Legislature(2001 - 2002)

05/03/2001 06:56 PM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ 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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