Legislature(2017 - 2018)BARNES 124
04/07/2018 02:00 PM House RESOURCES
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| HB331 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
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= bill was previously heard/scheduled
| += | HB 331 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 7, 2018
2:03 p.m.
MEMBERS PRESENT
Representative Andy Josephson, Co-Chair
Representative Geran Tarr, Co-Chair
Representative John Lincoln, Vice Chair
Representative Justin Parish
Representative David Talerico
MEMBERS ABSENT
Representative Harriet Drummond
Representative Chris Birch
Representative DeLena Johnson
Representative George Rauscher
Representative Mike Chenault (alternate)
Representative Chris Tuck (alternate)
COMMITTEE CALENDAR
HOUSE BILL NO. 331
"An Act establishing the Alaska Tax Credit Certificate Bond
Corporation; relating to purchases of tax credit certificates;
relating to overriding royalty interest agreements; and
providing for an effective date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 331
SHORT TITLE: TAX CREDIT CERT. BOND CORP; ROYALTIES
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/07/18 (H) READ THE FIRST TIME - REFERRALS
02/07/18 (H) RES, FIN
03/30/18 (H) RES AT 1:00 PM BARNES 124
03/30/18 (H) Heard & Held
03/30/18 (H) MINUTE(RES)
04/04/18 (H) RES AT 1:00 PM BARNES 124
04/04/18 (H) Heard & Held
04/04/18 (H) MINUTE(RES)
04/06/18 (H) RES AT 1:00 PM BARNES 124
04/06/18 (H) Heard & Held
04/06/18 (H) MINUTE(RES)
04/07/18 (H) RES AT 2:00 PM BARNES 124
WITNESS REGISTER
KEN ALPER, Director
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "State of Alaska Department of Revenue HB 331: Oil &
Gas Tax Credit Bond Proposal," dated 3/30/18, and answered
questions.
MIKE BARNHILL, Deputy Commissioner
Office of the Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions during the hearing of HB
331.
DEVEN MITCHELL, Executive Director
Alaska Municipal Bond Bank Authority
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions during the hearing of HB
331.
ACTION NARRATIVE
2:03:40 PM
CO-CHAIR GERAN TARR, following a recess from 4/6/18, called the
House Resources Standing Committee meeting back to order at 2:03
p.m. Representatives Tarr, Parish, Talerico, and Lincoln were
present at the call back to order. Representative Josephson
arrived as the meeting was in progress.
HB 331-TAX CREDIT CERT. BOND CORP; ROYALTIES
2:04:07 PM
CO-CHAIR TARR announced that the only order of business would be
HOUSE BILL NO. 331, "An Act establishing the Alaska Tax Credit
Certificate Bond Corporation; relating to purchases of tax
credit certificates; relating to overriding royalty interest
agreements; and providing for an effective date."
REPRESENTATIVE PARISH directed attention to slide 14 and asked
whether the information provided on the slide would be
determined by future directors of the [Tax Credit Certificate
Bond Corporation, the commissioners of DOR, the Department of
Commerce, Community & Economic Development, and the Department
of Administration].
2:07:01 PM
KEN ALPER, Director, Tax Division, Department of Revenue (DOR),
explained the structure of the bonds related to the timing of
the interest and principal payment, does not bear on the
calculation of the buyout, thus all of the math used to
determine what a credit holder would receive from the state does
not matter because the lump sum would be financed. However, the
variable on slide 14 is the term length of the payback; for
example, five years to ten years does not affect the initial
amount of the principal. He confirmed the [three commissioners
who are the directors of the] proposed bond [corporation] would
determine the best way to structure [the payment schedule].
REPRESENTATIVE PARISH surmised the state would delegate to the
[directors] the authority to - from a general obligation (GO)
fund - [make payments] of between approximately $13 million and
approximately $130 million, and "therefore bind our hands ...
relative to the amount of the loan that we wish to repay at any
given time ....
2:08:39 PM
MIKE BARNHILL, Deputy Commissioner, Office of the Commissioner,
DOR, pointed out [HB 331] does not fall into "the general
obligation context."
REPRESENTATIVE PARISH directed attention to the aggregate
payments from the general fund (GF), shown on slide 14, which
range from $12.9 million in [fiscal year 2031 (FY 31)] to close
to $130 million in FY 23-FY 28. He questioned the large
variance in the state's debt obligation between FY 23 and FY 31
and asked, "Is it usual for the state to delegate that degree of
authority?"
MR. BARNHILL explained the four cohorts shown on slide 14
represent separate bond issuances that would address tax credit
certificates as they are submitted for payment. The totals for
cohorts 2, 3, and 4 are relatively small compared to cohort 1,
which would be a large bond issued [in 2018]. In fact, cohort 4
[$12.91 million in FY 31] would pay the last tax credits.
Because cohorts 2, 3, and 4 are relatively small, the payment
schedules are structured with balloon financing: interest only
payments until at the end of ten years a balloon payment of the
principal amount becomes due. Mr. Barnhill said balloon
financing is a standard approach that is utilized because it is
anticipated the state cashflow would maintain a static
percentage to unrestricted general funds, and to maintain
parity, balloon financing is the most prudent. He was unsure
how often balloon financing is utilized in state obligations and
deferred to the state's debt manager.
REPRESENTATIVE PARISH clarified his question was how often the
[legislature] has delegated to a board the authority to obligate
future legislatures.
2:13:39 PM
MR. BARNHILL said there are multiple authorizations in statute
to issue bonds such as the State Bond Committee, Treasury
Division, DOR, the Alaska Housing Finance Corporation, and the
Alaska Pension Bond Obligation Corporation, each of which have
discretion to set the terms of the bonds. He said he was
unaware of any large issuance by the state that was structured
with a balloon payment after a long term. Further [the cohort
4] bond issuance is "not a large bond issuance, it's a bond
issuance for something less than $15 million." In further
response to Representative Parish, he confirmed the cohort 3
bond issuance, with a $70 million balloon payment, is also not a
large bond issuance.
MR. ALPER further explained cohort 1 is the bond issuance to pay
$807 million of known and current tax credits; payment of the
subsequent cohorts was modeled by DOR in multiple ways in order
to establish the present value to the state, when compared to
the existing statutory payment schedule, and [the proposed bond
program] is a moneymaker for the state. Furthermore, he
cautioned bond committees can ask for certain terms, but in a
free market transaction, terms must be attractive to buyers.
CO-CHAIR TARR asked Representative Parish if the bill needs
additional prescriptive language related to the activities of
the proposed bond corporation.
REPRESENTATIVE PARISH opined it is up to the committee to decide
how much latitude to grant the bond corporation, related to
issuing bonds for an amount near $1 billion, and urged for
further restrictions on incurring state debt.
CO-CHAIR TARR inquired as to why three department commissioners
would comprise the board of directors of the proposed bond
corporation, which differs from the boards of other state
corporations.
MR. BARNHILL stated the language of HB 331, Section 2, is based
on statutes creating the Alaska Pension Obligation Bond
Corporation and authorizing the State Bond Committee to issue
debt. By drafting the bill in this manner, DOR's intention was
to demonstrate that the structure within HB 331 has previously
been enacted into law.
2:19:18 PM
DEVEN MITCHELL, Executive Director, Alaska Municipal Bond Bank
Authority, DOR, said the structures of both the board of the
Alaska Pension Obligation Bond Corporation and the proposed Tax
Credit Certificate Bond Corporation are designed to administer
bonds issued for the sole purpose of paying a debt related to a
state activity; the state is the obligor, thus at-large members
are not necessary as they are for a board such as the board of
directors of the Alaska Housing Finance Corporation.
REPRESENTATIVE PARISH questioned why the Alaska Pension
Obligation Bond Corporation failed to issue bonds.
MR. MITCHELL recalled there were legislative concerns about the
transaction. Although all the aspects of the transaction were
completed, "a decision was made that due to legislative concerns
about the transaction, that we should hold off." In further
response to Representative Parish, Mr. Mitchell explained the
Senate Finance Committee sent a letter to the governor about its
concerns in this matter, which raised the issue with the
underwriting community, and the governor canceled the
transaction [in the fall of 2016].
MR. ALPER stated the [legislation creating the Alaska Pension
Obligation Bond Corporation] differs from that of [HB 331]
because [issuance of the] pension obligation bonds was intended
to address the unfunded pension liability, and he provided
details.
REPRESENTATIVE PARISH said it is "a little bit odd to borrow
money to get out of debt ...."
MR. MITCHELL, in further response to Representative Parish, said
he did could not summarize the concerns within the letter from
the Senate Finance Committee, however, the letter is available
to the public.
REPRESENTATIVE PARISH redirected his question, as to the
specifics of said letter, to Mr. Barnhill and Mr. Alper.
2:23:56 PM
MR. BARNHILL noted there are philosophical differences about the
merits of pension obligation bonds within the state and
nationwide. He opined certain legislators regard the state's
pension obligation as a "soft liability." However, nonpayment
transforms debt into a "hard liability" with debt service that
must be paid; in fact, nonpayment of debt service on bonds
issued by a state corporation would have ramifications to the
state's credit rating. Mr. Barnhill further described aspects
of pension obligation bonds. He affirmed [HB 331] differs in
that there is no ongoing liability, but instead creates a
mechanism so the state can make payments to small oil and gas
explorers who were attracted to Alaska by the offering of
cashable oil and gas tax credits. The state has not fully paid
the credits that have accrued, resulting in disruption to the
industry, and this form of financing can provide some immediate
relief. He discussed how DOR modeled alternative bond
structures.
2:27:54 PM
CO-CHAIR TARR observed [HB 331] proposes a bond of approximately
$1 billion, which is much larger than the previous general
obligation (GO) bond issued in 2006.
MR. BARNHILL said the size of the proposed bond issuance has
been determined by the purpose of the legislation, which is to
pay off accrued tax credits estimated to be $800 million.
MR. ALPER stressed there was concern about the state's risk with
pension obligation bonds because the value of the securities
bought by the bond money can go down; however, the bond program
proposed by HB 331 does not buy securities, but pays a fixed
obligation, thus there is not a comparable risk.
REPRESENTATIVE PARISH posed the scenario in which the bill was
enacted and the companies holding credits accepted the terms of
the legislation: the state would still have $184 million in
outstanding tax credits, through the existing statutory program,
and he asked whether the state would pay tax credits both
through the statutory program and through the tax credit bond
proposal.
MR. BARNHILL opined if the bill were enacted, the $184 million
in the operating budget [for the existing statutory payment
program] would be reduced to the first-year debt service; in
fact, the Alaska State Senate put $184 million in the budget in
order to reflect existing statute and fund [AS 43.55.028. Oil
and Gas Tax Credit Fund]. He explained:
[The view of] some stakeholders of the legislature
[is] that the budget should have been submitted
initially, with respect to existing statute, as
opposed to a proposed bill. So, the way the governor
submitted the budget in December reflected debt
service on a bill that had yet to be enacted. So,
what the Senate has done is essentially put the budget
back to existing state law and then it would change to
reflect that debt service if the bill were to pass.
REPRESENTATIVE PARISH surmised a company that does not
participate in the proposal would have a legitimate grievance
against the state if repurchases are not made according to the
schedule in statute.
2:33:21 PM
MR. ALPER acknowledged the possibility a company would not
participate and would expect full access to the money available
[in the existing payment program]. He stated DOR's
interpretation of existing statute:
Our interpretation of the tax credit fund and how
money is spent from it is we would not have to do
that. ... We would look at the holder of that $184
million credit and say, "Where would they normally
have been paid, in the absence of this bill?" If
their credits are further down the chain enough, they
might not get anything in FY 19, if they're toward the
front they might get some proportional share of the
[$184 million]. And we would intend to pay any
individual that held back at the same rate, and along
the same formula, that they would have been paid had
the bill not passed.
REPRESENTATIVE PARISH asked how HB 331 would facilitate the
department's interpretation.
MR. ALPER stated the language mandating DOR's discretion is not
explicitly in the bill; however, elsewhere in existing statute
it is established that it is discretionary for DOR to purchase
tax credits. He clarified:
It is our intent, and I'm happy to say it on the
record, to, to not allow that sort of gaming by only
making payments. We don't want anyone to be unduly
helped by choosing to not participate in the program.
And we would, to the best of our ability, endeavor to
interpret future purchases along those lines.
REPRESENTATIVE PARISH inquired as to whether a future
administration could choose a different interpretation.
MR. ALPER said yes.
REPRESENTATIVE PARISH observed implicit in HB 331 would be the
legislature's expectation that the state would depart from the
statutory payment schedule and reduce the allocations to a level
proportionate to the number of credits [for companies] that
don't participate in the program.
2:36:08 PM
MR. ALPER agreed and suggested other options could be to veto an
appropriation "down to that number," or simply "not spend all of
it, [and DOR] ... holding some back, perhaps to spend the next
year." In further response to Representative Parish, he
confirmed the third alternative would be an administrative
choice.
REPRESENTATIVE PARISH posed a scenario in which one company has
[$184 million] in credits, and the state allocates $184 million
for the statutory payment, and asked whether the administration
could purchase said credits for full value.
MR. ALPER said yes.
REPREPRESENTATIVE PARISH continued:
If that were to happen, if we followed the statutory
payment schedule and had the passage of this bill
removing the large majority of the credits
outstanding, then in the next year we might, while the
statutory payment schedule under the, the pretend tax
rate of 35 percent instead of the actual, including
the $8 per barrel credit, would be enough to wipe out
all credits earned next year. And credits, or the
statutory payment the next year would be enough to
wipe out all credits claimed that year, and so forth,
so forth. So, the, the following three cohorts, if
the administration decided to follow the statutory
payment schedule, well, they'd have no incentive to
participate, would they?
MR. ALPER said yes. If cohort 2 represents approximately $100
million worth of credits and $100 million is appropriated,
companies may assume if they hold back, they'll be paid in full;
however, he opined that would be "a profound unfairness" and a
situation DOR would seek to prevent. In fact, DOR would support
an amendment to subparagraph (k) that would prevent the
aforementioned situation.
REPRESENTATIVE PARISH suggested companies "retain all of their,
their credits but have them sign off the value of using them
against their taxes and say that they're willing to give this
portion to the state for a, a payment of $1 or zero dollars
even." If so, the state could justify leaving companies "in
their place in line ... in determining the order at which people
got repaid ...." Representative Parish provided an example.
2:41:14 PM
MR. ALPER cautioned negotiations in this regard would begin
soon; the $100 million expected in cohort 2 are credits that are
largely tied to last year's activity on tax returns that have
been filed, and the credits will be issued in July [2018].
Further, depending upon the effective date of the bill, some
cohort 2 credits may be included in cohort 1 which, ideally,
could eliminate cohorts 3 and 4. However, with 37 active credit
holders who received pro rata shares of FY 18 funding, and
others who did not, he said he was unsure whether DOR could
negotiate term changes with all the parties.
REPRESENTATIVE PARISH noted the state would be negotiating term
changes with all 37 credit holders if HB 331 were enacted.
MR. ALPER said yes; however, [HB 331] does not provide for
negotiations, but provides a mathematical formula to determine
offerings based on a party's credits.
REPRESENTATIVE PARISH posited a situation in which there were
two companies that each held $300 million in tax credits for a
total value of $600 million: company "A" agrees to participate,
takes a 7 percent discount [referred to as a haircut] and
accepts a payment, leaving the state with $200 million in
statutory payments; company ["B"] gets $200 million plus $100
million next year.
MR. ALPER restated DOR's intent that, in the aforementioned
scenario, if the amount appropriated was $200 million, each of
the companies would get one-third, and the second company would
also be paid $100 million. Although not explicit in the bill,
this is DOR's interpretation of "how it should be done in the
name of fairness, and again, if we would like to find a way to
get it locked into statute, I'm happy to try to work with you
for that."
2:45:44 PM
REPRESENTATIVE TALERICO, from his interpretation of the bill,
opined once the state offers a certain bond package, existing
statute would allow a particular percentage of tax credits to be
paid; however, if a company chooses a bond package, and its tax
credit is paid, the state's tax credit liability disappears to
whatever volume was paid off, and is no longer a tax credit. He
gave the following example:
We'll use a billion dollars, and half a billion gets
paid out in bonds, our previous liability was a
billion dollars. We have a bond financing liability
that we're dealing with but, that, we make that, that
annual payment on, but our actual, legal definition of
a tax credit liability has just been cut in half. Am
I mistaken there? ... I think that, due to level of
participation. There's seems to be a concern ...
because we've got this statutory requirement, and say
we had to put $150 million in there, we're going to
have to do that forever until all these people are
paid off. My argument would actually be, no, those,
those people that participate in the bond have been
removed, whatever tax credit they had is removed from
the tax credit liability ....
2:47:49 PM
CO-CHAIR TARR asked Mr. Alper to respond to Representative
Talerico within the context of House Bill 111 [passed in the
Thirtieth Alaska State Legislature]; she expressed her
understanding [AS 43.55.028. Oil and Gas Tax Credit Fund] would
exist until all of the credits were paid, and HB 331 would not
repeal the statutory payment formula.
MR. ALPER stated House Bill 111 provides for a repeal of AS
43.55.028 one year after the last tax credit is claimed.
Although HB 331 may or may not foreshorten that period,
appropriation of the statutory formula is fully up to the will
of the legislature. He remarked:
If half the credits left the field one reasonable way
to approach that ... [is to] figure out the statutory
appropriation and cut it in half to address the idea
that half of the credits are no longer in play. ...
But again, there's a lot of individual will at stake,
because you're talking about budgets for legislatures
that haven't been elected yet.
MR. BARNHILL added DOR has been in contact with all 37 tax
credit holders and all have been provided with estimates of
their tax credits under a 10 percent discount rate and an
estimated 5.1 percent discount rate. In response to an informal
poll, at this point no tax credit holder has declined to
participate in the program, and DOR expects most, if not all, to
participate, eventually. Although the final version of the bill
is unknown, he said DOR seeks legislation to eliminate the
state's obligation in a manner attractive to tax credit holders
and tolerated by stakeholders.
CO-CHAIR TARR returned attention to slide 10 which illustrated
payments to a credit holder due $100 million in credits would be
paid over four years; however, a company with certificates in
the amount of $100 million would have the expectation to be
"first in, first out."
2:52:06 PM
MR. ALPER acknowledged slide 10 is a stylized and simplified
model of no specific company; he gave an example of a company
with $100 million in tax credits, there are $400 million worth
of [outstanding] credits, and the state appropriates $100
million per year for four years: under the existing statutory
formula, the company would get paid its pro rata share 25
percent per year. Instead, under the bond program, as shown on
slide 14, the payment schedule would actually be a six-year
plan; $89 million, paid in FY 24, would be less than the full
year's appropriation per the statutory formula, but is all the
state would need given the known amount. He pointed out slide
14 assumes no credits are sold to major producers even though
DOR believes $125 million in credits will be sold to producers,
and that would reduce the total outstanding to $821 million, and
other effects. Mr. Alper stressed all of the math presented is
preliminary and presumptive of certain possibilities; in fact,
the language of the bill allows DOR to "lock down all the
numbers in the weeks and days, literally, before the actual
market transaction of selling the bonds goes through."
CO-CHAIR TARR observed:
If you just take the face value of $100 million, with
a 10 percent discount, then you'd be getting $90
million, but if you allow ... it to go in the other
direction, and just apply the discount on that annual
basis, as you're continuing to reduce the value, then
... it's a few million less. ... [Conversely], if I'm
holding a $100 million certificate today and I sign up
for the program as it begins, because I'm holding
certificates from two prior years, possibly, that
haven't been paid, that I would only want you to
discount ... that, but not be able to apply some
delayed ... payment schedule to it because, you know,
it further is going to reduce the value.
MR. BARNHILL assured the committee every company has received
the pertinent information illustrated on slide 10; from his
discussions with the tax credit holders, he advised the majority
of companies are willing to accept a payment "that seems fair."
[DOR] decided to offer a 10 percent discount rate because it is
a midpoint between the state's 5 percent cost of borrowing and
the average cost of capital for the companies, which is in the
15-18 percent range. Mr. Barnhill opined, "They're not wildly
enthusiastic about a 10 percent discount rate, or even a 5.1
percent discount rate, but I think at the end of the day, if
it's that or nothing, they'll be in."
CO-CHAIR TARR expressed her understanding if, instead of
directing money in the budget plan [to pay tax credits], the
state applies a discount rate and borrows, the net present value
is greater.
MR. ALPER mentioned other informal ideas, such as negotiating
with individual companies, and cautioned the state would still
need to appropriate money; the bonding proposal is the only
scenario that avoids appropriating $200 million to $300 million
during a fiscal crisis.
2:57:35 PM
REPRESENTATIVE PARISH returned attention to slide 10 and asked
whether four years would be the typical anticipated payback
period.
MR. BARNHILL said three to four years.
MR. ALPER returned attention to slide 14 and explained credits
with a 2016 origin date - under normal circumstances - would be
paid between FY 19 and FY 20, and "the first small portion of
the FY 21 money would pay off the last of them ...." Credits
originating in 2017 would be paid for with FY 21, FY 22, and FY
23 money; FY 23 and FY 24 money would pay the remaining. He
offered to provide the committee with a model to show how a
company with tax credits originating in two different years
would normally be paid. In further response to Representative
Parish, he said he would also provide the statutory payment
schedule previously reported to the House Finance Committee.
3:01:47 PM
REPRESENTATIVE PARISH stated the statutory payment schedule and
the proposed payment schedules differ from "existing practice"
with regard to term and rates, and the original practice was to
pay full face value every year, which he opined was a mistake.
He returned attention to the aforementioned hypothetical
situation he posed with two companies, each of which holds $300
million in tax credits [documentation not provided]. In the
foregoing scenario, the statutory [payment] amount would be $200
million and, if the bill were enacted, the state could pay one
company for its existing credits at a 7 percent discount, and
the other company could get full face value over two years. He
proposed that if a company choose to participate, the state
could eliminate one tranche of its payments according to
"current statutory guidance." Representative Parish continued
with further details of this hypothetical situation and asked
Mr. Barnhill, "Do you follow?"
3:06:01 PM
MR. BARNHILL said he did not. However, DOR would be happy to
discuss ideas proposed by the committee in this regard, and then
present its response at a subsequent hearing. He recalled the
months of work necessary to draft HB 331, which is a complex
bill, and one that is guided by policy objectives.
CO-CHAIR TARR questioned whether the bill addresses DOR's
concern that companies could choose from two options and thereby
obtain near-term cash now, and later rely on the statutory
formula, which would not pay down all the debt.
3:08:07 PM
MR. BARNHILL assured the committee the bill addresses the
hypothetical related to two options because all parties who
participate get paid from the $184 million allocated in FY 19,
100 cents on the dollar; further, the bill requires all
participants to include all of their credits. He restated no
company has refused to participate at this point in time.
Although there is no reason not to explore other options, DOR
needs a full understanding of each proposal prior to responding
[to proposals offered by the committee].
MR. ALPER added there are multiple aspects of the bill that
intend to restrict the freedom of companies to take advantage by
choosing not to participate; furthermore, DOR does not wish to
discourage companies from participating. However, he restated
his concern that a future administration may interpret the bill
differently, and therefore, if the committee seeks to constrain
participants - by directing DOR to pay a pro rata share - an
amendment could be drafted to do so. The department fully
supports the goal of preventing one company from getting a
financial advantage over another company by not participating.
CO-CHAIR TARR suggested Representatives Parish and Talerico co-
draft an amendment. She stated her reluctance to support HB 331
instead of legislation that would establish a three-year
timeline, rather than ten years, and reviewed several other
aspects of the bill. She said her preference would be to pay
the credits off sooner, through a fiscal plan, although the bill
"may be the best option."
MR. BARNHILL said if the bill were enacted the legislature would
have the option to prepay the debt.
3:13:11 PM
MR. MITCHELL cautioned typical municipal bonds are issued for a
standard ten-year par call; if the term is shortened to less
than seven years, a penalty must be paid, and he provided
details.
REPRESENTATIVE LINCOLN, regarding DOR's interpretation of the
statutory payment schedule, asked how long the state has used
the aforementioned interpretation to pay credits, and how firmly
this precedent is established.
MR. ALPER said the formula was established in 2007 by [House
Bill 2001, Alaska's Clear and Equitable Share (ACES) passed in
the Twenty-Fifth Alaska State Legislature], with little
indication of legislative intent; more importantly, under the
ACES tax structure, there was not as much of an impact from
credits used against [tax] liability and thereby reducing tax
calculations. However, beginning in 2013, subsequent to passage
of [Senate Bill 21, More Alaska Production Act, passed in the
Twenty-Eighth Alaska State Legislature], oil and gas taxes were
greatly reduced by the credits, which created "distortions," and
DOR's interpretation of the language in the legislation was that
the tax should be a percentage of the amount levied by [AS
43.55.011 Oil and Gas Production Tax.] Therefore, during the
2015 legislative session, following the collapse of oil prices
and increasing state deficits, and in response to requests from
legislators, DOR's interpretation of the statute resulted in $91
million for a tax credit appropriation. However, in 2015, the
budget passed with an open appropriation which was vetoed by the
governor to $500 million; in 2016, $30 million - based on the
funding formula - was placed in the operating budget for funding
tax credits; in 2017, $77 million was agreed upon by the
legislature. He advised between 2017 and 2018 - because the
price of oil rose - attention was turned to the formula and to
DOR's alternative interpretation. Mr. Alper was unsure as to
whether the alternative formula calculation was contemplated
before this session.
3:19:04 PM
REPRESENTATIVE LINCOLN inquired as to the expectations of the
companies that chose to invest in the tax credit program,
related to the "minimum payment," when many investment decisions
were made by companies during 2014-2016, prior to awareness of
this issue.
MR. ALPER, speaking from industry's perspective, affirmed
industry's first choice would be for full payment, its second
choice would be a plan to pay off $300 million per year for the
next three years for the sake of certainty, and its third choice
would be knowing that statutory appropriations - as DOR has been
currently calculating them - are coming. Although buoyed by
rising oil prices, debate over two interpretations of the
statutory payment schedule give industry substantial anxiety
about years of continued debate leading to unresolved and
undependable appropriations; he said the intent of HB 331 is to
forestall further argument.
REPRESENTATIVE LINCOLN asked whether it is reasonable for
industry to expect more than a minimum payment after the state
marketed a program which urged exploration companies to invest
in Alaska.
3:22:12 PM
MR. BARNHILL advised the statutory formula is based on the
highly volatile price of oil, thus industry's expectation of a
legislative appropriation should be tempered with the knowledge
the price of oil is very difficult to know. However, industry's
expectations, when based on the state's marketing program and
previous funding of tax credits, are that "money would be paid
sooner rather than later." He cautioned the legal ramifications
of various statutory interpretations are ultimately unknown
because for many years, the legislature paid all [the tax
credits] when presented, marketed Mr. Moose, and made promises
of cash.
CO-CHAIR TARR restated her interest in a fiscal plan, without
borrowing money. She observed tax credits in the amount of $807
million are outstanding now, and an additional $139 million are
expected in calendar year 2017 (slide 14).
3:26:23 PM
MR. ALPER said correct; the forecast is $807 million, as of
12/31 [2017]. Further, as provided by House Bill 111, of
operating loss credits earned in calendar year 2017, only one-
half are eligible for cash repurchase, and he gave an example.
Thus, the anticipated total of [2017] credits is one-half what
it would have been, and there have been other reductions to cash
repurchase aspects of the tax credit program.
3:28:07 PM
CO-CHAIR TARR returned to the $807 million forecast and surmised
with a buyout of the three major [oil companies] of $125 million
at a 10 percent discount rate, the state could "whittle this
down," to a manageable two-year payout schedule. She restated
she would prefer to issue bonds for capital and infrastructure
improvements and not to borrow money.
MR. ALPER pointed out the administration unsuccessfully proposed
a revenue bill that would have raised about $300 million per
year by assessing a [new] statewide tax of approximately $2,000
upon every working person. He further discussed the
difficulties the state would have to raise $300 million, and
restated industry's support for HB 331 is based on the certainty
companies would be paid, at a discount, in full. In further
response to Co-Chair Tarr, he said, to his knowledge, DOR did
not evaluate whether companies could be paid, first with a lump
sum, and debt financing afterward for the remainder.
CO-CHAIR JOSEPHSON opined the administration seeks a solution
[to pay tax credits]; although there could be litigation in this
regard, in court, the statute favors the state's position on the
equity side of the statute, even though industry also has
[valid] arguments. He recalled in January 2016, the
administration unsuccessfully sought a 1 percent increase in the
"gross floor, which would have brought in $50 million ...." to
"pay all these down." Co-Chair Josephson concluded industry has
made substantial cuts, and it is logical for the state to do the
same, in an equal response to a crash in the oil economy.
REPRESENTATIVE PARISH stated support for the bill with several
reservations. He asked whether the estimated statutory payment
schedule (slide 14) was based on [DOR's Spring 2018 revenue
forecast].
MR. BARNHILL said yes.
3:35:14 PM
REPRESENTATIVE PARISH surmised a revenue forecast could be
wrong.
MR. ALPER said the payment schedule reflects DOR's median
forecast of the price of oil for the coming year, and whether it
is above or below $60 [per barrel]. Relatively fixed is the
[statutory payment of] $184 million, and in FY 20, the
[statutory payment of] $168 million. Subsequent revenue
forecasts in fall 2018, and spring 2019, will lead to new
calculations based on the expected price of oil and other
factors, although "there's a lot of swing," and he gave several
examples of forecasts that were affected by rising and lowering
oil prices. He offered to provide information from the spring
revenue forecast to the committee.
CO-CHAIR TARR returned attention to [slide 10] and asked for a
further review of the [two alternative discount] rates.
MR. MITCHELL explained 3.6 percent is the estimated cost of a
taxable transaction with amortization of [payment schedules] as
shown on slide 14. An additional 1.5 percent is embedded in the
bill to maintain a 1.5 percent spread between the state's cost
of capital and the [companies'] discount rate; therefore, as the
state's rate increases or decreases, the discount rate for the
participating companies would also adjust to the market, between
now and pricing.
CO-CHAIR TARR noted the program may span ten years, and
questioned if, in the event interest rates rise, the 5.1 percent
rate would automatically increase, so the state would maintain a
1.5 percent "cushion."
3:39:35 PM
MR. MITCHELL said yes, and added the 3.6 interest is somewhat
high; in fact, some of the bonds may be eligible for tax
exemption, which would be favorable to the state.
3:40:35 PM
CO-CHAIR TARR asked whether the 1.5 percent represents the
administrative cost associated with the bonding process.
MR. BARNHILL clarified the 1.5 percent is intended to protect
the state's attempt to achieve equivalency in net present value
terms: if interest rates increase, the discount rate increases,
and the state is protected. He remarked:
If we didn't have that cushion in there, it would be
much more difficult for us to sit before you and say
that, "This is all going to pencil out in net present
value terms that are favorable or equivalent to the
state.
CO-CHAIR TARR concluded the percentage of cushion is arbitrary,
and a more conservative percentage would be 1.75.
MR. BARNHILL cautioned an increase would be less attractive to
participants.
MR. ALPER, in further response to Co-Chair Tarr, pointed out a
company's commitment would be made within a period of a couple
of weeks and would be for a fixed rate; if interest rates
increase within said two-week period, the state could lose [a
portion of its cushion], but would never "go negative." The
bond offer and timing are part of the bill in Section 10,
subsection (k). Although the 3.6 interest rate is not specified
in the legislation, subsection (m) defines the term "true
interest cost plus 1.5 percent"; thus the 1.5 [cushion] is
established in the bill, and the true interest cost would be
determined by market conditions.
CO-CHAIR TARR pointed out a cushion is not built into the
[alternative] 10 percent discount rate.
MR. APLER said no.
MR. BARNHILL restated DOR's reasoning for the bill was to find a
fair midpoint between the state's cost of capital and that of
small oil and gas companies.
REPRESENTATIVE LINCOLN asked for clarification that the bonds
are offered at a fixed rate over a certain term.
MR. MITCHELL said, although not a requirement in the bill, fixed
rate bonds have been modeled and are the most conservative mode;
however, in shorter term transactions, the bill allows for the
use of variable rates. Returning to the issue - raised by
Representative Parish - concerning the latitude afforded the
bond corporation within the bill related to the structure of the
bonds, he said this latitude is intentional because the bond
corporation must respond to market conditions; therefore, this
function in state public corporations, and for state revenue and
GO bonds, needs to be delegated to the executive branch.
3:46:13 PM
REPRESENTATIVE LINCOLN cautioned there could be a lot of
variance in interest rates between cohorts and thus the state
could experience a much different outcome.
MR. MITCHELL affirmed the bond corporation would have to issue
fixed rate bonds or the state would incur "interest rate risk"
for the life of the transaction. [A variable interest rate]
would only be an option for participants who were receiving the
10 percent discount rate and hadn't bought down their rate.
REPRESENTATIVE PARISH added the state is also exposed to the
risk of the price of oil dropping, and thereby lowering the
state's net present value.
MR. ALPER answered if the bill were enacted and the bonds sold,
that would lock in the assumptions illustrated on slide 14; for
example, if the price of oil goes down, the payment schedule
would be extended and payments would be delayed at a cost to the
state, however, if the price goes up, the statutory payment
would respond, and the state would make money.
REPRESENTATIVE PARISH directed attention to the bill on page 13,
line 29, which read [in part][original punctuation provided]:
A discount rate based on the true interest cost plus
1.5 percent and is less than ten percent ....
REPRESENTATIVE PARISH asked why the language includes, "and is
less than 10 percent."
3:50:02 PM
MR. ALPER explained 10 percent, [on page 13, line 29] and
elsewhere in the bill, describes the base rate available to
everyone, and is there for drafting consistency.
3:50:47 PM
REPRESENTATIVE PARISH surmised, if due to market conditions, the
true interest cost to the state became 9.99 percent, the
incentive to participate at the discount rate could disappear
because the discount rate would become the state's actual
borrowing cost. He suggested a remedy for this possibility
would be to specify the "standard" rate would be based on the
true cost of interest, plus 5.5 percent.
MR. ALPER acknowledged there is a risk to the state - at the 10
percent discount rate - if interest rates "spike," and in order
to protect the state, the interest rate would have to "float."
He advised a dramatic swing in interest rates is unlikely to
happen to affect cohort 1, and the impact on cohorts 2, 3, 4
would be much smaller. He directed attention to the bill on
page 14, line 3, which read:
AS 43.55.025, a discount rate based on the true
interest cost plus 1.5 percent and is
MR. ALPER said the first reference [on page 13, line 29] refers
to corporate income tax credits and refinery credits, and the
reference on page 14, line 3, is applicable to the "other three
conditions."
REPRESENTATIVE PARISH asked whether any companies holding tax
credits have promised to participate [in the tax credit bond
proposal].
3:53:48 PM
MR. BARNHILL said yes, the majority of companies have indicated
they would, in an informal and nonbinding sense.
[HB 331 was held over.]
3:55:10 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:55 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB331 Transmittal Letter.pdf |
HRES 3/30/2018 1:00:00 PM HRES 4/4/2018 1:00:00 PM HRES 4/6/2018 1:00:00 PM HRES 4/7/2018 2:00:00 PM HRES 4/9/2018 1:00:00 PM HRES 4/10/2018 8:00:00 AM |
HB 331 |
| HB331 Version A.PDF |
HRES 3/30/2018 1:00:00 PM HRES 4/4/2018 1:00:00 PM HRES 4/6/2018 1:00:00 PM HRES 4/7/2018 2:00:00 PM HRES 4/9/2018 1:00:00 PM HRES 4/10/2018 8:00:00 AM |
HB 331 |
| HB331 Fiscal Note -DNR-DOG 1.29.18.pdf |
HRES 3/30/2018 1:00:00 PM HRES 4/4/2018 1:00:00 PM HRES 4/6/2018 1:00:00 PM HRES 4/7/2018 2:00:00 PM HRES 4/9/2018 1:00:00 PM HRES 4/10/2018 8:00:00 AM |
HB 331 |
| HB331 Fiscal Note-DOR-TAX 2.5.18.pdf |
HRES 3/30/2018 1:00:00 PM HRES 4/4/2018 1:00:00 PM HRES 4/6/2018 1:00:00 PM HRES 4/7/2018 2:00:00 PM HRES 4/9/2018 1:00:00 PM HRES 4/10/2018 8:00:00 AM |
HB 331 |
| HB331 Supporting Document - Presentation Credit Bonds for HRES 3.30.18.pdf |
HRES 3/30/2018 1:00:00 PM HRES 4/6/2018 1:00:00 PM HRES 4/7/2018 2:00:00 PM HRES 4/9/2018 1:00:00 PM HRES 4/10/2018 8:00:00 AM |
HB 331 |
| HB331 Supporting Document - DOR.LAW 3.2.18.pdf |
HRES 3/30/2018 1:00:00 PM HRES 4/4/2018 1:00:00 PM HRES 4/6/2018 1:00:00 PM HRES 4/7/2018 2:00:00 PM HRES 4/9/2018 1:00:00 PM HRES 4/10/2018 8:00:00 AM |
HB 331 |
| HB331 Sectional Analysis 3.29.18.pdf |
HRES 3/30/2018 1:00:00 PM HRES 4/4/2018 1:00:00 PM HRES 4/6/2018 1:00:00 PM HRES 4/7/2018 2:00:00 PM HRES 4/9/2018 1:00:00 PM HRES 4/10/2018 8:00:00 AM |
HB 331 |
| HB331 Supporting Document - Letter of Support 3.29.18.pdf |
HRES 3/30/2018 1:00:00 PM HRES 4/4/2018 1:00:00 PM HRES 4/6/2018 1:00:00 PM HRES 4/7/2018 2:00:00 PM HRES 4/9/2018 1:00:00 PM |
HB 331 |
| AOGA Testimony - HB 331 - 4.4.2018.pdf |
HRES 4/4/2018 1:00:00 PM HRES 4/6/2018 1:00:00 PM HRES 4/7/2018 2:00:00 PM HRES 4/9/2018 1:00:00 PM |
HB 331 |