04/10/2018 08:00 AM House RESOURCES

           HB 331-TAX CREDIT CERT. BOND CORP; ROYALTIES                                                                     
                                                                                                                                
8:03:53 AM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR  announced that the  first order of  business would                                                               
be  HOUSE BILL  NO.  331,  "An Act  establishing  the Alaska  Tax                                                               
Credit  Certificate Bond  Corporation; relating  to purchases  of                                                               
tax credit certificates; relating  to overriding royalty interest                                                               
agreements; and providing for an effective date."                                                                               
                                                                                                                                
REPRESENTATIVE  PARISH  restated  the  purpose  of  Amendment  2,                                                               
[moved and  objected to  during the  recessed meeting  of 4/9/18]                                                               
labeled 30-GH2863\A.3, Nauman, 4/9/18, which read:                                                                              
                                                                                                                                
     Page 6, line 25:                                                                                                           
          Delete "1.5"                                                                                                          
          Insert "two"                                                                                                          
                                                                                                                                
     Page 13, line 24:                                                                                                          
          Delete "of 10 percent a year"                                                                                         
          Insert "based on the true interest cost plus                                                                          
          seven percent"                                                                                                        
                                                                                                                                
     Page 13, lines 29-30:                                                                                                      
        Delete "1.5 percent and is less than ten percent                                                                        
          applies each year"                                                                                                    
          Insert "two percent"                                                                                                  
                                                                                                                                
     Page 14, lines 3-4:                                                                                                        
        Delete "1.5 percent and is less than ten percent                                                                        
          applies each year"                                                                                                    
          Insert "two percent"                                                                                                  
                                                                                                                                
REPRESENTATIVE   PARISH  explained   HB   331  incorporates   two                                                               
percentage rates:   a  fixed 10 percent  rate and  an approximate                                                               
rate  of 5  percent, "which  floats on  top of  the true  cost of                                                               
borrowing for the  state."  Amendment 2 would provide  for the 10                                                               
percent rate  to float on top  of the state's cost  of borrowing.                                                               
Further, Amendment 2  increases the lower rate by  0.5 percent to                                                               
provide the state greater security at lower oil prices.                                                                         
                                                                                                                                
REPRESENTATIVE  BIRCH  stated  opposition  to Amendment  2.    He                                                               
referred  to  previous testimony  by  the  Department of  Revenue                                                               
(DOR) which  indicated a  1.5 percent rate  is reflective  of the                                                               
state's  cost; in  fact,  the  floating rate  is  not 5  percent.                                                               
Furthermore,  the proposed  bill is  not  to make  money for  the                                                               
state but  to recover  the state's cost,  and the  amendment does                                                               
not reflect the intent of the bill.                                                                                             
                                                                                                                                
CO-CHAIR TARR asked  whether the state uses a  standard 7 percent                                                               
[rate]  for other  programs  such as  the  Alaska Permanent  Fund                                                               
Corporation.                                                                                                                    
                                                                                                                                
8:08:29 AM                                                                                                                    
                                                                                                                                
KEN ALPER, Director, Tax Division,  DOR, advised the state's goal                                                               
for a return  interest rate is "roughly our own  cost and we were                                                               
using that 7  percent figure [because] it lines up  with what the                                                               
permanent  fund  investment  advisors   think  of  as  their  ...                                                               
expected earnings."                                                                                                             
                                                                                                                                
8:09:12 AM                                                                                                                    
                                                                                                                                
MIKE BARNHILL, Deputy Director,  Office of the Commissioner, DOR,                                                               
added that the permanent fund's  expected return is currently 6.5                                                               
percent.  The rate in the  bill was derived from a combination of                                                               
earnings  reserve   assumed  return  and   constitutional  budget                                                               
reserve assumed return, both of which are lower.                                                                                
                                                                                                                                
CO-CHAIR  TARR  asked whether  a  rise  in interest  rates  would                                                               
affect the cost of borrowing.                                                                                                   
                                                                                                                                
MR.  ALPER further  explained  during the  drafting  of the  bill                                                               
trust interest costs  were presumed to be 3.6  percent; rates are                                                               
not expected to go down before the initial large bond offering.                                                                 
Under Amendment  2, if  interest [costs] rose  to 4  percent, the                                                               
state would discount  [tax credits] at 11 percent.   For example,                                                               
for a $100  million company, a buyout offer that  was affected by                                                               
0.5  percentage   point  would   be  adjusted   by  approximately                                                               
$700,000.                                                                                                                       
                                                                                                                                
8:11:33 AM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 8:11 a.m. to 8:15 a.m.                                                                       
                                                                                                                                
8:16:07 AM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR removed her objection to Amendment 2.                                                                             
                                                                                                                                
8:16:13 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAUSCHER objected to Amendment 2.                                                                                
                                                                                                                                
8:17:47 AM                                                                                                                    
                                                                                                                                
A roll  call vote was  taken.  Representatives  Drummond, Parish,                                                               
and  Tarr  voted  in  favor  of  Amendment  2.    Representatives                                                               
Lincoln, Birch, Johnson, Rauscher,  Talerico, and Josephson voted                                                               
against it.  Therefore, Amendment 2 failed by a vote of 3-6.                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  expressed his  support for [HB  331], which                                                               
he described  as a creative  solution to a  long-standing problem                                                               
and  which  could strengthen  the  state's  economy, enhance  oil                                                               
production  and   development,  and  address  the   state's  debt                                                               
liability.                                                                                                                      
                                                                                                                                
REPRESENTATIVE PARISH remarked:                                                                                                 
                                                                                                                                
     I'd like  to just get on  record that I wasn't  able to                                                                    
     get the  third amendment drafted ...  to explicitly say                                                                    
     that if we  put this into place we plan  to depart from                                                                    
     the statutory  schedule, and I  was ... hoping  to find                                                                    
     some   way  of,   of   both   honoring  our   statutory                                                                    
     obligations perhaps  by having people keep  their place                                                                    
     in line  ... but we weren't  able to get it  drafted at                                                                    
     this point.   ... And as the bill exists  right now, it                                                                    
     would  be in  my opinion  a legitimate,  unfortunate, a                                                                    
     poor  choice  but perhaps  a  necessary  one under  the                                                                    
     statute  at present,  to appropriate  not only  the ...                                                                    
     statutorily  designated amount  but also  the, whatever                                                                    
     debt service  we should  decide upon.  ... I  do remain                                                                    
     somewhat  dubious  of  the bill,  I  commend  the,  the                                                                    
     administration  for the,  the  thought  that went  into                                                                    
     this, it  is, in fact,  a way to rebalance  the playing                                                                    
     field ... it could potentially  result in more money in                                                                    
     state  coffers I  just have  some serious  reservations                                                                    
     about the  schedule of repayment, how  it will interact                                                                    
     with   the  existing   statute   and   the  notion   of                                                                    
     contracting state debt by another name                                                                                     
                                                                                                                                
8:21:22 AM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON  referred to  liabilities associated  with the                                                               
bill and pointed  out the contracts created by the  bill would be                                                               
novation  contracts, which  are new  contracts.   He said  he was                                                               
unsure of the  actual liability and said, "... I  don't treat the                                                               
constitutional  questions as  entirely  frivolous,  I think  that                                                               
there  have  been  some  references   to  AHFC  and  the  pension                                                               
obligation history, ... [we're] sort  of trying to mirror some of                                                               
the ways in which  - I think it's [article 9  of the Alaska State                                                               
Constitution] -  that there  are sort of  exceptions to  the rule                                                               
...  [and]   the  constitutionality  would  be   affirmed."    He                                                               
expressed his support for the motion to move the bill.                                                                          
                                                                                                                                
REPRESENTATIVE TALERICO said  he appreciated the administration's                                                               
thorough explanation of  HB 331, and views the bill  as a plan to                                                               
resolve  some of  the state's  tax credit  issues.   Further, the                                                               
bill could  restore activity  for the industry  and grow  the oil                                                               
and gas industry workforce.                                                                                                     
                                                                                                                                
CO-CHAIR TARR  said she  would not  support the  bill due  to the                                                               
[financial]  mechanism,  although  she agreed  the  [tax  credit]                                                               
obligation needs  to be addressed.   She  pointed out there  is a                                                               
statutory schedule for payout, which  could be exceeded; however,                                                               
when bonds  are issued  to pay a  debt, non-payment  could affect                                                               
the state's  credit rating,  thus the  proposed state  debt would                                                               
transfer from "an  interest-free debt" to an  obligation that may                                                               
threaten  important  state  programs.   Co-Chair  Tarr  said  her                                                               
preference is to establish a  state fiscal plan and determine how                                                               
to pay the existing debt.                                                                                                       
                                                                                                                                
REPRESENTATIVE JOHNSON expressed her support for the bill.                                                                      
                                                                                                                                
8:27:59 AM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON moved  to report HB 331 out  of committee with                                                               
individual  recommendations and  the  accompanying fiscal  notes.                                                               
There being  no objection, HB 331  was reported out of  the House                                                               
Resources Standing Committee.