Legislature(2019 - 2020)SENATE FINANCE 532

01/14/2019 10:00 AM House LEGISLATIVE BUDGET & AUDIT

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Audio Topic
10:02:23 AM Start
10:03:24 AM Approval of the Agenda
10:03:47 AM Approval of the Minutes
10:04:19 AM Amendment to Special Audit Request
10:06:35 AM Executive Session
10:42:30 AM Final Audits Release
10:42:55 AM Other Committee Business
11:09:36 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Amendment to Special Audit Request
- Dept. of Health & Social Services, Office of
Children's Services (HB 151)
+ Final & Preliminary Audit Reports - Executive TELECONFERENCED
Final Audits Release
1. AK Gasline Development Corp., Select
Financial Issues
2. Dept. of Commerce, Community, & Economic
Development, Big Game Commercial Services Board
Other Committee Business
                    ALASKA STATE LEGISLATURE                                                                                  
             LEGISLATIVE BUDGET AND AUDIT COMMITTEE                                                                           
                        January 14, 2019                                                                                        
                           10:02 a.m.                                                                                           
MEMBERS PRESENT                                                                                                               
Senator Bert Stedman, Chair                                                                                                     
Senator Anna MacKinnon                                                                                                          
Senator Cathy Giessel                                                                                                           
Senator Click Bishop                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Natasha von Imhof (alternate)                                                                                           
Representative Andy Josephson, Vice Chair                                                                                       
Representative Paul Seaton (via teleconference)                                                                                 
Representative Ivy Spohnholz                                                                                                    
Representative Jennifer Johnston                                                                                                
Representative Dan Ortiz (alternate)                                                                                            
MEMBERS ABSENT                                                                                                                
Representative Scott Kawasaki                                                                                                   
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Shelley Hughes                                                                                                          
Representative Tammie Wilson                                                                                                    
Representative Gary Knopp                                                                                                       
Representative George Rauscher                                                                                                  
Representative Mark Neuman                                                                                                      
Representative Geran Tarr                                                                                                       
COMMITTEE CALENDAR                                                                                                            
APPROVAL OF THE AGENDA                                                                                                          
APPROVAL OF THE MINUTES                                                                                                         
AMENDMENT TO SPECIAL AUDIT REQUEST                                                                                              
EXECUTIVE SESSION                                                                                                               
FINAL AUDITS RELEASE                                                                                                            
OTHER COMMITTEE BUSINESS                                                                                                        
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
RANDY RUARO, Staff                                                                                                              
Senator Bert Stedman                                                                                                            
Legislative Budget and Audit Committee                                                                                          
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   Reported  on  the  Legislative Budget  and                                                             
Audit Committee transition report.                                                                                              
ACTION NARRATIVE                                                                                                              
10:02:23 AM                                                                                                                   
CHAIR  BERT  STEDMAN  called the  Legislative  Budget  and  Audit                                                             
Committee  meeting  to  order  at  10:02  a.m.    Representatives                                                               
Josephson, Johnston, Spohnholz,  Seaton (via teleconference), and                                                               
Ortiz  (alternate)   and  Senators  Stedman,   Hoffman,  Giessel,                                                               
Bishop, MacKinnon, and von Imhof  (alternate) were present at the                                                               
call to order.                                                                                                                  
^Approval of the Agenda                                                                                                       
                     Approval of the Agenda                                                                                 
10:03:24 AM                                                                                                                   
CHAIR STEDMAN  announced that the  first order of  business would                                                               
be approval of the agenda.                                                                                                      
REPRESENTATIVE JOSEPHSON  moved that  the Legislative  Budget and                                                               
Audit Committee approve the agenda  as presented.  There being no                                                               
objection, it was so ordered.                                                                                                   
^Approval of the Minutes                                                                                                      
                    Approval of the Minutes                                                                                 
10:03:47 AM                                                                                                                   
CHAIR STEDMAN announced that the  next order of business would be                                                               
approval of the minutes.                                                                                                        
REPRESENTATIVE JOSEPHSON made a motion  to approve the minutes of                                                               
the December  13, 2018  meeting.  There  being no  objection, the                                                               
minutes from the meeting of December 13, 2018 were approved.                                                                    
^Amendment to Special Audit Request                                                                                           
               Amendment to Special Audit Request                                                                           
10:04:19 AM                                                                                                                   
CHAIR STEDMAN announced that the  next order of business would be                                                               
to  rescind  an   action  from  the  previous   meeting  and  add                                                               
definition  to   that  motion  to   ensure  there  was   not  any                                                               
misunderstanding  to  the  technicalities.    He  explained  that                                                               
during its December  13, 2018 meeting the  Legislative Budget and                                                               
Audit Committee  had approved  a special audit  request.   At the                                                               
end of  that meeting there  had been discussion for  the adoption                                                               
of an  amendment which  would use  the FY  18 information  as the                                                               
baseline.   However,  this  change "was  not  firmly adopted  and                                                               
voted on."  He reported  that the Legislative Auditor had advised                                                               
that a formal vote  to adopt the use of the  FY 18 information as                                                               
the baseline was necessary.                                                                                                     
10:05:31 AM                                                                                                                   
REPRESENTATIVE JOSEPHSON  moved that  the Legislative  Budget and                                                               
Audit  Committee rescind  its  action to  adopt  a special  audit                                                               
request on the Office of  Children's Services (OCS) under HB 151,                                                               
as amended, to reference use of FY 16 as its baseline.                                                                          
10:05:44 AM                                                                                                                   
CHAIR  STEDMAN   objected  for  discussion.     There   being  no                                                               
discussion, the  objection to adoption  of the motion  to rescind                                                               
was removed.                                                                                                                    
10:06:03 AM                                                                                                                   
REPRESENTATIVE  JOSEPHSON  moved  to   adopt  the  special  audit                                                               
request as presented with an  amendment to include FY 18 baseline                                                               
data in the audit.  There being no objection, it was so ordered.                                                                
^Executive Session                                                                                                            
                       Executive Session                                                                                    
10:06:35 AM                                                                                                                   
CHAIR STEDMAN announced that the  next order of business would be                                                               
to move into executive session.                                                                                                 
10:06:47 AM                                                                                                                   
REPRESENTATIVE  JOSEPHSON  made a  motion  to  move to  executive                                                               
session  under   Uniform  Rule  22(b)(1)   for  the   purpose  of                                                               
discussing  confidential audit  reports  for  the Alaska  Gasline                                                               
Development   Corporation  and   the   Department  of   Commerce,                                                               
Community &  Economic Development,  Big Game  Commercial Services                                                               
Board,  under  AS  24.20.301.   There  being  no  objection,  the                                                               
committee went into executive session at 10:09 a.m.                                                                             
10:08:28 AM                                                                                                                   
The committee took a brief at-ease.                                                                                             
Chair Stedman brought the committee back to order.                                                                              
10:09:46 AM                                                                                                                   
The committee took an at-ease from 10:09 a.m. to 10:41 a.m.                                                                     
10:41:23 AM                                                                                                                   
CHAIR   STEDMAN   brought   the    committee   back   to   order.                                                               
Representatives  Josephson,  Johnston,   Spohnholz,  Seaton  (via                                                               
teleconference),  and  Ortiz  (alternate) and  Senators  Stedman,                                                               
Hoffman, Giessel,  Bishop, MacKinnon,  and von  Imhof (alternate)                                                               
were present at the call back to order.                                                                                         
^Final Audits Release                                                                                                         
                      Final Audits Release                                                                                  
10:42:30 AM                                                                                                                   
REPRESENTATIVE JOSEPHSON  made a  motion for the final audits for                                                               
the  Alaska  Gasline  Development Corporation,  Select  Financial                                                               
Issues  and  the Department  of  Commerce,  Community &  Economic                                                               
Development, Big  Game Commercial Services Board,  to be released                                                               
to the public for response.   There being no objection, it was so                                                               
^Other Committee Business                                                                                                     
                    Other Committee Business                                                                                
10:42:55 AM                                                                                                                   
CHAIR STEDMAN reported that Mr.  Ruaro would present a transition                                                               
packet for  the incoming  House Chair  of the  Legislative Budget                                                               
and Audit  Committee, explaining that this  committee rotated its                                                               
chair from  Senate to House every  two years.  He  reported that,                                                               
as   the  committee   represented  the   majority  and   minority                                                               
membership in both the House and  the Senate, a lot of its agenda                                                               
was  non-partisan  work, with  input  from  consultants, for  the                                                               
benefit  of the  entire Alaska  State Legislature.   He  reported                                                               
that, as recent  Legislative Budget and Audit  Committee work had                                                               
been  on a  gasline, a  set of  consultants had  been engaged  to                                                               
bring "some analytics  to the gasline decisions  that we're going                                                               
to  be facing  in the  Legislature in  the event  that we  have a                                                               
large in-state export  line built."  He shared that,  in order to                                                               
preserve  this accumulation  of information,  Mr. Ruaro  would be                                                               
compiling  the information  for transfer  to the  incoming chair.                                                               
He  noted   that  the  complexity   of  the  gasline   issue  was                                                               
"substantial in any realm."   He acknowledged that the transition                                                               
document was  not yet  ready, as  they were  waiting to  get some                                                               
information from the  consultants.  He stated  that this document                                                               
would be available  to all current and  future committee members,                                                               
as well as  current legislators.  He expressed his  hope that the                                                               
document would  offer a better  understanding for "the  scope and                                                               
realm  of what  we're dealing  with."   He  noted that,  although                                                               
there had been some unreported  complications, "at some point, we                                                               
have to lay some of these issues  on the table."  He shared that,                                                               
in December, it had been  revealed that the "information flow was                                                               
highly restricted  out of the  administration to  this committee,                                                               
which made it more difficult for us  to move forward as fast as I                                                               
would have  liked to."  He  added that the significance  of these                                                               
discussions and  the accumulation of information  in the upcoming                                                               
months was  "of such  a nature,  I would  recommend that  the new                                                               
House  organization,  whoever  or  whatever  that  structure  is,                                                               
consider  having  this information  put  forth  in front  of  the                                                               
[House  Resources  Standing  Committee].    He  noted  that  this                                                               
information would  be shared with  the Senate  Resources Standing                                                               
Committee and the Senate Finance Committee.                                                                                     
10:48:02 AM                                                                                                                   
RANDY RUARO, Staff, Senator Bert  Stedman, Legislative Budget and                                                               
Audit  Committee,  Alaska  State  Legislature,  reported  that  a                                                               
transition report  was in progress  to describe and  identify the                                                               
issues   related  to   the  AGDC   [Alaska  Gasline   Development                                                               
Corporation] and AK LNG [Alaska  liquified natural gas] projects.                                                               
He  noted   that  these  topics  span   fiscal  analysis,  fiscal                                                               
certainty, and legal issues, as  well as royalty calculations and                                                               
the  possible  stacking of  deductible  lease  expenditures.   He                                                               
added  that it  would  include the  question  whether field  cost                                                               
allowances applied to  liquids that were produced.   He expressed                                                               
his surprise that the AGDC  calculations had not considered these                                                               
issues or were  unable to share them.  He  explained that most of                                                               
the  fiscal impacts  flowed  from  two areas.    The first  area,                                                               
potential project  cost overruns, had some  structures which AGDC                                                               
hoped to  put in place to  protect the state, as,  at any moment,                                                               
the parties responsible  for those cost overruns  could choose to                                                               
"simply walk away from the project  at which time the state would                                                               
be the deep pockets that would  be left."  He explained that some                                                               
experts had been retained to look  at cost overrun issues and how                                                               
to  mitigate  the potential  impact  and  risk  to the  State  of                                                               
Alaska.  He  reported that information on cost  overruns for mega                                                               
projects averaged  as much  as 80 percent,  although it  could be                                                               
much less  on this project.   He added that the  committee wanted                                                               
all the  risks identified and  the strategies reviewed,  in order                                                               
to mitigate those risks.  He  stated that the general concept for                                                               
this work was  to identify and mitigate  every identifiable risk,                                                               
which could help  the state "be on solid ground  knowing what the                                                               
returns  would be,  what the  risks  are going  forward with  the                                                               
project."  He  reported that, in the last year,  the Alaska State                                                               
Legislature  had denied  a  request from  AGDC  for an  unlimited                                                               
amount of  receipt authority.   He offered  his belief  that this                                                               
had been denied because the  legislature was not comfortable with                                                               
the amount  of information  it had  received from  AGDC, possibly                                                               
reflecting a need for more  transparency and information sharing.                                                               
He suggested that,  although "that could be a  little tricky with                                                               
commercial terms,"  there were ways for  mitigation by presenting                                                               
ranges  of  terms.    He  added that,  although  AGDC  had  broad                                                               
confidentiality powers under Alaska law,  if there was intent for                                                               
an  equity  offering to  the  public  or  other persons,  it  was                                                               
necessary to  make disclosures  of a lot  of fiscal  and contract                                                               
information  under  federal  SEC (U.S.  Securities  and  Exchange                                                               
Commission) rules  and laws.   He shared one  recommendation from                                                               
the  report,  that  AGDC publicly  present  all  the  information                                                               
necessary for a  formal equity offering for review  by the public                                                               
and  the legislature.    This would  allow  that suggestions  for                                                               
modifications to  contracts or negotiations be  returned to AGDC.                                                               
He shared  that AGDC  "seemed to be  unconcerned" or  [not] "very                                                               
worried about  the fiscal impacts  from potential  cost overruns"                                                               
or "fiscal  impacts from deductible lease  expenditures and field                                                               
cost   allowances  that   would  be   created  by   the  upstream                                                               
infrastructure  that  the  oil companies  would  be  building  at                                                               
Prudhoe and Point Thomson."  He  offered his belief that the cost                                                               
estimate would be  for billions of dollars  of infrastructure and                                                               
ongoing  operating costs  of hundreds  of millions.   He  relayed                                                               
that  Senator Stedman's  had directed  the consultants  to review                                                               
these issues and develop a fiscal  year by year net impact of the                                                               
project  to the  [state] treasury.   He  emphasized that  Senator                                                               
Stedman wanted "to get to the  bottom-line net by fiscal year" to                                                               
allow any necessary  mitigation for impacts to the  treasury.  He                                                               
declared that  the overall need  was for the legislature  and the                                                               
public to  understand the impacts  and mitigate those  impacts to                                                               
the maximum extent,  so the state and the public,  along with the                                                               
other   parties  on   the  project,   could  move   forward  with                                                               
confidence.    He  acknowledged that,  although  some  commercial                                                               
terms did need to remain  confidential, many commercial terms and                                                               
contracts needed to  be disclosed under federal law.   He pointed                                                               
out that federal law preempted state law.                                                                                       
MR. RUARO added that the  Department of Natural Resources and the                                                               
Department  of  Revenue  received   appropriations  in  the  past                                                               
legislative  session  to  perform  their own  due  diligence  and                                                               
review  of   the  work   to  achieve   a  uniform,   agreed  upon                                                               
identification of issues and impacts.   He noted that there would                                                               
be  continued  meetings  between  the  experts  from  all  sides,                                                               
including AGDC,  to work  toward agreement  of the  variables for                                                               
the modeling  and the impacts from  this effort.  He  added that,                                                               
with  the recent  change  of administration,  there  had been  an                                                               
increase of  data from  AGDC.   He opined that  the only  way the                                                               
project  could move  forward was  for identification  of all  the                                                               
issues  and  impacts,  with  strategies   to  mitigate  each  and                                                               
agreement for how to move forward.                                                                                              
10:58:28 AM                                                                                                                   
CHAIR  STEDMAN  added  that  the  Legislative  Budget  and  Audit                                                               
Committee  consultants had  been working  with the  Department of                                                               
Natural Resources  and the  Department of  Revenue.   He reported                                                               
that, in December, a preview  of the integrated analysis, showing                                                               
the net  impacts back  to the  state, had  been presented  on the                                                               
summary page.   He questioned how a $40 billion  project could be                                                               
negotiated without  an understanding for  the net cash  impact to                                                               
the state.   He  opined that the  Senate Finance  Committee would                                                               
"take some detailed interest in,  on whatever project was sittin'                                                               
on  the  table to  be  built."   He  declared  that  he "was  not                                                               
impressed  with AGDC  not doing  it  [the integration  analysis]"                                                               
even as it was in statute to  review the net impact to the state.                                                               
He referenced another issue being  reviewed by the analysts, "the                                                               
loss of oil  due to the take-off of gas,"  adding, "I think there                                                               
might be  some discussion  in the  resources committee  on that."                                                               
He declared that the project  would continue to move forward, and                                                               
"hopefully, at  the end  of the  day, we'll end  up with  a large                                                               
export gasline."                                                                                                                
11:01:27 AM                                                                                                                   
REPRESENTATIVE SEATON (via  teleconference) directed attention to                                                               
a  presentation he  had e-mailed  to the  committee members.   He                                                               
expressed his  concern with slide  6 of this  presentation, which                                                               
showed   consideration   for   two   different   projects   using                                                               
alternative  financing.     He  explained  that   this  financing                                                               
alternative  separated  the  Chinese   portion,  as  the  Chinese                                                               
National Bank would offer low  terms to only the Chinese national                                                               
oil company  which would be  responsible for paying  that lender.                                                               
He added  that the other  25 percent  of the project,  the equity                                                               
side  which  included the  State  of  Alaska, would  be  financed                                                               
separately.  He offered his belief  that the interest rate on the                                                               
Chinese portion  could be 1  or 2  percent which would  make this                                                               
available gas more economical; however,  for the State of Alaska,                                                               
the interest  rate would be  8 or 9  percent.  He  concluded that                                                               
this raised the  possibility for two sections of  this project, a                                                               
Chinese  section which  was  totally economic  and  the State  of                                                               
Alaska  section which  was not  competitive due  to the  interest                                                               
rate.   He expressed his  concern that there  was not a  plan for                                                               
further explanation.   He suggested  that the  Legislative Budget                                                               
and Audit  Committee ask its  contractors to  specifically review                                                               
this investment  proposal so  the state would  not be  subject to                                                               
subsidies in order to sell its portion of the gas.                                                                              
11:06:29 AM                                                                                                                   
CHAIR  STEDMAN declared  that he  was unclear  for the  financial                                                               
package  to be  presented by  the Chinese,  stating that  "it's a                                                               
moving target."   He pointed out that the  consultants would need                                                               
to review  and understand "whatever  package is put on  the table                                                               
and this  mechanism of  basically bifurcating  the project  of 75                                                               
percent  of overseas  and 25  percent  on this  side and  running                                                               
it... like two different projects."                                                                                             
CHAIR  STEDMAN, in  response to  Senator Hoffman,  said that  the                                                               
transition report would be distributed as soon as possible.                                                                     
MR. RUARO said that distribution  of the transition report by the                                                               
end  of  January was  a  reasonable  expectation, although  Legal                                                               
Legal  Services  had   advised  for  a  possible   delay  in  the                                                               
authorizations to the contractors  until a new Legislative Budget                                                               
and Audit Committee Chair and project director were seated.                                                                     
CHAIR  STEDMAN   said  that  he  wanted   the  transition  report                                                               
distributed as soon  as possible and that he would  work with the                                                               
incoming  chair.    He  opined  that  the  consultants  would  be                                                               
available for discussions during the winter.                                                                                    
11:09:36 AM                                                                                                                   
There being no further business before the committee, the                                                                       
Legislative Budget and Audit Committee meeting was adjourned at                                                                 
11:09 a.m.                                                                                                                      

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