Legislature(1997 - 1998)
04/20/1998 08:30 AM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
April 20, 1998
8:30 A.M.
TAPE HFC 98 - 117, Side 1.
TAPE HFC 98 - 117, Side 2.
TAPE HFC 98 - 118, Side 1.
CALL TO ORDER
Co-Chair Therriault called the House Finance Committee
meeting to order at 8:30 A.M.
PRESENT
Co-Chair Hanley Representative Kelly
Co-Chair Therriault Representative Kohring
Representative J. Davies Representative Martin
Representative G. Davis Representative Moses
Representative Foster Representative Mulder
Representative Grussendorf
ALSO PRESENT
Representative Eric Croft; Representative Con Bunde;
Representative Ethan Berkowitz; Senator Gary Wilken;
Senator Randy Phillips; Scott Brandt-Erichsen, Borough
Attorney, Ketchikan Gateway Borough, Ketchikan; Don
Bullock, Legislative Liaison, Ketchikan Gateway Borough,
Ketchikan; Rick Cross, Deputy Commissioner, Department of
Education; Eddy Jeans, Manager, School Finance Section,
Education Support System, Department of Education; Steve
Van Sant, (Testified via Teleconference), State Assessor,
Division of Municipal and Regional Assistance, Department
of Community and Regional Affairs, Anchorage.
SUMMARY
SB 36 An Act relating to transportation of public
school students; relating to school construction
grants; relating to the public school foundation
program and to local aid for education; and
providing for an effective date.
SB 36 was HELD in Committee for further
consideration.
SENATE BILL NO. 36
"An Act relating to transportation of public school
students; relating to school construction grants;
relating to the public school foundation program and
to local aid for education; and providing for an
effective date."
Co-Chair Therriault noted that the meeting would consist of
presentation addressing full and true value determinations
and the school size factor. He advised that there are a
number of very complicated issues associated with this
concern.
SCOTT BRANDT-ERICHSEN, BOROUGH ATTORNEY, KETCHIKAN GATEWAY
BOROUGH, KETCHIKAN, presented information regarding the
State's revenues from oil and gas property taxes. [Copy on
File]. He noted that the Ketchikan Gateway Borough School
District will be severely impacted by the current school
funding formula. This issue is about all districts who are
inequitably funded under the current program. Juneau,
Sitka, Kenai and Ketchikan are funded the maximum allowed
by law and yet they must cut programs and services as
inflation reduces the buying power of that funding ceiling.
The proposed legislation addresses the rural districts that
do not have a significant tax base. Mr. Brandt-Erichsen
pointed out that districts like the Northwest Arctic
Borough has more students than North Slope Borough but has
a per capita income so low that it would take a person
almost three year's total income to earn enough to pay one
year worth of the per capita property taxes collected by
the North Slope Borough. Every community which has seen
reduced municipal assistance and revenue sharing and every
community which is concerned about the level of
transitional funding available for SB 36, has a vested
interest in seeing that the State gets every dollar of
revenue to which it is entitled. That will allow the
communities who rely upon transfer payments from the State
not to have to face cuts or inequitable levels of funding
because it has always been done that way.
Mr. Brandt-Erichsen commented that any potential increase
in State revenue, which could make funds available to
restore educational equity, is an option worth considering.
The Ketchikan Gateway Borough proposes to increase
revenues; specifically the State's share of oil and gas
property tax. The relationship between the tax and
potential fund sources came to light during a Senate
hearing at which time it became obvious that the North
Slope Borough appeared to be working off of two widely
different tax base values; one approximately $2 billion
dollars and the other $12 billion dollars. The apparent
conflict came to the attention of Don Bullock who then
worked for the State of Alaska but now works as a
legislative liaison for the Ketchikan Gateway Borough. He
has done extensive research into the history around this
concern and application of the oil and gas property tax.
Mr. Brandt-Erichsen provided a history of the issue. In an
effort to avoid huge disparities in wealth between
municipalities and to use the proceeds from the development
of natural resources owned by all residents for the benefit
of all residents, the Legislature in 1973, established a
state property tax on oil and gas properties of 20 mills.
At that time, the Senate Committee on Community and
Regional Affairs expressed its concern over fabulously rich
communities which have oil and gas development adjacent to
poor communities which do not. Through the State level tax
and a specifically limited delegation of authority to
municipalities to tax only part of the oil and gas
property, the Legislature sought to prevent such
disparities, particularly where resources creating the
wealth belong to the people of the entire State. Two types
of limits were selected:
? On the total amount of revenue per resident which
could be raised, and
? The other on the portion of oil and gas property
which the local communities would have the
jurisdiction to tax.
Each year, each community must select one of these two
calculated methods by February 1st of that year.
The Senate Committee recognized that allowing communities
to tax was the same as if the State levied the tax itself
and then appropriated the funds to the local government for
its purposes. The Committee noted that the State
Legislature should not vote to appropriate $3000 dollars
per person to Fort Yukon while voting State per person
revenue sharing in the amount of $25 for Koyakuk. Such a
result would be unfair and unconscionable.
Mr. Brandt-Erichsen remarked that twenty-five years later,
the result, which the Senate in 1973 called unfair and
unconscionable, is exactly what exists in Alaska. He
claimed that the North Slope Borough and Valdez are "rich"
while their neighbors are "poor", and that the State's
failure to properly implement the protections that the
Legislature enacted in 1973 is the chief cause. According
to the 1997 Alaska Taxable, the value of all oil and gas
properties in the State as of January 1, 1997 was fourteen
billion six hundred twenty-three million four hundred
thirty-six thousand and two hundred ten dollars
($14,623,436,210.00). At a tax rate of 20 mills, that
could generate a State tax in the amount of approximately
$292,470,000 dollars.
Mr. Brandt-Erichsen continued, the State does not receive
all this revenue. At the time AS 43.56 was enacted, the
Legislature realized that there would also be some impacts
from oil and gas development on local municipalities. The
State tax was imposed because of the strong belief that oil
and gas resources belong to all Alaskans and when developed
should benefit everyone. In drafting the legislation, a
compromise was struck between maximizing the revenue from
the tax for needs throughout Alaska and ensuring local
governments had the revenues to meet local impacts.
Mr. Brandt-Erichsen explained that the limitation amount
was a calculated number and that by taking the population
as determined by the Department of Community and Regional
Affairs (DCRA), multiplying that by $1500 would provide the
number. For the North Slope, the calculated number would
be $19,407,000 and for Valdez, the amount would be
$6,381,000. The pro-ration of value limitation is also a
calculated number. DCRA is responsible for designating the
portion of the oil and gas property tax base which may be
subject to the municipal tax, AS 43.56.101(c). The State
assessor provides the calculation each year in the Alaska
Taxable.
Each municipality must decide by February 1st of each year
which method it will use. Over the years, there have been
some disputes about how these limitations are applied.
In a 1978 Alaska Supreme Court case, there was a judgement
regarding how the credit against the State mill levy would
apply. The case also addressed the impact of AS 29.45.100,
which waives the statewide 30 mill tax rate limit and the
$1500 per resident amount limit as they apply to taxes
needed to pay debt service.
Mr. Brandt-Erichsen continued, the Court implicated that
taxes for bonds might exceed the 30-mill limit. It also
held that this credit applies on a statewide basis. Thus,
a municipal levy, which exceeds 20 mills, will create a
credit for the taxpayer which could be applied against
state taxes on oil and gas property the taxpayer owns
elsewhere in the State.
The debt service exception in AS 29.45.100 stipulates that
taxes to pay bonds may be levied without limitation as to
rate or amount. The term "rate" refers to the mill rate.
The mill rate limitation referred to in AS 29.45.090(a) is
30 mills. The amount limitation refers to the total
revenue cap and is $1500 dollars per year per resident.
He emphasized that it is important to remember in regard to
the debt limitation, that there is not a "carte blanche"
authority to tax at will.
? First the debt limitation statute has been on the
books since 1960. Since 1960, the same phrase
has remained unchanged: "Without limitation as
to rate or amount". That was in place long
before there was any statute relating to taxation
of oil and gas property, and long before the
concept of apportioning shares of the oil and gas
property tax base was used.
? Stepping back and looking at the concept of the
$1500 per resident limit and the pro-ration of
value limit, one realizes that if reading AS
29.45.100 as providing an exception to pro-
ration, then the per person limit has no meaning
once the statewide per person assessed value
exceeds $22,222. The $1500 per person limit is
the same as 30 mills per person on a $50,000
assessed value. If the statewide per person
assessed value exceeds $22,222 dollars, and the
method applied by the North Slope was used, then
the pro-ration value method will always give the
local government more money without any increase
in the mill rate. It is unreasonable and
contrary to the statutes to eviscerate the $1500
per person limit in that manner.
? The North Slope method repeals the $1500 limit in
AS 29.45.080(b).
At the same time as the Court was looking at the bond
payment limit, the Department of Revenue responded to a
question on the prorated value calculation. In a March 6,
1978 letter to the North Slope Borough by the Department of
Revenue, a method was established for calculating the
prorated value under AS 29.45.080(c). Mr. Brandt-Erichsen
pointed out that letter contained a couple of errors. It
erroneously prorated the non-oil and gas property. The
method nullified the $1500 limit. The ratio of local
property and oil and gas property ends up the same under
both methods. The local property is 2.42% of the total
assessed value. Thus, under the $1500 per person method,
the local property bears only 2.42% of that cost.
Under the pro-ration of value method, you prorate both the
local and the oil and gas property, then the ratio of 2.42%
is preserved and even though the mill rate may increase,
the true dollar tax burden stays the same, only the amount
ceiling of $1500 per person is removed.
Mr. Brandt-Erichsen pointed out that looking at the statute
being interpreted here, the error is clear and that AS
29.45.080(c) contains the key phrase. The statue says that
a municipality can levy and collect a tax on the full and
true value of "that portion of taxable property taxable
under oil and gas property as assessed by the Department of
Revenue which"; the second clause "when combined with the
value of the property otherwise taxable by the
municipality" would not exceed the limit. Thus, the
statute calls for prorating the value of the oil and gas
property only, not houses and commercial buildings.
Despite the error, the 1978 letter is helpful in explaining
pro-ration value. Putting the 1998 numbers in this format
for the North Slope Borough demonstrates that the North
Slope Borough tax base is limited to taxing 18.5% of that
full and true value of oil and gas property in the Borough
if it elects the prorated value method.
Mr. Brandt-Erichsen commented that two other Supreme Court
cases addressed the oil and gas property tax, but are not
as significant in regard to these issues. A 1986 decision
upheld the method used to calculate population. The North
Slope Borough population used in the formula is 12,938
people, whereas, the actual Borough population is listed as
9,189, on Page 17 in the 1997 Alaska Taxable. That number
includes an adjustment counting remote site workers whose
primary residence is elsewhere. The higher population
figure benefits the North Slope Borough because it
increases the $1500 per person amount.
In 1990, an effort was rejected by Valdez to set up a
special taxing district comprised of oil and gas property
which amounted to how the oil and gas property tax base got
converted to revenues. The calculation in the Alaska
Taxable does not follow the statutes on that point. When
the assessor calculates the impact of the mill levy, he
overlooks the fact that the Borough elects the prorated
value method. Instead of using the tax base permitted
under AS 29.45.080(c) and AS 43.56.010(c), he has been
using the entire assessed value for the Borough. In
effect, this switched methods without reverting to the
total tax limitation amount of $1500 per person.
Mr. Brandt-Erichsen summarized that in order for the North
Slope Borough to reach the entire assessed value, they
would need to use the $1500 per person method. If they
elect the prorated value method, then their tax base is
only 18.5% of oil and gas property, which would amount to
about $2,167,000,000 dollars for that area. This error
reduces revenues due the State by over $43 million dollars
per year under the $1500 method or over $18 million per
year under the value method.
Representative Foster expressed frustration with the
complexity of Mr. Brant-Erichsen's testimony. Co-Chair
Therriault acknowledged that this issue is complicated,
although, noted that it is important to understand the
issue and how it applies to the foundation formula.
In response to Representative Foster, Mr. Brandt-Erichsen
stressed that funds which the State is missing, should be
going into the general fund. That money could be used for
numerous projects such as increased municipal revenue
sharing, etc. He advised that this is a State money source
which the State has not been collecting.
Representative Grussendorf inquired if the Department of
Law or the Department of Revenue had previewed this
information packet before it was distributed to Committee
members.
DON BULLOCK, LEGISLATIVE LIAISON, KETCHIKAN GATEWAY
BOROUGH, KETCHIKAN, replied that the issue has come up many
times in previous years and there has not yet been a
regulation adopted. The Administration has not looked at
this particular proposal.
(Tape Change HFC 98- 117, Side 2).
STEVE VAN SANT, (TESTIFIED VIA TELECONFERENCE), STATE
ASSESSOR, DIVISION OF MUNICIPAL AND REGIONAL ASSISTANCE,
DEPARTMENT OF COMMUNITY AND REGIONAL AFFAIRS, spoke to the
method used to establish the taxable base, and the
selection method chosen for this taxable year.
Each community makes their payment to the Department of
Revenue, with a choice of two methods. He added that
concerns raised by Mr. Brandt-Erichsen had also been raised
in 1989 at which time the Senate appointed a research
committee. They found that the present system was
reasonable for the structure of municipal finance in the
State. Although, the Committee believed that the
interpretation was ambiguous and advised that it be
clarified through adopted regulations. Mr. Van Sant
emphasized the complexity of this issue when addressing
bond and revenue sharing.
Co-Chair Hanley pointed out with the legislation in the
House Finance Committee, there has been much discussion
regarding the actual impact. Depending on which valuation
method is used, the Department has run numbers specifying
various amounts of contribution to the North Slope Borough
(NSB).
Co-Chair Hanley asked Mr. Van Sant if he thought the
assessed value should be $2 or $12 billion dollars. Mr.
Van Sant replied that DCRA has taken an official position
in which they calculated on the $2 billion dollars, but in
lieu of education's Title 14 the Department continues to
use $12 billion dollar figure. Co-Chair Hanley asked for
clarification if the NSB would then pay all of its own
education costs at that level. Mr. Van Sant replied that
under that scenario, the North Slope would be responsible
for paying the entirety of education.
Co-Chair Hanley asked which method the North Slope Borough
has currently chosen. Mr. Van Sant replied that no
municipality had used the $1500 dollar cap because it
yields a lesser revenue number. NSB and Valdez will
continue to use subsection (c), 225%. Co-Chair Hanley
interjected that was the $2 billion dollar position. He
questioned if the mill rate would be larger in order to pay
for that operating budget and how that difference would be
reconciled. Mr. Van Sant explained that the $2 billion
dollar level would be used for the operating budget,
whereas, for the revenue sharing and bond indebtedness,
they choose the $12 billion dollar level. In reconciling
that, the State has continued using the same $12 billion
dollar level, the Department of Education for school
allocation.
Co-Chair Hanley understood that the debt service would use
the $12 billion dollar level and that the school would come
within the operating budget portion. Mr. Van Sant
clarified that the operating budget was limited to the $2
billion dollar cap and that the total mill rate is
calculated into the $12 billion dollar level. When revenue
sharing is taken advantage of, the $12 billion dollar level
is also used. Mr. Van Sant pointed out that a part of
Title 14 had been written to help accommodate this concern.
Co-Chair Hanley pointed out that a complicated $2 billion
dollar formula is available although nothing is being
applied to it at this time. He questioned if there was any
calculation which truly utilizes the $2 billion dollar
figure. Mr. Van Sant explained that the $2 billion dollar
figure was used when determining the cap in operating
revenues. That is the per capita value of $74 thousand
dollars times 225% of the population which provides the
assessed value limit for operating funds. The 30 mills are
multiplied, providing the total statutory limit for the
operating budget.
Co-Chair Hanley asked what the NSB mill rate is. Mr. Van
Sant replied that the effective overall rate would be
calculated on the total $12 billion dollars, which has
dropped them back down to 5.12 mills in FY98. He stressed
that this is "only" the effective mill rates in regard to
the $12 billion dollars. Co-Chair Hanley inquired the mill
rate written in North Slope Borough ordinance. Mr. Van
Sant thought that it was 18.51% including operating and
debt service.
Co-Chair Therriault asked if there was anything written in
statute which would stipulate that maximum tax could be
established under one method and then switching and
assessing using a different method. Mr. Van Sant explained
that the 225% was capped; the maximum revenue, which could
be collected from that, would be $65 million dollars. Co-
Chair Therriault asked if there was any correspondence with
the Department of Law or the Department of Revenue,
clarifying that section of statute. Mr. Van Sant replied
that he was not aware of any and agreed that if the statute
is changed, it should be changed through legislation and
not by regulation.
Mr. Bullock added that AS 43.56.030 specifically addresses
the grant of the municipality to tax oil and gas property.
A municipality may levy and collect taxes on taxable
property only by using one of the methods established in
Section (b) or (c). Each area is responsible for choosing
one of these methods.
Representative J. Davies asked for clarification of the
case code. Mr. Bullock explained that before 1973, there
were no restrictions on what municipalities could tax. In
1973, Governor Egan recognized that oil and gas resources
belonged to all people in Alaska and desired that revenue
generated from development of these resources be shared
effectively. At the same time, the Legislature and
Governor realized that there would be local impacts, at
which time the next tax base was established, separate from
the local assessment.
Mr. Bullock noted that this case looks at the relationship
between how a municipality can tax oil and gas property and
what the amount of oil and gas property is that can go to
the municipality. The municipality makes the first choice.
Mr. Bullock believed that the best choice would be the (b)
method because that method spreads the revenue needs over
the entire tax base. The $1500 per person method is
insufficient, and that they can not use the (b) method
which resulted from that court decision. When a
municipality makes a choice, that becomes their tax base
and the only way to receive the full tax base would be to
choose that option. The North Slope Borough is not doing
that. Representative J. Davies asked for a copy of the
decision made by the Supreme Court case asserting that
decision.
Representative Mulder pointed out that decision had been
made 20 years ago and that other school districts are being
disenfranchised because of this inequity. Mr. Brandt-
Erichsen suggested that this could be better understood
when analyzing who is doing the paying and who is likely to
benefit if it is fixed. The oil companies are going to pay
20 mills regardless of the policy. They have no vested
interest in complaining. He added that change between the
local community and the State has no affect on what they
pay. The local community has a vested interest in
continuing to do it this way. The State will be the entity
to gain money by doing it the correct way. There are
individuals who want the status quo to continue. This
question was not raised until 1989, when that State
assessor wrote a report pointing out the inequity of the
situation.
Representative Mulder inquired the amount which the State
has been shorted over the years. Mr. Brandt-Erichsen
replied that determination would depend on the method used.
If the NSB were to shift to the $1500 dollar per person
method, the State lose would be $43 million dollars per
year. If they used the other scenario, the State would
have lost approximately $18 million dollars per year since
1978. Co-Chair Therriault interjected in regard to the
interaction between the municipalities and the Department
of Revenue, the State does not have the authority to go
back and recoup money, although, from this point forward, a
clarification should be made.
Representative Kelly asked the mechanism in which the State
lost money. Mr. Brandt-Erichsen explained that the credit
was greater; if a local community receives a higher amount,
the State's share would be smaller.
Representative Foster compared the Ketchikan school
allocations to those received in the village areas. He
pointed out that most of the 30 village schools in his
district do not have a school nurse, art or music program
or librarians. He took offense that Ketchikan was
attempting to get greater education funding at the expense
of the rural school districts. Representative Kelly asked
that the presentation provided by Mr. Brandt-Erichsen be
consolidated and written in understandable language for the
Committee's information.
(Tape Change HFC 98- 118, Side 1).
RICK CROSS, DEPUTY COMMISSIONER, DEPARTMENT OF EDUCATION,
spoke to the school size concern. He provided the
Committee with a handout "Alaska Department of Education -
Foundation Program". [Copy on File]. He stated that this
chart would indicate how the State has applied the schools
to the table listed in the bill.
Mr. Cross referenced Page 6, Lines 4 -21 of the House HESS
version of the bill. For the purposes of calculating a
school's Adjusted Daily Membership (ADM) to determine State
aid, the ADM of each school in a district shall be computed
by applying such a formula. The formula is indicated in
that section of the bill. He pointed out that this portion
of the bill comes directly from the McDowell study and
represents the funding shift in the communities current
formula.
Mr. Cross pointed out that the charts list the schools and
their districts. He noted that this is important in
understanding how many funding communities are in a
district to understand the significant reallocation of
funds.
To the Department of Education, there has been a request to
define what a "school" is. He continued, in a large school
district with 800 students or more, it is easier to define
a school. Problems arise when a small program operated by
the school district, decides to be independent or grouped
together with the rest of that school district. Mr. Cross
admitted that situation could be addressed by the school
district providing a definition, clarifying what goes
through the table and what does not. Additional problems
arise in defining in the smaller to middle-size communities
throughout the State. The purpose of the table is not to
determine the fixed operating school costs. That
information should be covered in the district cost factor.
The chart does take into consideration the personnel costs
associated with the operation of the schools.
Mr. Cross advised that the current formula does not address
those communities that have one school and which attempts
to serve all of an area's education population needs. The
question returns to how to define a school in order that
the above concern be fixed. He directed that a definition
of "school" for those communities below 750 would not be
the place to start. A new model must be created so that
two similar communities with separate needs are treated
differently.
Mr. Cross recommended that the Legislature analyze how
schools are applied on the referenced table. Co-Chair
Therriault noted that the bill is attempting to create a
formula which addresses the "true" costs of education. Mr.
Cross agreed that there needs to be greater efficiencies.
He advised that the table provided in the handout is quite
aggressive and believed that this is what is needed,
although, the criteria was not applied to real data.
Additionally, alternative programs within the school
systems need to be defined. Mr. Cross agreed that the
issues surrounding larger communities can be more easily be
addressed, whereas, in communities with a student
population size around 10, it becomes more complicated to
create a definition of "school".
Co-Chair Therriault asked if the Department recommends that
smaller schools be removed from the current definition and
treated differently. Mr. Cross noted that it has been
recommended to treat them as communities with a different
education need or perhaps to define those schools in
context of their program.
Representative Martin reminded Committee members when
Representative Ron Larson worked long and hard on this
issue and had encouraged legislators to reevaluate that
information.
SB 36 was HELD in Committee for further consideration.
ADJOURNMENT
The meeting adjourned at 10:25 A.M.
H.F.C. 13 4/20/98 a.m.
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