Legislature(2005 - 2006)

03/20/2006 09:01 AM House W&M

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09:01:05 AM Start
09:01:18 AM HB492
10:44:44 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
           HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS                                                                          
                         March 20, 2006                                                                                         
                           9:01 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Bruce Weyhrauch, Chair                                                                                           
Representative Norman Rokeberg                                                                                                  
Representative Ralph Samuels                                                                                                    
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Representative Carl Moses                                                                                                       
MEMBERS ABSENT                                                                                                                
Representative Max Gruenberg                                                                                                    
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 492                                                                                                              
"An  Act relating  to the  transfer  of the  state's interest  in                                                               
certain gas  to the  Alaska Retirement  Management Board  for the                                                               
purpose of  satisfying the  unfunded accrued  actuarial liability                                                               
of the  state and  employers of  teachers in  the state  to state                                                               
retirement systems; and providing for an effective date."                                                                       
     - HEARD AND HELD                                                                                                           
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 492                                                                                                                  
SHORT TITLE: NATURAL GAS ROYALTIES TO FUND PERS/TRS                                                                             
SPONSOR(S): FINANCE BY REQUEST                                                                                                  
03/15/06       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/15/06       (H)       W&M, FIN                                                                                               
03/20/06       (H)       W&M AT 9:00 AM CAPITOL 106                                                                             
WITNESS REGISTER                                                                                                              
REPRESENTATIVE MIKE KELLY                                                                                                       
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  During the hearing of HB 492, provided                                                                     
information and answered questions.                                                                                             
BILL VAN DYKE, Acting Director                                                                                                  
Division of Oil and Gas                                                                                                         
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:   During the hearing of HB  492, he explained                                                               
the possible  challenges to the  proposed transfer of  gas assets                                                               
to  address  the  unfunded  liability  of  the  state  retirement                                                               
BOB SHEFCHIK, Chief of Staff                                                                                                    
Mayor's Office                                                                                                                  
Fairbanks North Star Borough                                                                                                    
Fairbanks, Alaska                                                                                                               
POSITION STATEMENT:  Testified in support of HB 492.                                                                            
GARY BADER, Chief Investment Officer                                                                                            
Treasury Division                                                                                                               
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   During  the hearing  of  HB 492,  answered                                                               
TOM BOUTIN, Deputy Commissioner                                                                                                 
Treasury Division                                                                                                               
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   During  the hearing  of  HB 492,  provided                                                               
information and answered questions.                                                                                             
DON BULLOCK, Attorney                                                                                                           
Legislative Legal and Research Services                                                                                         
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   During  the hearing  of  HB 492,  answered                                                               
questions regarding the possible legal implications.                                                                            
MIKE BARNHILL, Assistant Attorney General                                                                                       
Labor and State Affairs Section                                                                                                 
Department of Law (DOL)                                                                                                         
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   During  the hearing  of  HB 492,  answered                                                               
questions regarding the possible legal implications.                                                                            
DICK MYLIUS, Acting Director                                                                                                    
Division of Mining, Land and Water                                                                                              
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:   During  the hearing  of  HB 492,  answered                                                               
questions on the DNR fiscal note.                                                                                               
ACTION NARRATIVE                                                                                                              
CHAIR BRUCE WEYHRAUCH called the  House Special Committee on Ways                                                             
and  Means  meeting to  order  at  9:01:05 AM.    Representatives                                                             
Weyhrauch, Moses, Seaton, and Wilson  were present at the call to                                                               
order.    Representatives Rokeberg  and  Samuels  arrived as  the                                                               
meeting was in progress.                                                                                                        
HB 492-NATURAL GAS ROYALTIES TO FUND PERS/TRS                                                                                 
[Includes brief mention of SB 141 and HB 475.]                                                                                  
9:01:18 AM                                                                                                                    
CHAIR WEYHRAUCH announced  that the only order  of business would                                                               
be HOUSE  BILL NO. 492, "An  Act relating to the  transfer of the                                                               
state's  interest  in  certain   gas  to  the  Alaska  Retirement                                                               
Management  Board  for the  purpose  of  satisfying the  unfunded                                                               
accrued  actuarial  liability  of  the  state  and  employers  of                                                               
teachers in the state to  state retirement systems; and providing                                                               
for an effective date."                                                                                                         
9:02:31 AM                                                                                                                    
REPRESENTATIVE  MIKE KELLY,  Alaska  State Legislature,  provided                                                               
background  information  to  the  bill on  behalf  of  the  House                                                               
Finance  Committee of  which he  is a  member.   He relayed  that                                                               
passage of  SB 141 last year  and the proposed legislation  in HB
475  are  initial  steps  to   ensure  the  $6  billion  unfunded                                                               
liability of  the Public Employees' Retirement  System (PERS) and                                                               
the  Teachers' Retirement  System (TRS)  does not  increase.   He                                                               
explained other  attempts to address  the liability:   having the                                                               
state  fund the  increases,  holding the  annual  increases to  5                                                               
percent,  and  proposed  legislation addressing  everything  from                                                               
pension obligation bonds  to continuing the annual  payments.  He                                                               
noted that  the annual  payment is  climbing from  "$38 [million]                                                               
last year  [and] will  reach its  terminal velocity  at somewhere                                                               
around $140 million."  He opined  that whereas there may be "some                                                               
howling"  in  future  discussions,   [HB  492]  is  one  possible                                                               
solution  of  several and  has  tremendous  potential for  upside                                                               
assistance in addressing the increasing debt.                                                                                   
REPRESENTATIVE KELLY  directed the  committee's attention  to the                                                               
slideshow information  in their packets prepared  by Bob Shefchik                                                               
from the Fairbanks  North Star Borough, one  of the organizations                                                               
that might  benefit from the [solution  proposed in HB 492].   He                                                               
explained  that  Mr.  Shefchik's  prepared  information  suggests                                                               
using  future assets  to address  the liabilities  as opposed  to                                                               
relying solely  upon cash payments  or financing  through pension                                                               
obligation bonds.  Representative Kelly  noted that on page 2, it                                                               
shows  the present  annual impact  in  fiscal year  2007 (FY  07)                                                               
totaling $124  million which,  with the  5 percent  increases per                                                               
year,  results  in annual  costs  at  terminal velocity  totaling                                                               
approximately  $400   million  a  year.     He  highlighted  that                                                               
potential gas assets would match  future liabilities and "thereby                                                               
stop the annual  payment requirement for the  unfunded portion of                                                               
[PERS  and TRS]."   He  remarked that  this would  result in  the                                                               
state   being  "fiscally   solvent  relative   to  the   unfunded                                                               
liability."    Furthermore,  in   conjunction  with  the  defined                                                               
contribution plan for  new hires, he added that a  new plan would                                                               
be in place  enabling more money be available for  the state, the                                                               
university, the municipalities,  and the schools.   He listed the                                                               
changes for the current year as a  result of this plan:  the cost                                                               
of state government would be  lowered by $44 million; $10 million                                                               
would  be  available to  the  university;  the municipal  payment                                                               
costs  would  be lowered  by  $26  million;  and $44  million  in                                                               
funding would  be made available  to school classrooms.   He then                                                               
listed  the results  of the  plan for  FY 08  and beyond:   state                                                               
government costs  lowered by  $140 million;  $26 million  more to                                                               
the university;  municipal payment costs lowered  by $55 million;                                                               
and $193 million more for the classrooms.                                                                                       
REPRESENTATIVE  KELLY informed  the committee  that the  proposed                                                               
transfer of  interests in known  natural gas reserves  would have                                                               
no  impact  on  the  permanent   fund  and  other  constitutional                                                               
obligations.   Furthermore,  he  said that  the  amount of  these                                                               
transferred  assets  would  be "equal  to  the  future  liability                                                               
stream" and, in the event  this legislation passes expeditiously,                                                               
it  would freeze  the  PERS and  TRS rates  beginning  in FY  07.                                                               
Referring  to the  reduction of  future gas  revenue streams,  he                                                               
opined  that it  would take  "quite a  bit of  work to  evaluate,                                                               
appraise, and identify  those resources to be  transferred to the                                                               
Alaska Retirement Management Board (ARMB).                                                                                      
9:13:30 AM                                                                                                                    
REPRESENTATIVE  SAMUELS  asked  Representative Kelly  if  he  was                                                               
referring to all gas in the state.                                                                                              
REPRESENTATIVE KELLY said he was  referring specifically to North                                                               
Slope gas.                                                                                                                      
REPRESENTATIVE SAMUELS, on the premise  that "the royalty doesn't                                                               
exist  until the  gas hits  the ground  and is  developed," asked                                                               
whether  Representative  Kelly meant  "only  if  the natural  gas                                                               
pipeline  is built."   Additionally,  given  the royalty  doesn't                                                               
currently exist and the gas pipeline  may or may not be built, he                                                               
asked Representative Kelly how he ran his numbers.                                                                              
9:14:24 AM                                                                                                                    
REPRESENTATIVE  KELLY suggested  that  Don  Bullock, an  attorney                                                               
with the Division of Legal and Research Services, address this.                                                                 
REPRESENTATIVE  SAMUELS proceeded  to  list the  other issues  he                                                               
wished addressed,  such as those regarding  private royalties and                                                               
the  effect  on  the National  Petroleum  Reserve-Alaska  (NPR-A)                                                               
should Alaska royalties  be less [than expected].   He also asked                                                               
about different  royalty sets  per lease  and noted  that whereas                                                               
the most  common one is  12.5 percent, not  all are at  this same                                                               
percent.   He  concluded that  it  "seems problematic  to try  to                                                               
value a  royalty on  something which  is obviously  further along                                                               
now than it's ever been ...."                                                                                                   
REPRESENTATIVE KELLY said he felt  it important to note that "the                                                               
revenue stream  required to  extinguish these  future liabilities                                                               
is also kicked out there; it's  a 25-year run."  He then informed                                                               
the  committee  that HB  492  currently  does not  have  specific                                                               
language addressing  municipalities.  He explained  that when the                                                               
bill was  introduced by  the House  Finance Committee,  there had                                                               
been    considerable    discussion    regarding    whether    the                                                               
municipalities  should  be  handled differently  than  the  other                                                               
entities.  He said that an  amendment had been drafted to include                                                               
CHAIR WEYHRAUCH  said he would like  to address this at  a future                                                               
9:17:21 AM                                                                                                                    
REPRESENTATIVE  SEATON expressed  his belief  that the  intent of                                                               
this legislation  is not to  pay the past service  cost liability                                                               
based on an assumption of  obtaining revenues generated through a                                                               
gas pipeline that has yet to be  built.  He said he would like to                                                               
know projected  increases in  the liability  until such  point in                                                               
time that revenues are actually  generated.  He also relayed that                                                               
he  had questions  regarding the  approximate 50  percent of  the                                                               
liability resulting  from those federal employees  funded through                                                               
the  state.    He  expressed his  belief  that  this  legislation                                                               
proposes the state pay "that half of the federal liability."                                                                    
9:19:58 AM                                                                                                                    
REPRESENTATIVE SAMUELS explained that  "the companies will get to                                                               
book   the  reserves   after  [the   Federal  Energy   Regulatory                                                               
Commission] (FERC) sanctions  the project."  He  opined that this                                                               
regulatory process would be slow  and tedious.  Furthermore, once                                                               
it's finally completed, companies will  want to book the reserves                                                               
"to  pump  up   their  shareholder  value"  and   the  state,  in                                                               
accordance to this  legislation, would want to  book the reserves                                                               
to [pay  the unfunded liability].   He expressed his  belief that                                                               
it would make  better sense to postpone  passing this legislation                                                               
until after  the regulatory process  when the state  could better                                                               
determine which steps to take.                                                                                                  
9:21:08 AM                                                                                                                    
REPRESENTATIVE  SEATON,  in regard  to  the  transfer of  assets,                                                               
noted  that this  legislation  does not  address  the selling  of                                                               
assets by the ARMB.   He said that if he were  on the ARMB, given                                                               
its fiduciary  responsibility, he  would want  to examine  how to                                                               
monetize [assets] in a shorter time  to earn interest to then pay                                                               
off the liability.   He expressed his belief that  this "would be                                                               
a transfer out of complete state  control ...."  He asked whether                                                               
[HB  492] had  any provisions  preventing the  [ARMB] from  using                                                               
assets in that way.                                                                                                             
CHAIR WEYHRAUCH requested this be  addressed by Gary Bader, Chief                                                               
Investment  Officer with  the  Treasury  Division, Department  of                                                               
Revenue (DOR), when he testified.                                                                                               
9:22:08 AM                                                                                                                    
REPRESENTATIVE  WILSON  expressed   her  concern  for  postponing                                                               
addressing the unfunded  liability for another 10  years and said                                                               
that the  debt would continue "to  grow quite a bit  in that time                                                               
because  we're  not   doing  a  thing  about  it."     She  asked                                                               
Representative  Kelly if  he discussed  the  results of  delaying                                                               
with  the actuaries  and whether  he  knew how  high the  percent                                                               
would grow should the state delay.                                                                                              
REPRESENTATIVE KELLY  said he agreed  and that  theoretically the                                                               
liability would  grow "until  the ramp  on the  employers' shares                                                               
hits  the terminal  velocity and  stops that."   Furthermore,  he                                                               
said that  if "the  gas interest was  not sufficient  to generate                                                               
the extinguishment of that past  service liability, [the risk] is                                                               
still there."                                                                                                                   
REPRESENTATIVE WILSON said that she  would want specific facts as                                                               
to what  the percentage of debt  would be overall in  delaying 10                                                               
more years.                                                                                                                     
CHAIR  WEYHRAUCH informed  the  committee  that this  information                                                               
could be obtained from the ARMB.                                                                                                
REPRESENTATIVE  SEATON   offered  his  understanding   that  [the                                                               
proposed  legislation]  would  not   only  address  the  unfunded                                                               
liability   but  would   wipe   out  the   past  service   costs.                                                               
Additionally,   he  relayed   that  with   assets  available   to                                                               
[accomplish  this], there  would be  "no ramping  up of  employer                                                               
fees ...  we would go  back to just  the normal cost  because the                                                               
system would have the assets to  equal the liability."  He opined                                                               
that "under  those circumstances,  [the state would  actually] be                                                               
reducing  the  percentage  funding  of money  in  the  fund,  and                                                               
transferring them to  perceived assets that will  be monetized in                                                               
the future  ...."  He noted  that because some of  these payments                                                               
are due in  the next 10 years, the state  will actually be making                                                               
the PERS  and TRS payments  from money not yet  received, thereby                                                               
reducing the  cash value of  all other assets  in the fund.   How                                                               
much of a reduction and how  much of the state's other asset base                                                               
would be lowered by past  service cost payments, are questions he                                                               
said he would  like addressed given the possibility  that the gas                                                               
may not be flowing until 2015.                                                                                                  
9:26:21 AM                                                                                                                    
REPRESENTATIVE  KELLY  sought  confirmation  from  Representative                                                               
Seaton that what  he was referring to is a  "mismatch."  That is,                                                               
there would  be a risk to  having the state begin  writing checks                                                               
for  the  actual  outflow  without the  matching  inflow  of  gas                                                               
REPRESENTATIVE SEATON said  that this is correct  though noted it                                                               
is different than  a past service cost liability  growing at 8.25                                                               
percent.  With  this legislation, "we're actually  eating up [the                                                               
state's] asset  base from  the rest of  the fund,"  he explained,                                                               
and should the  gas pipeline project not come online  by 2015, it                                                               
would be an imaginary asset -  "something we think will equal the                                                               
$5 billion net present value ...."                                                                                              
REPRESENTATIVE KELLY said he agrees and that the risk is there.                                                                 
9:28:22 AM                                                                                                                    
BILL  VAN  DYKE,  Acting  Director,  Division  of  Oil  and  Gas,                                                               
Department   of  Natural   Resources   (DNR)   relayed  that   he                                                               
understands  this committee  is  investigating ways  to fund  the                                                               
retirement system  and said, "Obviously,  in one way  or another,                                                               
[Alaska's]  resource  wealth   is  going  to  be   part  of  that                                                               
solution."   He then presented  three significant  challenges the                                                               
bill presents.   The first, he  noted, is that not  only does the                                                               
current  or expected  gas royalty  in  the Cook  Inlet area  fall                                                               
short of the [needed] "$5  billion," very little gas is presently                                                               
sold  or marketed  on  the North  Slope.   A  second concern,  he                                                               
indicated, is the  fact that the transfer  of exclusively natural                                                               
gas rights,  by either the state  or a third party,  has not been                                                               
done  to  date.   He  explained  that  what has  previously  been                                                               
transferred are  complete oil and  gas estates to  other entities                                                               
in land  trades or land  assignments, to such entities  as Native                                                               
corporations,  the  Alaska  Mental Health  Trust  Authority,  the                                                               
university, or the federal government.   However, he relayed that                                                               
never before  has the state  tried to  sever oil rights  from gas                                                               
rights for the  purpose of solely transferring the  gas rights to                                                               
a third  party.  He  then referred  to a third  concern regarding                                                               
the transfer  of oil and gas  interests which is the  fact that a                                                               
net of  the permanent  fund and  school fund  share has  not been                                                               
done to  date.   He clarified  that when  transferring land  to a                                                               
third  party, "it's  been the  entire estate,  and the  permanent                                                               
fund  loses its  right  ... to  royalties  from that  transferred                                                               
mineral estate."  He opined  that reserving or preserving a share                                                               
for the state - for either  its permanent fund or its school fund                                                               
- poses a  challenge.  Additionally, he noted  that the challenge                                                               
would  be determining  who would  be responsible  to assure  that                                                               
both  these funds  receive their  share and  suggested that  this                                                               
might   involve  "some   sort   of  an   overriding  royalty   or                                                               
participatory share ... in the  fee itself" to [assure] it occurs                                                               
and is legally binding.                                                                                                         
MR. VAN  DYKE, drawing upon  his former training  in engineering,                                                               
informed  the committee  that natural  gas [primarily]  exists in                                                               
the same  reservoirs with oil and  that there have been  very few                                                               
gas-only reservoirs  discovered in the  North Slope to date.   He                                                               
listed the  most common  gas accumulations  up north  and relayed                                                               
that they are  combination oil and gas pools  which would require                                                               
"delicate  surgery" to  carve out  the  gas interest  alone.   He                                                               
referred  to previous  management  and  accounting challenges  in                                                               
splitting the  ownership of  oil and gas  in the  same reservoir,                                                               
field, or lease,  and expressed his belief that  this, in itself,                                                               
"really  was  a headache."    He  said  that he  would  recommend                                                               
avoiding the split oil and gas  ownership if at all possible.  He                                                               
then  highlighted that  the total  statewide gas  royalty revenue                                                               
for calendar  year 2005 (CY  05) was approximately  $61.8 million                                                               
gross  and about  $46.1 million  net  of the  permanent fund  and                                                               
school fund.   For  North Slope  gas alone, he  cited that  CY 05                                                               
revenue was approximately $11.1  million gross, $8.3 million net,                                                               
and  most  of the  gas  is  otherwise  reinjected back  into  the                                                               
ground.  Assuming  that a value has been assigned  to the gas, he                                                               
remarked that "somewhere between half  and all of the total known                                                               
royalty gas on  the North Slope" might represent  an amount equal                                                               
to the $5  billion [needed to fund the  state retirement system].                                                               
He opined  that since  there is no  gas pipeline  currently under                                                               
construction, it would  be a challenge to assign a  value for the                                                               
gas  which,  at present,  is  being  re-injected in  the  ground.                                                               
Furthermore, he surmised  that whereas the North  Slope gas could                                                               
be  booked  as  "official reserves,"  using  accepted  accounting                                                               
standards, "assigning any book value  to those resources today is                                                               
probably  not  appropriate."   He  informed  the  committee  that                                                               
assigning any value to the  yet-to-be-discovered gas on the North                                                               
Slope - on  either unexplored leases or on unleased  state land -                                                               
is  more of  a challenge  and  one he  would not  recommend.   He                                                               
relayed that the  exploration risks on these  unexplored lands is                                                               
too difficult to quantify.                                                                                                      
9:37:00 AM                                                                                                                    
CHAIR WEYHRAUCH  requested Mr. Van  Dyke focus  further testimony                                                               
on  the general  concept  of  the bill.    He  asked whether  the                                                               
perspective would be  any easier in replacing  the words "natural                                                               
gas" with the word "oil."                                                                                                       
MR. VAN  DYKE opined that  although it would certainly  be easier                                                               
to assign  a value to  the [oil]  resource, a question  of "split                                                               
estate" would still  be created.  He provided an  example of this                                                               
by noting  the different  interests, motivations,  and management                                                               
practices the  ARMB might  have in oil  rights versus  those with                                                               
interests in gas rights.                                                                                                        
CHAIR  WEYHRAUCH  asked whether  the  problem  would be  somewhat                                                               
easier if the gas was restricted to that of Cook Inlet.                                                                         
MR. VAN DYKE expressed his belief  that it would be easier if the                                                               
legislation referred to  only the gas in the  Cook Inlet, Beluga,                                                               
and Kenai  fields.  However, he  remarked that there isn't  a lot                                                               
of value  remaining in the Cook  Inlet reserves.  "We  just can't                                                               
come anywhere near $5 billion in value," he said.                                                                               
9:39:03 AM                                                                                                                    
REPRESENTATIVE SEATON inquired as to  whether the transfer of the                                                               
potential  asset versus  the transfer  of a  revenue stream  from                                                               
that asset, would change Mr. Van Dyke's perception.                                                                             
MR. VAN  DYKE explained  that from  an accounting  and management                                                               
standpoint, those oil and gas  revenues specifically dedicated to                                                               
funds, such as the permanent fund  and the school fund, work fine                                                               
and  far  more  easily  than   having  to  transfer  "the  actual                                                               
ownership interest in the resource."                                                                                            
REPRESENTATIVE  SEATON  asked  whether part  of  the  anticipated                                                               
problem in  splitting North Slope gas  from oil may in  part be a                                                               
result  of  unequal field  shares  and  the variety  of  opinions                                                               
regarding whether to reinject gas or market it.                                                                                 
MR. VAN DYKE affirmed that  determining the speed at which fields                                                               
are  produced  is one  type  of  problem  that often  results  in                                                               
tension between field owners.                                                                                                   
9:41:51 AM                                                                                                                    
BOB  SHEFCHIK, Chief  of Staff,  Mayor's Office,  Fairbanks North                                                               
Star Borough,  informed the  committee that  he prepared  some of                                                               
the initial concept work and  cost savings estimates available in                                                               
the committee packets.  He opined  that "the issue of rising PERS                                                               
and  TRS  rates  for  public employers  really  is  an  impending                                                               
budgetary crisis for  years to come."   Additionally, he remarked                                                               
that  the $5.7  billion, which  "slowly ratchets  up 5  percent a                                                               
year,"  is   a  20-  to   23-year  problem  for   employers  when                                                               
determining  how to  meet payroll  expenses  and pay  bills.   He                                                               
expressed his belief  that HB 492 provides  an alternate solution                                                               
to the annual increase [of 5  percent].  He stated that finding a                                                               
different way to meet the past  service rate and finding an asset                                                               
that  would generate  cash in  the future,  "really was  the crux                                                               
behind  [this  legislation]."   Returning  to  earlier  questions                                                               
posed  by  the  committee,  he explained  how  he  envisions  the                                                               
concept will  work in conjunction  with the ARMB.   Assuming that                                                               
DNR  is able  to find  sufficient [gas]  reserves with  assets to                                                               
match  the $5.7  billion, he  relayed  that the  ARMB would  then                                                               
value the  asset transfer annually  as it establishes  the rates.                                                               
He said:                                                                                                                        
     If [the project] proceeds and  a gas line is in motion,                                                                    
     clearly the value of the gas  is more certain.  If in 3                                                                    
     to  5 years,  there  still is  no  action, [the  state]                                                                    
     could  expect  a responsible  ARMB  to  write down  the                                                                    
     value  of that  asset  based  on the  risk  of it  ever                                                                    
     coming to market.   So the window of  potential loss of                                                                    
     payments and the increase of  the liability, I wouldn't                                                                    
     put  at 10  or 15  years.   I would  put it  at 3  or 4                                                                    
     [years] because  [the state] will  have an  ARMB that's                                                                    
     annually going to evaluate the value of the gas."                                                                          
MR. SHEFCHIK  then returned to earlier  discussion regarding what                                                               
happens should  there be no gas  pipeline by 2015.   He expressed                                                               
his belief that  although this risk is real, it  is one the state                                                               
would be  aware of  prior to  2015 and would  then return  to the                                                               
same  solution currently  used -  that of  increasing rates  with                                                               
methods  paying off  the unknown  liability.   He suggested  that                                                               
this  scenario  might  cost  the state  "3  years  of  ratcheting                                                               
payments, not  15 [years]."   Although the current  solution [for                                                               
addressing  the  long-term  liability] is  cash-based  across  23                                                               
years, he opined that  it need not be.  Rather  than using a cash                                                               
flow solution,  he highlighted  that this  bill proposes  using a                                                               
balance  [sheet]  approach  by  transferring a  future  asset  to                                                               
offset a future  liability.  Additionally, he  clarified that the                                                               
5 percent  annual increases on  salaries could be  eliminated and                                                               
rates set at a 13 to 14 percent normal cost rate.  He said:                                                                     
     The committee  has already identified  a number  of the                                                                    
     problems  -  that  the  value of  the  gas  reserve  is                                                                    
     dependent on  getting gas to market.   In 3 to  5 years                                                                    
     those  reserves,  if  there   is  no  progress  on  the                                                                    
     gasoline, ... would  get written down to  near zero and                                                                    
     we would be  at the same point we are  now at 8 percent                                                                    
     for the 3 or 4 years  that ... rates didn't ratchet up.                                                                    
     The  bill does  offset  competing  requirements of  the                                                                    
     constitution:     the   requirement  to   meet  pension                                                                    
     liabilities, versus  dedicated funds  in appropriation,                                                                    
     and it  does reduce future discretionary  revenues from                                                                    
     gas.    However,  ...  they're  neither  insurmountable                                                                    
     [nor] greater  than the problems created  by the status                                                                    
MR.  SHEFCHIK informed  the committee  that the  [Fairbanks North                                                               
Star] Borough is supportive of the  ideas embodied in HB 492.  He                                                               
relayed   that   although  the   borough   would   like  to   see                                                               
municipalities included  [in the bill], it's  "supportive of even                                                               
a  partial solution  to this  huge problem."   Referring  to [Dr.                                                               
Pedro]  van   Meurs'  testimony  in  February,   he  offered  his                                                               
understanding  that  future  gas royalties  were  estimated  high                                                               
enough to address the state's retirement liability.                                                                             
9:48:58 AM                                                                                                                    
CHAIR  WEYHRAUCH sought  confirmation of  his understanding  that                                                               
the asset  is on  paper only and  that there is  no real  way for                                                               
ARMB  to  monetize  that  to  where  the  liability  is  actually                                                               
MR.  SHEFCHIK opined  that it  would be  no different  than other                                                               
assets the state  currently has.  He referred to  the risk of the                                                               
gas pipeline  not being completed  and not getting to  market, as                                                               
one of the key pieces in valuing the future assets.                                                                             
CHAIR WEYHRAUCH inquired as to  whether there was any benefit to:                                                               
identifying revenue-producing lands -  whether they are oil, gas,                                                               
timber,  or otherwise;  bestowing  the authority  to receive  and                                                               
sell those lands  upon the ARMB; transferring assets  to the ARMB                                                               
for  the purpose  of reducing  the unfunded  liability; and  when                                                               
[the liability]  reverts to zero,  having [the assets]  revert to                                                               
the state.                                                                                                                      
MR. SHEFCHIK  remarked that this would  only be a benefit  if the                                                               
state could identify those revenue-producing  lands that were not                                                               
already committed elsewhere.  Furthermore,  should the state pull                                                               
a revenue-producing  asset from the  current mix, he  opined that                                                               
it would cause  a ripple effect throughout state  operations.  In                                                               
response to  Chair Weyhrauch's  query that  this would  hold true                                                               
for  any  committed  resource,  he  countered  that  the  pension                                                               
obligation is  different in  that it  has a  constitutional basis                                                               
unlike commitments to other projects  such as those for improving                                                               
state roads or parks.                                                                                                           
9:51:43 AM                                                                                                                    
REPRESENTATIVE SEATON, in  noting that the state  is obligated by                                                               
its  constitution to  make payments  on the  past service  costs,                                                               
inquired as to why it's  necessary to specifically identify "some                                                               
future  valuation"  of gas  revenues  to  pay  these costs.    He                                                               
expressed  that he  is uncertain  as to  what the  legislation is                                                               
effectively trying to accomplish.                                                                                               
MR. SHEFCHIK explained  that the difference is due  to the nature                                                               
of the commitment and the identification of the assets.                                                                         
9:53:33 AM                                                                                                                    
REPRESENTATIVE  KELLY   commented  on  the   differences  between                                                               
university endowments  and the [transfer of  gas assets] proposed                                                               
in  HB 492.   Upon  noting  that the  "valuation can  bob up  and                                                               
down," with increased exposure during  this fluctuation, he asked                                                               
Mr. Shefchik what risks might be associated with that.                                                                          
MR. SHEFCHIK informed the committee:                                                                                            
     If you  let it run  for 10 years, the  risks associated                                                                    
     with that  are the  current value  times 8  percent and                                                                    
     that's bigger  than one would  want to take.   Clearly,                                                                    
     the  progress in  the  next two  or  three years  would                                                                    
     determine whether  or not  this was  continued on  or a                                                                    
     different solution  would be  needed.  It  really would                                                                    
     have to be treated by the  ARMB as a real asset similar                                                                    
     to a  real estate  investment or ...  it would  just be                                                                    
     putting  the problem  off into  the  future ...  hoping                                                                    
     that things get better, and that would be a bad thing.                                                                     
MR. SHEFCHIK  returned to earlier discussion  regarding the state                                                               
liability and  the percent  of federal  liability that  is passed                                                               
through.   He  explained that  during his  five years  of finance                                                               
work at  the Geophysical  Institute at  the University  of Alaska                                                               
Fairbanks (UAF), there were those  on federally funded projects -                                                               
funds with  generally fixed amounts  and not based on  the actual                                                               
cost  of projects.   He  relayed that  "by having  a system  that                                                               
lowers the  retirement cost onto  projects, ... it frees  up more                                                               
direct costs ... whether it's  roads or research, that plows back                                                               
into the  economy.   It does  make for a  cost share  but doesn't                                                               
reduce the amount of federal  money that's coming into the state;                                                               
it  changes it  so that  it's  direct costs."   Additionally,  he                                                               
opined  that as  the PERS  and  TRS rates  climb, those  agencies                                                               
considering funding research proposals,  may look negatively upon                                                               
the retirement rate  being offered.  He opined,  "It would indeed                                                               
help offset federal payments toward  PERS and TRS, but [wouldn't]                                                               
reduce  the amount  of federal  money coming  into the  state; it                                                               
would just change what it would be paid for."                                                                                   
9:57:57 AM                                                                                                                    
REPRESENTATIVE  SEATON sought  confirmation of  his understanding                                                               
that the state's current asset  base would be reduced in addition                                                               
to the  lowering of  the percentage of  funding within  the state                                                               
system.  He expressed his belief  that "it's much larger than the                                                               
8.25 percent interest rate on  the money; it's actually eating up                                                               
the asset."                                                                                                                     
MR. SHEFCHIK said he does not  know the answer to this because he                                                               
doesn't know the cash flow projections of the PERS system.                                                                      
9:59:11 AM                                                                                                                    
REPRESENTATIVE  SAMUELS sought  confirmation from  Representative                                                               
Kelly that  he was  referring specifically to  the cash  flow and                                                               
that the transfer of leases would not be under ARMB control.                                                                    
REPRESENTATIVE  KELLY clarified  that whereas  the management  of                                                               
the land stays  with DNR, the interest in the  gas would transfer                                                               
"for it to have any value to the ARMB."                                                                                         
9:59:55 AM                                                                                                                    
REPRESENTATIVE ROKEBERG  inquired as  to whether the  title would                                                               
rest with  the State of  Alaska or  with ARMB.   Additionally, he                                                               
asked whether  Representative Kelly was referring  to "the income                                                               
stream rather than the vesting of title."                                                                                       
REPRESENTATIVE KELLY deferred discussion  of this to Don Bullock,                                                               
an attorney with Legislative Legal and Research Services.                                                                       
10:00:56 AM                                                                                                                   
GARY   BADER,  Chief   Investment  Officer,   Treasury  Division,                                                               
Department  of Revenue  (DOR),  announced that  the  ARMB has  no                                                               
position HB 492.  He relayed  that the board is scheduled to meet                                                               
this  week with  Mr. Shefchik  and  others to  ask questions  and                                                               
gather information to  help the board prepare  suggestions on how                                                               
the  legislature might  address the  state's unfunded  liability:                                                               
either all  at once  or "more  likely in  increments."   He noted                                                               
that whereas the cash flow, as  proposed in the bill, would equal                                                               
nearly a  third of the  fund, no cash  would be generated  for an                                                               
unknown  number of  years.   He added  that the  ARMB would  give                                                               
further  consideration to  the possibility  that  passage of  the                                                               
bill, "might ...  make [the retirement system]  fully funded, but                                                               
without a revenue  stream, we begin falling further  behind by at                                                               
least $400 million a year ...."                                                                                                 
10:03:41 AM                                                                                                                   
CHAIR WEYHRAUCH  asked Mr. Bader  to explain his  relationship to                                                               
the ARMB.                                                                                                                       
MR. BADER  clarified that  he is a  chief investment  officer for                                                               
DOR and that the department is staff to the ARMB.                                                                               
CHAIR  WEYHRAUCH  inquired  as  to whether,  the  board  has  the                                                               
statutory authority  to obtain  and manage an  asset such  as the                                                               
one proposed in the bill.                                                                                                       
MR.  BADER offered  his understanding  that the  board does  have                                                               
this  authority, however,  indicated that  Michael Barnhill  from                                                               
the  Department of  Law, would  know the  answer to  this.   Then                                                               
returning to  earlier discussions on  the transfer of  assets, he                                                               
said it  was his understanding  that according to the  wording in                                                               
the  draft  legislation, once  the  unfunded  liability is  fully                                                               
addressed, [the assets] revert back to  DNR.  He opined that this                                                               
"creates a marketability" and relates  to the question of whether                                                               
the asset could be monetized.                                                                                                   
10:05:14 AM                                                                                                                   
REPRESENTATIVE SEATON  asked Mr.  Bader to provide  the committee                                                               
the schedule of payments on the  past service costs.  Whereas the                                                               
committee does have the amortized  rate of contributions required                                                               
to pay  the debt, he expressed  that it does not  have a schedule                                                               
of payments the state is required to make.                                                                                      
MR.  BADER said  he  could  provide the  committee  with a  close                                                               
approximation of these figures.                                                                                                 
10:06:54 AM                                                                                                                   
TOM  BOUTIN, Deputy  Commissioner, Treasury  Division, Department                                                               
of  Revenue (DOR),  informed the  committee  that the  department                                                               
learned  from the  auditors, KPMG  International, that  the asset                                                               
would have  to be  "measurable and  have to  be available  to pay                                                               
liabilities in the current year in  order to book it as a value."                                                               
He  offered   his  understanding  that  according   to  generally                                                               
accepted accounting principles (GAAP), there  isn't a way to book                                                               
assets that  have not  actually been purchased.   He  provided an                                                               
example of  the estimated 7  billion barrels of oil  remaining on                                                               
the North Slope  and explained that these are  neither booked nor                                                               
depleted assets by the state.   Furthermore, he added, the Alaska                                                               
Permanent Fund Corporation (APFC) does  not book the royalties it                                                               
expects to  receive from those  barrels of  oil.  The  same would                                                               
apply,  he  said,  to  the  resources  in  the  timber  and  coal                                                               
industries; those  assets do  not appear  on the  state's balance                                                               
sheet.   He expressed his  understanding that GAAP  doesn't allow                                                               
10:09:31 AM                                                                                                                   
REPRESENTATIVE SAMUELS opined that  there is a difference between                                                               
selling the cash flow after development  [of the gas] to doing so                                                               
while  [the gas]  is still  under ground  and therefore  would be                                                               
subject to considerably  more rules.  He asked Mr.  Boutin how he                                                               
predicted it  would play out  in the long  run should the  gas be                                                               
transferred while it's still in the ground.                                                                                     
MR.  BOUTIN  suggested  that  these  might  be  questions  better                                                               
addressed by  DNR than DOR.   He repeated that the  KPMG auditors                                                               
will  look  to  see  that  the  [gas  asset]  is  measurable  and                                                               
available to  pay current year  liabilities.  "Whether  there's a                                                               
way  to have  this  asset in  this bill  be  both measurable  and                                                               
available for current year expenditures, I don't know," he said.                                                                
10:11:55 AM                                                                                                                   
REPRESENTATIVE ROKEBERG relayed  that he is a  "great skeptic" of                                                               
this  legislation, however,  said  he  appreciated the  resulting                                                               
debate.  He  asked whether DOR could provide a  variation of this                                                               
approach that would meet the  requirements stipulated by KPMG and                                                               
still fund the liability of the state's retirement system.                                                                      
MR.  BOUTIN  said  that  DOR   has  not  examined  other  similar                                                               
approaches.   Regardless  of the  approach, he  remarked that  an                                                               
asset would need to start earning  8.25 percent and that the rate                                                               
is assumed  by the actuary to  be long term, doubling  every nine                                                               
years.  He  relayed that a booked asset  that wasn't appreciating                                                               
at  an  8.25  percent  rate,   starts  diminishing  the  earnings                                                               
immediately.   He  said  that the  sponsors  of the  [retirement]                                                               
plans  now have  some  investments that  are relatively  illiquid                                                               
such  as those  investments in  private equity  and real  estate.                                                               
These  assets, he  explained,  were purchased  at  a fair  market                                                               
value and hopefully  bring in a return that is  even greater than                                                               
the 8.25  percent.   "It's an investment  concept ...  every plan                                                               
sponsor has to  have, and anybody talking about  filling this gap                                                               
has to have," he opined.                                                                                                        
10:15:39 AM                                                                                                                   
REPRESENTATIVE  SEATON inquired  as  to  whether "lease  rentals,                                                               
royalties, royalty  sale proceeds,  net profit shares,  and other                                                               
receipts related to  the gas interests," listed on  page 2, lines                                                               
29-30, would  be [considered] liquid  before gas is  flowing down                                                               
the pipeline.                                                                                                                   
MR. BOUTIN said that others at  DOR and DNR might know the answer                                                               
to this.                                                                                                                        
REPRESENTATIVE  KELLY remarked  that  this problem  is much  more                                                               
sensitive to the  required earnings rate of 8.25  percent than to                                                               
the cash flows.   Without the liquidity, he  expressed his belief                                                               
that the unfunded liability will continue to grow.                                                                              
MR. BOUTIN relayed that the  actuary annually provides the amount                                                               
required to  meet both the  future liability and to  amortize the                                                               
past  service  liability  over  25  years.    He  explained  that                                                               
employers haven't  been meeting  the contribution rate  needed to                                                               
amortize  the past  service liability  over  this 25-year  period                                                               
because of the cap set each  year on any increases to those rate.                                                               
He expressed that  he has "never been able to  buy into the model                                                               
that says  that employers are  being charged an interest  rate of                                                               
8.25 percent on the past service liability."                                                                                    
10:18:20 AM                                                                                                                   
REPRESENTATIVE  ROKEBERG, referring  to  an  earlier question  by                                                               
Representative  Seaton,  said that there would be a  value to the                                                               
[gas]  asset, regardless  of whether  it's actually  flowing, but                                                               
only if  that asset could  be alienated.   He offered  his belief                                                               
that,  "you could  monetize  it but  ... only  if  you sold  your                                                               
10:18:50 AM                                                                                                                   
CHAIR  WEYHRAUCH  noted that  it's  this  committee's mission  to                                                               
explore  and  determine ways  to  fund  the state's  [retirement]                                                               
liability.    He  referred  to  the meeting  held  last  year  in                                                               
Anchorage,  with experts  from the  National Conference  of State                                                               
Legislatures (NCSL) who presented the  many ways other states are                                                               
addressing their  pension fund liabilities.   He highlighted that                                                               
some of the  states investing in property have  done well, unlike                                                               
those states  investing in  pension bonds.   With Alaska  being a                                                               
resource-rich state,  he remarked  that identifying  and applying                                                               
this kind  of asset, and using  it as a future  revenue stream to                                                               
pay off the  debt without harming the other job  functions of the                                                               
state  government, would  seem a  viable approach.   However,  he                                                               
opined  that "it's  monetizing the  asset and  getting it  to the                                                               
ARMB  to  pay the  unfunded  liability  [that]  seems to  be  the                                                               
10:20:21 AM                                                                                                                   
REPRESENTATIVE ROKEBERG  returned to  his earlier question  as to                                                               
whether  there  would  be  a  benefit  to  assigning  a  current-                                                               
producing  oil and  gas lease  -  or any  other natural  resource                                                               
asset - to  the [ARMB] to reduce some of  the unfunded liability.                                                               
He suggested that it "may  run afoul constitutionally," but there                                                               
may be  some benefit to it.   However, he remarked  that it would                                                               
decrease  the amount  of  cash flow  available  for general  fund                                                               
10:21:32 AM                                                                                                                   
REPRESENTATIVE SAMUELS, in  response to Representative Rokeberg's                                                               
remarks,  opined that  North  Slope  gas is  needed  "to make  it                                                               
worthwhile" and  that the  companies can't  book [the  gas] until                                                               
FERC  sanctions  the  project;  there  is  no  value  to  company                                                               
shareholders until this is accomplished.                                                                                        
MR. BOUTIN relayed that unlike  the oil companies, both the state                                                               
and  APFC have  a "higher  test" because  they comply  with GAAP:                                                               
even when oil  companies book North Slope oil,  the state doesn't                                                               
book its  share of the oil  nor does the permanent  fund book its                                                               
expected royalties from known oil reserves.                                                                                     
REPRESENTATIVE SEATON inquired  as to whether there  would be any                                                               
problem  with having  the state  acquire  the asset  as gas,  not                                                               
royalty payments, and then at some  future point in time, the gas                                                               
would be sold to create the revenue stream.                                                                                     
MR. BOUTIN  said it was not  clear to him that  this "would allow                                                               
booking today an  asset value that would help  fill this unfunded                                                               
liability  hole and  thereby reduce  employer contribution  rates                                                               
today."   If wording to describe  this option were given  to him,                                                               
he said he would present it to the state's actuary and KPMG.                                                                    
REPRESENTATIVE SEATON  said he agreed  with Mr.  Boutin's earlier                                                               
testimony on the  issue of cash payments versus  the 8.25 percent                                                               
on  the net  present  value.   He opined  that  what is  actually                                                               
happening is  that the net  present value is being  determined by                                                               
back-calculations on scheduled cash payments.                                                                                   
MR. BOUTIN stated his agreement.                                                                                                
10:26:19 AM                                                                                                                   
REPRESENTATIVE   ROKEBERG   asked   Mr.  Bullock   whether   this                                                               
legislation,  enacted as  written, would  run afoul  of dedicated                                                               
funds as addressed in the state constitution.                                                                                   
10:26:30 AM                                                                                                                   
DON BULLOCK,  Attorney, Legislative Legal and  Research Services,                                                               
Alaska State Legislature, said that  because the state's interest                                                               
in gas  would go to the  ARMB and because the  earnings from that                                                               
would be dedicated to offset  the unfunded liability, a dedicated                                                               
fund issue  is raised.   He informed  the committee  that whereas                                                               
Article IX, Section 7 of  the Alaska State Constitution prohibits                                                               
dedicating  state funds,  Article  XII, Section  7 competes  with                                                               
this as follows:                                                                                                                
     Membership in employee retirement  systems of the State                                                                    
     or  its  political   subdivisions  shall  constitute  a                                                                    
     contractual  relationship.   Accrued benefits  of these                                                                    
     systems shall not be diminished or impaired.                                                                               
MR. BULLOCK  surmised, "It's possible  that a court will  look at                                                               
these competing  sections and say that  in this case, this  is an                                                               
exception to the prohibition on dedicated funds."                                                                               
10:27:49 AM                                                                                                                   
REPRESENTATIVE  ROKEBERG  inquired  as  to how  the  transfer  of                                                               
Mental Health Trust Authority  authorized receipts ("MHTAAR") was                                                               
justified and  asked whether it  was a requirement of  the Alaska                                                               
Statehood Act.                                                                                                                  
MR. BULLOCK  said he was  not familiar with the  MHTAAR, however,                                                               
he  relayed  that  Section  6,   subsection  (i)  of  the  Alaska                                                               
Statehood Act, specifies that  those underlying mineral resources                                                               
below land  received from the  federal government at the  time of                                                               
statehood, can't  be transferred away  from state.   He clarified                                                               
that as long  as the transfer takes place within  the state, such                                                               
as to  the university or the  ARMB, the state would  still retain                                                               
ownership and not be in violation of the Alaska Statehood Act.                                                                  
REPRESENTATIVE ROKEBERG  sought confirmation  that this  same act                                                               
also requires the state "look after local communities."                                                                         
MR. BULLOCK stated his agreement.                                                                                               
REPRESENTATIVE  SEATON  asked Mr.  Bullock  to  define the  legal                                                               
parameters for the transfer of  assets as opposed to the transfer                                                               
of a revenue stream with a conditional release of that asset.                                                                   
MR. BULLOCK  explained the  underlying concept of  the bill.   He                                                               
relayed  that  the  state's  ownership  in  the  natural  gas  is                                                               
actually  being  transferred  to  the  ARMB;  however,  DNR  will                                                               
continue   to  manage   the   land  on   behalf   of  the   ARMB.                                                               
Additionally,  he highlighted  that  there's a  provision in  the                                                               
bill that  would require the ARMB  reimburse DNR for the  cost of                                                               
that management.   Other aspects  of the bill, he  noted, include                                                               
DNR's  management   of  reserves,   leasing  gas   interests  and                                                               
deducting the  contributions made to  the permanent fund  as well                                                               
as to  the public school trust  fund.  The net  income would then                                                               
be transferred  to the ARMB, he  said, and "DNR will  continue to                                                               
manage the  interest just as  any other interests that  the state                                                               
10:30:35 AM                                                                                                                   
REPRESENTATIVE SEATON posed a situation  in which the ARMB wishes                                                               
to monetize its  asset - the ownership of the  gas - and inquired                                                               
as to whether it would be possible  for the board to sell it to a                                                               
state entity such as University of Alaska.                                                                                      
MR. BULLOCK  explained that under  the Alaska Statehood  Act, the                                                               
ARMB "could not sell [its] interest in the gas."                                                                                
REPRESENTATIVE SEATON  rephrased his  question asking  whether it                                                               
wouldn't  be possible  for the  ARMB  to sell  to the  university                                                               
which has had gas interests transferred to it previously.                                                                       
MR.  BULLOCK said  this might  be possible  if the  asset can  be                                                               
identified and is saleable.                                                                                                     
10:32:22 AM                                                                                                                   
REPRESENTATIVE SAMUELS  sought confirmation of  his understanding                                                               
that the sale  of assets could not  be made to a  company such as                                                               
ExxonMobil Corporation.                                                                                                         
MR.  BULLOCK said  this was  correct and  further clarified  that                                                               
under the Alaska Statehood Act,  the state's assets may be leased                                                               
with  a royalty  interest  retained; however,  the  land and  its                                                               
underlying resources may not be sold.                                                                                           
REPRESENTATIVE SAMUELS asked whether  it was possible to transfer                                                               
the royalty itself and not the land.                                                                                            
MR.  BULLOCK explained  that then  it  would become  an issue  of                                                               
"whether it's the income stream or the gas itself."                                                                             
REPRESENTATIVE SAMUELS asked how  autonomous the ARMB is, whether                                                               
it's under the  control of the governor, and  whether its members                                                               
are appointed for  specified terms or serve until  just cause for                                                               
MR. BULLOCK said  he is uncertain as to the  particular status of                                                               
the  employees  of  the  board, however,  noted  that  there  are                                                               
political  appointees  that  serve  on   the  board  as  well  as                                                               
representation from  DNR and  DOR.  The  ARMB, he  clarified, has                                                               
the  fiduciary responsibility  to  manage  the funds  responsibly                                                               
regardless of administration changes.   Furthermore, he said that                                                               
"the  obligation  under  the Alaska  State  Constitution  not  to                                                               
impair  the retirement  funds continues  regardless of  political                                                               
entities."  In  further response to Representative  Samuels as to                                                               
possible   conflicts  of   interest  among   ARMB  members,   the                                                               
commissioner  of DNR  and other  top administrators,  opined that                                                               
"anything  is  possible;  however, the  unfunded  liability  will                                                               
continue  and  the ARMB,  regardless  of  what happens  to  [its]                                                               
investment in the  gas, would have to come up  with the money, at                                                               
least some other way."                                                                                                          
10:35:44 AM                                                                                                                   
MIKE  BARNHILL,  Assistant  Attorney  General,  Labor  and  State                                                               
Affairs Section, Department of Law  (DOL), informed the committee                                                               
that although  there appears to  be constitutional  concerns with                                                               
the bill,  he is not prepared  to provide a definitive  answer as                                                               
to whether it would actually  be in violation of dedicated funds.                                                               
He relayed  that [DOL] will  research this further.   He referred                                                               
to  the 2004  Alaska Supreme  Court decision  on the  transfer of                                                               
university lands.  He highlighted  that the court determined that                                                               
this transfer was not an  appropriation but rather a non-monetary                                                               
asset transfer.  Whether [HB  492] proposes a similar transfer of                                                               
assets, has  not yet been  determined.  He relayed  that although                                                               
there is  constitutional protection  of the state  pension funds,                                                               
he  expressed  his  uncertainty  as to  "whether  a  court  would                                                               
consider that  and say  that somehow excuses  this bill  from the                                                               
dedicated  funds prohibition."    He opined  that  they are  "two                                                               
entirely  separate provisions  in  the  constitution that  aren't                                                               
linked or necessarily in conflict."   As per the request of Chair                                                               
Weyhrauch, he  explained that his  last point was in  response to                                                               
Mr. Bullock's  suggestion that "because there's  a constitutional                                                               
provision to protect and not  to diminish the retirement systems,                                                               
that somehow  the courts would give  the benefit of the  doubt to                                                               
the legislature  if there was  a bill with a  potential dedicated                                                               
funds violation."  He reiterated  his doubt that the courts would                                                               
do this.                                                                                                                        
CHAIR  WEYHRAUCH relayed  that with  the likelihood  of the  bill                                                               
being amended,  the actions of  committee may overtake  the legal                                                               
10:39:40 AM                                                                                                                   
DICK  MYLIUS,  Acting  Director,  Division of  Mining,  Land  and                                                               
Water,  Department  of  Natural  Resources  (DNR),  informed  the                                                               
committee that  he was available  to answer only  those questions                                                               
on  the DNR  fiscal note.   He  explained that  because the  note                                                               
assumes  a  transfer of  property  interests  to the  [ARMB],  it                                                               
focuses on  federal research  and the preparation  of deeds.   He                                                               
highlighted  that whereas  this falls  under the  purview of  the                                                               
Division of Mining, Land and  Water, any technical issues are the                                                               
purview of the Division of Oil and Gas.                                                                                         
10:41:01 AM                                                                                                                   
REPRESENTATIVE   KELLY  inquired   as  to   whether  Mr.   Mylius                                                               
envisioned the actual transfer to be that of the land interest.                                                                 
MR.  MYLIUS  offered  his  understanding  that  it  involves  the                                                               
transfer of the "gas interest" to  the ARMB.  In further response                                                               
to Representative  Kelly, he relayed that  any previous testimony                                                               
did not alter his understanding  of the basis for the calculation                                                               
of the fiscal note.                                                                                                             
REPRESENTATIVE SEATON  inquired as  to whether DNR  would foresee                                                               
any problems should the ARMB  intend to monetize the interest and                                                               
transfer  it within  the  state,  such as  to  the University  of                                                               
MR. MYLIUS expressed his belief that  this would not be a problem                                                               
as the  university is still an  entity of the state.   In further                                                               
response   to   Representative   Seaton   regarding   any   other                                                               
foreseeable problems,  he suggested  that the  attorney general's                                                               
office might  be better able to  address this.  He  expressed his                                                               
uncertainty as to whether the  ARMB has the authority to transfer                                                               
title of a portion of the state's land.                                                                                         
10:43:17 AM                                                                                                                   
CHAIR WEYHRAUCH announced that HB 492 would be held over.                                                                       
REPRESENTATIVE  KELLY, [referencing  the upcoming  ARMB meeting],                                                               
in  addition to  KPMG's  approach to  liquidity,  opined that  it                                                               
might  be  helpful  to  know  whether the  assumption  of  a  gas                                                               
contract would perfect the usefulness of the asset.                                                                             
10:44:44 AM                                                                                                                   
There being no further business before the committee, the House                                                                 
Special Committee on Ways and Means meeting was adjourned at                                                                    
10:44 a.m.                                                                                                                      

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