HB 379-OIL & GAS PROPERTY TAX  8:08:34 AM CO-CHAIR LEDOUX announced that the first order of business would be HOUSE BILL NO. 379, "An Act relating to the limitation on the value of property taxable by a municipality; and providing for an effective date." 8:08:57 AM CO-CHAIR NAGEAK introduced HB 379, which is sponsored by the House Community and Regional Affairs Standing Committee of which he is a co-chair. He said the North Slope Borough is seeking a legislative change that will provide more flexibility in managing its own budget, while providing a sliding scale for municipalities to lower taxes on oil and gas properties. He summarized the history of the North Slope Borough. Beginning in the late 1960s oil was discovered in Prudhoe Bay, and his people were excited, but also apprehensive, because if anything happened in areas of traditional hunting and gathering, it would have tremendous impact on the people and their way of life, so, initially, residents were against development in that area. He recalled coming home from serving in the Army in 1972 and seeing a completely different world. "It is an opportunity for our people to move forward; to build things; but first we had to form some sort of instrument to help us do that." He noted that the leaders, like Eben Hobson, Jake Adams, and others, started the land claims and the formation of the borough. The people were uneasy, he said, but over the years they came to believe that the oil industry and the people's way of life, including the animals and the environment, can coexist. "That was a new thing for us; we've seen the oil industry be a good neighbor in the State of Alaska," he said, but it was not always like that. CO-CHAIR NAGEAK said that when the borough was being formed, there was considerable anxiety from the industry and the state, and he recalled hearing that the Inupiaq were ignorant and could not govern a municipality. They were told that they were not far from the Stone Age and the area was so vast and there were no family ties within the area. But for a millennia, his people lived and traveled together, and he pointed out that his grandfather was an Inupiaq missionary with a parish that went from Barrow to Kaktovik and to the Canadian border. He has relatives everywhere: Point Hope, Kotzebue, Anaktuvuk Pass, Wiseman, and maybe even in Russia, he noted. Inupiaq and other Alaska Natives have always had a form of government, but they were characterized as ignorant and unable to run their own affairs, and if they had a borough and money started coming in, they would "go crazy and spend everything on frivolous things." 8:16:32 AM CO-CHAIR NAGEAK said, "The reality is another story." His people organized and became a home rule government in a fashion like no other, and "from the get-go they knew what they were doing." He spoke of the charter of the North Slope Borough: to take care of the land, give everyone a say, and consider the wildlife, and it was written by young men chosen by Eben Hobson. To this day, it is one of best charters in the state-it even has a department of wildlife management, he said, because it is important to have viable animal populations. He noted that he was the director of that department for about six years. He asked, "What has happened since 1972?" He recalled waking up some mornings, freezing-cold, and heading to the warmth of the school mechanical room to wash up before walking in the front door of school. Today, there are beautiful schools, airports, runways, roads (although still dusty and filled with potholes), clinics, and an educational system that is equal to anywhere in the state. Co-Chair Nageak attributed it all to what the North Slope Borough has provided. He repeated that the state and the oil industry were against forming the borough, and so the state sued the people of the North Slope, because "they didn't trust us." The borough has been very successful and he is proud. He has been an assessor and a mayor, and he recalled that at the age of 24 he was talking with oil industry people about billions of dollars. "We didn't back down. We got the valuation that we thought was enough for the North Slope," he said. 8:23:41 AM CO-CHAIR NAGEAK said, "Forty-some years later, we're in the same dang boat." He said HB 379 would amend "the way the valuation is." The same people who sued the people of the North Slope are keeping the borough from making the desired changes. One accusation is that the borough would make Alaska lose money, he said. Since the borough was formed, it has operated on an 18.5 mill rate, although it is allowed a 20 mill rate, and "we didn't use it all because we're good people," he said. The 1.5 mill is $30 million annually, and it goes to the State of Alaska. The state has benefitted from the borough, and since it was formed, the borough has given the state $1.2 billion, and "that's being a good steward," he said. 8:27:50 AM JOHN BITNEY, State Government Liaison, North Slope Borough, noted the importance of knowing the history in terms of "where did this come from and why are we talking about it." Under current law, the state assesses a property tax on oil and gas properties at 20 mills, and the municipalities have authority to set a tax rate that can capture some of that, up to 20 mills. The North Slope taxes 18.5 mills, which leaves 1.5 mills to the state, he explained. He said the North Slope Borough is trying to amend a formula that was crafted in the early 1970s in state law that puts a cap on what a municipality, with oil and gas property, can use from those revenues for its operations budget. He said the formula essentially caps the amount of oil and gas property tax revenue that can be used for an operating budget. This is not a bill to raise taxes, but rather to raise the cap that limits what municipalities can use for their operations budget, he clarified. 8:30:48 AM CO-CHAIR LEDOUX asked if all municipalities have the cap. MR. BITNEY said the cap is a general law of applicability that applies to all oil and gas properties, and there are different formulas that a municipality can choose. He stated that the law applies to all, but there are two municipalities where the oil and gas revenues are the most significant form of income, by far, and that is the North Slope Borough and the City of Valdez. 8:32:26 AM CO-CHAIR LEDOUX inquired as to why the state should even care how a municipality spends its funds. MR. BITNEY answered that "somebody did care," and "that is the frustration that brings us here today." He said that when the state was beginning to develop its gas and oil resources, a limitation was placed in statute. REPRESENTATIVE FOSTER requested an explanation of how [the statute] works. 8:33:39 AM MR. BITNEY pointed to a 2013 annual report produced by the state assessor called, "Alaska Taxable," and he said there is a good explanation of the formula on page 34. It shows two formulas, and one sets the operating cap (which is the focus of HB 379), and there is also the actual tax rate, he said. The formula takes the average per capita of the full value of the municipality, multiplies it by 225 percent, and then multiplies that by the population, and the product is the operating cap. In 2013 it was $174.6 million. "Once you have that number calculated by the state assessor's office, you then move down to the formation of the borough's budget and the actual tax levy amount that the borough puts in place," he explained. The borough sets that $174.6 million as the operating budget, and that works out to be 9.08 mills of tax. He said that the borough taxes at 18.5 mills, so the difference between that and the 9.08 mills of property tax equals what the borough is allowed to use for the debt service for its capital needs. Over all of these years, the North Slope Borough has built up its infrastructure to a point where it does not need the debt service amount, he stated. What it needs is flexibility to spend more on operations to maintain the existing facilities. It is an inefficient system to try and pay for things with debt, considering its interest charges and issuance costs, he added. He said that HB 379 changes the formula for the operations cap by increasing the 225 percent multiplier. 8:37:41 AM CO-CHAIR LEDOUX asked about eliminating the formula altogether. "Why does anybody have to regulate ... how much they can spend for this and how much they can spend for that?" She suggested that the borough be allowed to tax at 20 percent and leave it at that. REPRESENTATIVE FOSTER said that is a great idea. MR. BITNEY said what he wants to emphasize is that it is the borough's full intent to stay at 18.5 mills. 8:39:34 AM REPRESENTATIVE FOSTER asked if there was a number, or a cut off on the sliding scale, that the borough would prefer. He asked if the borough would like to make that decision each year and what they wanted the legislature to do. MR. BITNEY said it is a sliding scale in HB 379. The intent was to alleviate concerns that, if a formula were eliminated, it would leave unlimited headroom for taxes to go up, and "we have tried to craft something here that shows that that's not our intention." That is why it is crafted as a sliding scale. In fact, if [the tax] goes above 19 mills there will be no benefit of an increased multiplier, but if [the tax] goes below 18.5 mills, there would be a higher multiplier than what is being proposed for the borough. He said there may be an incentive to lower taxes, which would remit more of that revenue to the state. In essence, by lowering taxes there is a gain in flexibility with the higher multiplier, he explained. At a 300 percent multiplier within the 18 mill range, there will be about $50 to $55 million of flexibility for the borough. This is an annual exercise of the mayor and the assembly, but in looking at the history of budgets and taxation, 18.5 is a steady number by the borough. He added that state law requires that the mill rate apply equally to all taxpayers, so anyone raising taxes will have to face the local constituency. 8:42:40 AM REPRESENTATIVE FOSTER surmised that the borough does not intend to increase the 18.5 mill rate, because the state has a concern that an increase would leave the state with less [money]. If the borough decreases that rate, the state would get more [money], because "if you go down to 18, well now the state picks up 2 mills instead of 1.5, so that's better for the state, but the intent, though, is maybe to stay at 18.5 or go lower, and however that sliding scale within how the borough wants to spend that money, part of it goes to debt, part of it goes to operations-I'm totally fine with that." 8:43:31 AM REPRESENTATIVE REINBOLD said she is not sure that she fully understands the intent of HB 379. She noted that she was part of an initiative in Anchorage to cap taxes, so she finds this really, really interesting. "Our operating budgets were getting out of control-they still are, but at least this helped," she explained. She said a 9 percent operating budget is impressive, if that is how much the borough is spending. She said she wants to ensure that nobody is paying more, even on existing structures. MR. BITNEY said that was true. 8:44:21 AM REPRESENTATIVE REINBOLD surmised that, right now, the municipality collects 18.5 [mills], but only 9 percent is used for the operating budget. "It sounds like you think that you have enough capital projects, so the capital projects are not going to suffer in this, is that correct?" MR. BITNEY said that is correct. 8:44:34 AM REPRESENTATIVE REINBOLD said it is a good example if the borough is able to keep a low budget and living affordable. The schools are not going to be impacted; the roads are not going to be impacted; none of the infrastructure is going to be impacted-"is that correct?" MR. BITNEY answered that what is needed is maintenance, so the impact would be to keep it all in good shape for years to come. 8:45:02 AM REPRESENTATIVE REINBOLD said she believes that a lot of people use capital money for maintenance, and she really thinks that maintenance and improvement should be in the capital budget. REPRESENTATIVE KITO III declared that he has a conflict because of a contract with the North Slope Borough on another issue. He then pointed to the formula in the taxation manual and asked about the 30 mills identified in the first calculation. 8:46:35 AM ROB ELKINS, Deputy Director, Administration and Finance, North Slope Borough, said the first thing that the North Slope Borough uses is the formula in AS 29.45.080, which allows the borough to choose between either developing a budget of $1,500 per person or 225 percent per capita value of assessed property, multiplied by the borough population. He said that the borough uses the second figure. It provides an equivalent tax base, so in the current year, the North Slope Borough has a total assessed tax base of $17.9 billion, he explained. Because of the calculation required under AS 29.45.080(c), the borough takes the per capita average full property tax value, which is $146,000, and multiplies it by the 225 percent allowed in statute and comes up with an average modified full value of $330,152. That number is then multiplied by the population (18,637), which provides an equivalent tax base. "So rather than being able to tax for operations that entire $17.9 billion, we have a modified tax base of $6.153 billion-that number then has a 30 mill limit as identified under statute, applied to it, which gives, this year, the North Slope Borough $184 million to use for operations and leaves a leftover of $146 million for debt service." 8:49:16 AM REPRESENTATIVE KITO III asked where the 30 mills is in statute. MR. ELKINS said he will have to get back to the committee. CO-CHAIR NAGEAK noted his conflict of interest as he is a resident of the North Slope Borough. 8:50:21 AM CO-CHAIR LEDOUX said he [and Representative Kito] will be required to vote, and she opened public testimony. STEVE VAN SANT, State Assessor, Alaska Department of Commerce, Community & Economic Development, said that the 30 mill language is in AS 28.45.090(a), and it restricts the maximum operating budget to 30 mills or 3 percent. 8:52:27 AM SCOTT BRANDT-ERICHSEN, Attorney, Ketchikan, said he is only representing himself and that he worked on a case several years ago related to the statute being discussed. He originally believed that HB 379 was special interest legislation to give the North Slope Borough and Valdez a larger portion of the oil and gas tax revenues, but after reviewing the bill, he sees it as an opportunity to fix something that has annoyed him. Firstly, the fiscal note will likely relate whether the amount of revenues going to the state will be impacted by HB 379, but the sections of law that he has had concern with, AS 29.45.080(b), 090(b)(1) and (c)(1), deal with the limit of $1,500 per capita. He noted that the 2013 "Alaska Taxable Report," pages 24-25, shows per capita revenues by municipality. The North Slope Borough is $45,340 per capita and Juneau is $2,420 per capita, and better than half of the municipalities are above the $1,500 per capita limit. "I would submit that that $1,500 a year per capita limit serves no purpose and is ineffective." He said the state assessor's office has treated those two limits as disjunctive-meaning that the municipality only has to comply with one or the other. Since the $1,500 limit has no real meaning, he suggested eliminating it. He said he also sees a benefit from eliminating both limits altogether. A better limitation on the levy of taxes would be what the local community would be willing to pay, he opined. From a public policy standpoint, both the 225 percent limit and the $1,500 limit should be eliminated for all municipalities and then decided by voters. 8:57:08 AM ANGELA RODEL, Commissioner, Alaska Department of Revenue, said she would like to give the state's perspective on oil and gas property tax. It is important to know that the tax is a mechanism for Alaska to receive revenue from areas that greatly benefit from oil development and to allow the money to spread to other parts of the state. Additionally, oil and gas property tax affects Alaska's oil production tax calculations, "so when you take off limitations on oil and gas property tax, that's a deduction on the oil production tax, which feeds 90 percent of the state budget." She said the state is supportive of the borough's need for more funds to its operating budget, and the bill before the committee has created a mechanism that allows the borough to adjust mill rates to account for more operating budget revenue if needed, but "we have a $10 million potential negative affect, and that's simply to recognize the fact that if the borough does in fact ... raise its tax rate and take the full 20 mills, the state would have an impact of about $10 million as opposed to $30 million, which you heard Representative Nageak speak to earlier." She noted that there is no reason to believe that the borough will do that. 8:59:19 AM CO-CHAIR LEDOUX asked if the borough could do that now-increase the tax rate from 18.5 mills to 20 mills. COMMISSIONER RODEL said, "They could increase it and it would have an impact of $30 million; the reason they don't is because they haven't-and they don't intend to-and they're fully using their operating budget now, and I think that's the beauty of the creation of the sliding scale is that it does minimize the impact on the state at this time." 8:59:59 AM REPRESENTATIVE FOSTER spoke to the sponsor statement, which says that the municipality would gain more flexibility by lowering the taxes, and lowering the taxes appears to increase the multiplier. The goal is to be able to spend more on operations, and, right now, the borough is being restricted by the formula. "I was a little bit concerned when I saw the $10 million here because I thought it's not the intent of the borough, I guess, to increase their mill rate." COMMISSIONER RODEL agreed. That is her understanding. "We try to make a point to outline the impacts for you so that you understand when you're making decisions about the bill." 9:01:18 AM REPRESENTATIVE HERRON noted that Commissioner Rodel called it "the beauty of the sliding scale," and he asked if the scale could be modified to be more advantageous for the state. COMMISSIONER RODEL said the state worked hard to find a mechanism that did not impact the state, but [the statute] applies to any municipality with oil and gas property tax. To have zero impact on the state would force municipalities with higher mill rates to cut them, she explained. "We think the sliding scale is as neutral as we're going to be able to get," she added. 9:02:32 AM REPRESENTATIVE KITO III asked why a limit was placed on operating funds originally. COMMISSIONER RODEL said she does not know, but she knows there is the 30 mill rate that applies to all municipalities, and this multiplier was to equalize property values with areas without oil and gas property tax. 9:03:30 AM MATT FONDER, Director, Tax Division, Alaska Department of Revenue, said he believes that is the basic premise [of the statute], but he does not have the exact legislative intent. The statutes are about 40 years old, he noted. CO-CHAIR NAGEAK said it has been more than 40 years, and the borough has never gone above 18.5 mills. It never will because people understand that "we have to be good stewards of not only our municipality, but we need to be good citizens of the state." Being good citizens means sharing some of the wealth-"we could go all the way to 20; we could have, but we choose not to and we will continue to choose not to," he stated. 9:05:25 AM CO-CHAIR LEDOUX closed public testimony. She said HB 379 is good legislation, but if she had drafted it, she may have eliminated the entirety of the formula, but she does not want to slow the bill down to do that. REPRESENTATIVE HERRON moved to report HB 379 out of committee with individual recommendations and the accompanying fiscal note. There being no objection, it was so ordered.