Legislature(2015 - 2016)SENATE FINANCE 532
04/07/2015 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation Hearing: Department of Revenue - Commissioner | |
| Confirmation Hearing: Alaska Gasline Development Corporation Board of Directors | |
| Continuation of Confirmation Hearing: Department of Revenue - Commissioner | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
April 7, 2015
9:20 a.m.
9:20:43 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:20 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Randall Hoffbeck, Commissioner-Designee, Department of
Revenue; Rick Halford, Former State Senator, Eagle River;
Joe Paskvan, Former State Senator, Fairbanks; Hugh Short,
Girdwood.
SUMMARY
CONFIRMATION HEARINGS:
ALASKA GASLINE DEVELOPMENT CORPORATION BOARD OF
DIRECTORS
DEPARTMENT OF REVENUE - COMMISSIONER
^CONFIRMATION HEARING: DEPARTMENT OF REVENUE - COMMISSIONER
9:21:35 AM
RANDALL HOFFBECK, COMMISSIONER-DESIGNEE, DEPARTMENT OF
REVENUE (DOR), discussed his work history. He recounted
that he arrived in Alaska in 1980 with plans to become a
park ranger after graduating from college with a degree in
resource management. He related that due to a hiring
freeze, he was unable to secure the work he had planned. He
instead took a position doing land law adjudication under
the Alaska Native Claims Settlement Act (ANCSA) and the
Alaska National Interest Lands Conservation Act (ANILCA),
where he worked for approximately 1.5 years looking at
state and Native land rights claims. He then worked
building houses, selling real estate, and doing appraisals;
which he worked on for about two years until the market
collapse in the mid-1980s. He relayed that he sold his
business and took a position with the Municipality of
Anchorage doing real estate appraisals, where he spent
almost nine years as the supervisor.
Commissioner-Designee Hoffbeck shared that in 1992 he was
hired as part of an audit team by the North Slope Borough
to ensure their properties were being properly assessed
after state cutbacks in the oil and gas tax division. He
furthered that this team developed the audit program for
the oil and gas property tax audits in the state. He noted
that the state had been doing the audits previously, but
the team reformulated the process. He concluded that he
worked at the North Slope Borough until 1998, and had been
the tax manager for the majority of the time.
Commissioner-Designee Hoffbeck revealed that in 1998 he was
named as Parks and Beautification Manager by Anchorage
Mayor Rick Mystrom, and worked in that position until 1999.
He added that at the latter part of the mayor's term of
office, he formed a company with Dudley Platt and Dave
Walters (currently with BP) which bid on the tax support
contract for DOR. His company was awarded the contract and
worked on it for approximately two years, at which time the
state assessor retired and Commissioner-Designee Hoffbeck
was hired as the state Petroleum Property Assessor. He
clarified that he held the position from 2001 to 2006, and
during that time was a primary author of the rewrite of the
administrative regulations under AS 43.56. Additionally
during that time, he spent two years on the stranded gas
pipeline negotiations under the Murkowski Administration.
9:25:46 AM
Commissioner-Designee Hoffbeck continued to recount his
work history, and described how he had tried to reform
several of Alaska's property tax laws while working as the
state petroleum property assessor. He furthered that during
that time DOR went to a production-based upstream property
tax, which was originally tested for three years and
extended to a fourth year after being incorporated into the
language under stranded gas. He commented that after the
test was over, agreement was not reached by all parties
involved and the model went back to a more standard cost-
based approach for valuing properties. He related that
during the same time there was a Trans-Alaska Pipeline
System (TAPS) settlement agreement for three years but the
fourth year the state was unable to reach settlement.
Commissioner-Designee Hoffbeck explained that he was hired
by the North Slope Borough in 2006 as finance director, a
job he held until 2011. The scope of the job included
serving as chief investment officer, chief fiscal officer,
debt manager, treasurer, and budget manager. He commented
that during that time, the borough received three ratings
upgrades from the rating agencies, primarily due to the
close working relationship the borough had with the state
and the revenues generated by the work that was done by the
state. He added that they were able to increase revenues,
decrease debt, decrease taxes, and increase savings. He
listed the scope of other duties to include being in charge
of accounting, annual audits, grants, benefits, risk,
insurance, purchasing, shipping, receiving, records
management, and tax audit and assessing. He remarked that
the scope of the finance director position was greater than
that of the commissioner of DOR.
Commissioner-Designee Hoffbeck spoke of being hired as
chief of staff to North Slope Borough Mayor Charlotte
Brower in 2011. He related that he had retired in 2012 and
completed a seminary degree, with the intention of going in
to full-time ministry. He recounted that Governor Walker
had asked him if he was interested in working as
commissioner of DOR. After some consideration, he accepted
and was excited about bringing the gas line project to
fruition.
9:29:40 AM
Co-Chair MacKinnon drew the committee's attention to the
duties and responsibilities of the commissioner for the
Department of Revenue under AS 43.05.010. She highlighted
three of the duties listed in the statute:
4. keep a record of all departmental proceedings,
record and file all bonds, and assume custody of
returns, reports, papers, and documents of the
department;
6. keep a record of each order, process, and
certificate issued by the commissioner, and keep the
record open to public inspection at all reasonable
times;
7. hold hearings and investigations necessary for the
administration of state tax and revenue laws;
Co-Chair Kelly asked Commissioner-Designee Hoffbeck to
comment on his strategies for maximizing state revenue.
Commissioner-Designee Hoffbeck commented that there were no
easy decisions or simple solution. He referred to the price
and volume of oil production and stressed the need to look
at a combination of other revenue sources. He opined that
there were some difficult discussions needed with regard to
state expenditures and determinations as to what areas were
considered to be part of the state's core function. He
emphasized the need for public understanding that the
legislature and administration had made the budget as lean
as possible while focusing on core functions.
Commissioner-Designee Hoffbeck cited continued spending of
state savings as a finite funding option that would not get
the state to a final solution, and reiterated the need to
look at other revenue sources. He mentioned utilizing
revenue earnings, and specified a structured form of
spending investment earnings from the permanent fund as an
option. He reported that DOR was putting together a model
to examine several scenarios of how the state could use the
various investment earnings, including the Percent of
Market Value (POMV) proposal, capping the permanent fund,
or various other things. He detailed that the model was not
dissimilar from a model recently presented by David Teal,
Director, Legislative Finance Division; but would contain
more robust forecasting and more options. He named other
revenue sources including income tax, sales tax, and
statewide property tax as possibilities to examine; and
characterized them as "standard government tools." He
mentioned a bill being worked on in the House of
Representatives that would look at reduction of indirect
costs. He suggested there was a package of solutions, and
surmised it would take three of them in order to make a
balanced budget.
9:33:52 AM
Co-Chair Kelly asked if Commissioner-Designee Hoffbeck was
satisfied with the way the state was investing state
accounts in the short and long-term, and whether he had
different strategies to make the state's cash more liquid.
Commissioner-Designee Hoffbeck noted that he had asked his
staff to look at the efficient frontier for investing the
Constitutional Budget Reserve (CBR), to see if there was an
opportunity to use some equities within it. He explained
that the CBR was set up to function as an asset
preservation account, and had been primarily been invested
in some form of fixed income type investments. He added
that the sub-account was the more aggressive account with
equities in it. He relayed that there was statutory
language specifying that the commissioner of DOR, while
investing in the sub-account, must assume the funds would
not be used for five years. He added that the situation no
longer applied and the funds were moved from the sub-
account in to the main account. He reiterated that DOR was
examining whether there was an opportunity within the main
account to get more return than just fixed incomes. He
revealed that DOR had also looked at how much the state
held in cash on a given day for paying bills and whether
there was opportunity to reduce the amount in order to keep
more invested. He qualified that any short-term liquid
investments had not paid much. He referred to proposals by
DOR economics staff that would entail using current savings
as collateral to borrow against, and then use the borrowed
funds to invest as a revenue source. He referred to current
market volatility and advised that DOR was not ready to go
forward with the proposals at that time.
Co-Chair MacKinnon asked Commissioner-Designee Hoffbeck to
recount his experience with maximizing revenue as opposed
to asking for additional revenue sources. Commissioner-
Designee Hoffbeck explained that in his position as finance
director for the North Slope Borough, he rewrote investment
policies to allow for more aggressive investing than was
previously in place. He added that he would rely primarily
on the experts on staff as well as consultants. He
acknowledged that he was not a banker, but that DOR had
people who were, and he would primarily rely on their
expertise.
9:37:31 AM
Senator Dunleavy referenced the aforementioned revenue
models and asked if Commissioner-Designee Hoffbeck would be
seeking tolerance data to reflect the point at which
residents of Alaska would depart the state after taxes were
imposed, which he called the "tipping point." Commissioner-
Designee Hoffbeck related that he had engaged in such
discussion with the economics group and to the extent that
it would be possible, (the issues would be examined) but
not as part of the base revenue model. He pointed out that
such data was speculative and it was hard to objectively
point to what the tipping point was. He described that DOR
had become keenly aware of what constituted new money
versus recirculated money. He clarified that if the state
had a sales or income tax, it would bring in a little new
money (i.e. sales tax from tourism, income tax from out of
state employees) but the majority of that money would be
recirculated within the state and would not really
stimulate the economy. He qualified that the two items that
would stimulate the economy were investment earnings
(currently being saved and not part of the economy), and
our savings account; both of which were new monies. He
discussed the market collapse that occurred when he was
appraisal supervisor in Anchorage in the 1980s, when people
lost 75 percent of land value and it took 10 years for the
economy to recover. He recounted that this experience made
him aware that the state had to be a part of the solution,
rather than the problem. He continued that if oil prices
remained low in the following year or two, industry would
have to pull back. He referenced the promised investment
under SB 21 [oil tax legislation from 2013], and stated
that industry had kept that promise. He further stated that
at some point the numbers would be such that everyone would
have to pull back. He summarized that at that point in time
the state would need to balance the budget and look at new
monies in order not to add to the problem of an economy
that was retracting.
Senator Dunleavy expressed interest in the aforementioned
budget modelling and wondered how far the budget could be
reduced, at what point taxes would be imposed on the people
of Alaska, and in what form. He asked if Commissioner-
Designee Hoffbeck thought that enough cuts had been made
thus far. He added that the governor had discussed reducing
the budget by 16 percent and others had discussed 25
percent. Commissioner-Designee Hoffbeck commented that the
Governor had a target of a 25 percent, which had not yet
been reached. He stated that although there had been some
very difficult cuts made, specifically in the Senate
Finance Committee the previous week, he considered most of
the cuts to be "fine tuning within government." He
furthered that the next step was program cuts, discussion
was necessary, and there was still a ways to go.
Senator Dunleavy asked if Commissioner-Designee Hoffbeck
thought that government could shrink a little bit more.
Commissioner-Designee Hoffbeck observed that there were
areas that were not part of core government that were still
being funded, and it was also a question of public
tolerance.
9:42:56 AM
Vice-Chair Micciche noted that the total earnings in the
state were just over $17 billion. He mentioned a "$4
billion issue" and remarked that there was a very small
number of working Alaskans relative to the number of
workers in other states. He clarified that he did not
advocate an income tax, and hoped that significant
reductions followed by an oil price increase would help the
state's budget shortfall. He estimated that the possible
income tax rate would be 23 percent in order to cover the
$4 billion. He stated that a hypothetical 23 percent tax
rate was nearly twice the highest taxed state in the
country, and was five times the average in the lower 48. He
wondered if Commissioner-Designee Hoffbeck would
aggressively and publicly support the legislature's current
and future budget reductions.
Commissioner-Designee Hoffbeck replied that budget
reductions were the initial step in the process. He stated
that he would probably not agree with all legislative
decisions, and understood that some of the reductions would
have significant personal impact for Alaskans. He shared
that he had committed to meet with each of the employees
that would be laid off from DOR. He agreed that he would
indeed continue to support the idea that budget cuts needed
to be made first.
Vice-Chair Micciche wondered if Commissioner-Designee
Hoffbeck would be pursuing a hedging strategy in
investments, and if so, which division of DOR would begin
the process. Commissioner-Designee Hoffbeck replied that
the Treasury Division would begin the hedging strategy, led
by Gary Bader, Chief Investment Officer. He shared that
there had been general conversations about hedging, but it
currently was dealt with through savings, and as such there
would be no additional hedging costs.
Vice-Chair Micciche asked if there was an intent to engage
with Alaskans on the current fiscal situation. He shared
that he represented a very conservative district; many of
his constituents expressed that there were not enough
budget reductions, yet others felt that the reductions were
too extreme. He felt that the constituent feedback
represented a gap in understanding of the current fiscal
situation. He remarked that there were some savings and
reserves, which were designed for budget crises. In order
to consider solutions, he felt that Alaskans should be well
informed. He added that he hoped it would be a team
approach to impart the information, rather than the
legislature being the sole source. Commissioner-Designee
Hoffbeck replied that he hoped that the administration and
the legislature could work together during the interim to
present the various solution options that were available.
He did not believe that attacking and placing blame would
help the situation.
9:48:35 AM
Senator Hoffman announced that the governor had halted some
of the mega-projects in the state. He wondered when there
would be recommendations about what would be done with the
projects; such as the Susitna Dam, Knik Arm Crossing,
Juneau Access Road, and the commercialization of gas. He
queried the specific timeframe within the following 3.5
years as to when there would be project recommendations and
a follow up on the gas line. He wondered if there would be
debt financing to commercialize the gas, and felt that the
gas line was the most important project. He also wondered
how to utilize the state's cash flow over the next two
years, in order to get the project in the right direction.
Commissioner-Designee Hoffbeck replied that DOR was
formulating a fiscal package, rather than focusing on
individual components, because it was important to see how
the projects related to each other. He furthered that the
capital project funding would be outlined in the fiscal
package. He did not know when prioritizations of the
projects would occur, but those considerations would be
factored in to the fiscal package.
Senator Hoffman wondered if there would be a formulated
picture by the following January. Commissioner-Designee
Hoffbeck replied in the affirmative.
Senator Hoffman wondered if the debt financing of the
project would also be formulated into the fiscal package.
Commissioner-Designee Hoffbeck replied that there would be
a financing option study done by Lazard Frères & Co. LLC
(Lazard) on how to finance the various projects.
Senator Hoffman discussed the permanent fund and wondered
whether the state could continue to afford inflation-
proofing. He asked Commissioner-Designee Hoffbeck to
comment on the administration's perspective. Commissioner-
Designee Hoffbeck provided that the inflation-proofing
component was largely driven by the original investment
structure of the permanent fund, which was in fixed-return
investments including treasuries and bonds, and was an
essential part of the investment strategy. He continued
that because the permanent fund was currently invested in
equities and alternative investments, inflation-proofing
was almost automatic, based on the total value rather than
the realized earnings. He stressed that the inflation-
proofing would continue to occur if the fund was managed as
a POMV fund versus realized gains. He concluded that
inflation proofing still put money back in to the corpus of
the fund, but was probably not critical going forward.
9:54:08 AM
Senator Bishop appreciated the nominee's efforts to raise
the bond rating while working on the North Slope, and
recounted that those efforts helped to pass prior
legislation. He asked if Commissioner-Designee Hoffbeck had
worked under the Stranded Gas Development Act (SGDA).
Commissioner-Designee Hoffbeck replied in the affirmative.
Senator Bishop asked if the nominee was familiar with the
previous session's legislation, SB 138 [oil and gas
legislation passed in 2014]. Commissioner-Designee Hoffbeck
replied in the affirmative.
Senator Bishop wondered if there were similarities between
SGDA and SB 138, and whether he preferred one over the
other. Commissioner-Designee Hoffbeck responded that SB 138
was "healthier" than SGDA, because SB 138 was better
formulated. He shared that he had been in negotiations for
the SGDA pipeline, when there was a specific stated goal of
getting the pipeline "at all cost" yet there was no bottom
line or "walk-out strategy." He recounted that working
under tight timelines made it nearly impossible to
negotiate a good deal for SGDA, and the legislature quickly
rejected the plan. He opined that the structure of SB 138
was better, but still relied heavily on the responses of
BP, ConocoPhillips, and ExxonMobil. He felt that SB 138
reflected many of the lessons learned from SGDA.
Senator Bishop queried the greatest current challenges of
the Child Support Services Division. Commissioner-Designee
Hoffbeck responded that the greatest challenge before the
legislature [within SB 51] was drafting the specific
language relating to child support from individuals
residing in foreign countries, so the division could
collect funds under a treaty. He shared that the Child
Support Services Division was his lowest-maintenance
division, because it had strong leadership. He felt that
the biggest problem of the division was staff retention,
because it was a very difficult job. The turnover was
sometimes 30 percent a year.
Co-Chair MacKinnon asked if the nominee could return later
in the day for more questions from the committee. She
shared some concerns about the management of DOR, and felt
that those issues should be addressed. Commissioner-
Designee Hoffbeck replied that he would be available later
in the day.
Senator Olson commented that he was very impressed with the
accomplishment of obtaining a seminary degree while working
as financial director on the North Slope. He made a
biblical analogy about the story of Jonah and the Whale.
Co-Chair MacKinnon set aside the résumé of Commissioner-
Designee Hoffbeck, and would revisit the conversation later
in the day at 3:00 p.m.
^CONFIRMATION HEARING: ALASKA GASLINE DEVELOPMENT
CORPORATION BOARD OF DIRECTORS
10:00:45 AM
Co-Chair MacKinnon directed the committee's attention to AS
31.25.020:
(a) The corporation shall be governed by a board of
directors consisting of
(1) five public members; and
(2) two individuals designated by the governor
that are each the head of a principal department
of the state, except that the commissioner of
natural resources and the commissioner of revenue
may not be designated to serve on the board
unless the project for which a license is issued
under AS 43.90 has been abandoned or is no longer
receiving the inducements in AS 43.90.110 (a) or
the commissioner of natural resources and the
commissioner of revenue are no longer signatories
on a valid contract under AS 43.90.
(b) Public members of the board shall be appointed by
the governor and are subject to confirmation by the
legislature. When appointing a public member to the
board, the governor shall consider an individual's
expertise and experience in natural gas pipeline
construction, operation, and marketing; finance; large
project management; and other expertise and experience
that is relevant to the purpose, powers, and duties of
the corporation. Public members of the board serve
staggered five-year terms. A public member serves at
the pleasure of the governor. A vacancy shall be
filled in the same manner as the original appointment.
10:01:51 AM
RICK HALFORD, FORMER STATE SENATOR, EAGLE RIVER, commented
that it was possible to gain a fantastic education on
issues while being a member of the legislature, as he once
was. He mentioned the National Conference of State
Legislatures (NCSL) and other institutions. He related that
he started his legislative career in the House Resources
Committee 35 years prior, and the first oil and gas issue
before him was the extension of the interim tariff on the
Trans-Alaska Oil Pipeline. He outlined the scope of inquiry
for a legislator to fully understand an issue. He relayed
that he received a degree from Alaska Methodist University,
with a Minor in Economics and Majors in History and
Political Science. He related the challenges in working 24
years in the legislature. He recounted serving on a gas
line committee in the 1990s, and chairmanship of the
BP/Arco Merger Committee. He listed his previous roles in
the legislature: the House Resources Committee, the Senate
Resources Committee, and the role of Majority Leader. He
highlighted continuous work with the oil and gas industry.
He discussed the Alaska Liquid Natural Gas project (AKLNG),
and called it a unique opportunity which he hoped would go
forward. He referred to the Alaska Standalone Pipeline
(ASAP) as "strictly a backup project." He stressed the
importance of the branches of government working together;
and commented on the massive scope, financial commitment,
and importance of the [AKLNG] project.
10:06:14 AM
Senator Dunleavy asked what the impact of HB 132 [current
legislation relating to policy direction of AGDC] would be
if it was not vetoed. Mr. Halford stated that he did not
know, but opined that the greatest positive impact was
people working together to get a solution from the
executive and legislative branches of government. He
thought the issue of the prioritization of the AKLNG
project and the ASAP project would be a source of
disagreement. He again emphasized the importance of moving
forward with compromise and working towards a common cause.
He highlighted the importance of the attitudes of the
executive branch and legislative leadership to try and be
on track with a major project going forward, and a
reasonable backup project. He commented that an investment
in differences would be a lost investment.
Co-Chair MacKinnon asked if Mr. Halford had signed a
confidentiality agreement. He answered in the negative, and
clarified that he was not necessarily opposed to signing
such an agreement, and thought it was necessary. He related
that he had signed a confidentiality agreement in the past
that had allowed him to view the business plans of BP and
Arco in the merger debate.
Co-Chair MacKinnon mused that it was difficult to make a
decision on whether one route was better than another if
one did not know what the other route was. Mr. Halford
concurred.
10:08:43 AM
Co-Chair Kelly asked Mr. Halford if he could discuss his
view of world markets, and if the world markets on liquid
natural gas (LNG) were "inviting" to a $50 billion or $60
billion project or if they precluded a project of that
size. He further asked if the provisions in SB 132 were
appropriate or were flawed. Mr. Halford opined that there
were huge difficulties in getting a project the size of
AKLNG to move forward. He mentioned the Point Thomson Oil
and Gas Project, and expressed hope for its success. He
remarked that the market had been much better at times in
the past. He observed that going to LNG provided the most
flexibility. He commented on the numerous issues involved
with putting that much liquid natural gas into the market.
He referred back to the challenges of a divided perspective
on the project.
Co-Chair Kelly asked Mr. Halford to comment on the
structure of SB 138. Mr. Halford asserted that "the
structure of the process is the structure of the partners
and the whole package."
10:12:17 AM
Senator Dunleavy asked what role AGDC would play in moving
into construction of a gas pipeline if HB 132 was vetoed.
Mr. Halford expressed that he did not know the answer, but
reaffirmed that the relationship of the legislative and
executive branches was more important than the components
and terminology of an individual bill. He considered that
if one could maintain a stream of information that was
logical on an economically viable alternative at minimal
cost, it made sense. He furthered that if it was a
competitive project it would create problems. He discussed
the issue of pipe strength, and recalled that it brought up
questions regarding such things as gas conditioning plants
and pump stations; which were tremendously expensive to
research and answer. He suggested that there was a large
sum of money for the purpose of researching and answering
questions, the answers to which might never be utilized.
10:14:14 AM
Senator Hoffman asked what the roles of the Department of
Natural Resources (DNR) and the Department of Revenue (DOR)
would be in commercializing Alaska's natural gas. Mr.
Halford underlined that DNR knew more of the project
details and confidential information than any other party.
He surmised that DNR would be a major player and the
question of marketing would be in its hands as well. He
reiterated that he had not yet signed a confidentiality
agreement, reasserted that he would sign one, and
maintained that he did not have the details of what such an
agreement would include. He spoke to the need for a level
of trust between the administrative branch and legislative
branch.
Senator Hoffman restated his question about the role of
DOR. Mr. Halford asserted that DOR would have the tax
structure and benefit structure pieces of the project. He
suggested that trust had different modalities. He referred
back to difficult economic times while he served in the
legislature, and hoped that the current body would do a
better job than was done previously.
Senator Dunleavy referred to competing philosophies on the
gas pipeline, and wondered if Mr. Halford saw the main
purpose of the project to bring inexpensive gas to
Alaskans, or as a revenue enhancement for export. He
commented that the market for inexpensive gas to Alaskans
was something the public hoped for, but observed that the
real benefit of the gasline would be revenue to the state,
which would in turn benefit Alaskans.
Senator Dunleavy asked Mr. Halford to comment on an
alternative in the case that the economics of a gasline did
not pan out. Mr. Halford stated that there was no way to
subsidize a project of its magnitude if it was not
economic. He discussed the economics of the project, and
suggested that the state had little control over the
outcome, which was largely determined by price changes. He
described himself as an "economic determinist."
10:19:26 AM
Vice-Chair Micciche referred to the three individuals with
a great deal of expertise who were removed from the AGDC
board, and asked if Mr. Halford felt comfortable
disagreeing with the governor publicly. Mr. Halford shared
his discomfort in disagreeing with the governor, yet avowed
he would communicate honestly with the governor. He
asserted his faith in the governor, and stated he also had
faith in the process.
Vice-Chair Micciche referred to a compass piece that
"dropped a bomb on the AKLNG process." He wondered if the
piece was a good entrance into a relationship with the
legislature on the project. Mr. Halford qualified that he
did not think the governor had anticipated the outcome of
the piece, and mentioned the steep learning curve to which
the governor was subjected to during his administrative
transition. He commented on the forthrightness of the
governor and the resultant concerns with his candor.
10:22:09 AM
Vice-Chair Micciche referred to the costs of the AKLNG
project, and the level of aggregate risk. He mentioned the
governor referring to a greater than 51 percent proportion
of ownership which, he asserted, left the people of Alaska
responsible for a very expensive project which was
dependent upon the price of energy globally. He asked Mr.
Halford if he thought Alaska could afford the level of risk
on such a large project. Mr. Halford shared that he was not
comfortable with the level of risk, and likened the
scenario to putting too many eggs in one basket. He
discussed revenues including the permanent fund. He
discussed the confusing notion of pondering a pipeline
without considering a conditioning plant or liquefaction
plant. He discussed project costs and scope. He suggested
that all the questions had not been answered.
Vice-Chair Micciche admitted that the AKLNG project was an
ambitious project, but the alternative ASAP project carried
with it numerous inefficiencies. He asked if AKLNG was not
viable, did Mr. Halford see any way that the ASAP project
(or other) would be economically feasible. Mr. Halford
stated that the problems were magnified substantially.
Co-Chair MacKinnon thanked Mr. Halford for his years of
public service. She asked Mr. Halford if he had experience
constructing a natural gas pipeline. Mr. Halford answered
in the negative.
Co-Chair MacKinnon asked Mr. Halford if he had experience
operating a gas pipeline or marketing gas. Mr. Halford
stated that he did not.
Co-Chair MacKinnon referred to the pipeline authorization
bill and noted that the legislature had endeavored to make
sure people had expertise and the pipeline and its benefit
to Alaska would outweigh any political participation.
10:26:53 AM
JOE PASKVAN, FORMER STATE SENATOR, FAIRBANKS, related that
he had been nominated for the Board of Directors for AGDC.
He shared his personal history as a lifelong Alaska
resident and emphasized his strong connection to the state.
He discussed his family. He related that he had been an
attorney in private practice for over 30 years, and had
been a rotary member for approximately 25 years. He
discussed other affiliations and memberships. He referred
to his experience as a state senator. He related that he
had been nominated as a public member under AS 31.25.020.
He mentioned his experience with construction, including
large state contracts and disputes. He added that he had
retained technical consultants to assist his clients'
interests. He expressed understanding for construction
schedules and had retained engineers to advise on projects
and timetables. He related that he had been professionally
involved with construction contracts for nearly all his
professional life. He informed that he was on two AGDC
subcommittees, the Technology Committee (led by Dave Kruz)
and the Commercialization Committee (led by John Burns). He
outlined the purpose of the subcommittees to be
information-gathering rather than taking action. He
discussed the overarching task of AGDC (as defined by
statute) and paralleled his professional experience in
securing and engaging technical advisors. He briefly
described the AKLNG project, a large diameter gas line, and
stated it had the probability of the biggest success for
Alaska. He outlined the ASAP project, a 36" gas line, and
described it as the backup project that was an economically
viable alternative if AKLNG faltered.
10:31:54 AM
Mr. Paskvan continued his presentation to the committee,
noting that AGDC did work that advanced both projects;
giving examples such as data sharing and framework, right-
of-way work, mapping, surveys, and environmental impact
statements.
Senator Bishop referred to the mention of trust by the
previous testifier, and asked Mr. Paskvan if he would
advise the governor to proceed with the AKLNG project (and
shelve the ASAP project) if it was revealed to be the most
propitious. Mr. Paskvan answered in the affirmative and
clarified his stance that the state's greatest potential
for economic return was with the AKLNG project.
10:34:08 AM
Senator Dunleavy asked what the impact would be if HB 132
was not vetoed. Mr. Paskvan ventured that the legislation
would restrict the ASAP project to production of 500
million cubic feet of gas per day. Senator Dunleavy asked
if Mr. Paskvan agreed that TransCanada did have a role, and
furthered under the AKLNG process it had an ownership role.
He elaborated that ultimately the determination of whether
the AKLNG project would proceed to the Front End
Engineering & Design (FEED) stage would be made in the
summer of 2016. He stressed the importance of understanding
that the AKLNG project could be a positive net-present
value project, and it could still be determined not to be
built. Under this scenario, it would beg the question of a
backup project to explore. He emphasized the importance of
the state doing due diligence to ensure that AKLNG was a
positive net-present value project.
Senator Dunleavy asked if Mr. Paskvan philosophically
agreed with TransCanada's role in the project. Mr. Paskvan
referred to TransCanada's part in the 25 percent ownership
of the AKLNG project, and commented that it was the law
regardless of his political feelings about it. He disclosed
that one of the reasons he had wanted to be on the AGDC
board was because he had considered it to be non-political;
rather, he had considered the intent of the committee to
pursue due diligence in looking at what projects were in
the best interest of Alaska getting low gas prices and
revenue in a non-political context.
Co-Chair Kelly asked Mr. Paskvan to discuss SB 138, and the
structure and potential flaws of the bill. Mr. Paskvan was
unsure if it was his position to look at strengths and
weaknesses of the legislation. He recounted that he and the
other prospective board members had but one meeting on the
subject and had not explored all the details. He suggested
that the policy decisions needed to come from the
legislative branch, and relayed that the board members had
operated within the policy when they previously met.
Co-Chair MacKinnon asked if Mr. Paskvan had signed a
confidentiality agreement so that he could understand the
project direction from the previous administration versus
what was being presented currently. Mr. Paskvan stated that
there had previously been discussion of such an agreement,
it was his understanding that it was in the draft stage,
and he would sign it when it was completed. He added that
it was his expectation that there would be a balance
between open and transparent government and appropriate
necessary confidentiality.
Co-Chair MacKinnon asked if Mr. Paskvan favored the
Southcentral terminus option for the gasline, or if he was
still considering the Richardson Highway route. Mr. Paskvan
asserted that he was not favoring politics of one route
over another, and commented that the ASAP line had planned
to go into Southcentral for a number of years. He
reiterated that he wanted to get to a project that had a
"positive net present value."
10:39:52 AM
Vice-Chair Micciche asked how Mr. Paskvan felt about the
concept of Payment in Lieu of Taxes (PILT) on the structure
of the gasline. Mr. Paskvan commented that the Fairbanks
Northstar Borough had, for many decades, relied
significantly upon the property taxes on the TAPS
facilities that went through the borough. He wondered if
PILT was an AGDC issue.
Vice-Chair Micciche clarified that his question regarded
the value of the pipeline over time, and wondered if Mr.
Paskvan could see a way that PILT could work while
satisfying the needs of impacted local communities. Mr.
Paskvan stated that he considered the judicial system to
have followed an appropriate process using evidence in
determining the property value of TAPS property.
Senator Hoffman asked Mr. Paskvan what role he saw AGDC,
DNR, and DOR playing in commercializing Alaska's gas. Mr.
Paskvan stated that DNR was required by law to market gas.
He added that DOR would be working with AGDC for purposes
of assessing the revenue streams and making sure the state
had a positive net present value for any project the state
would advance. He furthered that in these economic times
the state could not subsidize AGDC's project.
Co-Chair MacKinnon asked if Mr. Paskvan had individual
experience in building or constructing a natural gas
pipeline. Mr. Paskvan answered in the negative.
Co-Chair MacKinnon asked if Mr. Paskvan had individual
experience in operating a gas pipeline or marketing gas.
Mr. Paskvan answered in the negative.
10:44:18 AM
AT EASE
10:44:34 AM
RECONVENED
HUGH SHORT, GIRDWOOD, outlined his priorities as a board
member of AGDC: competitively priced and reliable in-state
gas; commercialization of North Slope gas resources through
the sale of LNG to global markets and access for in-state
demand; creating jobs for Alaskans in exploration,
production, development, and transportation of natural gas;
increasing opportunities for Alaska-based businesses;
providing additional revenues to the State of Alaska; and
building infrastructure for the development of on-shore and
off-shore oil and gas exploration and production.
Mr. Short outlined his background and qualifications for a
position on the board of AGDC. He shared that he had a
career in business and finance, most recently as chairman
and CEO for the PT Capital family of companies. He related
that PT Capital was in the midst of building a private
equity firm that focused on investments and small to medium
market companies in Alaska, Canada, Iceland, and Greenland.
He commented on the unique nature of the company, as
traditional private equity investment had previously been
done from outside of the state. He furthered that he had
built the company anchored by one of the largest sovereigns
in the world, with one of the most pristine reputations,
and surrounded by other well-regarded investors. He added
that additionally, one of the company's subsidiaries (PT
Securities) was the most northern Financial Industry
Regulatory Authority (FINRA) and regulated Securities and
Exchange Commission registered broker-dealer investment
banks in North America. He discussed the services provided
by PT Securities, and mentioned the outcome of further
development of a strong financial services sector in
Alaska.
Mr. Short discussed his over two-year chairmanship of the
Alaska Industrial Development and Export Authority (AIDEA),
and pointed out the appropriation of over $530 million in
capital and associated contributions by partners. He added
that the board had approved due diligence on an additional
$295 million in infrastructure development projects,
including the first investments in on-shore and off-shore
drilling rigs. He mentioned his chairmanship of the Alaska
Energy Authority (AEA), and his responsibility for the
implementation of the Susitna-Watana Hydroelectric project.
He reminded the committee that it was a $5.19 billion
project, and as chairman he was responsible for
implementation of the Federal Energy Regulatory Commission
(FERC) process as well as licensing and construction. He
discussed his achievements as chairman of AEA and AIDEA;
which included the institution of regular performance
evaluations, and tying key performance metrics to overall
organizational goals.
Mr. Short related that as president and CEO of Alaska
Growth Capital, he was responsible for the deployment of
$240 million of capital and financing for the acquisition
construction of telecommunications networks for GCI and a
high-cost arctic rural build-out. In addition, he was
responsible for the financing of businesses that worked in
Alaska's oil, mining, tourism, retail, logistics, and
transportation industries. He linked the activities of the
businesses to the core natural resource exploration and
production that fueled the state.
10:48:22 AM
Senator Hoffman disclosed that Mr. Short was his son-in-law
and that they did not share any business ventures.
Co-Chair MacKinnon referenced AS 31.25.020 and surmised
that Mr. Short had explained his relevant financial
experience and work in the markets.
Senator Dunleavy asked why Mr. Short wanted to be a part of
the AGDC board. Mr. Short thought it was an honor and a
rare opportunity to build an important piece of
infrastructure for the state, and considered his background
appropriate for creating the "next big infrastructure" that
would anchor the state's economy for the next century.
Co-Chair MacKinnon asked if Mr. Short believed there were
alternate routes for a pipeline terminus still on the
table. Mr. Short relayed that currently AKLNG was
contemplating a southern crossing of Cook Inlet to Nikiski,
after evaluation of Point MacKenzie as an appropriate
crossing. He opined that AGDC needed to keep focused on the
Cook Inlet crossing. He pointed out that the ASAP project
currently tied into the ENSTAR natural gas line, in to Mat-
Su; and he supported both of those routings.
Co-Chair MacKinnon asked Mr. Short to characterize the risk
to the state of Alaska as it continued to move forward with
two competing projects without yet knowing the economics of
AKLNG, which would provide the lowest-cost energy to
Alaskans. Mr. Short commented that he looked forward to
discussions with Lazard regarding their initial assessment
of bonding and appropriate risk to the state. He furthered
that the state did not own any gas and must therefore work
with its partners to access the gas and get the royalty and
production share to market. He considered the best path
forward to focus on AKLNG, and thought that AGDC was on the
right track with the project.
Co-Chair MacKinnon asked if Mr. Short had signed a
confidentiality agreement in order to understand what the
previous administration had proposed. Mr. Short conveyed
that he had participated in a governance committee meeting
at which the attorney general had been expeditiously tasked
with providing the board with a confidentiality agreement
to sign. He clarified that the agreement had not yet been
provided.
Co-Chair MacKinnon asked if Mr. Short had ever been
involved in constructing a natural gas pipeline. Mr. Short
responded in the negative.
Co-Chair MacKinnon asked if Mr. Short had experience
marketing a gas pipeline. Mr. Short responded in the
negative.
Co-Chair MacKinnon ADVANCED the names of Rick Halford,
Joseph Paskvan, and Hugh Short in accordance with AS
39.05.080 and recommended the appointments be forwarded to
a joint session for consideration. There being NO
OBJECTION, it was so ordered.
10:52:58 AM
AT EASE
10:54:36 AM
RECONVENED
Co-Chair MacKinnon commented that the committee would
recess until 3:00 pm that day, and at that time take up the
confirmation of Commissioner-Designee Hoffbeck.
10:54:57 AM
RECESSED
3:05:48 PM
RECONVENED
^CONTINUATION OF CONFIRMATION HEARING: DEPARTMENT OF
REVENUE - COMMISSIONER
3:06:08 PM
Co-Chair MacKinnon asked Commissioner-Designee Hoffbeck
what challenges he foresaw in implementing and collecting
the marijuana excise tax. She wondered if he saw any cash
management challenges, and asked at what point the state
would receive the tax revenue to include in the revenue
forecast book. Commissioner-Designee Hoffbeck surmised that
compliance would be the biggest challenge. He discussed
other states who had previously legalized medical marijuana
and used databases to work from; and noted that Alaska did
not have such a tool, which would add to the challenge. He
spoke to the federal prohibition on the banking of
marijuana funds, and wondered how DOR would receive them
from individuals. He commented that it would be a year or
two until a positive tax would register, depending the
structure of the law as well as how much the state would
need to modify existing systems to implement the tax. He
remarked that much of the information was speculation thus
far, since it was not known what the tax would be.
Co-Chair MacKinnon asked who would be reviewing the issue
of how to collect the marijuana excise taxes. She wondered
when the committee would be able to see a report outlining
her previous questions. Commissioner-Designee Hoffbeck
replied that the team reviewing the excise tax was led by
Ken Alper, the DOR tax division manager. He was unsure of
when there would be a plan ready for committee perusal, but
agreed to get back to the committee with the information.
Co-Chair MacKinnon continued to discuss marijuana excise
taxes. Commissioner-Designee Hoffbeck thought it would take
a year of implementation before seeing revenues from
marijuana excise taxes.
Co-Chair MacKinnon pondered that commercialization of
marijuana would not happen for a year, as licensing and
registration had to happen first.
3:08:56 PM
Vice-Chair Micciche asked if Commissioner-Designee Hoffbeck
had contacted other states to consult on dealing with
difficult fiscal situations, and whether or not he was open
to the idea. Commissioner-Designee Hoffbeck related that he
had looked at what other states had done; and although he
had not contacted any directly to solicit help or
solutions, he was open to doing so. He commented that most
other states had a more diverse tax base, where Alaska was
heavily dependent upon one industry. He described Alaska as
having limited its options by pulling away from other
revenue sources when oil was so profitable. He asserted
that the state would need to re-create the other revenue
options over the next year.
Co-Chair MacKinnon asked if Commissioner-Designee Hoffbeck
had any plans for moving forward aside from taxes.
Commissioner-Designee Hoffbeck reiterated his statement
that there was no "magic bullet" or single solution to the
problem of declining revenues; rather, it needed to be a
combination of various things. He mentioned investment
earnings, encouraging additional investment in the state
(as was done in SB 21), the state's savings, working for a
gasline, and taxes as options for revenue.
3:11:52 PM
Senator Dunleavy commented on the relatively small
population of Alaska and its large area with little
infrastructure. He mused that laws and regulations over
time were contributing much of the cost of government in
Alaska. He wondered if Commissioner-Designee Hoffbeck
foresaw himself or the governor's cabinet considering
reducing budget through examining such laws and
regulations. Commissioner-Designee Hoffbeck was not aware
that a discussion of laws had come up yet, however there
was a subcabinet group that was examining the relationships
between departments and areas where consolidations could
occur and more efficiencies could be gained. He thought the
concept of examining laws was a great idea.
Senator Dunleavy shared that he had been working with the
educational establishment to identify what items they could
remove to relieve costs. He remarked on the myriad of laws
and regulations imposed by the United States Department of
Education, the federal government, the state department of
education, and the state legislature that incurred costs.
He strongly urged Commissioner-Designee Hoffbeck to examine
laws and regulations that may have driven costs to the
state.
3:15:00 PM
Co-Chair MacKinnon mentioned a $4 billion draw from the
CBR, previously referenced by Commissioner-Designee
Hoffbeck in a press release. She referenced the 2014 Fall
Revenue Forecast, which had indicated the CBR would not be
exhausted until the year 2025. She asked Commissioner-
Designee Hoffbeck if he had a new target date for the CBR's
depletion, and if he could discuss the $4 billion draw.
Commissioner-Designee Hoffbeck stated that the target date
would be driven in part by the actions of the legislature
with regard to reducing the size of the budget. He
furthered that 2019 was the outside date for how long state
savings would last. He clarified that the projected date
did not assume use of investment earnings. He continued
that the projection was the genesis of moving the $4
billion in equities out of the sub-account, selling them
and reinvesting them in fixed-incomes in the main CBR. He
referenced statutory language that specified that for the
Commissioner of Revenue to invest within the subaccount,
they must assume that the monies would not be needed for
five years. He asserted that the assumption could no longer
be made, and so the equities were sold and reinvested in
the CBR as fixed-incomes.
Co-Chair MacKinnon mentioned that the spring forecast had
just been released, and noted that DOR had projected
increased investment earnings. She asked if Commissioner-
Designee Hoffbeck could speak to the higher projected
earnings in light of the $4 billion that was sold.
Commissioner-Designee Hoffbeck stated that he would need to
review the executive summary, however he had reviewed
numbers that indicated potentially having $75 million less
in investment earnings; partially due to the transfer, and
partially due to earnings not meeting forecasted levels
prior to the transfer.
Co-Chair MacKinnon clarified for the committee that she had
asked Commissioner-Designee Hoffbeck to quantify the loss
of income resulting from moving the funds from the CBR. Her
question related to why the state did not move the fixed
assets to the CBR so they would be available for sale
versus selling the assets outright. She asserted that she
would re-check the spring forecast to verify her assertion
about increased earnings.
3:18:27 PM
Co-Chair MacKinnon asked if Commissioner-Designee Hoffbeck
believed in a social justice philosophy in relation to the
state's investments, and wondered whether DOR looked at it
in that way. Commissioner-Designee Hoffbeck commented that
there were components within DOR investment policies that
had that element, and thought the state had completely
divested any investments that were associated with Iran. He
avowed that he would invest based on the investment
policies before him and leave the social conscience to
others.
Co-Chair MacKinnon asked if Commissioner-Designee Hoffbeck
could discuss commercialization of North Slope gas, and
wondered when the committee would see the proceeds as part
of the spring or fall revenue forecast. She wondered when,
based on the current administration's proposal, there would
be some reflection in the revenue resource book.
Commissioner-Designee Hoffbeck replied that until there was
certainty of a pipeline being constructed, revenues from
any gas commercialization would not show up in revenue
forecasts. He suggested that during the Final Investment
Decision (FID) phase it would be possible to see revenues
from gas commercialization.
Co-Chair MacKinnon asked how Commissioner-Designee Hoffbeck
saw his role in participating with the AGDC board in
bringing Alaska's gas to market, and wondered what his team
was doing to support the [AKLNG] project. Commissioner-
Designee Hoffbeck related that there were several DOR
employees that had signed confidentiality agreements and
had actively participated in fiscal negotiations. He shared
that he recently travelled to Houston, Texas to meet with
producers and their teams for various components such as
pipeline construction. He stated that he had participated
in robust conversations and gained a great deal more
information. He specified that ultimately it rested on
himself and the commissioner of DNR to make recommendations
to the governor on the gasline. He furthered that he
considered that they were a ways away from having the
information to make the recommendation. He reported that
they had asked the attorney general to give more guidance
on the confidentiality agreements. He continued that he and
the commissioner of DNR would like to be more actively
involved; however until the confidentiality agreements were
finalized, there was a limited amount of information to
deal with.
3:21:50 PM
Senator Hoffman discussed the Permanent Fund Earnings
Reserve Account and commented that it had been been
controversial as to how the revenues would be utilized. He
wondered how Commissioner-Designee Hoffbeck envisioned the
funds being spent on both operations and capital
expenditures. Commissioner-Designee Hoffbeck thought that
the funds should be an integral part of any solution to the
current revenue picture. He asserted that they funds should
be part of a larger fiscal package, where there was a
balance of expenditures and revenue options. He furthered
that he did not support immediately spending the investment
earnings as a solution; rather, it should be only a part of
the solution.
Senator Hoffman followed up to ask if the permanent fund
earnings should be spent on daily government operations
versus building infrastructure such as investment in the
gasline. Commissioner-Designee Hoffbeck stated that the
funds could certainly be used for either purpose, and
thought there were more options on the capital budget side,
where the state could bond for some of the infrastructure
improvements. He restated that the spending should be part
of a greater fiscal package, rather than to just "kick our
liabilities down the road." He surmised that if there was a
way to capture an opportunity early on, using debt rather
than spending operational money, it should be examined.
Vice-Chair Micciche discussed unpaid tax liability and
audits for taxpayers; he asked Commissioner-Designee
Hoffbeck if he was aware of any substantial outstanding
overdue taxes. Commissioner-Designee Hoffbeck stated that
there was a memo being prepared for the legislature with
regard to five recently issued oil and gas tax audits that
equaled a total of $258 million.
3:24:45 PM
Vice-Chair Micciche referred to a tax lawsuit involving the
City of Valdez and the Fairbanks Borough, and wondered if
there had been a final ruling and if it was part of the
outstanding tax monies. Commissioner-Designee Hoffbeck
clarified that he had referred to five oil and gas tax
audits. He furthered that the case Vice-Chair Micciche
referred to involved Valdez and the North Slope and while a
settlement was still being attempted, it had been scheduled
for litigation in the Superior Court of Alaska. He added
that a part of the settlement may be tied to trying to
settle the longstanding TAPS litigation. He elucidated that
the cases were related due to the options that Valdez, and
to some extent the North Slope, were tied to whether the
monies flowed to the municipalities from the litigation or
not. He reiterated that the state was attempting to resolve
both cases without further litigation.
Vice-Chair Micciche asked if the Valdez settlement would
make it uncomfortable for DOR to recoup funds from the
litigation. Commissioner-Designee Hoffbeck commented that
if the courts mandated a refund from litigation, DOR would
enforce the ruling of the court.
Co-Chair MacKinnon asked if, as a trustee of the Alaska
Permanent Fund Board, Commissioner-Designee Hoffbeck had
given instructions to the permanent fund staff to examine
converting more of the earnings reserve to cash,
anticipating a need to draw on the CBR. Commissioner-
Designee Hoffbeck responded in the negative, and stated
that the reason DOR drew from the subaccount in the CBR was
purely because it was statutorily driven. He clarified that
there was no plan to draw on the investment earnings of the
permanent fund, adding that it was part of the discussion.
He described the CBR as "the balancing point" of the
budget, and DOR was in "asset preservation mode" with the
account so the monies would be there when needed.
3:28:00 PM
Co-Chair MacKinnon commented that her staff had reviewed
the Department of Revenue Spring Forecast, and as she had
earlier pointed out, it indeed showed higher investment
earnings over the fall forecast. She asked Commissioner-
Designee Hoffbeck to inform her in the case that it was an
error. Commissioner-Designee Hoffbeck agreed to do so.
Co-Chair MacKinnon asked what Commissioner-Designee
Hoffbeck saw as an advantage of moving towards using a POMV
strategy, and wondered if it would protect Alaskan's
dividends. Commissioner-Designee Hoffbeck explained that
the North Slope Borough also had a permanent fund, and
although much smaller, it was not dissimilar to the State
of Alaska Permanent Fund. He continued that the North Slope
fund was managed as a POMV, with a percent of the market
value available for operations on an annual basis. He
remarked that it worked well, and did not have the issues
of realized gains, which required selling assets in order
to generate a dividend. He described that POMV had two
components: how to manage the permeant fund, and using the
market value to fund the dividend. He noted that all of the
investment earnings of the permanent fund (around $6
billion) were available for appropriation. He furthered
that if you re-deposited the earnings into the permanent
fund, and then used the POMV for the allocation of the
earnings, there would be a little over $2.5 billion
available. He supposed that POMV could protect the rate at
which the investment earnings could be depleted, but for
the long term a systematic withdrawal from the permanent
fund would slow its growth. He went on to say that if POMV
was used as a measure for the dividend, it may still be
higher than what was yielded from realized gains in any
given year.
Co-Chair MacKinnon commented that she thought the Permanent
Fund Board had a standing resolution to be on a POMV basis,
and thought it interesting to hear what Commissioner-
Designee Hoffbeck believed to be advantages in terms of
managing the asset and protection of a rate of return over
time.
3:31:16 PM
Co-Chair MacKinnon commented that Commissioner-Designee
Hoffbeck was in a position in which people needed to have
confidence in his actions. She contemplated that he had
moved $4 billion in anticipation of a state statute, and
wondered if he had rebalanced the funds, or if it was off
the table in cash. Commissioner-Designee Hoffbeck clarified
that the funds were invested in treasuries and bonds, and
rather than being in anticipation of statute, it was
directly dictated by statutes. He pondered the question of
moving the $4 million if it were not for the statutory
language, and concluded that he would probably have been
more aggressive and left some of the monies in equities. He
explained that the CBR had never had equities in it, but
DOR was looking at putting some equities in the CBR so as
to have the opportunity to capture some gains if the market
continued to rise.
Co-Chair MacKinnon observed that the current administration
was handling things differently from the past, to varied
effect, and perhaps less aggressively in terms of a return
on investment for Alaska. She mused on observing the future
rate of returns of the invested funds. Commissioner-
Designee Hoffbeck reflected that the market was currently
high and volatile, and there was much concern that it would
return to a "bear market." Consequently there was some
logic to the sale, even if it weren't for the statutory
language. He remarked that it had been an opportune time,
in a low market environment, along with the aforementioned
statutory language regarding use of the funds.
Co-Chair MacKinnon stated that over the past year the
legislature had approved (in January of 2014) a move of $3
billion; with what she believed to be a greater level of
caution used at investing and making the fund transfers.
She wondered if Commissioner-Designee Hoffbeck thought the
state's income had "taken a dip" after he had moved $4
billion from the CBR, and asked how much the treasury bonds
were yielding. Commissioner-Designee Hoffbeck stated that
he would have to verify the amount of yield, and reiterated
that $75 million was the potential decrease in investment
earnings. He furthered that it depended upon what the
market did before the end of the fiscal year, it had been
relatively flat since the monies were originally
transferred two weeks previously. He considered that there
was more flexibility in making three tranches in investing
into the retirement accounts. He felt that the statute was
clear in that he did not have the authority to invest in
the sub-account of the CBR.
3:34:29 PM
Co-Chair MacKinnon asked if Commissioner-Designee Hoffbeck
could explain how he viewed his fiduciary responsibility to
the State of Alaska. She remarked that it was his
responsibility to make the best decisions for Alaska,
regardless of what state statutes said. Commissioner-
Designee Hoffbeck disagreed with the assertion of
"regardless of state statute," and reflected that the state
statutes put boundaries around what he could do. He
contended that his responsibility was to balance risk and
return in order to get the greatest possible return at the
lowest possible risk, and he took that responsibility
seriously.
Co-Chair MacKinnon judged that Commissioner-Designee
Hoffbeck had moved $4 billion dollars rather quickly, and
wondered if he could assure the committee of whom he had
discussed the move with. Commissioner-Designee Hoffbeck
qualified that the move was contemplated with internal
discussions, based on looking at statutory language as well
as how the state was invested, and the group had felt it
was out of compliance with the statutes.
Co-Chair MacKinnon asked him if he could relate whom (from
inside the department) he had relied on for discussions.
Commissioner-Designee Hoffbeck named Gary Bader, Chief
Investment Officer, Treasury Division, DOR, and his staff.
He specified that they had met with the deputy
commissioner, the treasurer, Mr. Bader, and two of his
staff in order to discuss the options and best way to get
back into compliance.
Co-Chair MacKinnon asked if there was documentation of the
meeting. Commissioner-Designee Hoffbeck reported that there
were no minutes from the meeting, but there should be
documentation of the decision and it was perhaps posted
online.
Vice-Chair Micciche asked for the title and statutory
reference to the aforementioned five-year rule for
liquidation in the CBR. Commissioner-Designee Hoffbeck
replied AS 37.10.430.
Vice-Chair Micciche asked if Commissioner-Designee Hoffbeck
had the statutory language in front of him. Commissioner-
Designee Hoffbeck stated that he did not.
Co-Chair MacKinnon asked him if he had any conflicts of
interest in his ability to perform as the commissioner of
DOR. Commissioner-Designee Hoffbeck didn't believe he had
any conflict, but qualified that there was some lingering
issues associated with the prior work he had done for the
North Slope Borough in Valdez. He reported that the issues
had been vetted by the Attorney General's Office, and that
he was limiting his participation in certain litigation
because of the positions he had taken with previous
clients.
3:37:54 PM
Co-Chair MacKinnon mentioned legislation dealing with PILT
and wondered why the bill had no reference to previous
dialogue from meetings of the Municipal Advisory Gas
Project Review Board. She suggested that the legislature
had begun to receive feedback from the municipal advisory
board that indicated their thoughts or comments from
previous discussions may not have been reflected in the
legislation. Commissioner-Designee Hoffbeck related that
DOR had already had a teleconference with the oil and gas
producers, and it planned to teleconference with the
municipal advisory board to discuss the recommendations
they had made. He discussed fiscal negotiations and the
need for flexibility. He relayed that there were five
components within the PILT bill, and revealed that the
municipal advisory board had given their recommendation for
the input on each of the five components. He remarked that
finalizing property tax particulars was premature, and
rather than locking in the property tax portion, DOR had
locked in a structure that would limit discussions to the
five measurable components.
3:40:11 PM
Co-Chair MacKinnon opined that Commissioner-Designee
Hoffbeck had value to offer from a local perspective on how
the local communities felt about the asset [oil and gas
project] crossing or being placed on property that could be
taxed. She suggested that the state perspective might be
different, and that the legislature was trying to ascertain
a specific price to pay in order to have terms to negotiate
to benefit all of Alaska. Commissioner-Designee Hoffbeck
pointed out that the largest recipient of the property tax
of the pipeline [AKLNG project] was the State of Alaska. He
asserted that DOR was protecting the state interest as well
as the municipalities' interest. He stated that there were
three parts to the discussion: what was the idea of the
"take" during operations, construction impact payments, and
how much of the money flows through the municipalities
versus how much flowed through the state. He added that DOR
had one of the three discussions accomplished.
Vice-Chair Micciche clarified his previous question,
regarding payment over the tax cap. He asked Commissioner-
Designee Hoffbeck if the fact that he previously
represented the North Slope Borough made it uncomfortable
in the case that he had to execute an over-payment order.
Commissioner-Designee Hoffbeck confirmed that litigation
was one of the areas in which he had stepped back, and he
would execute whatever the courts or the negotiated
settlement dictated. He added that he had some strong
opinions on the record, and that was his reason for
stepping back.
Vice-Chair Micciche wondered how the commissioner would
deal with potential conflicts or the perception of
conflicts or awkwardness. Commissioner-Designee Hoffbeck
relayed that the best way, much like legislators had done,
would be to be open and transparent about his involvement
in the past. Additionally, if there were any questions
about the decision-making process, he would be open about
what the decision-making process was. He concluded that he
had, to the extent that was possible, backed away from
those areas where the conflict would be most egregious.
3:43:14 PM
Co-Chair MacKinnon asked if the Power Cost Equalization
(PCE) Fund was managed differently than the overall assets
the state had. Commissioner-Designee Hoffbeck clarified
that the biggest difference in the way the fund was managed
was that the PCE had a directed rate of return at seven
percent. He stated that the biggest problem in with the
directed rate was in a low market, one might have to take
excessive risks to achieve 7 percent.
Co-Chair MacKinnon thanked Commissioner-Designee Hoffbeck
for sharing his perspectives. Commissioner-Designee
Hoffbeck expressed his appreciation for Senator MacKinnon's
input.
Co-Chair MacKinnon ADVANCED the name of Randall Hoffbeck,
in accordance with AS 39.05.080, and recommended the
appointment be forwarded to a joint session for
consideration. There being NO OBJECTION, it was so ordered.
ADJOURNMENT
3:46:10 PM
The meeting was adjourned at 3:46 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 040715 DOR Confirmation Resume.pdf |
SFIN 4/7/2015 9:00:00 AM |
Confirmations 2015 |
| 040715 AGDC Confirmation Resumes.pdf |
SFIN 4/7/2015 9:00:00 AM |
Confirmations 2015 |