual budget would be
written in an open-ended way. The effect would have been
the same, but companies had come to rely on the idea that
no matter what, the state would be appropriating to the
amount requested, which in retrospect may have been a bit
of a mistake.
1:55:47 PM
Vice-Chair Gara rejected the idea that companies had
developed an expectation. He reasoned that of course a
company wanted to receive as much as it could get. He
believed companies read the statute when they applied for
the credits. He stressed that the statutory calculation was
10 percent of the revenues generated from production tax,
whereas the calculation used by the administration was 10
percent of money the state would have received if it had a
35 percent tax. He elaborated that statute specified 10
percent of revenue at prices over $60 per barrel. He stated
the argument could easily be won in a court. He continued
it was a much smaller amount of revenue owed under the
statute than shown on slide 16. He would pose additional
questions later. He was angered by the presentation.
Mr. Barnhill regretted that Vice-Chair Gara was angry. He
communicated that they completely understood the
difficulties and recognized there were different and valid
interpretations of the statute. The goal was to push
through the different interpretations to solve a problem.
The problem was not the differing legal interpretations of
the statute. The desire was to jump start exploration and
production at present and to get the benefit of the state's
investments through the oil and tax credit program it had
already made, in order to get new production. New
production would hopefully result in jobs, new royalties,
new taxes, new funding for the state and for the Permanent
Fund Dividend program. He did not believe it was necessary
to argue the statute, but that it was necessary to solve
the problem.
1:58:31 PM
Representative Ortiz wondered if HB 331 would have
negative, positive, or neutral effects on the state's
ability to finance an infrastructure package and/or finance
the gas pipeline.
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, the legislation had
some pros and cons related to debt capacity and credit
quality. As shown in the presentation, there was a
reamortization of an existing obligation that would provide
some budgetary relief. The state had a liability that was
being refinanced with a discount on the existing liability
that offset the cost of the extended amortization. At the
same time, the state was taking a liability that was
"soft," meaning the legislature had greater discretion in
choosing amounts it would appropriate for the obligation.
There was the potential for an increase in the state's
relationship with the oil and gas sector and business in
general that the state's word was something other parties
could rely on. He believed there could be some positive
impacts related to the Alaska Gasline Development
Corporation (AGDC) because the bill would demonstrate the
state following through on its prior commitments. There
would be some impact on the state's debt capacity and
ability to fund other projects once the liability became an
annual obligation the capital markets would be reliant on.
2:01:51 PM
Representative Wilson thanked the administration for the
bill, which provided an option. She believed it had been
well considered. She thought SB 21 had helped increase oil
development, but further development had been hampered. She
asked how much income the state received in the years the
credits were due. She stated that the credits may have been
turned in for development that may have been in FY 16, FY
17, and FY 18.
Mr. Alper replied that the great bulk of the credits issued
in the calendar year 2016 were for work done in 2015.
Companies that filed tax returns in March of 2016 received
credits later that year. The work done in 2015, which led
to the credits, for the most part had not yet resulted in
production. He furthered that the companies hoped to be in
production in the next several years. In the North Slope
the credits were primarily NOLs, when companies were
producing they were most likely not operating at a loss;
however, in 2015 the price of oil had been so low, there
had been producers operating at a loss. The Cook Inlet
credits were largely tied to spending. He cited the 25
percent well lease expenditure credit. There were companies
operating and possibly profitable that were earning credits
simultaneous with their work. He did not believe he could
easily determine the amount of production the 2015 and 2016
spending profiles led to.
2:04:04 PM
Representative Wilson noted they were discussing credits of
approximately $800 million. She asked how much revenue the
state had received during that same period of time. She
assumed the state had received something in terms of oil
because production had been incentivized.
Mr. Alper responded that the pending credits associated
with 2015 and 2016 were approximately $800 million; the
total oil and gas revenue over the two years was $2 billion
or $3 billion. He stated it was relatively small
historically speaking. He returned to slide 6 and
referenced $3.6 billion in cashable credits that had been
paid out beginning in FY 07 through the end of FY 18.
During the time the $3.6 billion went out the door, a very
large amount of oil and gas revenue came into the state. He
believed the revenue was in excess of $40 billion. He
detailed it had been a time period when the state had
larger budgets, bigger capital budgets, and had put down
the savings it had been working through over the past four
years of the current fiscal crisis.
Representative Wilson stated her understanding that a
formula would still be utilized for companies who decided
to opt out of the plan. She asked which formula would be
used - a lower one or one that many legislators believed
they should have been using all along.
Mr. Alper replied that the legislature would appropriate a
number. At present, the operating budget was in conference
committee and had two different numbers. He conjectured the
outcome could be either number or somewhere in between. It
was important to structure the legislation so companies
that chose not to participate would not be unfairly
advantaged by their nonparticipation. He elaborated that if
a company was holding a credit that would normally be
further back in the line and everyone got out of the line
in front of them by joining the program, that the company
would not receive more than it otherwise would have had the
program not existed.
Mr. Barnhill added that DOR had been in touch with each of
the 37 tax credit holders on a fairly regular basis. One of
the things the department wanted to know in advance was how
many of the 37 tax credit holders were definitely not going
to participate in the program. Currently, no one within the
group had said they would definitely not participate. The
vast majority had communicated they were interested or
likely to participate. The department had communicated to
the companies its desire to know definitively in the
relatively near future.
2:07:33 PM
Representative Wilson was concerned about Mr. Alper's
statements that a company who opted out of the program and
waited in line would not get any more than the people who
took the program. She believed the point of opting out of
the program would be for a company to stay whole. She
reasoned if a company waited it should not have to receive
a discount to its credits. She stated she would wait until
an amendment came before the committee. She asked what the
state's yearly payments would be if all companies decided
to participate in the program (in comparison with current
payments).
Mr. Alper asked if Representative Wilson was asking what
the appropriation would be in the absence of the bill. He
wondered if she was asking how long the companies would be
waiting. He referenced slide 16 and asked if she was
referring to the number in the statutory payment column of
the table.
Representative Wilson clarified she was asking a different
question. She asked how much the state's annual payments
would be if it had to bond for $800 million. She wondered
if there would still be a balloon payment at the end of
nine years and asked if the entire $800 million would be
owed at that time.
Mr. Alper pointed to the Cohort 1 column on slide 16, which
presumed how to pay off the $807 million if the method
included interest only for two years, a fraction of the
principal for years three through five, and a balanced
payment for the remaining five years. The schedule could
easily be restructured to have a flat payment over ten
years of whatever the number would be to amortize $807
million. He clarified it was actually $740 million because
of the discount. With a flat rate the state would be
looking at payments between $105 million and $110 million
per year rather than the Cohort 1 schedule that paid less
at the beginning and $123 million in the last few years.
Representative Wilson surmised it would be higher than if
the state went with the $40 million, which was one of the
ways to look at the credits, versus the $200 million in
conference committee. She was trying to ensure the state
did not end up in a bind. She asked if the department had
talked to the Division of Retirement and Benefits about the
amount owed to PERS and TRS. She asked whether the state
could be faced with deciding which of the items to fund if
oil remained around the current price.
2:10:19 PM
Mr. Barnhill turned to slide 18. The chart showed how the
various payment obligations stacked up going forward. He
pointed to the column labeled "statutory payment to
PERS/TRS" and believed it was what Representative Wilson
was referencing with respect to anticipated state
assistance payments. The numbers were shown as a percentage
of UGF to show the relative burden each of the obligations
had. The information in the gray column to the left was
pulled from Mr. Mitchell's state debt report. To the right
of the column included two scenarios of how the tax credits
would be paid in terms of the percentage burden on UGF.
Under the status quo, the statutory formula as DOR had
interpreted it and published in the Revenue Sources Book,
created a lumpy cash outflow profile where the burden
increased sharply in the next four years because the
payments were in the $170 million to $184 million range.
Whereas, the bill proposed a backloaded debt service (shown
on the right of the table). The department had taken the
anticipated payments for PERS/TRS into consideration. In
recognition of that, the administration was proposing a
backloaded debt service to better match the anticipated
cash outflows and reduce the impact to the General Fund.
2:12:29 PM
Representative Grenn referenced earlier comments made by
Vice-Chair Gara and was reminded of a quote "trust is
earned in drops and lost in buckets." He believed that
regardless of whatever expectations had been set up in the
first years of paying credits back, the state's reputation
had been created in the past several years. He believed
that reputation, whether right or wrong, was brought into
company board rooms and executive sessions. He thought the
bill went a long way in helping to correct that reputation.
He asked if the department had talked to banks and
creditors about the proposals. He wondered what the
reaction had been.
Mr. Alper responded that the chart on slide 11 had been
sent to all 37 companies. He noted there were companies
with credit in the hundreds of thousands and others with
credit in the hundreds of millions, meaning there was a
widely disparate set of information the department shared.
In particular, there were two major banks that had credits
assigned to them - there were provisions in statute that
allowed the companies to pledge the credit by assigning it
to a financer. The tax division would make payments
directly to the assignees. He noted that about half of the
credits fell into that category. The banks did not get to
choose whether a company participated, but they did have
significant leverage because many were in forbearance and
were delinquent on loans.
Mr. Alper believed banks would be putting pressure on
companies to participate. One of the companies, ING, had
testified to the House Resources Committee and had
communicated its initial goal was to be made whole. He
elaborated that ING was owed $100 million, but the company
had $140 million in credits. If the state bought the
credits at 70 cents on the dollar, ING would be made whole,
but that was not their preferred outcome because they
wanted their customer to succeed. He continued that ING's
hope was for the system to be closed out. Once the loans
were made current, ING would be much more comfortable
making additional loans to let the companies continue on
their work, which was ultimately the goal of the bill.
2:15:41 PM
Representative Grenn asked how many of the 37 companies
that fell into Cohort 1 on slide 16.
Mr. Alper replied that the 37 companies held the $807
million. Cohort 1 was the assumption that all $807 million
would sell into the bill in round one once the bill was
passed.
Representative Grenn asked Mr. Alper to explain what would
happen to a company that chose not to participate.
Mr. Alper replied that the amount borrowed in the bonding
program would shrink by that amount [to account for a
company not participating]. He provided a theoretical
example where $100 million chose not to participate. The
$707 million would go through the discounting process and
bonds would be purchased. The $100 million would be
awaiting appropriation. He explained that if the program
passed, the legislature may not ever appropriate money into
the tax credit fund again. In that circumstance, the
company would be waiting until it got into production -
waiting until it had a tax liability to offset the credit
against or it would retain the ability to sell its credit
to another producer (generally one of the major producers
with an ongoing tax liability).
Mr. Alper continued that alternatively, the legislature
could appropriate a limited amount to the tax credit fund.
He used a scenario where the House passed a budget with a
$49 million appropriation included. As the only company
that elected not to participate in the HB 331 proposal, the
company may expect to receive the entire $49 million. The
department did not want to interpret the scenario in that
way - DOR felt it would unfairly advantage the company for
not participating. Under normal circumstances, the
company's share would have been $10 million or $15 million.
The state would want to dole that money out over a number
of years to treat the company the same as it would have
been treated had the bond bill not passed.
Mr. Barnhill returned to slide 11. He indicated that one of
the features of the bill, was its requirement for companies
to participate with all of their credits. He highlighted
the hypothetical company on slide 11 and explained that if
it opted not to participate it would receive $23 million in
year one (if the legislature made an appropriation). He
characterized the scenario as all or nothing. If a company
did not participate it ran the risk that it could receive
some, all, or none of the payments in years two through
five. He explained that the legislature had the legal
authority to appropriate some, all, or none according to
statute. For that reason, the administration believed
companies had evaluated the risks of not participating. At
present, no companies had communicated they would not
participate.
Representative Grenn asked whether the passage of the bill
had the potential to reduce UGF by $150 million (based on
the statutory appropriation schedule on slide 9).
Mr. Alper responded in the affirmative but noted there were
a couple of assumptions that were necessary to overcome
first. He elaborated that if the statutory appropriation
passed it would be $184 million (the number in the Senate's
current version of the operating budget in conference
committee. Whereas, if the bill passed, it included a $27
million fiscal note for debt service. The $27 million would
be added to the budget with the expectation that most or
all of the $184 million could be eliminated, which would
reduce spend by around $150 million.
2:20:39 PM
Representative Thompson was angered at the thought that the
credits had not yet been paid. He remarked that the there
had been a real problem where Cook Inlet had been running
out of gas. He recalled Anchorage had been preparing for
rolling brownouts. The state had been faced with
determining how to incentivize bringing more companies to
Alaska. The [credits] had worked and Cook Inlet was no
longer running out of gas. Simultaneously the state had
discovered there was less and less oil coming down the pipe
line. He referenced slide 3 showing that the state had been
after encouraging new companies to come to the state to do
more exploration and locate more oil.
Representative Thompson reiterated that the incentives had
been successful. Small companies had found substantial
reservoirs of oil that would add 200,000 barrels or more to
the pipeline around 2021 to 2023. By not paying the
credits, the companies had not been able to borrow money to
get the oil into the pipeline. He stressed the importance
of fulfilling the state's obligation to pay the credits in
order to creat more jobs and put more oil into the line.
The revenue would fund schools, highways, and health and
social services. He believed everything in the budget was
subject to appropriation by the legislature. He thought it
was unfortunate that the state had not been able to pay the
credits off. He understood that the crash in oil prices had
not been anticipated, but he believed denying the money
owed to companies was wrong. He underscored that the bill
would get the money back into the market and would create
jobs. He supported the legislation.
2:23:18 PM
Co-Chair Seaton was disturbed to hear that the state
anticipated more revenues going forward and that POMV gave
more revenue to pay the credits in the future. He thought
that counting on savings to pay larger bills in the future
was not something that should be projected with the bill.
He referenced the idea that the 10 or 15 percent production
tax that had been voted on would go towards paying credits;
however, over 60 percent of all production tax received by
the state was going to pay the $184 million. He did not
believe anyone had voted to put 60 percent of the tax
received in the .028 fund. He stated it was categorically
incorrect.
Co-Chair Seaton continued that he had heard several times
that the Cook Inlet credits had worked. He pointed out that
two things had happened in Cook Inlet simultaneously. The
Regulatory Commission of Alaska (RCA) had limited the price
charged for gas at about $2.25/mcf. At the same time, the
gas producers received $6.58 to $7.50/mcf so they made
money. He stressed that no one would have explored for gas,
even with tax credits, if the limitation had been
$2.25/mcf. He advised members to include the increase in
price allowed in regulation when discussing the issue. He
stressed it had been a major factor enabling people to
explore.
Co-Chair Seaton was amenable to using DOR's interpretation
of the statutory tax calculation; however, if some
companies chose not to participate, he would emphasize that
the alternative calculation should exist at a much lower
statutory rate. He addressed reinvestment and remarked that
the provision asking a credit holder to agree to an
overriding royalty interest made sense [to qualify for a
lower rate, the credit holder had to meet one of four
provisions (slide 10)] for a company that had an oil
project. He surmised the situation did not pertain to a
company with seismic data where it could agree to an
overriding royalty but would never be producing oil anyway.
He hoped the bill would allow a company to agree to an
overriding royalty and that the Department of Natural
Resources (DNR) and DOR had to approve it made sense. He
was trying to determine how the second bullet point "commit
to reinvest the money in Alaska" worked.
2:27:57 PM
Co-Chair Seaton continued that he had heard from had heard
from the banks that the majority of funds that would go to
the oil companies would go to paying off existing bank
loans. He stated that the money would not be residing with
the oil companies, but would go towards wiping out their
debt. He stated that the companies had been able to get the
financing using tax credits as the underlying value. He
asked how the commitment to spend the money in Alaska going
to work if most of the money would go to repay banks.
Mr. Barnhill regarding companies that had pledged their
credits to a bank - their credit was currently frozen. He
spoke to a hypothetical situation where a company had
assigned its credits, its credit was frozen, and it wanted
to access the lower discount rate, the company would submit
a qualified plan of capital expenditures to DNR (similar to
other programs administered by DNR) and had to make the
expenditure in two years in order to qualify. He explained
that DNR already had a process to ensure that the expenses
were qualified and that they would be made.
Mr. Barnhill elaborated that DOR's understanding from the
banks was that unfreezing the current credit situation and
uncertainty would enable the company owner to obtain new
financing. One of the banks had shared that the credit had
not frozen in Texas for as long as it had in Alaska. He
detailed there had been work-outs and restructurings, but
primarily because of a much different cost structure,
Texas, Oklahoma, and elsewhere had been able to clear
through the credit issues very quickly to get credit
flowing again allowing companies to get credit and drill.
He explained it was not the case in Alaska, primarily
because the state had a much higher cost structure and due
to uncertainty regarding the tax credits. The goal with the
bill was to get as much certainty as possible, if a company
wanted to access the lower discount rate, that the money
would be invested over two years in Alaska.
2:32:05 PM
Co-Chair Seaton asked Mr. Barnhill to follow up with
information about the consequence that would occur if a
company did not follow through with the plan. He asked if
there would be a forfeiture of the lease to the state. He
mentioned Norway as an example. He would be more
comfortable if there was a commitment [from companies] that
the work plan would be followed through.
Mr. Barnhill believed the suggestion was a great idea. He
deferred to Mr. Alper for further comment.
Mr. Alper replied that it was not explicit. He elaborated
that the bill referred to the term qualified capital
expenditures, a term in statute relating to the original 20
percent qualified capital expenditure credit on the North
Slope. The type of activity the companies would have to
commit to and invest would be upstream capital expenditures
(oil field development work). He did not know what the
remedies would be if a company made the commitment and
later reneged. The department would get back to the
committee about the issue.
2:33:41 PM
Mr. Barnhill addressed Co-Chair Seaton's question about
companies that decide not to participate in the program if
the bill passed. He restated Co-Chair Seaton's view that
the appropriation made for those companies be under the
alternative statutory formula, which produced a much lower
statutory appropriation should the legislature decide to
appropriate. He reported that the idea was not something
the administration had considered. He stated the team would
need to weigh the pros and cons of the method. From a
policy perspective, one of the obvious benefits was that it
would help encourage companies on the fence with respect to
participating, to participate. He reasoned it would bring
certainty to the statutory interpretation. He expounded
that with the understanding that the legislature could
appropriate some money or none, it may encourage companies
to make a certain decision.
Mr. Barnhill moved to Co-Chair Seaton's point about price
regulation in Cook Inlet. He had not been aware of the
price regulation and appreciated the information. He wanted
to present what had happened in Cook Inlet fairly and
accurately. With respect to statutory interpretation, the
administration recognized the alternate legal arguments.
The administration was trying to push through the debate
and come up with a solution that would benefit Alaska as a
whole. For better or for worse, several years back DOR had
come up with the interpretation it had; it had published
the interpretation through a series of calculations in the
Revenue Sources Book.
Mr. Barnhill addressed Co-Chair Seaton's first question
about whether anything the department said assumed that
POMV would come into its anticipated cash flow. He turned
to slide 18 and explained that the gray column to the left
["Subtotal: Current Obligations without Tax Credits") came
out of the DOR debt report. The anticipated UGF came from
the Office of Management and Budget's (OMB) cash flow
projections and did not include Permanent Fund earnings.
There was another chart that Mr. Mitchell had started
including on request that showed what would happen if
Permanent Fund revenues came into the UGF.
Co-Chair Seaton thought he had heard a statement earlier in
the presentation and reasoned that if the statement was not
anticipated it should come out of the presentation. Mr.
Barnhill responded, "fair enough."
2:37:13 PM
Representative Guttenberg observed that the whole situation
was built on actions in the past; however, if the past was
not considered, the mistakes would be repeated. He thought
the bill was trying to fix things from the past. He
stressed that the number of non-Alaskans working in the oil
and gas industry was 37 percent and rising. He elaborated
that he had been a part of that world for a number of
decades and his experience was that companies did not hire
Alaskans. He continued that everyone talked about jobs - it
was included in the presentation several times; however, he
wondered who the jobs were for.
Representative Guttenberg continued that companies on the
North Slope had been managing the workforce for 30 to 35
years. He found the situation unacceptable. He planned to
discuss the issue further when the committee talked about
the relationship between the bonds and the industry. He
referred to the comment that was made about Texas' cost
structure versus Alaska's cost structure. He believed the
issue was only relevant in that the system had stabilized
in Texas more quickly. He underscored that Texas was a
different world from Alaska in terms of lease owners. He
continued there were thousands of lease owners in Texas,
whereas the state was the leaseholder in Alaska.
Representative Guttenberg remarked that the bill only
looked at "us and paying off the tax credit holders." He
asked about the state and its borrowing capacity and its
relationship with paying off loans. He spoke to all of the
conditions the state had and the variables between
"everything hitting the fan and being able to pay them off
sooner." He asked if there would be a presentation about
that as well.
Mr. Barnhill addressed the issue of Alaskans not being
hired or losing jobs at a quicker rate in the oil and gas
industry. He stated it had been a problem the state had
struggled with from the beginning. He elaborated that the
state had taken laws that require Alaska-hire to the U.S.
Supreme Court; the court had ruled it was very difficult to
enforce local-hire preferences. Nevertheless, every
gubernatorial administration since 1977 had some initiative
to try to encourage, coerce, or cajole the industry into
hiring more Alaskans. The issue had been and always would
be a concern. He acknowledged and validated Representative
Guttenberg's concern and relayed the concern was shared by
everyone. The bill tried to provide a solution that would
enable the industry to hire more Alaskans. The
administration would do everything it could within the
boundaries of U.S. constitutional law to make sure it
happened.
Mr. Barnhill stated he would pass on the comment regarding
the Texas cost structure. He had merely been passing on a
comment provided by one of the banks involved regarding its
observation about the differences between Alaska and Texas.
The issue was leading the state to come up with a solution
that would hopefully put Alaska, Texas, and other oil and
gas basins on more equal footing when it came to companies'
decisions about whether and where to invest. He asked
Representative Guttenberg to rephrase his question
pertaining to future presentations.
2:42:31 PM
Representative Guttenberg stated that the committee had
been talking about paying off the tax credit holders. He
asked about the state's relationship with the bond market.
He spoke to the state's liability it would or would not be
able to pay off. He asked about other risks.
Mr. Barnhill answered that HB 331 was a proposed
restructuring of an existing obligation of approximately
$800 million. He explained that the obligation would still
exist if the bill passed and debt was issued. The reason
the administration had proposed of a backloaded debt
service structure was to get at Representative Guttenberg's
concern related to the risk the state would not pay or
would have difficulty in paying the obligation. Based on
DOR's anticipated cash flow, the risk would be reduced by
matching the obligations and cash flows related to all
state obligations to the state's anticipated cash flow. He
acknowledged that it did not take all of the risk away. The
administration was trying to craft a solution based on the
best information available in a way that poses the least
risk possible to the state going forward, while still
accomplishing the objective of jump starting the particular
oil and gas industry sector.
Representative Guttenberg appreciated Mr. Barnhill's
comments about the local hire, the U.S. constitution, and
the commerce clause. He stated it was well established and
was the law, but it was not the problem. He explained that
if the state was using General Fund dollars on a project,
it asked the company to hire more Alaskans, because it was
paid for with Alaskan dollars. He was interested in knowing
about the areas outside the commerce clause. In some cases,
the state had incentives built into statute. He asked if
"this is outside of that or is this similar?" He stressed
the need to hire students from the state's engineering
schools, apprentice and trade programs, and others. He
underscored that currently over $500 million in payroll was
leaving the state according to the Department of Labor and
Workforce Development. He explained the state had an
inherent vested interest in a part of the economy that it
was not capturing. He thought the state should be able to
do it in a way that was neutral for others.
2:46:02 PM
Mr. Alper thought Representative Guttenberg was asking that
if the state was going to give a company the additional
advantage of the lower discount rate, whether it could
encourage companies to the extent legally possible to hire
Alaskans. He was prepared to work with Representative
Guttenberg to try to find a way to address something within
the language of the bill. He stated that it was a judgement
call - companies would be applying for a lower discount
rate and the DOR commissioner was determining it was in the
best interest of the state. He speculated that perhaps
something could be addressed in the language. There were
always the legal limitations of trying to force [Alaskan
hire]. He was prepared to help in any way within the
department's powers to provide comfort in the bill.
Representative Guttenberg commented that Co-Chair Seaton
had asked about reinvesting in Alaska. He stated the
legislature did not have any oversight over a plan
submitted by the industry or qualified expenditure
information. He wondered how to deal with a situation where
a company qualified but the terms were more favorable to
the company than to the state. He cited a theoretical
example where the company wanted to do wellhead work, but
the state wanted increased development and production. He
asked how the state would have any command over what
qualified as a qualified expenditure.
Mr. Alper referred back to a table on slide 11 showing the
side-by-side comparison of the two discount rates for a
theoretical producer. The company would receive $85 million
without the reinvestment commitment and slightly less than
$92 million with the reinvestment commitment. Under the
current version of the bill, if a company showed intent to
spend $92 million in upstream development work in the next
two years, it would receive the $92 million. In the absence
of the commitment it would receive $85 million. The great
bulk of the companies were non-producers that currently did
not have much, if any production. The companies with
production were looking to greatly expand that production.
The department had not contemplated a restriction on what
sort of expenditure, other than the requirement to meet the
definition of qualified capital expenditure (upstream oil
and gas development work). A capital expenditure met a
federal depreciation standard. He did not think there was
significant risk of companies trying to work around that by
doing maintenance work, given the nature of the companies
involved. He thought perhaps companies would offer
additional information during public testimony.
2:49:46 PM
Representative Pruitt referred to slide 4. He clarified
that in 2013 the per-barrel credit that had replaced the
capital credit was part of the tax and did not actually add
to the taxable credits currently owed by the state. He
thought the bullet point could be confusing.
Mr. Alper explained that the old ACES regime had the
capital credit, which was eligible for cash repurchase.
Although it had generally been used by major producers to
reduce the tax calculation and the credit had not typically
been paid to the majors. He explained that the per barrel
credit was never cashable; it could be used to offset a
company's taxes in the current year but could not be
carried forward, transferred, or cashed.
Representative Pruitt referred to slide 7 regarding the
amount of production that had come from the current
credits. He stated that certain investment had come from
the credits that had not yet been booked; therefore, it
could not be included in the projected information. He
asked for the accuracy of his statements.
Mr. Alper replied that it was difficult to discuss
specifics because of taxpayer confidentiality. He used
Caelus as an example because the company had publicly
talked about tax credits it was owed. He detailed that
Caelus was a producer and had an operating field in
Oooguruk it had purchased from Pioneer.
Mr. Alper moved to slide 6, which listed 86 million barrels
of oil [on the North Slope] in existing production. The
presentation included the production profile for a similar
field and what it would be expected to produce in the next
ten years. The 106 million [barrels] on slide 7 was the
continuing production from currently producing fields that
were related in some way to previous year tax credits. The
23 million barrels listed in the second bullet point was
the production from fields that received tax credits thus
far and that initial production was expected in the next
few years. He noted it was a small number that was expected
to grow dramatically in the future. He cited Armstrong's
Pikka field as an example. He continued that they could be
talking about many millions of barrels years into the
future; some of that production would start to be seen in
the outyears of the ten-year production forecast.
2:53:29 PM
Representative Pruitt returned to slide 10 and asked about
the various options that would enable a company to receive
the lower discount rate. He requested additional detail
about the overriding royalty interest. He mentioned seismic
data. He wondered if the state would be able to receive the
state would receive the interest presently or in five
years.
Mr. Alper replied that Section 11 of the bill was a DNR
section and created a process by which a company would
offer and negotiate an overriding royalty interest with
DNR. He explained that a company would communicate it was
prepared to offer "x" amount (e.g. an extra 1 or 2 percent)
on the particular leases for a given period of time (e.g.
ten years). Under the bill, DNR would come up with a
present value based on the additional revenue it
anticipated to come to the state and the associated risk
that the revenue would come to fruition. He turned to slide
11 and expounded that DNR would look at the increment the
company was asking for. Under the theoretical scenario on
slide 11, the producer would get an extra $7 million (the
difference between the lower and the higher discount
rates). If the company believed the additional value of
what was being offered from the state was greater than $7
million, it would agree to the overriding royalty interest.
Representative Pruitt asked about the seismic data bullet
point on slide 10.
Mr. Alper answered that if a company received credit for
doing seismic work, it submitted the information to DNR
where it was kept in a library and published after a ten-
year period. He explained that the publication was perhaps
used by other companies to invest in leases nearby. He
noted that in 2017 there had been items in the news where
ten-year old seismic data was publicly released. He
explained that the company had the 10 years exclusive
rights, but the state was in possession of the data for its
own planning purposes and scheduling lease sales. To
qualify for the lower discount rate under the bill a
company would give up its exclusive right and the state
would have the ability to publish the seismic data
immediately.
2:56:44 PM
Representative Pruitt referenced the commitment for a
company to reinvest the money in Alaska (slide 10). He
believed the goal appeared to be moving the 37 companies
into utilizing the credits. He provided a hypothetical
scenario where 36 companies decided to use the option
offered under HB 331, meaning there was 1 remaining company
the state was still paying under the minimum. He believed
that company may have a bonus and benefit the other
companies did not receive. He continued that the
legislature would not appropriate up to the gross or net.
He reasoned the one company could receive a windfall and
everyone else "playing good" did not. He suggested
including a provision specifying that if a company did not
participate, the state would pay out as if the pro rata was
still in place. Therefore, if a company was supposed to get
a small portion of the amount, it would still receive the
same amount. He asked if the administration would be
amenable to the idea.
Mr. Barnhill indicated that Representative Parish had asked
the same question in the House Resources Committee. He
believed the change would be beneficial and the department
had prepared the amendment to submit at the appropriate
time.
Representative Pruitt addressed the cohort debt service
payment scenarios on slide 16. He believed he understood
why Cohorts 2 through 4 used interest only initially and a
balloon payment at the end. He thought the balloon payment
had been scheduled to occur after Cohort 1 had been paid
off. He pointed out that the first payment for Cohort 1 was
around $27 million. He noted that the Senate had been
amenable to pay $181 [million] for FY 19, whereas the House
had included $47 million. He recognized the current fiscal
situation and did not want to push something off to an
unknown.
Representative Pruitt believed Mr. Alper had stated earlier
that the forecast for additional oil and gas revenue due to
increased throughput made DOR comfortable that there would
be increased revenue in the future. He believed it had been
separate from a conversation about a POMV. He reasoned that
the future was still unknown. He asked why the particular
system with interest and a low payment in the beginning had
been decided upon in Cohort 1. He asked if there had been
another mechanism that would allow the state to pay an
amount it was already comfortable paying in the current
year, which would mean a less substantial burden in
outyears.
Mr. Barnhill responded that there was an infinite number of
ways to model debt financing. The model on slide 16 had
been developed to match debt service to anticipated UGF
revenue. One legitimate criticism of the structure was when
any debt service was backloaded, it meant increased
financing costs over time. The way to counter that was to
flatten or frontload the debt service profile, which saved
on financing costs and may reduce risk slightly in terms of
the coupon the state had to pay in order to market the
loans. The administration was striving for what it believed
was an optimal balancing based on the variety of competing
concerns; however, it recognized there may be other
optimals for debt service including a flatter payment
schedule.
Mr. Barnhill communicated that DOR had prepared a model to
review different scenarios of debt service and had provided
the model to the Legislative Finance Division earlier in
the session. He offered to go through the model with
members outside of the meeting. Ultimately, the goal for
the net present value line on the table was for cashflows
under statute versus cash flows under debt service roughly
penciled out in order to maintain a cost neutral approach.
Mr. Barnhill agreed there were a variety of ways to reach
that goal and the administration recognized that some
committee members would be more comfortable with a flatter
or front-loaded debt service schedule. Ultimately, the
discretion to structure the debt service fell within the
authority of the directors of the state tax credit bond
corporation. He elaborated those directors of the state
bond committee included the commissioners of DOR, the
Department of Administration, and the Department of
Commerce, Community and Economic Development. The
administration was willing to engage in discussion to try
to find some optimal approach that worked.
Co-Chair Foster noted he anticipated a minimum of three
meetings on the topic.
3:04:05 PM
Representative Pruitt remarked that over the past few years
he and the administration had disagreed on the past, but he
appreciated that the administration had brought the bill
forward. He reasoned that whatever happened in the past
regarding the reason for the tax credits and the agreement
behind them, no longer mattered. He stated that what
mattered was the money was owed and it was impacting how
the state was viewed in international markets. He thanked
the administration for developing the bill, which he
believed was one of the most important things the state
could do to get back on stable footing.
Representative Kawasaki commented that he had been in the
legislature through ACES, the Cook Inlet Recovery Act, and
several iterations of tax bills. He had never felt the
state would be in a position where it would be giving out
more in credits than it was receiving in production tax. He
also appreciated that the administration had brought a
proposal forward, but he believed there was a difference of
opinion about what the state should do. He noted that the
committee had heard much about how the bond would work, but
not about how the bill would work. He asked if a review of
how the bill would work would be provided at a later time.
Mr. Alper replied that the administration had submitted a
sectional analysis that he could review at any time. He
explained there were four components of the bill.
Initially, the bond corporation was created and had various
rights and responsibilities in how reserve funds were
established, funds passed through, and credits were
purchased. Second, there were numerous technical changes to
existing tax credit statutes to clarify that the bill
option was in addition to the existing system, which would
remain in place as an option for companies that chose not
to participate. Third, there were specific procedures about
how a company would engage in the program; how it would
offer its credits; how the state would value the credits
and determine a company's anticipated cash flow in the
absence of the program; what a company's proration would be
if the statutory appropriation occurred; what a company's
cashflow would be; how to discount the cashflow; and how a
company would get higher or lower of the variable discount
rate.
Mr. Alper explained that Section 10 of the bill included
all of the nuts and bolts of the new program. The fourth
part of the bill was the overriding royalty interest - the
process to negotiate a value with DNR and to find it
acceptable. He could provide greater detail when he
reviewed the sectional.
Co-Chair Foster relayed the committee would move to
constitutional questions and would take up a more detailed
sectional analysis at the next bill hearing.
3:08:16 PM
Representative Kawasaki provided a scenario where a company
agreed to reinvest a given amount of money in the state and
qualified for the 10 percent discount rate, but then found
itself in default. He asked if the state would be out the
money.
Mr. Alper replied there was not currently a remedy in the
bill. He detailed that DOR would work internally and with
DNR to determine whether a remedy could be added. Under the
theoretical scenario on slide 11 the state would be out $7
million. The hypothetical company would have received the
lower discount - it had received an extra $7 million by
promising to reinvest the money. The department would
follow up on what the options for state recourse may be if
the company reneged on its agreement.
Representative Kawasaki noted that the bill addressed how
debt was assumed and that it would still be subject to
appropriation. He asked how it would work. He wondered how
it would work to have a subject to appropriation statute,
while having a debt to bond holders. He asked if it was
similar to the statute specifying the state owed a
particular amount to producers.
Mr. Barnhill answered that Section 2 of the bill was the
authority to create the corporation that would issue the
debt. The language in the section was almost entirely taken
from statute pertaining to the Alaska Pension Obligation
Bond Corporation. In both cases the corporations had the
ability to statutorily issue subject to appropriation debt.
Mr. Barnhill explained the corporations were not authorized
to issue debt that would bind the state's appropriation
power or to issue "big D" constitutional debt that pledges
the full faith and credit of the state. He underscored it
was an extremely important distinction that would be
discussed by attorneys later. When the state issued debt
that pledges the full faith and credit of the state it
constitutionally required approval from the legislature and
the people. The pledge was functionally a transfer of
appropriation power to the court system. He expounded it
was the only situation he was aware of in the state's
constitutional system where the courts took over for the
legislature in terms of being able to appropriate. He
summarized that if the state issued general obligation debt
and bound the state with a pledge of the full faith and
credit and the legislature refused to appropriate debt
service, the court system could step in and order the debt
service; the courts would override the legislature's
appropriation power.
3:12:53 PM
Mr. Barnhill elaborated that debt that was short of that,
the legislature at all times maintained its ability to
appropriate what it chose (just like under the tax credit
program). He read from page 4, line 15, subsection (g) of
the bill:
To ensure the maintenance of the required debt service
reserve in the reserve fund, the legislature may
appropriate annually to the corporation for deposit in
the fund...
Mr. Barnhill pointed to page 4, lines 22 and 23:
Nothing in this subsection creates a debt or liability
of the state.
Mr. Barnhill noted bond counsel was available for
questions. The administration believed the obligation in
the bill would be subject to appropriation.
Co-Chair Foster noted they would get into the issue more
later.
Mr. Mitchell spoke to the nature of the subject to
appropriation commitment. Currently, if the legislature
chose not to appropriate for the obligation there would be
a further degradation of the relationship with the state's
primary industry. If the legislation passed, bonds were
issued, and the legislature chose not to appropriate, there
would be credit action taken against the state and a loss
of access to capital markets. There would be negative
ramifications in either case - both may impact the state's
credit quality. From his perspective it was more of a
bright line when it came to any consideration of taking on
a capital market obligation secured by the state's subject
to appropriation commitment as a term of art within the
industry, which is one notch. He elaborated that if the
state was AA, it was an AA- credit rating. He explained it
was a very high pledge of the state organization to make
the payments into the future. He believed the distinction
was important.
Representative Kawasaki remarked that there would be
discussion about the constitutionality later on. He stated
that the payments would be subject to appropriation under
the bill. He compared the situation to not paying a
personal credit card. He reasoned he would receive a huge
interest rate spike and the bank could take other
belongings. Once the state committed to the concept it
would be committing to a particular schedule of payments.
Mr. Mitchell agreed there would be a schedule of payments.
He also agreed there would be no recourse. He explained
that in the event of a default on a signature loan there
was not much recourse for the lender other than to ding a
person's credit score and perhaps limit their access to
additional loans. He explained it was comparable to what
would happen to the state if it defaulted on an obligation
contemplated in the legislation.
3:16:32 PM
Representative Kawasaki asked how much more the state could
be obligated at the present time with its current rating.
Mr. Mitchell answered there was gradation to the answer. In
the instance of the credits there was an existing liability
the state had historically been paying at a certain level.
As demonstrated in the percentages of UGF revenue, there
was some benefit to the restructuring of the obligation;
however, it became a hard liability that would be included
in the state's net tax supported debt, rather than an
operating obligation of the state. The debt proposed in the
bill would have some impact on the state's debt capacity.
He shared that the debt affordability analysis for the
current year, which relied on the historical definition of
UGF revenue (no POMV or Permanent Fund income), estimated
the debt capacity in the $300 million to $400 million
range. He explained that because the bill dealt with an
existing obligation, the administration argued that it
would not have a one-for-one type of impact on capacity. He
estimated it at the $200 million range. He characterized it
as an art rather than a specific science.
Mr. Mitchell explained that when the department had worked
with the rating agencies with the Pension Obligation Bond
Corporation's issuance, which had been proposed at $2.2
billion, it would more than double the state's debt
commitments. There had been no rating action by Fitch or
Moody's. He noted that S&P had expressed some concern about
the size of the increase in net tax supported debt and had
discussed a one-notch rating adjustment to the state as a
result of the issuance. He stated there was an impact, but
if the debt had all been new money for general obligation
bonds to build a dream list of capital projects, all three
agencies would have downgraded the state's rating and
probably by more than a notch.
3:19:14 PM
Representative Tilton asked about the 5.1 percent discount
rate and the confidence level in the state's ability to do
that in the current environment.
Mr. Barnhill answered that the department had been in
constant communication with underwriters about the rates
the state may be able to access. The department had used a
true interest cost rate of 3.26 percent, which remained a
good rate. Rates had ticked up a bit lately, but for
various reasons, including the possibility that some of the
bonds could be issued on a tax-exempt basis, DOR believed
3.26 percent was a good estimate. He reiterated that the
department remained in close contact with underwriters who
provided a good idea of rates.
3:20:43 PM
Vice-Chair Gara believed the credits were a real obligation
the state needed to pay. The question was whether the state
could come up with an affordable way to pay - the governor
had proposed HB 331. He was not keen on coming up with new
ways for the state to spend money. He stated there was
still something on the books that he found concerning. He
used a scenario where the current bill proposal turned out
to be unconstitutional, meaning the state would have to
come up with a new way to pay the credits. Under the
current plan if the state paid $35 million to $40 million
per year at oil prices of $60 per barrel, the state would
still owe $500 million in ten years. He agreed that was not
the best way forward. He was not enthusiastic about
adopting the bill and maintaining every way to pay off the
credits on the books. He commented on the
unconstitutionality of the bill's method. He highlighted
the option for any company with profits to pay 60 cents on
the dollar and receive a 100 percent deduction off the
taxes paid. He asked for detail on the option.
Mr. Barnhill was gratified and humbled that there had been
some success in convincing people of the problem that
needed to be solved. He had done his own research and was
absolutely persuaded that the approach was constitutional
and that the state had issued subject to appropriation debt
for decades. He was also persuaded that the constitutional
framers knew what they were doing when they adopted a debt
restriction in the constitution pertaining to debt pledging
the full faith and credit of the state. He hoped they could
move forward with the proposal given the late date.
Additionally, it would be discouraging for his team to
start anew. He hoped to move forward and set the minds of
legislators and the public at rest that the bill was a
legal and standard way of restructuring obligations. He
deferred to Mr. Alper for additional detail.
3:24:36 PM
Mr. Alper answered it was important to recognize there were
three different ways to monetize or get value for the tax
credit. The cashing out by the state subject to
appropriation was always number three - it had been the
last one added and just happened to be the one that
dominated the system for much of recent history. The
initial option had been to offset a company's own taxes - a
company could earn a credit and reduce its taxes if it had
a tax liability. He elaborated that if a company did not
have a tax liability, but it anticipated one within several
years, it may be in the company's best interest to hold the
credits. Vice-Chair Gara's question was about the
transferability of credits. For example, if a company was
holding a $10 million tax credit, a major oil company with
a tax liability could purchase and use the credit against
its tax liability. The transfer of credits did not happen
much for a number of years, but they were starting to
happen again. It was important to recognize it was a market
transaction - someone would buy the credits for whatever
they could, and someone was going to sell them for as much
as they could. In 2006 and 2007 there was talk the credits
were selling for 70 cents on the dollar - he did not know
how much truth there was to that. He remarked it was that
and anxiety over the number being too low and unfair to
explorers that created the idea of state repurchase at 100
percent.
Mr. Alper continued that when the state had been buying the
credits there had been no need for a secondary market. In
recent years when there may have been a secondary market,
the market did not develop, primarily due to a lack of
ability to use the credits. Under current law, it was not
possible to use purchased credits to go below the floor.
When the price of oil had been $40 per barrel, the major
producers had been paying at the floor and had no ability
to purchase the credits. He elaborated that if the major
producers had offered to buy the credits, they would have
offered a relatively deep discount because they could not
use them immediately - they would have been buying the
credits on the hope that two or three years later the price
of oil would recover and they could then use the credits.
He mentioned a temporary circumstance related to the Trans-
Alaska Pipeline System (TAPS) settlement where some of the
major producers owed past year liabilities because of a
settlement that reduced the tariff (transportation cost) in
2011 through 2013. The department believed companies would
buy some credits to offset additional tax liability in the
past.
Mr. Alper explained that prior to the passage of HB 111 in
2017 allowing the use of credits going back in time had not
been allowed. He continued that oil prices had increased
into the $70 per barrel range. He explained that if a major
producer's tax would be $200 million above the minimum tax,
they would be in the market for $200 million in tax
credits. He believed that if the company could buy the
credits - he used 60 percent for $120 million, the
companies would leap at the option. The company selling it
would want closer to $190 million. The administration hoped
that putting the offer on the table where it would buy
credits at 85 cents to 90 cents on the dollar, would put a
floor under the secondary market. No one would be selling
to producers for 60 cents if the state was offering 85
cents. The state was in some ways protecting the explorers
from the possibility that the market price would be too
low.
3:29:24 PM
Mr. Alper continued to answer that in the absence of the
bill, some explorers would get more desperate - some were
closer to bankruptcy than others and would be looking to
cash out for whatever they could. He elaborated that if
there was a limited demand and several hundred million
dollars of supply, the market price would be low, and
people would be selling credits for a much lower price. He
believed the solution to the weak secondary market was
passing HB 331.
Vice-Chair Gara asked if the bill option were to disappear
off the books, whether the other option would remain. Under
that scenario, if oil was at $80 per barrel, the state
could see $200 million worth of deductions from the oil
production tax at a time when the state was in a fiscal
crisis. He was concerned about adding another way to pay
tax credits and leaving all the other existing options on
the books. He was concerned about the potential of paying
60 cents on the dollar and charging the state a dollar on
the dollar.
Mr. Alper responded that many of the conversations had
taken place the preceding year when HB 111 had been
debated. One of the concerns the state and legislature had
was about multibillion dollar investment projects that
under the old system would be leading to billions of
dollars in tax credit - additional obligation that the
state could not afford and may never be able to afford. He
believed he had stated that if the obligations were out
there and there was a $150 per barrel oil spike for one
year, the state may not see any revenue because the major
producers would be scooping up all of the tax credits to
offset them. That program had been ended and the state was
no longer producing new tax credits. He concluded that to
the extent there was a problem, the problem of companies
offsetting their taxes with purchased tax credits was
temporary.
Mr. Alper detailed that he would be anxious about
eliminating the ability to sell the credits for two
separate reasons. First, companies selling the credits may
need the money and if they did not have the ability to use
them and did not have the appropriation to monetize them,
it could drive them into bankruptcy. In certain
circumstances, even selling at a discount might be
advantageous to bankruptcy. The state could set a minimum
price and implement restrictions, but it could not legally
force anyone to purchase another company's tax credits.
Second, the tax credits were sometimes pledged as
collateral. He detailed that someone would lend money
against the tax credit or to a company and would be
promised the tax credit. In those circumstances, if there
was a default, the tax credits could change hands without
the state having any voice in the matter. He would not want
to encumber that transaction because it may prevent a
company from being able to borrow the money in the first
place.
3:32:48 PM
Representative Wilson asked for verification that the
credits were had been earned by companies that invested
billions in Alaska, hired Alaskans, and produced oil that
funded government. Mr. Barnhill replied in the affirmative.
Representative Wilson surmised that the credits were like a
refund check for companies that had already done the work.
Mr. Barnhill answered in the affirmative.
Representative Wilson stated that the companies had done
the work the state had asked and previously the state had
given the refund when it came due. She reasoned that the
state was putting more obligations on companies despite the
fact they companies fulfilled their end of the deal. She
asked for the accuracy of her statement.
Mr. Barnhill asked for verification that Representative
Wilson was referring to the discount the state was asking
companies to take on the face value of their tax credits.
Representative Wilson stressed the issue was not only about
asking the companies to take less for the work they had
done. She explained the bill would implement four new
obligations on the companies in order to qualify for a
lower discount rate [slide 10]. She reasoned that not only
would companies be asked to take a discount, they would be
asked to fulfill additional requirements to receive the
discounted money.
Mr. Barnhill affirmed that the bill asked companies to take
a discount to participate in the program. The goal of the
legislation was to craft a fair balance between state
interests and oil and gas tax credit holder interests. The
flip side was without the program and the ability to pay in
the current year, the companies would have to wait. He
explained that waiting involved a time value of money
calculation. He elaborated if the state paid companies in
two to four years from the present, the value of the dollar
would be less in the future than at present. The goal was
to produce a payment to companies in the present that was
worth more than a payment in two to four years' time. He
continued that the administration was aiming for a solution
the companies would see as fair and that would be cost
neutral or a slight benefit to the state.
3:36:06 PM
Representative Wilson had been in favor of looking at the
discount portion - she could see that under the higher or
lower discount, everyone would not get paid immediately.
She was concerned about adding requirements for credits a
company had already earned. She wanted to ensure the public
realized that companies had held up to their end of the
deal. She referenced the conversation about including a
provision on Alaskan-hire. She believed in Alaskan-hire,
but it was an additional obligation to the credits and for
a company to move up on the payment list order. She wanted
to be careful about the requirement. She pointed out that
the commercial fishing industry was made up of something
like 70 percent out-of-state workers. She did not believe
it was fair to constantly talk about that the oil and gas
industry was not hiring enough Alaskans, while not making
the same argument about other industries. She wanted the
public to understand that the state had already benefitted
from the oil industry in the past. She remarked that it had
led to years with higher capital and unfortunately higher
operating budgets as well. She wanted to be careful not to
put more obligations on industry that had held up its own.
Representative Pruitt asked for clarification about the
amount of credits compared to what the state's production
tax would be. He thought the Revenue Sources Book
projection with the governor's numbers would be around 45
percent of production tax.
Mr. Alper answered that the larger number may have been an
FY 18 number - he would need to follow up. He agreed that
under the FY 19 forecast, the number was about 45 percent.
He detailed that $184 million (the state's determination of
the statutory number owed) was a percentage of $410 million
(the production tax forecast for FY 19). He concluded the
number was roughly 40 to 45 percent.
Representative Pruitt believed it was an important
clarification. He added the state received royalty and
corporate income tax as well.
Co-Chair Foster moved to the constitutionality portion of
the meeting. He relayed the committee had received a legal
opinion from Legislative Legal Services and an opinion from
the Attorney General's Office. He asked Legislative Legal
Services to address the committee.
3:40:09 PM
AT EASE
3:41:26 PM
RECONVENED
Co-Chair Foster referenced a Legislative Legal Services
document dated April 13, 2018.
EMILY NAUMAN, DEPUTY DIRECTOR, LEGISLATIVE LEGAL SERVICES,
noted the agency had authored more than one legal opinion.
She asked for the author of the memorandum Co-Chair Foster
was referring to.
3:42:08 PM
AT EASE
3:42:23 PM
RECONVENED
Co-Chair Foster referenced an April 13, 2018 memorandum to
Co-Chair Seaton [authored by Emily Nauman] from Legislative
Legal Services (copy on file).
Ms. Nauman introduced herself.
JERRY LUCKHAUPT, REVISOR, LEGISLATIVE LEGAL SERVICES,
explained that the agency's purpose was to identify issues
and concerns to help the legislature when it made
decisions. The agency's concern with HB 331 was based on
the financial provisions of the state's constitution
including the dedicated funds clause, the general
obligation debt provisions of Article IX, Section 8, and
other debt provisions in Sections 10 and 11. The agency's
concern was also based on the discussions of the
constitutional framers at the time of the provisions had
been created and the reasons they sided for the provisions.
Additionally, the concern was based on the decisions of the
Alaska Supreme Court. He detailed there were six or seven
supreme court decisions that touched on the provisions and
the state was still feeling out what the sections of the
constitution all mean. There had been discussion and
litigation over the years about what the provisions mean.
The agency's concern was also based on the past actions,
prior acts, session laws, and bills passed by the
legislature in comparison to what HB 331 would do.
Mr. Luckhaupt shared that the agency's big concern was that
the approach in the legislation appeared to be different
than the approach the legislature had taken in the past to
authorize debt. While the bill appeared to be modeled after
the pension obligation bonds approved nine or ten years in
the past (none of which had been issued), the approach [in
HB 331] was slightly different. The past approach involved
pension obligation bonds - the state was going to issue the
bonds and through arbitrage and funding the state's costs
would have been decreased slightly. The bonds would have
been backed by contracts that the Pension Obligation Bond
Corporation would enter into with municipalities and the
state to repay the bonds. The agency's concern [with HB
331] was the only possible repayment seemed to be the
appropriations the legislature would make to the
corporation by itself.
Mr. Luckhaupt returned to Article IX, Section 8 of the
state's constitution specified that no state debt shall be
contracted unless authorized by law and ratified by a
majority of the voters. At the time of the constitution it
had been limited to capital improvements. The provision had
been successfully amended once with regards to housing for
veterans. He noted that in 2017 the people voted down a
proposal to allow the issuance of general obligation debt
for student scholarships. There had also been other past
proposals to allow general obligation debt. He explained
that general obligation debt allowed someone to come after
the assets of the state - a debtor could use the court
system to seize property of the state to fulfill the debt.
Mr. Luckhaupt continued that Article IX, Section 10 dealt
with interim borrowing and specified that the state could
borrow all of the money it needed to as long as it was
repaid by the next fiscal year. The language was to cover
situations where receipts coming in had not been sufficient
to meet payments going out and where balancing out was
needed.
3:48:13 PM
Mr. Luckhaupt stated that [Article IX] Section 11 was
listed in the constitution as exceptions. The section dealt
with restrictions on contracting debt. Article IX, Section
8 specified that no state debts shall be contracted. The
same language was used under exceptions - the restrictions
on contracting debt did not apply to debt incurred by a
public corporation or enterprise of the state or a
political subdivision of the state where the only security
for the debt was the revenues of the corporation or the
enterprise.
Mr. Luckhaupt noted that political subdivisions were also
included, but that was not important for the purpose of the
current conversation. Legislative Legal Services was
concerned that the provision specified the only security
for the debt was the revenues of the public corporation. In
the past with pension obligation bonds there had been
contracts, but nothing had ever been done. In prior years
when former Governor Walter Hickel had bought the "spam
can" building [in downtown Juneau] and the prison, at the
time the state had certificates of participation and lease
purchases. The Carr v. Gottstein case had made its way to
the Alaska Supreme Court - the court had ruled that leased
purchase agreements were not debt under the constitution.
Prior to Carr v. Gottstein, the supreme court, in the
Chefornak case [Village of Chefornak v. Hooper Bay
Construction, 1988] specified that constitutional debt was
debt evidenced by paper (bonds or other notes) providing
for the repayment of money. He concluded that the bill
would issue bonds, which appeared to be constitutional
debt.
Ms. Nauman provided more specifics. She believed the
administration would rely on the finding in Carr v.
Gottstein that simply because a bond was subject to
appropriation that it did not equal debt under the
constitution. She stated that Carr v. Gottstein did not
open and close the issue. She detailed that the case had
been about a lease purchase, which had been distinguished
from bonds in several places. There were multiple cases in
Alaska that specifically used bonds as an example of
constitutional debt. She continued that bonds were
discussed explicitly in the constitutional convention
minutes and within the constitution, which specified the
restrictions on debt did not apply to the issuance of
revenue bonds. It appeared to her that bonds were a
different type of instrument - a borrowing of money - and
there was not a case that resoundingly provided a solution
to the problem.
Ms. Nauman continued there were many other states that had
come down indicating subject to appropriation bonds were
not part of borrowing limits. Alaska's constitution was
written with the knowledge of that, which was acknowledged
in the constitutional convention minutes. She believed the
government's authority was rooted in the constitution and
she had not found anything in the constitution specifying
bond debt was permitted. She was not willing to say that
the subject to appropriation debt was not permissible. She
explained that her memorandum specified that the issue was
a big question mark for her. She did not have any tools or
case law providing ultimate clarity. She wished she could
provide the clarity, but she did not have it to give.
3:53:52 PM
Mr. Luckhaupt continued that Alaska's constitution was
different and had been drafted in the 1950s - it had been
completed before Alaska's statehood. He explained the
drafters had looked to the issues taking place in other
states and did not want some of the issues that had
occurred, especially back East, where states had multiple
dedicated funds and money was tied up going to the state
transportation commission (or something) and there was no
money for other state services. Most states allowed
dedicated funds, but Alaska did not. He elaborated that
most states had limits on the amount of debt they could
have at a given time. For example, 1, 2, or 5 percent of
their assessed valuation. He explained that Hawaii had
drafted its constitution at the same time as Alaska and had
included a monetary limit on the amount of debt it could
have. Alaska's drafters had decided to limit what the state
could have general obligation debt for and had specifically
provided an exception for debt from public corporations and
enterprises that were secured by their revenues. He
believed it implied that the public corporations and
enterprises had some revenues of their own. He relayed it
was what the state had in the past.
Vice-Chair Gara remarked on all of the hours spent on the
opinions provided by Legislative Legal Services and the
Attorney General's Office. He provided a scenario where the
answer did not become clear to the committee after hearing
all of the testimony. He asked if there was a way to
include something that would get an expedited supreme court
review of the question, so it would not linger for many
years.
Mr. Luckhaupt answered that unfortunately there was not a
provision in the state's constitution allowing the state to
seek advisory opinions from the supreme court. The
provisions existed in a number of other states, but not in
Alaska.
Vice-Chair Gara asked for confirmation there was nothing
the legislature could include in the bill that would get a
quicker review. He asked for verification that it would
still be up to the court under the rules the court followed
for accepting a case for review.
Mr. Luckhaupt did not believe anything of that nature would
be successful. Some of the issues as approached over the
years had gone to the supreme court - it was part of the
process of a young state to discover what the provisions of
the constitution meant. The drafters could not have
envisioned every scenario that would arise in the future.
He mentioned a situation where someone brought up a
declaratory judgement action. He referenced the past Meyers
v. State case pertaining to tobacco bonds. He detailed that
a person concerned about the issue had brought a law suit
and alleged the state could not issue the tobacco bonds it
had issued at the time.
3:58:45 PM
Representative Wilson asked if retirement bonds would fall
under the same issue as the bonds in the proposed
legislation.
Ms. Nauman answered that she had not been asked
specifically to look into pension obligation bonds and she
was not an expert in that area. She clarified that her
legal opinion was limited to HB 331. It was her
understanding there was some sort of revenue intended for
the corporation, which was the distinguishing
characteristic.
Mr. Luckhaupt elaborated that the distinguishing
characteristic [of the pension obligation bonds] was a plan
for contracts with the corporation, contracting with the
Department of Administration or other to issue the bonds
and receive payments in the future, which would have been
appropriations. The contracts would also be entered into
with municipalities. In exchange, in theory, there would be
a lower amount they would have to pay in the future as the
bonds were issued the state would explore the arbitrage and
make some money. That language was different than the HB
331 language.
Representative Wilson she surmised that with the pension
obligation bonds or the particular retirement and benefits
corporation, money went to the corporation because people
pay into retirement. She did not believe there would be
revenue going into the corporation under HB 331 with
exception to the $800 million. She inferred there would be
no revenue going into the corporation to help pay for it.
Ms. Nauman agreed. She referred to her memorandum, which
discussed the classic definition of revenue bonds (the
phrase revenue bonds was used under Section 11 of the
state's constitution) pertained to capital projects where a
state corporation was established to build a bridge bonds
for the funds to build the bridge relies on the tolls of
the bridge to repay the bonds. She imagined it was the
thought of the framers when they had included the language
in the constitution.
4:01:41 PM
Representative Pruitt used the University as a real-life
example. He asked if the University was able to spend money
without appropriation by the legislature.
Mr. Luckhaupt answered that the legislature appropriated
the money to the University in its budget. The University
had some funds the legislature had appropriated into that
the University was then able to spend without further
appropriation, including some bonds the University had
issued.
Representative Pruitt referenced the $37.5 million the
University had put into the University of Alaska -
Fairbanks engineering building. He did not recall that a
general obligation bond had been voted on allowing the
University to use the funds on the building. He asked if
Mr. Luckhaupt was indicating the University had money
available to pay for the building. Alternatively, he
wondered if the University would not have the ability to
pay the bond back unless the legislature appropriated the
money (even though it was in a block grant that would
include UGF, certain DGF such as tuition).
Mr. Luckhaupt answered that the legislature had to
appropriate every year because of the state's dedicated
funds clause. He explained it was slightly different than
the idea [in HB 331] of appropriating for bonds. The
University is a public corporation of the state with
revenues of its own. The fact the state had to appropriate
to the University just like it appropriated to other state
departments was not relevant. He underscored that the state
could not have dedicated funds except for those that
existed at statehood or for those required as participation
in a federal program. That funding occurred annually.
However, to actually provide that the only revenue of a
public corporation was the appropriations of the
legislature from regular tax revenues, it would be the
portion of the Legislative Legal Services opinion that
talked about what revenues were, the general tax revenues
of the state would be the only revenue provided to the
corporation. Other public corporations and enterprises had
their own revenues. The University had its own revenues
including the endowment and tuition. The fact that the
University relied on a General Fund appropriation because
those revenues were not sufficient to pay all of the
services of the University, was not relevant in his mind to
the corporation that would be created by HB 331.
4:05:35 PM
Mr. Luckhaupt provided an example pertaining to state-
issued sport fisheries bonds. He detailed the issue had
been identified as a public enterprise of the state. He
elaborated that the enterprise brought in revenues - a
special fee had been added to every sport fishing license
to increase sport fishing opportunities around the state.
He explained they had been financed through a series of
bonds. He cited the Knik Arm bridge project as another
example. He detailed that the bridge would have tolls, but
the tolls were not projected to cover the entire cost of
the bonds. He elaborated that the legislature had provided
Knik Arm with substantial funds for the project to spend as
it needed. He continued that an Anchorage parking garage
had been created as a public enterprise of the state and
had its own revenues being used to pay back the bonds.
Representative Pruitt provided a scenario where he went to
the bond market to get a bond. He stated the payment would
be based on "x" revenues such as the cost of parking or
other. He thought that because the state could not dedicate
funds it meant that the state did not have the ability to
bond for almost anything it had bonded for. He reasoned
that if it was not allowable to dedicate parking fees to
the parking garage, the bond would not be a revenue bond
and an appropriation would be required. He thought the
scenario violated what Mr. Luckhaupt had highlighted - the
state could not do revenue bonds if it meant the
legislature had to appropriate for them.
4:08:17 PM
Mr. Luckhaupt answered that he would have to look at the
bonds again. He had looked at some of the bonds in the past
and the state had identified that revenue would be provided
and subject to appropriation because it had to be subject
to appropriation under Alaska's constitution. The person
who chose to purchase the bonds had to decide whether they
were secured enough. He was referring to the language in
the state's constitution that talked about that a public
corporation or enterprise may issue revenue bonds, which
was not considered debt of the state; it was not debt
covered by the constitution - it was an exception if the
sole security for the debt came from revenues of the public
corporation. In the past the legislature had tried to
structure the issued debt instruments to have an
identifiable revenue source that was different than the
general tax revenues of the state. The crux of the issue
for Legislative Legal Services was that in the case of HB
331 it did not appear there was a revenue source other than
general tax revenues of the state.
4:10:07 PM
Representative Pruitt spoke to his concern about the
argument by Legislative Legal Services. He stated that the
argument had the potential to tear down a large portion of
the way the state currently managed its debt. He referenced
the argument that bonding had to go before voters or it had
to be revenue from a corporation. He cited the University's
$300 million and explained the University had not specified
that revenues it received would go to particular items. He
stated items had been backed based on the faith and credit
of the state to continue appropriating to the University.
He asked if Legislative Legal Services was concerned that
it was changing the way the state would manage debt and
would prevent the state from operating the way it had in
the past.
Mr. Luckhaupt replied that he did have concerns with some
of the state's existing debt. The situation was not unique.
He remarked that the bill took the issue further and the
legal opinion had taken the issue further than concerns
raised by the agency in the past. The agency's job was to
advise the legislature on the constitution and about
concerns that may be in a bill. The agency believed the
bill was different than previous iterations of debt. The
agency had identified what it believed was a distinguishing
factor based on the language of the constitution. He stated
that the constitutional framers had put the information in
to avoid obligating the state's full faith and credit.
Ms. Nauman elaborated that if all of the revenues were
subject to appropriation it would mean that any of the debt
under discussion would be outside of the constitution. She
had to believe the constitutional provisions meant
something and were there to operate as a restriction in
some way on the state's ability to act. She believed it was
necessary to read the two sections together. She was not
sure what the resolution was; there was not a specific case
or article of the constitution that provided the answer.
Co-Chair Foster asked to hear from the administration.
Representative Pruitt wanted to understand why the issue
was arising now if the practice had been done for seventy
years. He stated that no one had ever challenged the
practice in court. He surmised that perhaps it was the goal
to have the supreme court to make a ruling to eliminate the
ambiguity. He stated that the issue had not been brought up
in the past and it had been practiced in some capacity. He
believed Legislative Legal Services was arguing that the
practice had not been used in the past. He wondered why the
issue arose at this point in time.
4:15:15 PM
Ms. Nauman agreed that the question had not been answered.
She noted that Alaska was a relatively new state. She did
not know what legal opinions had been given with other
bills that may have proposed a structure similar to HB 331.
She had been told by the administration that it had looked
into the issue and had resolved it. She stated that until
she saw a case or some language that definitively provided
the answer - it may be a supreme court case - she could not
advise it was a certainty.
Representative Pruitt believed that if Alaska did not have
precedent through case law it should be reviewing cases
from other states. He thought 32 states used subject to
appropriation as well. There was case law in some states
and he believed they had largely ruled in favor of the
concept under discussion.
Ms. Nauman answered in the affirmative. She had reviewed
other states and confirmed that a majority of the states,
but not all, had fallen on the other side of the issue. She
added that Alaska's constitution was fundamentally
different than most of the other states.
Mr. Luckhaupt added that the state's supreme court had
looked at other similar issues. The progression had started
with DeArmond [DeArmond v. Alaska State Development
Corporation, 1962] where bonds had been issued by the
Alaska State Development Corporation. Someone had sued and
claimed the bonds were illegal in Alaska. The bonds had
only been secured by the revenues of the Alaska State
Development Corporation. He elaborated that the corporation
had been issuing loans to businesses and the loans were
repaid to the state. The supreme court had ruled the
practice did not constitute general obligation debt and was
allowed under Article IX, Section 11 of the state's
constitution. Then came the Walker v. Alaska State Mortgage
Association [1966] case, which preceded Alaska Housing
Finance Corporation (AHFC) and the Alaska State Housing
Authority (ASHA) (the two entities had merged into AHFC).
Another example was the Meyers v. AHFC case, where someone
has sued because of the tobacco bonds. The state had
received a lump sum payment in a settlement; the Alaska
Supreme Court had ruled it had not been the general tax
revenues of the state being pledged or given to the public
corporation. There had been no dedicated funds clause
problem. He continued that the public corporation had
received a sum of money from the state in annual payments
for the lawsuit settlement and the public corporation had
then issued bonds. In that case, the court ruled that the
bonds had been issued by a public corporation with its own
revenues.
Mr. Luckhaupt communicated there had been decisions over
time, but Legislative Legal Services believed the bill was
different than what had been looked at in the past where
there had been some attempt to identify a revenue source.
He shared that the Legislative Legal Services opinion did
not go beyond the requestor unless that person shared it
someone else. It was his 29th session and he had written
myriad opinions over the years and the majority had not
gone beyond legislative offices. He stated it did not mean
that the legal opinion that had been shared was something
new or that the agency was trying to do something to the
bill. The only reason the agency was discussing its opinion
with the committee was due to someone's decision to release
it.
4:21:04 PM
Mr. Luckhaupt shared that the agency did not have an answer
or a case on point. Other states' constitutions were
different than Alaska's. The agency could not say that
because of action in another state such as Indiana that it
would be constitutional in Alaska. He stated that the
language in Alaska's constitution had been adopted by a
different group and in the case of Pennsylvania, it had
been adopted almost 80 years after Pennsylvania's
constitution.
4:22:00 PM
AT EASE
4:22:24 PM
RECONVENED
Co-Chair Foster invited the administration to the table. He
listed documents including a memorandum from Mr. Mitchell
to DOR Commissioner Sheldon Fisher dated April 16, 2018, a
letter from the Department of Law (DOL) and Mr. Mitchell
and to Senator Cathy Giessel dated March 2, 2018, a
document on frequently asked questions of DOR, and a press
release by the Department of Law (copies on file).
Vice-Chair Gara appreciated the document from DOL. He did
not anticipate leaving the room with ultimate clarity on
who was right.
BILL MILKS, ATTORNEY V, CIVIL DIVISION, LABOR AND STATE
AFFAIRS ATTORNEY, DEPARTMENT OF LAW, introduced himself.
MARY HUNTER GRAMLING, ATTORNEY V, CIVIL DIVISION, NATURAL
RESOURCES, DEPARTMENT OF LAW, introduced herself.
DOUGLAS GOE, PARTNER, ORRICK, PORTLAND (via
teleconference), stated that he was online.
Co-Chair Foster asked if Greg Blonde and Leslie Krusen
[additional Orrick bond counsel] were online with Mr. Goe.
Mr. Goe believed they were online at different locations.
Mr. Milks shared how DOL had viewed constitutional debt for
quite some time. He referenced the words subject to
appropriation, which had been used throughout the hearing.
The bonds proposed in the bill were subject to
appropriation bonds, not general obligation bonds. As the
department understood the Alaska constitution and Alaska
caselaw it was the point where the road divided. Under the
state's constitution there was constitutional debt (general
obligation debt) in Article IX, Section 8 that was limited
for certain purposes and required voter approval because it
pledged the full faith and resources of the state.
Mr. Milks explained that regardless of whether or not the
legislature wanted to appropriate money or had appropriated
money to pay general obligation bonds, the bonds must be
paid, and the court could direct that the money come out of
the state treasury. Whereas, the debt in HB 331 was subject
to appropriation. He believed it almost immediately became
apparent to him that HB 331 did not include constitutional
debt because it was an important obligation; however, if
someone purchased a subject to appropriation bond and the
issuer did not make a debt payment, unlike a general
obligation bond where the court would order payment, if the
purchaser went to court the court would rule that the bond
specified it was subject to appropriation. He explained the
point had been the key dividing line for DOL for a long
time.
Mr. Milks referenced the discussion about legal cases and
relayed that DOL believed a key case was Carr v. Gottstein.
He explained that the case addressed whether debt was
always debt. He stated that constitutional debt was a term
of art that describes an obligation involving borrowing. He
clarified that the term did not describe what the specific
financial instrument may have been that created an
obligation involving borrowing. He elaborated that
constitutional debt was an obligation involving borrowing
where there was a promise to pay in the future whether
funds were available or not. The department believed it was
the lynchpin of the analysis. The bill dealt with subject
to appropriation bonds and the legislature would retain its
power to appropriate the debt service on the bonds. The
bonds would be important obligations as testified to by Mr.
Mitchell; however, the current discussion dealt with a
limited and specific legal question. He furthered that
because the bonds in HB 331 were subject to appropriation,
it had led DOL to determine the bill was proper and legal.
Additionally, the department had worked with bond counsel
on the bill, which had led DOL to the view that HB 311 was
almost identical to pension obligation bond statutes
written ten years back.
Mr. Milks reiterated that the issue was subject to
appropriation. He continued that the Mr. Mitchell could
explain that when a general obligation bond was purchased
the purchaser understood that the court could order the
payment (the discretion was gone from the legislature in
that case), but the purchaser received slightly less
interest than it would on subject to appropriation bonds.
4:29:54 PM
Mr. Milks continued that there had been substantial
experience in Alaska with subject to appropriation bonds.
The department's view was the constitution identified
constitutional debt as full faith and credit debt. Even
during the period the framers had written the constitution
(prior to statehood), the territory had been issuing
revenue bonds backed up by subject to appropriation debt
(the territorial legislature's annual appropriation). The
department believed the bonds in HB 331 were lawful.
4:31:38 PM
Mr. Milks relayed he would ask bond counsel to provide a
broader national perspective. He reported that subject to
appropriation bonds were sold regularly from all states and
municipalities; the purchasers made assessments on their
interest in the bonds. He addressed the opinion from
Legislative Legal Services that was not saying the bonds
were unconstitutional, but the agency was not prepared to
say they were constitutional. He noted that DOL had already
presented the bill to the Senate Resources Committee and
when the department had learned of the memo it had
vocalized its view that the bonds were lawful and
constitutional. He detailed that if the bill passed and
bonds were issued, DOL would have to issue an opinion. He
referenced the pension bonds that had been proposed a
couple of years earlier would have been backed by the
annual appropriation of the legislature to the Pension Bond
Corporation. He elaborated that the state (not the
municipality) would have been responsible for refinancing
its pension debt. He stated that prior mention of a
contract was not really applicable.
Mr. Milks continued that DOL had to certify that it
believed the bonds were lawful. Additionally, bond counsel
had to independently look at Alaska law and had to certify
the bonds were lawful. He stated that subject to
appropriation was a fundamental constitutional principal.
He referenced an earlier conversation about the tax
credits. He elaborated there was a statutory appropriation
and some disagreement between the two legislative houses
about how much to appropriate. He agreed that the funds
were subject to appropriation. He reported DOL had a big
case in the past year that challenged a statutory payment
program and the Alaska Supreme Court had ruled subject to
appropriation. The department believed that once subject to
appropriation was included, it dealt with a core
constitutional principal.
Mr. Milks referenced a question by Vice-Chair Gara asking
whether a provision could be inserted in the bill if there
was enough concern about the legality of the bonds. He
agreed that a provision could be inserted. He shared that a
colleague had pointed out a provision in the Alaska Gasline
Inducement Act (AGIA) AS 42.90.420. In DOL's view it did
not create a problem for the court because it was not being
asked to issue an advisory opinion. He continued that it
set a specific statute of limitations; the timeframe had
been set at 90 days under AGIA and it was not unusual for
states issuing bonds to put a 60-day or 30-day limit so
when the entity that may issue the bonds issued public
notice to issue bonds, there was a statutory provision that
tried to provide information in the event of a potential
challenge.
Mr. Milks asked Mr. Goe would weigh in on how the state's
bond counsel looked at Alaska's authority to issue bonds
and how the nation looked at subject to appropriation
bonds.
4:36:21 PM
Mr. Goe introduced himself as a partner and vice chair of
public finance for Orrick, Herrington & Sutcliffe LLP
(Orrick); the firm served as State of Alaska bond counsel.
He detailed that without the firm's unqualified opinion on
bonds, Wall Street would not purchase the bonds. Wall
Street required an unqualified opinion of bond counsel. The
bonds were legal, valid, and binding obligations.
Additionally, if the bonds were tax exempt they were also
exempt from federal income tax. The firm was privileged to
be the leading bond counsel firm nationally; by dollar
volume sometimes the firm was twice the next leading firm.
Mr. Goe outlined that Orrick had worked closely with Mr.
Milks and DOL in examining the memorandums and
constitutional deliberations prior to Article IX, Section 8
being put in the state's constitution. The firm and DOL had
also carefully reviewed the Alaska caselaw on the issues.
The firm had concluded that the Carr v. Gottstein case was
the determinative case on the issue; it was also consistent
with the majority of cases that had considered the question
around the country. One of the more recent cases on the
subject was a 2003 case of the New Jersey Supreme Court. In
the Carr v. Gottstein case, the Alaska Supreme Court was
with the majority of courts in holding that debt subject to
appropriation is not constitutional debt. He detailed that
the specific type of debt limits applied in constitutions
and sometimes applied in statute and voter approved city,
borough, or county charters. The question that that always
arose was what debt meant when there was a debt limitation.
Mr. Goe identified that there were two broad exceptions
noted in caselaw and legislative counsel had noted one of
those, which was what was sometimes called the revenue
bonds exception reflected in Article IX, Section 11 of
Alaska's constitution. He continued that sometimes in state
law it was also referred to as the special fund doctrine,
where there was a source of revenues or special fund that
was the payment (not general tax revenues); therefore, it
did not constitute debt.
Mr. Goe detailed that the other major exception was subject
to appropriation debt. As had been noted, the supreme
courts, under a very broad range of state constitutions,
had determined that debt subject to appropriation was not
constitutional debt. He noted that subject to appropriation
was not subject to statutory limitations or a charter debt
limit if it was the applicable limitation being considered
by the court. The firm earned its reputation on giving
unqualified opinions, which it took very seriously before
being prepared to deliver. Based on existing Alaska Supreme
Court precedent, Orrick was comfortable that HB 331 was
constitutional. He continued that if the bill was enacted
assuming the opinion of DOL and customary things, the firm
expected to be able to render its opinion to the state and
the bond market that the bonds would be valid and binding
obligations of the tax credit bond corporation and would
not be debts of the state. He was available to answer any
questions.
4:42:23 PM
Mr. Mitchell noted that he was not an attorney, but he
worked in the municipal bond market on a regular basis. He
referenced examples given earlier about the University, the
potential Knik Arm crossing toll revenue bond structure,
the Goose Creek Correctional Center lease revenue bonds,
the Alaska Native Tribal Health Consortium's residential
housing building, the Anchorage jail, the Seward Spring
Creek Correctional facility, and the Juneau court plaza
building. He underscored that the revenue pledged for all
of the examples had only been derived from state
appropriation in some way. He emphasized that no other
revenues had existed. He stated it was the same thing
contemplated by HB 331. He referenced the discussion about
the Pension Obligation Bond Corporation. He detailed that
because the corporation had the ability to enter into
contracts with municipal employers for the purpose of
funding unfunded liability it may be liable. He stressed
that the only employer with an unfunded liability that
would benefit was the state based on make whole payments
the state had or the limits at 22 percent or 12.5 percent
of payroll within the two systems [PERS and TRS
respectively]; the state was the only obligated party.
Mr. Mitchell continued that the same could be done with the
HB 331 proposal. He explained that the bill could direct
the holders of the tax credits assign them to the
corporation. He explained it was the same thing - the money
would be coming from the General Fund "no matter how you
slice it." He did not believe the arguments made earlier in
the meeting meshed well. He understood the concern and that
the language was not a hard declaration that there was an
issue with the constitution. He stated that the declaration
alone in the bond world caused concern. From his
perspective, the dissenting opinion [from Legislative Legal
Services] was troubling because in the event bond counsel
provided an unqualified opinion and the bond purchase moved
forward, the purchaser may ask to be paid more.
Mr. Mitchell believed that based on past practices of the
state and the laws, the issue had been interpreted and
defined prior to statehood. He elaborated that the bonds
had to be approved by the legislature, which had not always
been the case. In the past, when ASHA had issued lease
revenue bonds the state supported through lease payments it
had not required legislative approval. State law had been
tightened up since those early years. Up until the Wildwood
Correctional facility had been financed, the state could
issue COPs [certificate of participation] for real property
for up to $5 million. He explained it had been cut to
generally zero because the administration at the time had
gotten clever and had done a $4.9 million COP to acquire
the land and a $4.9 million COP to improve the land. The
legislature had been heavily involved in regulating the
financial tool since statehood.
4:47:14 PM
Representative Guttenberg corrected that the opinion from
Legislative Legal Services was not a dissenting opinion. He
remarked the state had separation of powers. He did not
believe Orrick would have the ability to issue an
unqualified opinion without pointing out that the
legislative attorneys had a difference of opinion. He
reasoned in one way or another it would cost more money or
hold the process up until clarity came from the courts. He
asked if his assessment was accurate.
Mr. Milks answered that the legislature had the opinion
from Legislative Legal Services staff and DOL had provided
analysis to the Senate Resources Committee. Attorney
General Lindemuth intended to issue a formal attorney
general opinion on the topic of subject to appropriation
bonds.
Mr. Goe restated his understanding of the question. The
firm took all facts and circumstances into account when
delivering its opinion. The firm would certainly prefer
that there not be a legislative legal opinion out there. He
referenced Mr. Mitchell's comment about whether the opinion
would be a cost to the state because the state had an
obligation to disclose all material facts. He believed it
would be the case. Whether the legislative opinion would
impact Orrick's ability to deliver its opinion remained to
be seen. If the attorney general issued a formal legal
opinion on the case it would aid Orrick in the ability to
deliver an unqualified legal opinion. He believed there
could still be a cost to the state of the legislative
counsel opinion because under federal securities laws the
state may have an obligation to disclose the existence of
the opinion and the state may incur higher interest costs.
He believed that if Orrick and DOL stepped up and delivered
their opinions, the bond market would still accept the
opinions and buy the bonds.
Representative Guttenberg referenced Vice-Chair Gara's
question about an expedited hearing. He noted that existed
for redistricting issues. He asked if the administration
was free to ask the courts for a declaratory judgement in
the case of HB 331. He asked if there was some process to
go forward.
Mr. Milks answered that in response to a question by Vice-
Chair Gara, Assistant Attorney General Gramling had
identified a specific statute of limitations provision in
AGIA. Some other states had a similar provision for bond
bills to try to get a quick opinion. He clarified that the
state was not looking for litigation and DOL intended to go
forward with a formal attorney general opinion.
4:53:15 PM
Representative Grenn read from page 2, lines 19 through 22
of the bill:
The bonds do not constitute a general obligation of
the state and are not state debt within the meaning of
art. IX, sec. 8, Constitution of the State of Alaska.
Authorization by the voters of the state or the
legislature is not required.
Representative Grenn asked about the importance of the
language. Additionally, he inquired about exceptions in
Article 11.
Mr. Milks answered that the language in the bill was
important to clarify that the bonds were subject to
appropriation. When the bonds were marketed and bought in
the future the language made it clear they were not general
obligation bonds of the State of Alaska. Article IX,
Section 11 was an exception to Section 8 (Section 8 dealt
with constitutional debt - full faith and credit debt).
Permitted constitutional debt included general obligation
bond debt and public corporation revenue bonds. He
continued that subject to appropriation bonds were not full
faith and credit - no one could go to court (unlike a full
faith and credit bond) and obtain a judicial order to pay
debt service. He referenced page 4, line 16 of the bill
that included the statement that the "legislature may
appropriate." He clarified that the [subject to
appropriation] were still important obligations. The
department was addressing the narrow issue of how it saw
the issue of constitutional debt.
4:56:02 PM
Representative Pruitt referenced testimony by Legislative
Legal Services that Alaska had a different state
constitution than other states. He asked how different
Alaska's constitution was from other states in terms of
obligations. He thought it was fascinating that New Jersey
had used the Carr v. Gottstein case from Alaska. He
understood that it did not necessarily mean something from
New Jersey would fit into Alaska's framework. He asked if
there were enough similarities with other states to help in
discussions if the particular issue went to court in
Alaska.
Mr. Goe replied in the affirmative. He believed other
states were instructive in terms of using it. Other state
constitutions varied - the common denominator among all
constitutions was the use of the term "debt." The question
became how one interpreted the term debt. For example, he
considered whether housing loans for veterans was an
exception. Additionally, capital improvements were commonly
seen related to state debt limits. He explained that the
relevant question for the conversation at hand was what
debt meant for constitutional purposes. He believed they
could learn from other states on the issue.
Mr. Goe elaborated that it was Orrick's view and the view
of DOL that the Alaska Supreme Court had already spoken -
it had considered a broad range of objections in Carr v.
Gottstein case and had come down solidly in ruling that
subject to appropriation debt did not qualify as
constitutional debt within the meaning of Article IX,
Section 8. He believed it was the reason the New Jersey
Supreme Court had quoted the case as standing for the
principle (with the majority of other supreme courts around
the country) that subject to appropriation debt was not
debt within the meanings of the various constitutions.
Representative Pruitt asked who would argue the case on the
state's behalf. Mr. Milks answered that if a law was passed
by the legislature it was the Attorney General's
responsibility to defend Alaska's laws.
5:01:14 PM
Representative Wilson asked that when people bought the
bonds if they were told that the bonds were worthless if
the legislature decided not to pay. She believed that's
what had been indicated.
Mr. Mitchell replied that [the market] was told there was a
risk of failed appropriation. They were also provided with
the history of the state and its payment on all of its
municipal market subject to appropriation pledges and the
importance of the municipal capital market to the State of
Alaska and its future and the ability to provide for
capital projects large and small. The market would consider
the negative impacts that would result from a failure to
appropriate and would need enough assurance that they
believed the state would pay. At the end of the day credit
was a buyer's belief that someone would repay them.
Representative Wilson stated that most of the examples
provided were attached to buildings or something tangible,
whereas the bonds in HB 331 were not. She asked for
verification there would be language on the bonds
specifying there was nothing backing them and that the
paper may be worth more than the payment the buyer may
receive.
Mr. Mitchell replied yes. He noted that they did not own a
title position on a building if the state failed to pay.
The state would lose access to the building for a period of
time and then the building becomes the state at the term
lease whether the state paid or not. There may be a two or
three-year extension depending on how the lease language
was written. The other best example of a similar entity
being proposed was the Pension Obligation Bond Corporation.
There was an existing liability of the state, there was not
real property involved, the state was going to enter into a
contractual commitment to pay that was going to be provided
to the public corporation in exchange for the lump sum
deposit into the retirement trust, and the payment was
subject to appropriation. There were no PERS employer
payments backing the bonds, it was the state's subject to
appropriation pledge; if the state did not appropriate,
there would have been no recourse.
Representative Wilson stated that the difference discussed
by Legislative Legal Services was that in order for the
bonds to be legal they were associated with an organization
taking other revenue in.
Mr. Mitchell clarified that the Pension Obligation Bond
Corporation had no right to employer or employee
contributions that went into the trust. The contract that
would have been the basis of the financing was the
Department of Administration entering into a contract with
a pension obligation bond corporation. He explained that
pledge was securitized, pledged to the third parties, and
was subject to appropriation. Once the money was deposited
into the trust it was gone.
Vice-Chair Gara spoke to the importance of a clear
legislative record. He did not know which opinion was
correct. He clarified that his remarks were not intended to
communicate that he believed the bill was or was not
constitutional. He believed there were good faith opinions
on both sides. He spoke to the thoroughness that Ms. Nauman
went through in analyzing [Article IX] Sections 8 and 11
[of the state constitution]. He was disappointed he had not
heard much from DOL about the sections. He thought the
merits of the bill should be addressed.
5:06:01 PM
Representative Kawasaki agreed and appreciated the work by
Legislative Legal Services. He had asked for a legal
opinion [from DOL] but had been referred to the press
release. He hoped to get an opinion from the attorney
general. He would write his questions down and would submit
them. He asked who to direct the questions to.
Co-Chair Seaton asked members to submit the questions
through the chair. He remarked that the issue was
difficult, and he was glad the discussion had occurred. He
noted that the next meeting was currently unscheduled. He
recessed the meeting to a call of the chair [note: the
meeting never reconvened].
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB331 Transmittal Letter.pdf |
HFIN 4/21/2018 1:00:00 PM |
HB 331 |
| HB 331 Sectional for H FIN.pdf |
HFIN 4/21/2018 1:00:00 PM |
HB 331 |
| HB331 Credit Bonds for HFIN 4-21-18.pdf |
HFIN 4/21/2018 1:00:00 PM |
HB 331 |
| HB 331FAQ on Constitutionality.pdf |
HFIN 4/21/2018 1:00:00 PM |
HB 331 |
| HB 331 Press Release - Tax Credit Bonds 4-18-18.pdf |
HFIN 4/21/2018 1:00:00 PM |
HB 331 |
| HB 331 Memo re Broad Interpretation of Debt.pdf |
HFIN 4/21/2018 1:00:00 PM |
HB 331 |
| HB 331 Revenue Law Letter re Const.pdf |
HFIN 4/21/2018 1:00:00 PM |
HB 331 |
| HB331 Credit Bonds for HFIN 4-21-18.pdf |
HFIN 4/21/2018 1:00:00 PM |
HB 331 |
| HB 331 Constitutionality of HB 331 (Bonding to pay Tax Credits).pdf |
HFIN 4/21/2018 1:00:00 PM |
HB 331 |