Legislature(2001 - 2002)
05/03/2001 06:56 PM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 186
"An Act establishing a limit on the general obligation debt
that may be authorized and issued by home rule and general law
municipalities; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Donley moved to adopt CS SB 186, 22-LS0851\C as a working
draft.
There was no objection and the committee substitute was ADOPTED.
Co-Chair Donley testified this bill would set limits on bonding
exposure to local governments in Alaska by placing a $10,000 per
resident ceiling on municipal general obligation bond debt. He
noted the bill also limits the mil rate to one-percent for oil and
gas property tax for municipalities with a per capita assessed
value of property over $500,000.
Co-Chair Donley stated this legislation is partially in response to
the recent Bullock vs. State of Alaska, Alaska Supreme Court
decision. He noted this legislation would not impact any existing
bonded debt and would only apply to additional debt incurred by a
local government after the effective date.
Senator Wilken asked why the bill has no fiscal note other then the
indeterminable fiscal note and analysis submitted by the Department
of Revenue.
Co-Chair Donley surmised there would be a fiscal impact to the
state but that it would take several years before there was a major
impact.
Senator Wilken suggested the Committee could issue a fiscal note
for the Department of Revenue to assist in consideration of the
bill.
SFC 01 # 93, Side B 07:56 PM
AVRUM GROSS, Attorney representing the North Slope Borough,
testified to the 20 years he has represented the borough primarily
on this and related issues. He asserted this bill is aimed at the
North Slope Borough (NSB) as a result of the Bullock case and would
prohibit the borough from issuing any bonds for the next ten to 11
years. He added that it would prohibit the borough from refinancing
existing bonds even if lower interest rates could be procured,
which would save the borough money.
Mr. Gross told the Committee the bill contains language in the
committee substitute, which he did not understand.
Mr. Gross expressed, "You must realize that this is a life and
death bill as far as the North Slope Borough is concerned."
Mr. Gross gave a background on the statute this bill would change,
which he said came out of a legislative special session in 1973
called by Governor Bill Egan because delays to the Trans-Alaska
pipeline project were threatened. This special session, Mr. Gross
reminded, was called to resolve lawsuits filed by oil companies
against the state in response to legislation adopted during the
1972 regular legislative session that attempted to regulate the
pipeline in ways the oil companies "found offensive." He informed
that he was present at this special session as council to the
Atlantic Richfield Company.
Mr. Gross recounted the special session addressed the regulation of
the pipeline, which he said was removed and that the "state caved
in on its ability to regulate the pipeline." In addition, he
informed, the special session addressed the matter of taxation,
specifically property taxation of the values that would be created
by construction of the pipeline and related facilities along the
pipeline from the North Slope to Valdez. He stressed that other
taxes were already established to "make sure that the oil wealth
would be spread across all the citizens of the state." He listed
severance, income and royalties, as these taxes, noting they remain
in existence and generate revenues from oil production for the
state.
Mr. Gross pointed out two issues that arose in this special
session; "how much the oil companies should pay" and "who they
should pay it to." He stated that property taxes are traditionally
municipal taxes and are the way local governments are financed.
However, he stated, some argue that during the time of the special
session as well as in the present, that this was "too much for too
few" and that it would be unfair to let the citizens of the NSB,
Valdez, Fairbanks, and other communities along the pipeline route,
to tax these properties in the same manner other property is taxed
across the state. He listed salmon canneries in Kodiak and Bristol
Bay, and office buildings in Anchorage and noted these communities
do not share the revenue garnered from property taxes on these
properties with the state. The fact that one municipality has more
property than another, he stated, up to the point of the special
session had never been considered an issue.
Mr. Gross told the Committee the special legislative session
resulted in some compromises. He said the first agreement was that
oil companies would pay 20 mils tax to the state on all oil
properties and that any property tax paid to municipalities would
be credited against the 20 mils owed to the state. Secondly, he
noted municipalities with oil and gas properties within their
boundaries would be allowed to tax these properties to raise money
for their operating budgets under "a very complicated formula".
Co-Chair Kelly interjected to request the witness address his
earlier statement that there is a flaw in the bill regarding the
NSB ability to bond in the future.
Mr. Gross continued that the last element of the compromise is to
allow boroughs to issue bonds based on the fair market value of the
oil and gas property within their borders and without limits. He
said the specific intent was that the NSB, which he stressed was
specifically discussed in the legislature, would be able to bond,
realizing that prior to that time the borough had no assets on
which to base bonds. He emphasized the borough had no public
facilities and that the oil and gas activities are from a
nonrenewable resource.
Mr. Gross raised this issue, he said because the sponsor testified
that the intent of the legislature during the special session has
been ignored or mistaken. Mr. Gross countered that the intent of
the legislation adopted during the special session "is crystal
clear" in stating there is no limitations on the ability of
boroughs to issue bonds based on the value of property. In
addition, he said, it was specifically discussed during the special
session that the NSB would be allowed to issue bonds to, "try to
catch up to some of the things that every other municipality in the
state has had for years."
Mr. Gross gave an example of Ketchikan, which has had
infrastructure for about one hundred years, and has bonded over
that period of time to built schools, sewer systems, parks, etc.
and would continue to do so. He informed that prior to passage of
the legislation from the special session, the NSB had no sewers,
water systems, schools, public safety facilities, fire facilities
or any other infrastructure. He remarked that the legislature was
aware of this and specifically authorized the NSB to bond, knowing
that it would be "very expensive." The NSB, he said, has
subsequently issued many bonds totaling "a lot of money". He
emphasized that because the population in the borough is sparse,
and because of higher costs for infrastructure, the per capita
bonded indebtedness is "extremely high."
Mr. Gross addressed SB 186 before the Committee saying it purports
to prohibit boroughs from issuing bonds if they have a certain
level of per capita bonded indebtedness. He stressed this punishes
the NSB for "doing exactly what the legislature authorized it to
do." He expressed, The North Slope Borough would be prohibited from
issuing bonds for ten to eleven years; any bonds, of any kind, for
anything."
Mr. Gross continued that this bill would also prohibit the NSB from
refinancing any existing bonds. He pointed out that even if lower
interest rates were available, the borough could not take advantage
of them.
Mr. Gross remarked "this is a devastating bill for the North Slope
Borough," and requested the Committee give the legislation more
review. He told the members, "You are literally going to destroy
the bonding power of the NSB if you pass this" which is a "drastic
step to take in the name of helping state finances at this late
hour."
Co-Chair Kelly countered that the earlier legislature "could have
never imagined the extravagance" with which the residents of the
NSB would utilize this bonding authority "to the detriment to the
rest of the state." He remarked that if there are technical
problems with the bill he was interested in them. However, he
expressed, "I'm having a hard time buying in to the old 'poor North
Slope' and all they're doing is what everyone directed of them
because I don't think the people back then imagined what they'd use
their bonding power for."
Mr. Gross replied the NSB has utilized its bonding authority to
produce "the kind of life that people in Anchorage take for
granted." He stressed that most residents of the state take
infrastructure items, such as sewer for granted, but there were no
sewer systems on the North Slope. He emphasized the higher
construction costs in northern regions.
Co-Chair Kelly repeated his request that the witness address the
problem areas of SB 186 regarding refinancing of current bonds.
Mr. Gross emphasized that the entire bill was a problem. He
qualified he did not understand the first section, which was added
earlier in the day. He cited Sections 6 and 7 as prohibiting the
NSB from issuing new bonds or refinancing existing bonds even at
lower rates.
Co-Chair Donley offered that if there is a way to rewrite these
sections to allow refinancing ability without extending the terms
of the bonds, he surmised the Committee would be open to it. He
suggested the witness prepare such language to accomplish this
while maintaining the intent of the legislation.
Mr. Gross asked if the sponsor's concern is that the borough would
refinance its existing bonds. He asked what the sponsor wanted the
language to provide.
Co-Chair Donley responded, "The goal is very clear, to hold bonded
indebtedness down below $15,000 per capita." He said he does not
oppose allowing refinancing so long as it does not extend the
amount of time it would take to bring the debt below the proposed
maximum.
Mr. Gross replied that language allowing such, would address one of
his concerns with the bill.
Senator Wilken agreed that the 1973 legislation provided a vehicle
to allow the NSB to fund its infrastructure. He referenced an
analysis prepared by Fitch IBCA, Duff and Phelps [Portions of this
report are on file] He read, "The borough's significant current
capital needs are primarily to extend water and sewer and other
utility services to seven outlying villages, build schools and
complete mandated projects. Much of the infrastructure is funded so
future needs would decline from prior levels." Therefore, he
ascertained there is an ability to reduce the bonded indebtedness
of the borough.
Senator Wilken remarked that this issue would not concern him
except that it takes funds from the 20-mil tax rate imposed on oil
and gas properties. He pointed out that every dollar that goes to
the NSB to support debt is a dollar that is not deposited into the
general fund and distributed across the state.
Senator Wilken suggested the intent of the original legislation was
to prevent "pools of wealth," which he emphasized, creates "pools
of debt." He stated this is what has actually occurred in the last
30 years and remarked, "This is the disparity that I see that needs
to get fixed."
Senator Wilken informed that assessed value determines property
taxes and the economy in most of Alaska. He divided the number of
people by the full and true assessed value and calculated the
statewide average per person, not including the NSB, as $72,000. He
listed Fairbanks residents at approximately $57,700, Anchorage at
$63,000, Ketchikan at approximately $80,000, and the lowest amount
is in the Lake and Peninsula Borough at $38,000. He explained the
assessed value "engine" on the North Slope is $1,160,000 per
person, which is 16 times the statewide average. He did not think
the legislature, in 1973, envisioned this leverage on assessed
value, of which, 97 percent is from oil and gas property. He then
calculated the average debt per Alaskan is $2,573, including
residents of the NSB. On the contrary, he stated, the per capita
average of the NSB is $64,409, which is 20 times the statewide
average.
Senator Wilken surmised these figures are "so far out of reason"
and that he could not understand this. He explained the proposed
debt limit of $15,000 per capita is still five times the amount of
any other municipality. He pointed out that the community of St.
Paul has a per capita debt of $13,000, but is primarily because of
a large port project.
Senator Wilken opined that the Bullock vs. Alaska case is a message
from the court to the legislature that it is time to address the
issue.
Senator Wilken predicted, "This is a $100 million deal ten years
from now for the general fund." He stressed this legislation does
not "clamp down" on the NSB but rather gives an ability to fund
five times the amount of the remaining communities in Alaska."
Co-Chair Donley added that he did not believe in 1973 it was
envisioned that oil and gas property taxes would not provide the
full amount of property tax revenue. He also did not think the
earlier legislature predicted that the oil supply would last as
long as it has. He continued that in 1973 it was not understood
that one borough would develop a $490 million permanent fund
savings account. Therefore, he stressed many things have changed
since the adoption of the original bonding authority. He did not
find the argument that the original legislation was adopted 30
years ago and "it's worked great" persuasive because he did not
think it has worked great. This, he said, is because none of the
current conditions could have possibly been foreseen.
Mr. Gross responded that he did not testify that just because the
legislation was adopted 30 years ago it was great. Rather, he
remarked, it is unfair to retroactively determine that because the
NSB issued the amount of bonds it has, the borough could not issue
additional bonds for the next ten or eleven years. He stressed that
this legislation does not provide that the borough could issue up
to five times the amount of per capita bonded debt, as Senator
Wilken stated. Mr. Gross expressed the legislation instead
penalizes the borough for issuing bonds as the legislature
permitted.
Mr. Gross admitted that the concerns raised are valid. However, he
stressed that in 1973 the NSB had no tax base and that in 20 to 30
years it would again have no tax base after oil production has
ceased. He also noted the value of the oil and gas properties
decreases every year, resulting in less revenue, and remarked,
"that is all they have, and when it's gone, that's it." Therefore,
he informed that the borough has "a brief window of time" to make
capital improvements. He agreed that the borough has bonded
"enormously" but noted it would not be able to do so, regardless of
whether this legislation passes.
Co-Chair Kelly requested reviewing the refinancing issue and the
possibility of a "ramp down provision so these next eight to ten
years, there isn't just this brick wall that they run into." He
assured this was not the intention of the Committee. However, he
voiced concern that if proposed natural gas development occurs,
relative property taxes could be "sucked up" by the NSB, resulting
in a similar situation to this.
Co-Chair Kelly addressed the witness' comparison of infrastructure
of the NSB to that of Anchorage and Fairbanks, stressing there are
many amenities the NSB has that are not provided in other
municipalities. He said he does not begrudge NSB residents from
receiving these, but opined the current system has been abused. He
admitted there is disagreement between him and Mr. Gross on whether
there has been abuse.
Senator Olson requested an explanation of how the decision in the
Bullock vs. Alaska case and subsequent rulings are related to this
legislation.
Mr. Gross detailed the history of the case brought by Don Bullock,
a former employee of the Department of Revenue, that unsuccessfully
advocated that the manner in which the statutes governing taxation
of oil and gas properties in the NSB and other areas, were being
improperly interpreted. Mr. Bullock, according to Mr. Gross,
alleged that the administrators of the oil and gas property tax for
the past 25 years had been mistaken. Mr. Gross relayed that the
Alaska Supreme Court ruled it was plaintiff who was mistaken and
that the state officials administering the tax were correct.
Mr. Gross continued that some people hoped the court would rule in
favor of the plaintiff primarily because they felt the NSB was
getting too much money. He said this is the reason for SB 186,
which would change the law to reflect what had been hoped for in
the court decision.
Senator Olson shared that this raised more questions and he
requested time to consider them before action was taken on the
bill.
Co-Chair Kelly stated that the bill would be held for the purpose
of addressing the issue of refinancing of existing bonds.
Co-Chair Donley chaired remainder of the meeting.
Senator Wilken commented that he has a more optimistic view of the
future of the North Slope in twenty or thirty years.
Mr. Gross pointed out that he is the former chair of the governor's
Gas Pipeline Commission 1975 charged with determining the pipeline
route. He stated that he is therefore more pessimistic.
Senator Ward referenced the sponsor statement [copy on file], which
states that the NSB currently has approximately $65,000 per
resident for bond indebtedness and that this legislation reduces
that amount to $15,000. He asked if there was an amount between
these two that the borough could support.
Mr. Gross replied that any amount less than $65,000 would mean the
borough could not issue any bonds until the bonded indebtedness is
paid down to that level.
Co-Chair Donley announced the bill would be held to determine how
to allow refinancing without extending the date the bonds expire.
He also wanted to research the "ramp down" option that would limit
the amount of debt to no more than the statewide average. He
predicted this would allow for any emergencies. He stressed that
the NSB has a permanent fund that would "be the envy of any
community in America." Therefore, he ascertained the borough has
adequate resources with which to draw to fund any projects it is
prohibited from bonding.
Senator Wilken requested the Department of Revenue detail the
fiscal note further.
Co-Chair Donley ordered the bill HELD in Committee.
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