Legislature(2017 - 2018)BUTROVICH 205
02/21/2018 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| SB176 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 176 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 176-TAX CREDIT CERT. BOND CORP; ROYALTIES
3:30:42 PM
CHAIR GIESSEL announced consideration of SB 176, sponsored by
the Administration through the Rules Committee, and managed by
the Department of Revenue (DOR). She said Alaska's oil and gas
tax credit system, which included cashable reimbursement for
investments was reformed in 2016 and again in 2017 with the
passage of House Bill 247 and House Bill 111 that ended the cash
reimbursement provisions.
3:31:05 PM
SENATOR WIELECHOWSKI joined the committee.
CHAIR GIESSEL said however, the state still has unpaid
obligations. In response to those funding obligations and
recognizing Alaska's need to reduce its reputation for risk to
the world's financial sector, the Department of Revenue (DOR)
has proposed a solution. She welcomed Commissioner Sheldon
Fisher and Ken Alper, Director, Tax Division, to the table.
3:31:32 PM
SHELDON FISHER, Commissioner-designee, Department of Revenue,
Anchorage, Alaska, introduced himself and said he would talk
about the proposal in SB 176 to address the existing and
outstanding oil and gas tax credits.
KEN ALPER, Director, Tax Division, Department of Revenue,
Anchorage, Alaska, introduced himself.
COMMISSIONER FISHER said they would first discuss overarching
goals and objectives for this proposal, go into the history, and
then go into the details and provide a granular analysis. At the
end Mr. Alper would provide a sectional analysis. He would
prefer questions to be asked as they come up.
COMMISSIONER FISHER said when the governor asked him to be DOR
commissioner, he identified these tax credits as an issue he
wanted resolved. It has formed an important part of the
governor's economic stimulus package.
As many know, the state has lost about 9,200 jobs between 2015
and 2017 and the oil and gas industry is down almost 31 percent.
The Institute of Social and Economic Research (ISER) at the
University of Alaska is expecting the year-over-year losses for
2018 will be another .7 percent. They did not view this
reduction, which is less than prior years, indicates a recovery
in activity but rather that the state's financial challenges are
starting to be absorbed. They are still looking for some
recovery.
He said this proposal allows for up to $600 million or maybe a
little bit more that could be an economic stimulus for the oil
and gas sector of the economy. It also addresses the uncertainty
about how the credits will be funded that has created
limitations in the small companies' - the ones impacted by these
credits - ability to raise capital and to continue to invest in
the fields that they have discovered.
3:34:56 PM
COMMISSIONER FISHER said he didn't know how many jobs this might
create but he called their attention to an Institute of Social
and Economic Research (ISER) presentation last year on
government spending where they estimated that for every $100
million of government spending around 460 to 900 jobs are
created. When a stimulus is put into an economy, the whole
economy is stimulated with downstream jobs like support
services, retail locations, and restaurants. So, a large
overarching goal of the $600 million is to provide additional
stimulus into the economy.
3:35:58 PM
He said SB 176 tries to balance a number of competing interests
in addressing the state's fiscal problem. The governor proposes
a $477 million budget deficit and his budget assumes this bill
will pass. If it doesn't pass, another $180 million will need to
be appropriated to cover the statutory minimum. So, this bill
actually helps minimize the deficit in FY19. Some argue that
this money should be spent on higher priorities, but their first
priority is job creation. And because this proposal actually
preserves money, those dollars can be spent on other priorities
or to limit the amount of the deficit.
3:37:29 PM
SENATOR VON IMHOF said a good chunk of this money would pay off
bank debt and asked how that can create jobs.
COMMISSIONER FISHER replied that she was right, but one of the
dimensions of this bill is that credit holders will be able to
reduce the discount rate the state will charge them by
committing to reinvest in Alaska. He explained that the state
has learned that right now the capital markets are largely
frozen to these companies, because they are not performing on
their current obligations. As this money comes to the companies
and their balance sheets are cleaned up, he is confident they
would be able to access additional capital.
SENATOR VON IMHOF said that would be the two-step approach that
they hope will happen. On his point that the deficit will
increase by $180 million without this program, her view is that
assumes every entity that has an outstanding oil and gas tax
credit will participate in this program. But what if everyone
doesn't participate?
3:39:43 PM
COMMISSIONER FISHER replied that today's numbers are based on
the assumption that essentially everyone participates. Within
the last week they shared with the companies the DOR calculation
of their credits and the discount they would receive under the
various options under this program. Every affected party wants
to participate.
SENATOR WIELECHOWSKI said the large overarching goal of this
bill is to provide stimulus into the economy and asked if he
evaluated infusing $800 million into the economy in a different
way, like paying everyone their full Permanent Fund Dividend
(PFD) check.
COMMISSIONER FISHER answered that they did look at other
options, and the Governor's economic stimulus package also
includes a capital budget. Although he wasn't prepared to
discuss that today, he could say that it was for deferred
maintenance with an associated fair amount of value.
He hopes the committee is persuaded that this is almost a unique
opportunity. The reason is because while the state is using its
bonding capacity to pay these credits off, the discount that the
credit holders will take on their credits will pay the interest
on that debt. So, it's almost free money to be able to
accelerate the payment into the current time-period because the
cost of borrowing will be borne by the credit holders. He is not
aware of any other option that has that mechanism built into it
as a potential.
SENATOR WIELECHOWSKI said then that he assumes that they hadn't
done any other analysis of the simulative effect of infusing
$800 million into the economy like paying a full PFD check.
COMMISSIONER FISHER said others have done that, and the
department could bring that forward. He was not trying to avoid
that question, but it's a separate question. The legislature
could choose to appropriate a full dividend, and it wouldn't
either positively or negatively the merits and wisdom of this
program. Because of the nature of the structure, the credit
holders themselves are covering the interest on the debt and the
described relationship features are present regardless of what
the legislature decides to do with the PFD.
3:44:44 PM
CHAIR GIESSEL asked if the unpaid credits are considered debt by
the rating agencies and if they are negatively reflecting on the
state's standing.
COMMISSIONER FISHER answered they are part of the payment
obligations that the state has and that the credit rating agents
look at as they consider its debts in considering debt capacity.
SENATOR WIELECHOWSKI asked if security is being offered for
these bonds.
COMMISSIONER FISHER answered that these bonds would be subject
to appropriation bonds. So, the creditability of the State of
Alaska would be offered. In many respects, credit agencies would
think about this as one form of an obligation for a different
form of an obligation. In other words, the state's balance
sheet, called the Comprehensive Annual Financial Report (CAFR),
already includes these credit obligations and those will be
converted into a bond instrument.
3:46:16 PM
SENATOR WIELECHOWSKI asked if this is classified as a revenue
bond or a general obligation (GO) bond.
COMMISSIONER FISHER replied it is a "subject to appropriation
bond."
SENATOR STEDMAN said that "subject to appropriation" is why they
are sitting here today, because these credits were subject to
appropriations and not an open-ended call on the treasury. That
language wasn't in the statute. However, these credits
accumulated under the thinking that it was an open-ended
appropriation.
SENATOR STEDMAN said one could look at the budget in two ways.
One of the ways is that governors have to present a balanced
budget. So, if the state is running a deficit, they have to come
up with some revenues to make it equal before handing it to the
legislature. But the deficit from owing the credits is the same
today as it was a month ago, and he doesn't see it as increasing
the deficit by doing something to decrease it.
3:48:25 PM
COMMISSIONER FISHER agreed on his first point that these credits
were subject to appropriation, but he differed in thinking that
the state bears some responsibility for creating the expectation
that the credits would be paid annually as they occurred.
He said the Governor is trying to create a balance between a
variety of competing interests and the balance comes in by
saying to the credit holders if you want to receive your cash up
front you have to be willing to accept a discount. That discount
reflects the time/value of money and actually helps them and the
state in a number of ways.
3:49:31 PM
To Senator Stedman's second point on the deficit, the statutory
minimum published in the Revenue Sources Book for FY19 is $206
million. The payment that is contemplated under this scheme for
FY 19 would be $25 million. That is why he says there would be a
$180 million difference, and his point is that the Governor's
budget would have to be increased by $180 million to account for
it.
COMMISSIONER FISHER said he hoped to satisfy their concerns, but
central to this proposal is a desire to produce a savings to the
state budget in the near term (shifting payments into other
periods) but also an overall smoothing of spending into periods
when the state expects to have more revenue to pay them.
3:51:53 PM
COMMISSIONER FISHER said the second thing they are trying to
balance is support for the small producers, because the major
producers don't enjoy a benefit from the tax credits or the
credit program. One of the strategic interests the state had
when it created the credits in the first place was to try
inducing small producers to come to Alaska, because of the view
that it would increase competition, particularly on the North
Slope, and generate more development of the state's resources.
As a result of changes that have happened, many of these
companies are in default and unable to access capital. Part of
what SB 176 will do is clean that slate and allow them to get
back to work.
3:53:30 PM
Finally, Commissioner Fisher said, this is an issue of the
state's credibility: on the right-hand side of slide 3 was a
cartoon figure of a moose holding a wad of cash, a document that
was used by the state to try to attract producers to come to
Alaska. The sentences under it said: "For the entire lifecycle
of your project, the State of Alaska is there for you. We do not
just talk big, we follow through big - with cash! Here is what
you can expect when you come to Alaska:" and then it listed the
attributes of the program.
People were trying to get the word out, and statements like this
combined with a practice of paying the credits on a current
basis induced people - very sophisticated organizations - to
invest in Alaska. He thinks as a matter of ethics and honor that
these credits should be addressed.
COMMISSIONER FISHER related that the administration reached out
to a number stakeholders in developing this bill and one was a
bank that has historically lent into this space. The first
comment the individual made was that the bank was not lending to
Alaska. When asked why, he answered that the outstanding debt is
not performing; any new debt has to go to the same credit
committee that knows it's not performing. So, they have closed
Alaska off to future lending. They understand how Alaska got to
this point and view the bill as a mature and sophisticated
response to resolving the credit issue.
3:56:30 PM
SENATOR WIELECHOWSKI said the commissioner acknowledged that
these are very sophisticate investors and he assumed that they
read the law before investing tens of millions of dollars or
more. The law says it's subject to appropriation and then
subject to payment by the director: both are totally
discretionary. The state has actually paid every penny it is
statutorily obligated to pay.
COMMISSIONER FISHER responded that he is exactly right. This
program does not contemplate the state's perspective to be that
it is worse off than the statutory formula. This program invites
credit holders to accept a discount, so that the net present
value of their payments and the state's obligations under this
bond are actually neutral or modestly improved. His point is
that this is viewed as a mature and sophisticated response is
that it allows the credit issue to be cleaned-up and it allows
the small producers to go back to work. It really doesn't cost
the state anything, because the small producers themselves are
accepting a discount and that is paying for the cost of
financing the bond program.
3:58:07 PM
SENATOR STEDMAN remarked that his conversation with some of the
bankers is that they missed the appropriation risk in their
underwriting, but here the state is with a one-billion-dollar
mess in its lap that needs to be cleaned up; the banks will
tighten up underwriting going forward. There is enough finger
pointing to go around both sides of the table.
COMMISSIONER FISHER agreed with that perspective, but his only
point is that the administration is trying to balance all
interests in a way that is fair and reasonable, and he hopes to
persuade the legislature and Alaskans that this is a prudent
approach.
COMMISSIONER FISHER turned the discussion over to Ken Alper to
talk about the history and the background of the state's tax
credits.
3:59:54 PM
MR. ALPER said slide 4 provides a thumbnail history of the tax
credit background to walk through the intent perspective of some
of the tax credits that got added over time and built upon each
other. The first was an exploration tax credit that was started
in 2003, and that was still during the era of a gross based tax;
it had no cash payback element. It was only used to offset taxes
and was intended to bring new exploration, primarily on the
North Slope.
In 2006, transferable and cashable tax credits came with in the
Petroleum Production Tax (PPT) bill, along with the transition
to the net profits-based tax. New credits specifically targeted
capital expenditures (the state wanted people to spend money in
pursuit of oil) and operating loss credits, which in some ways
was the mirror-image of a net profits tax. A profitable company
that spends incremental money is reducing their profits and
therefore reducing their tax basis; a company spending without
production is losing money: so, that credit was a percentage of
their spend roughly equivalent to what their tax rate would have
been, and as a result, a similar economic benefit of losses
equal to the benefit of spending to a profitable company. This
incentivized new field developers all of a sudden not just
explorers. Embedded within that was the idea of a repurchase
where the state would not just give you a credit that you could
use or sell to another producing oil company but would actually
buy them back within certain constraints that originally went up
to $25 million/company/year.
A year later, the Alaska's Clear and Equitable Share (ACES) bill
revisited some of the assumptions in the PPT bill; one was that
the limitation was creating some market problems. Anecdotally,
the prices being offered for credits by the major producers was
lower than some felt comfortable with at the time and they
started looking at substantial surpluses. The cap was deleted as
to how much could be spent per company and instead a cap was put
on the appropriation. A statutory formula and a specific fund
was created to establish and hold the tax credit repurchase
money known as the ".028 Fund" for AS 43.55.028. It established
that some percentage of production tax revenue should be set
aside into the fund for the repurchasing purposes.
MR. ALPER stated that formula was routinely ignored for nine
years. Between FY07 and FY15 the budgets that were passed were
appropriated the full amount, and there never was any intent to
limit what the state spent. It was completely governed by what
the companies were asking for. It wasn't until FY 2016 that
those caps first started to come into play, and maybe by 2013/14
people had forgotten that there was a statutory formula cap at
all. But there they were!
In 2010, the Cook Inlet Recovery Act was a different incentive
targeted at the looming gas supply shortages for utility gas in
South Central Alaska - Anchorage, Kenai, and MatSu. It was a
very large credit tied to drilling-specific costs, but because
Cook Inlet already had a very minimal tax regime, there was
never was never an expectation of substantial revenue coming
from the oil and gas production there. Those credits were never
expected to generate new revenue the way the North Slope taxes
were expected to lead to new production and royalty for the
state. This credit was truly for preservation of a livable
lifestyle in South Central Alaska, which relies on gas for heat
and electric. That in some ways created a portfolio of credits
that was out of scale with the formula in the statutory
appropriation, because no one contemplated all the Cook Inlet
credits when the formulas were put in statute.
In 2013 the legislature passed SB 21, a North Slope-only tax
reform bill that was primarily a tax cut. It eliminated the
capital expenditure credit and replaced it with the per barrel
credit, which was tied to the price of oil and the amount of
production that a company might have. That made a fundamental
change in how credits were used on the North Slope, but all the
credits under SB 21 remained cashable just as they were under
ACES with the exception of that per barrel credit, which could
not be cashed out or carried forward or used generally below the
minimum tax level.
4:05:19 PM
More recently, in 2016/17, HB 247 reduced and eliminated the
credits for Cook Inlet - the state sort of declaring victory in
its war on the gas supply shortage. It also put some limitations
on the new oil benefits that were part of SB 21. Finally, HB 111
wound down the program completely to where the state would no
longer issue cashable tax credits. They eliminated the net
operating loss credit, the single largest-used credit and
replaced it with a new system of carried-forward lease
expenditures that companies will be able to use once the
underlying leases were brought into production. It was a
substantial change for the explorers and developers, although it
didn't materially affect the tax status of the incumbent major
producers.
4:06:15 PM
What have these tax credits done? They have helped heat
Alaskans' homes. Hilcorp took over aging Cook Inlet assets and
put a lot of money into their restoration, increasing production
and squeezing more productivity out of what some people were
beginning to write off. Now suddenly, there is no longer a
supply anxiety in Cook Inlet.
New companies came into Alaska looking for gas: Bluecrest and
Furie being the most prominent examples. (Mr. Alper said he gets
a little bit of leeway regarding confidentially, as these
companies had outed themselves as users of the tax credit
program, and he could talk more about specifics in a public
forum.)
4:07:36 PM
On the North Slope, the state has created the potential for
substantial new production: new oil and jobs. Pikka is Armstrong
and Repsol's field with a new partner called Oil Search, Ltd.
The Nuna field, which is an expansion to Oooguruk, is a Caelus
field originally developed by Pioneer. All those things feed
into the Governor's stimulus goals for jobs and additional
revenue - although the production tax from a new oil field in
its early years of production is relatively low in large part
because of the gross value reduction. However, they are paying
royalties from day one and that is a substantial revenue stream
for the state. The production tax benefits of the gross value
reduction go away after three to seven years, and then the tax
will start to increase to the state. All that revenue funds
government services.
SENATOR STEDMAN commented that some legislators have sat here
for a decade or so and struggled with trying to rejuvenate Cook
Inlet to prevent brown outs in the Railbelt area, but one of the
things they rarely mention is the impact of the Regulatory
Commission of Alaska (RCA) and deregulation of pricing. As they
attempted to stimulate Cook Inlet, and quite frankly
overstimulated it, the RCA allowed the price to flow more. Once
that kicked in, there was more gas in Cook Inlet than they know
what to do with. Looking at this in hindsight, about every two
years they were here at the Resources Committee to try to
stimulate Cook Inlet with everything they could think of.
MR. ALPER said it's not part of their pitch, but he is inclined
to agree with the Senator on some of the history.
SENATOR STEDMAN asked if they go forward with the bond package,
would all the participants in it remain confidential.
MR. ALPER replied not necessarily. Part of HB 247 is an annual
report to the legislature of how much a specific company
received in cash from the state in the previous calendar year.
The first report was issued last March and they will have a
similar report in a month or so with the 2017 totals. As
expected, that number will be around $77 million, most of it
going out in August/September. If all this money is spent in
2018 to finance credits, the state interprets the law to say
that the state would put that in the subsequent years' annual
report.
4:11:51 PM
MR. ALPER said slides 6 and 7 summarize the state's total
purchases to date: actual cash out the door is $3.6 billion. Of
that, some has gone to companies that aren't yet in production
and may never be in production (for example: failed exploration
and companies that have left Alaska). But 16 companies have
received credits who now have new production of about 175
million barrels of oil equivalent, much of it gas, through the
end of CY16. That is the best comprehensive data they have, and
production is split evenly between North Slope and the non-North
Slope (the new North Slope fields that came on in the last 8 or
10 years fall in this category and the new gas wells are the
worked-over gas wells that he noted in the last couple of
slides).
Slide 7 is about where the state is now, which is holding $806
million in credits, about $500 million of that North Slope and
about $300 million non-North Slope. Among that $800 million, are
$60 million of "conditional certificates." These are exploration
requests that have not been fully reviewed and vetted and
issued. Per the changes made in HB 111 last year, the DOR issues
a certificate at the time of application for the purposes of
getting them in the queue. These have to be finalized and may
have some small dollar adjustments before being bought under
some program.
4:14:08 PM
MR. ALPER said in the next 10 years they expect another 106
million barrels from fields currently producing and another 23
million from the fields not yet producing; adding that to the 86
million that already happened, they see 215 million barrels of
oil on the North Slope coming directly from the tax credit
program.
In Cook Inlet, (there is no Middle Earth production in the
forecast), all the current oil and gas production has benefited
from these credits. There is no question about it. Roughly
speaking, the ongoing production to meet the needs in the
Railbelt is 90 billion cubic feet per year, which works out to
15 million barrels of oil equivalent. Additionally, the oil from
the Cook Inlet has increased in the last several years and now
works out to about 5 million barrels per year. That number could
go up; Bluecrest might talk about some of their upside, for
example. But that 5 million plus the 15 million oil equivalent
of the gas is about 20 million times the 10-plus years in the
forecast added to what we already have, for about 300 million
barrels of oil equivalent incentivized from oil and gas tax
credits in Cook Inlet. The sum-total is over 500 million
barrels.
SENATOR STEDMAN wanted to know the non-North Slope total credits
and total severance and royalties and when the severance and
royalties will equal the credit expenditures.
MR. ALPER said he would do his best to get the answer for him,
but the answer for Cook Inlet is probably many years. On the
North Slope, he imagined a payout in a more reasonable period of
time, because the taxes in the Cook Inlet just simply won't
support the credit expenditure. The royalties, however, will,
but it will take longer.
COMMISSIONER FISHER continued on to slide 8 that gets into the
real proposal. It indicates the estimated statutory payment for
FY19-FY25. The statutory minimum is a formula based on the
production taxes that the state levies and the threshold is
$60/barrel. If it is at $60/barrel or higher, then the statutory
minimum is 10 percent of production taxes and if it's less than
$60 then it's 15 percent. It's important to say these figures
will be updated in the spring forecast that will be issued in
mid-March. The schedule has caused, in some cases, a cessation
of activities by small producers as they have struggled to
maintain financial viability.
SENATOR WIELECHOWSKI noted that the FY19 estimated statutory
payment is $206 million and the statute, AS 43.55.028(b)(1),
says that the money appropriated to the fund including any
appropriation of the percentage...is based on revenue of taxes
levied under AS 43.55.011, which is the oil and gas production
tax formula. But the revenue forecast for oil and gas production
tax in FY19 is $338.8 million. When he multiplies that by 15
percent, he gets $50,700,000, not $206 million. That figure is
actually high, because it includes the Hazardous Spill Response
Fund. It's probably closer to $48 million. So, it looks like
that number is overstated by $158 million.
4:19:33 PM
MR. ALPER responded that the math he was about to describe is
not new methodology; it has been used for the last three years
(for as long as it has been relevant, because the legislature
paid them in full before then). Section .028(b)(1) says the
percentage of the revenue from .011, and that has been
interpreted to mean the actual tax calculation, which is 35
percent of production tax value prior to the application of any
credits. Thirty-five percent of production tax value in FY19 is
in the neighborhood of $1.3 billion, and about $1 billion worth
of primarily per-barrel credits will be offset against that,
which results in the approximately $300 million in revenue that
is in the Revenue Sources Book. It's that $1.3 billion times the
15 percent, and the 15 percent is used because the forecast oil
price is $57/barrel, which is less than $60/barrel. That is
where the forecast gets the $206 million.
SENATOR WIELECHOWSKI said that is not how he recollected the
legislation was passed. The state could theoretically get into a
situation where 100 percent was engulfed in paying out taxes and
that was never the intent (recalling previous testimony from the
administration). It was never the intent to allow two-thirds of
the state's production tax revenue to go to paying tax credits.
MR. ALPER said it would come up again as they go through the
sectional analysis, and the portion of the bill that describes
the mechanism for calculating the anticipated cash flow to
producers, and therefore how the buyout amount is calculated,
presumes the same calculation that get them to the $206 million.
It repeats the language in a way that clarifies what Senator
Wielechowski is pointing out: it's before the application of any
credits. If the method he is suggesting were used in the bill,
and the payout was in the neighborhood of $50 million per year,
it would take 16 years to get through $800 million and they
would start seeing very reduced and probably unacceptable buyout
amounts to companies because of the compounded discount rates
over 16 years. There is some imperfect clarity in that section
of the language, which was corrected for the purposes of this
program in the new sections added by the bill.
4:22:22 PM
COMMISSIONER FISHER reiterated what Mr. Alper said, which is
that this is not a change to the way the administration has
calculated this and has published in the Revenue Sources Book
for a number of years. The appropriations that have been
submitted by the administration and approved by the legislature
have been based on this formula; the debate has been following
this formula. In his mind, this is another opportunity for the
state to either help or harm its reputation if the result of
this process is that in the very year where these credits are a
meaningful amount, the state chooses to reinterpret that and
reduce it again. It sends a signal to the industry that whenever
it's in the state's interest it will reinterpret the law to
favor itself. It is dangerous to do that.
4:23:48 PM
COMMISSIONER FISHER went to the slide 9 hypotheticals: if you
assume a credit holder has $100 million in credits that are
payable over a four-year period in equal amounts of $25 million,
the program offers two alternatives to that credit holder. The
lower discount rate is estimated to be 5.1 percent; that
represents the state's cost of borrowing and has two components:
the DOR has estimated, based on current market conditions, that
it would cost about 3.6 percent to borrow the money (interest on
the bonds plus the cost of issuance), and 1.5 percent has been
added as a cushion to come up with an estimated state cost of
borrowing of 5.1 percent. The 10 percent number is somewhat
arbitrary: it is roughly a mid-point between the state cost of
borrowing and their estimate for the weighted average cost of
capital for the credit holders. The 10-percent discount rate is
the base rate under the bill. So, if a credit holder does
nothing, the DOR's offer to them would be discounted at 10
percent.
To qualify for the lower discount rate of 5.1 percent, the
credit holder must give the state one of four additional
benefits: first, they have to agree to give the state on
overriding royalty interest, they have to commit to reinvest
this money in Alaska within a 24-month period, or if they have
seismic data that has been the subject of the credits they have
to agree to an early waiver of the 10-year term of
confidentiality for it. Finally, there are two credit programs
that are modest in size and a little different than most of what
they have talked about: one is capital investments in refineries
and the other is gas storage credits associated with the
Interior Energy Project (IEP); those would qualify for the lower
rate by definition. He provided two examples of payment options
on slide 9.
COMMISSIONER FISHER said someone might ask why a credit holder
would accept $87 million for $100-million worth of credits, and
the answer is: they need the money now. And even though 10
percent is materially above the state's cost of capital, but the
department believes it is less than a credit holder's cost of
capital. This means if they can't secure this financing at a
lower cost elsewhere, that would make them more inclined to
accept the discount. When the state pays them $87 million, it
would turn to the financial markets and borrow the $87 million.
He explained that the present value of payments to the bond
holder and the payments under the debt would be roughly the
same. In fact, under the 10 percent discount, the state is a
little bit better off; under the 5 percent discount the payments
between the those two are neutral. Of course, the state has
received some other benefit: the overriding royalty interest
which would be intended to have an equivalent value to the
roughly $6 million difference between the 10 percent discount
and the 5.1 percent discount rate in this example. Under either
scenario, the state would be covering its costs through the
discount rate that the credit holder would accept.
4:29:32 PM
Slide 10 walks through how the mechanism would work. Before
issuing bonds, the state would secure a commitment from the
credit holder to participate in the program. That requires the
department to estimate what proceeds would be available to them
under the various scenarios and then credit holder would have to
make an irrevocable commitment to participate.
COMMISSIONER FISHER said the reason the irrevocable commitment
to participate is important is before going to market and
issuing the bonds, he wants a precise number for the debt. Once
the commitment is received the state would issue bonds. Of the
current outstanding $806 million in credits, the department
estimates $100 million worth will likely be purchased by the
majors to offset other tax liabilities that they have, leaving
about $706 million to be addressed in the first issuance of this
program. That would result in a bond issuance in the range of
$618 million to $660 million, depending on the discount rate
that is applied.
COMMISSIONER FISHER said the state could be in the bond market
by August or September with this program, assuming this bill
passes by May. In the future, additional issuances will made as
additional credits become due, and estimate in the neighborhood
of $200 million over the next three successive years.
SENATOR VON IMHOF asked what the irrevocable commitment means
and when it has to happen.
COMMISSIONER FISHER replied the department would give the credit
holders notice and a period of time for closing of about two
weeks before issuing the bonds. "Irrevocable" means at that
point they are bound to accept that offer from the state, so it
can rely on it for the bond issuance.
SENATOR VON IMHOF asked if they were talking about issuing bonds
in late July.
COMMISSIONER FISHER answered late July or early August.
MR. ALPER said the lower discount rate is an estimate for
today's purposes. The exact rate will not be known until the
bonds are sold, but commitments will be made based on the DOR's
best estimate two weeks before. To the extent there is any
interest rate risk, it's whatever happens in that two-week
period.
SENATOR VON IMHOF remarked that she hoped the state wouldn't go
under water in that two-week period.
COMMISSIONER FISHER replied that they are confident that the 1.5
percent cushion built into the offerings would cover any
interest rate movement between the commitment and issuance.
SENATOR VON IMHOF said okay.
4:34:17 PM
SENATOR WIELECHOWSKI asked "how it can be constitutional to do
this?" Article 9, Section 8 says no state debt shall be
contracted unless authorized by law for capital improvements or
for housing loans for veterans and it is ratified by a majority
of the voters.
Section 11 has exceptions, but those say the restrictions on
contracting the debt of Section 8 do not apply to debt incurred
through the issuance of revenue bonds by a public enterprise or
public corporation of the state or political subdivision when
the only security is the revenues of the enterprise or
corporation.
He said the commissioner had testified that this is not a
revenue bond, that no security is offered, and that no revenue
will be generated by an enterprise or corporation. "This clearly
violates the constitutional prohibition on bonding," Senator
Wielechowski said.
COMMISSIONER FISHER invited the DOR State Investment Officer to
comment on this issue.
4:35:15 PM
DEVEN MITCHELL, State Investment Officer, Depart of Revenue
(DOR), said Senator Wielechowski is right that this wouldn't be
a constitutional debt like general obligation debt. He has heard
lawyers refer to it as "lower case "d" debt." It would be
similar to an Alaska Housing Finance Corporation (AHFC)
obligation: they are creating a public corporation that would
enter into a contractual arrangement with the state and that
arrangement would formulate a commitment of the state to pay,
and that commitment to pay would be pledged to third parties
that would purchase the state's bonds - similar to the financing
of the Goose Creek Correctional Facility, which was a revenue
bond of the MatSu Borough that didn't pledge anything except for
the state's commitment to pay through a lease the state entered
into with the borough.
The commitment to pay is subject to an appropriation commitment;
it's a pledge to third parties; it's the basis of the rating on
those bonds and the basis of the investors' risk in waiting.
4:36:36 PM
SENATOR WIELECHOWSKI said he asked the Division of Legislative
Legal for an opinion, but he hadn't received it yet. It just
seems like a really questionable way of circumventing the
constitutional prohibition against bonds. You could
theoretically say we have a $2.5 billion deficit and we're just
going to issue a bond that is subject to legislative
appropriations, which is exactly what the constitutional
founders wanted to prohibit.
MR. MITCHELL responded that, as Senator Wielechowski pointed out
earlier, the state has a variety of public corporations that
have that power. The Alaska Pension Obligation Bond Corporation,
for instance, has the ability to issue $5-billion worth of state
funded debt that is on the books right now.
SENATOR WIELECHOWSKI said that is because AGDC and AHFC have
potential revenue. Pension obligation bonds sought to get
revenue by investing the money at an 8 percent rate of return.
4:37:26 PM
COMMISSIONER FISHER said this is an important conversation and
the department feels comfortable with its position. The bond
counsel still has to issue an opinion and he is happy to engage
in a debate. He suggested tabling the issue and coming back to
it after a section analysis.
4:38:34 PM
SENATOR BISHOP said taking an overriding royalty position in
return for these discounts was mentioned earlier. Correct?
COMMISSIONER FISHER answered yes.
SENATOR BISHOP said, "Well, there's your linkage."
COMMISSIONER FISHER responded it could be, depending on what
percentage of credit holders use that function.
4:39:06 PM
COMMISSIONER FISHER said slide 12 was about details of the bond;
it would be a 10-year term; the all-in cost would be a little
over 3.6 percent. It has been modelled using two years of
interest only, three years of growing increased debt service,
and five years of a flat amortization at the end - for the
initial debt. Successive years would be interest-only paid "with
a bullet at the end."
4:40:28 PM
Slide 13 models the numerics of the statutory payment schedules
and the amount of payments annually. Comparing the statutory
minimum amount to the aggregate, one sees a couple things:
first, in every period between now and FY25, the amount of
payments would be less but obviously go longer. The large
amounts are not paid out in the next couple of years, which has
a number of helpful features. First, it allows the state a
little more time to deal with its current fiscal challenges,
giving the legislature a chance to see where the state's funding
will come from, and the costs are shifted into periods where the
state could be expected to have revenue to cover them. In
addition, the present value of these two streams - the statutory
payment and the aggregate stream - are either favorable or
neutral to the state, because of the discount options.
SENATOR STEDMAN said the schedule could be crafted in a lot of
ways and that he liked the idea that the department is trying to
deal with "this billion-dollar mess," but he personally didn't
like the interest-only aspect. He was concerned also about
shifting this problem down the road to the next governor and the
governor after that. The state could bite the bullet over the
next two or three years and make the payment schedule shorter
and get it over with. Everyone knows the money is going to come
out of the Permanent Fund to run the state in the next couple of
years. "We created this mess, we should clean it up, and leave
the budget to the next legislature in the best position
possible."
SENATOR VON IMHOF wanted to build on what Senator Stedman just
said and asked if there is a way to do a hybrid of the proposal:
the discount makes sense and going out in the bond market makes
sense, too, but having more aggressive payments. The totals
indicate the state will pay a couple hundred million more by
eeking this out over the extra five or six years. She
understands that by delaying the payment and doing interest-only
helps the current cash flow, but she thinks if there is a way to
model the payments in five or six years, they could just be done
with it.
4:45:34 PM
COMMISSIONER FISHER said he could certainly model any of those
scenarios. In the interests of simplicity, he pointed them to
the third column from the right on slide 14 that is titled
"Current Total Payments to Revenue." That column includes the
payments to revenue under state debt obligations, state
supported debt service (for things like lease/purchase of the
Atwood Building or supporting the Goose Creek Facility through a
lease commitment, school reimbursement programs, statutory
payments under PERS and TRS, as well as these credits). So,
starting in FY19, those add up to 35 percent of revenues and it
declines down to 20 percent of revenues out to FY27. Out of that
35 percent in FY19, 10 percent of that is these credits, and
under this financing program, that would become 1.3 percent. So,
the state is actually in a period (between now and 2024) where
35 to 31 percent of revenue is consumed by these other expenses
that don't fund daily state government operations; they go to
commitments the state has made. This program has the ability of
smoothing out the overall payments, and while it does that by
shifting them into the future, it creates a flatter schedule
that may be more appropriate. However, he said this is clearly a
decision for the legislature to address.
4:48:31 PM
Slide 15 was a recap of the proposal which is an economic
stimulus: they expect most of the credit holders will
reinvestment in Alaska; it supports small producers and
unfreezes some of their projects; and it reestablishes Alaska's
reputation. The commissioner added that as these entities
reinvest and continue to pursue their projects, production is
expected sooner than otherwise projected, which results in
future royalties, jobs and other benefits. It moves the cost
into periods where the cost and cash flow will be better
matched.
4:50:07 PM
At ease
4:50:21 PM
CHAIR GIESSEL called the meeting back to order and invited Mr.
Alper to provide a sectional analysis of SB 176.
MR. ALPER said the bill is conceptually three different things;
it creates a bond corporation, makes certain amendments to tax
credit statutes, and creates the mechanism to buy them back.
Another section deals with the idea of overriding royalties, DNR
statutes, at the end of the bill.
Section 1 exempts the overriding royalty interest as well as the
bond corporation from the Procurement Code. This language is in
a lot of bills.
Section 2 is many pages long and creates a new chapter AS 37.18,
which establishes the Alaska Tax Credit Certificate Bond
Corporation within the DOR. This new entity parallels almost all
the language that created the Pension Obligation Bond
Corporation in previous legislation. He emphasized that these
subsections and components were not made up on the fly; there
was precedent for all of it.
MR. ALPER continued explained that they are creating a
corporation, so it needs a board of directors, which is three
department commissioners, including the DOR commissioner. They
are authorized to issue bonds of up to $1 billion and then have
a reserve fund, the vehicle through which the money that goes to
pay the interest on the bonds passes through, as well as the
money that passes through to the companies from the credits are
bought. It authorizes the corporation to set the terms of the
bonds and has a sunset date.
Should the legislature move around some of the assumptions about
the bond, the payback schedule, what's interest only and what's
not, presuming that the discount rate stays the same, Mr. Alper
said that will not change any of the offers to buy credits from
the companies. The present value of all the variations should be
about the same. The part where they are valuing the credits is
not going to be impacted by putting in either a five-year or a
ten-year schedule. It's just a matter of the future state cash
flow in having to pay down on the principal and interest
payments on those bonds.
MR. ALPER said the proposed corporation must adopt a resolution
to approve the bonds (AS 37.18.060) and certain enforcement
rights to the bond holders. The bonds may not be issued unless
the discount rate is at least 1.5 percent greater than the total
interest cost. This gives the state protection that it won't
lose money through arbitrage or anything else. The Pension
Obligation Bond Corporation has a similar provision. The amount
the state expects to earn should be greater than the amount it
will pay. Bonds are legal instruments.
He didn't like the language: "This chapter shall be liberally
construed to carry out its purposes," which is legal language to
say that we understand what we are supposed to do with this and
we are going to do it. The corporation may adopt regulations as
necessary and the definitions.
MR. ALPER said he was not the most qualified person to talk
about the details, but someone from Treasury would be happy to
talk in greater detail about section 2 if needed.
4:53:43 PM
He said sections 3, 4, and 5 are all parallel construction
amending the three existing tax credits in the corporate income
tax statutes (AS 43.20.): the Kenai Gas Storage credit program,
the LNG storage credit for the Interior Gas Utility, and the
refinery infrastructure credit. All are written so that they can
be paid out of the .028 Fund. Those are amended and conformed to
say the credits can be bought using the proceeds of this bond
program.
SENATOR WIELECHOWSKI asked if this corporation will actually
have an office and people working in it or is it just sort of a
"dummy pass-through corporation" to avoid the constitutional
prohibition on GO bonds.
MR. ALPER answered there would be no staff or office; this is a
subsidiary of the existing Treasury Division that has a lot of
bonding programs. The fiscal note has $2,500 which is basically
an annual registration charge associated with having this bond
out there. He wouldn't characterize it as circumventing the
constitution.
SENATOR STEDMAN asked him to clarify the comment about how some
of the other credits are tied into this bond package.
MR. ALPER said those three corporate income tax credits are not
in AS 43.55 and a small amendment was needed to say they could
also be paid out of this bond proceeds mechanism, which isn't
directly passing through the .028 Fund.
SENATOR STEDMAN said this is a bigger target than just the
credit balance.
MR. ALPER answered no; those specific income tax credits are
already in the universe they are talking about. The $806 million
includes any refinery credits, and when they talk about the $200
million of credits yet to come even though the program has
sunset, they are talking about the last half year or so of
cashable credits that were earned before the sunset in HB 111 as
well as the last couple of years of the refinery credit, which
sunset in 2019, and the Interior Gas Utility credit, which
sunsets in 2020. Those are already presumed to be eligible under
the program, but their enabling statutes need to be amended to
make sure they are eligible to get the bond cash.
4:57:11 PM
He said sections 6 and 7 are the parts of the Tax Credit Fund,
itself, that talks about how cash is used. Specifically, the
money is used to purchase tax credits that comes from direct
legislative appropriations; the money from the bond proceeds can
also be used to purchase tax credits. It's conforming language.
Section 7 references a provision that was added by HB 247, the
so-called "Haircut," that puts a $70 million cap on how much a
given company can get in a year, and says of that $70 million,
the second $35 million, if the company wants it, will have to
take a reduction in value. This program is being exempted from
that Haircut. He clarified that obviously if there is a company
with a large number of credits, they would expect they would be
getting more than $70 million and want to make sure that that
cap language does not apply to the bond program. It just applies
to the traditional tax credit appropriations.
Section 8 is a definitions section. The important definitions
are: "money disbursed by the commissioner," which means the bond
money and "total interest cost" is a fiduciary term meaning the
cost of the interest plus the financing and creation cost
(management costs of doing the bond issuance). The rate in the
final bond will be the total interest cost plus 1.5 percent.
4:58:54 PM
Section 9 has to do with another section added into HB 247 that
says if a company has an obligation to the state through unpaid
royalties or fines, in addition to taxes the state could offset
their tax credits to pay these state obligations to a state
agency. This authority has always existed and is being extended
to include this new program.
Section 10 is the guts of the bill; the new changes and several
new subsections create the authority to go through the purchase
mechanisms for this bonding program. It creates new
.028(k)(l)(m) and (n):
.028(k): how a company makes the irrevocable
commitment of credits to the program. It also says
they have to offer all their certificates or none at
all. It also says if they choose not to participate in
the first round by the cutoff date, July 1, 2018,
those credits are not eligible for the second round of
financing.
MR. ALPER explained that the department tried to be as flexible
as possible but got a little restrictive here because their
modeling indicated the possibility of gaming the system. Someone
could choose to not participate hoping that a bunch of other
people do; clear the decks, get rid of all the credits in line
in front of them; and improve their position if they chose to
participate in a second round of financing.
.028(l) creates the expectation of cash flow for the
companies. It creates new definitions of "assumed pro-
ration methodology" and "assumed appropriation." In
other words, it references the statutory
appropriation, and given how many credits a particular
company has and what year they came in, and therefore
where they fit in the rank order of the credits in the
pro-ration among all the other credits from that year,
when they would expect to get their money. It empowers
the department to figure out what the cash flow would
be. Then it will be discounted at the rate to find in
subsequent section (m).
He said the department gave the companies a
preliminary analysis of what their expected
appropriations would be and what their discount would
be so that they could participate in this conversation
during the session.
5:02:19 PM
.028(m) says the discount rate in which a present
value will be established to pay a company off is 10
percent unless one of the four criteria are met:
1. one of the corporate income tax credits
2. the overriding royalty interest
3. the commitment to reinvest all the proceeds within
the state within 24 months. This requires the
commissioner to sign off on this being an acceptable
commitment on them being able to get a higher buyout.
4. the waiver of the 10-year confidentiality period
for those companies holding the seismic credits.
MR. ALPER explained that .028(m) doesn't "hard code" the 5.1
percent. It says total interest cost plus 1.5 percent, which
gets determined closer to the date of issuing the bonds.
.028(n) says once the credit is bought at something
less than face value, the remnant amount (the 13
percent not being bought) retains no value. It expires
by selling the rest to the state at a discount.
5:03:37 PM
Section 11 is about overriding royalty interests. It authorizes
the commissioner of DNR to negotiate these. If a company chooses
to offer a royalty interest, which would be a share of the value
(not an ownership interest in oil); it's a financial quasi-
royalty often used in industry when someone sells a lease to
another company, they might retain an overriding royalty
interest. For example, an offer is made. There is a method by
which DNR values it, risks it, and considers the likelihood of
it playing out and becoming real production. In the context of
Commissioner Fisher's slide with $87 million scenario or the $93
million scenario, that royalty has to have a present value to
the state of at least $6 million to warrant giving the
incremental cash to the company for it.
5:04:38 PM
Section 12 is regular regulatory language authorizing both
departments to write regulations.
Section 13 allows those regulations to be retroactive to the
effective date should it take longer than that to write them.
There is an immediate effective date on the bill. It isn't
usually in their bills, but the commissioner mentioned wanting
to go to the market in August and it would take 90 days to get
all the pieces ready to be able to do that. So, they would like
to have the statutory authority to be preparing for it at the
end of the legislative session.
5:05:26 PM
CHAIR GIESSEL thanked the presenters for explaining the bill.
She held SB 176 committee and said she looked forward to getting
the answers to the committee's questions.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CORRECTED Senate Resources Agenda - 2 - 21 - 2018 .pdf |
SRES 2/21/2018 3:30:00 PM |
|
| SB176 - Version A.PDF |
SRES 2/21/2018 3:30:00 PM |
SB 176 |
| SB176 - Sectional Analysis - Dept of Revenue - 2 - 21 - 2018.pdf |
SRES 2/21/2018 3:30:00 PM |
SB 176 |
| SB176 - Fiscal Note - Dept Natural Resources - 2 - 21 - 2018.pdf |
SRES 2/21/2018 3:30:00 PM |
SB 176 |
| SB176 - Fiscal Note - Dept Revenue - 2 - 21 - 2018.pdf |
SRES 2/21/2018 3:30:00 PM |
SB 176 |
| SB176 - Presentation from Dept Revenue to Sen Resouces Comm - 2 - 21 - 2018 .pdf |
SRES 2/21/2018 3:30:00 PM |
SB 176 |
| SB176 - Transmittal Letter.pdf |
SRES 2/21/2018 3:30:00 PM |
SB 176 |
| SB176 - Supporting Document - Opinion Piece AK Journal Commerce - 2 - 21 - 2018.pdf |
SRES 2/21/2018 3:30:00 PM |
SB 176 |
| SB176 - Supporting Document - Dept Revenue Graph - 2 - 21 - 2018.pdf |
SRES 2/21/2018 3:30:00 PM |
SB 176 |
| SB176 - Response from DOR, Law to Questions in Committee - 3 - 2 - 2018.pdf |
SRES 2/21/2018 3:30:00 PM |
SB 176 |