SB 242-PIPELINE PROP TAX USED FOR REV. SHRING SENATOR DAVE DONLEY, sponsor of SB 242, explained communities statewide are faced with the possibility that the pending property tax limitation initiative may pass this year. The initiative will have drastic effects on what local governments can collect as property taxes and it will reduce the current 30 mill limit to 10 mill the State imposes on communities. SB 242 addresses the impact of the initiative and it would go into effect if the initiative passes. The initiative limits what local governments can collect for property taxes; it has no impact on the existing State oil & gas property tax. The State has a 20 mill cap and a provision allowing it to only collect the difference between 20 mills and what local governments collect. Currently, of $240 million in oil & gas property taxes collected statewide, the State only gets $23 million because the local communities are capturing that money. If the initiative passes, the ability of communities to capture that money would decrease and the State's share would increase. A provision in the initiative allows communities to continue to retire existed bonded debt. Communities can exceed the 10 mill cap for existing debt, but they can't incur additional debt until the mill rate is below 10 mills or less. Next year, the State will receive an extra $5-8 million because the local communities' debt will begin to retire so the State's share will increase. The State may receive $130 million each year in the far future. SB 242 dedicates the money the State will receive from oil & gas property tax to the existing municipal assistance formula. SB 242 will utilize the new revenue the State is receiving to help communities that would be hard hit by the initiative. This is a step to mitigate the impacts. Number 407 CHAIRMAN KELLY asked about the legality of the contingent effective date and whether Senator Donley requested a legal opinion about the language. SENATOR DONLEY said the drafters did not express concern about it. He will request a specific opinion from the drafter on the language. SENATOR MACKIE asked why it will take an initiative. SENATOR DONLEY stated the affect of the initiative, if it passes, is that it will generate additional revenue for the State. If it doesn't pass, the status quo remains, and the local communities will continue to collect the revenue from oil & gas property. SB 242 is not going to hurt existing communities. If they are hurt by the initiative, it will help mitigate the effects by taking the additional money the State would get if the initiative passes and give it to the communities. SENATOR MACKIE asked if SB 242 will try to mitigate an unintended consequence. SENATOR DONLEY stated that it may be an intended consequence if the backers of the initiative think the city should not have that money. The initiative will hit some cities harder than others. SB 242 is not a full fix to that problem. SENATOR MACKIE asked what kind of affect it will have on the North Slope Borough (NSB), Valdez or some other communities. SENATOR DONLEY said those communities will be hit hardest by the 10 mill cap because they are at the 20 mill level and they will no longer be able to capture the value of all property, including oil & gas. Because the NSB has such a high level of bonded debt, the immediate impacts will be delayed until it starts to pay off the debt, then the impact will be very significant. The communities that will be hit hardest by the initiative are the ones that don't have bonded debt and are exempt. The ones that have bonded debt along the pipeline corridor are eventually going to be hit the hardest. Number 445 SENATOR MACKIE asked if the money goes back to where it was collected or whether it will be distributed throughout the municipalities. SENATOR DONLEY stated the revenue from the oil & gas property tax is designated to fund the current municipal formula. It goes out to communities statewide under that formula. SENATOR PHILLIPS asked why the State doesn't just let them have what is requested in the initiative. SENATOR DONLEY said the initiative doesn't address the existing oil & gas property tax. The State doesn't get that money now because local communities are getting it. This is a way to partially mitigate the impacts without creating new local taxes. SENATOR HOFFMAN said SB 242 should be held off to see if the initiative passes and, if the voters implement the tax cap, then the options should be weighed. Number 475 SENATOR DONLEY said that is a point to consider. The State should also see what the affects of inaction are. The State will get additional revenue if the initiative passes, but there would be no plan to mitigate the effects on communities. SENATOR MACKIE asked if this is another way to cut $8 million out of municipal assistance because they have a new revenue source. SENATOR PHILLIPS suggested passing a 10 mill limit and taking the initiative off the ballot so the legislature could write something that is workable. SENATOR DONLEY said SB 242 will not go into effect unless the initiative passes. It would have no impact on any community if it doesn't pass. It is a way of mitigating the effects if it does pass with money the State wouldn't normally get. CHAIRMAN KELLY said if the initiative doesn't pass, it is back to the status quo. If the initiative passes and SB 242 passes, then the additional money that is coming from the pipeline communities would go into a statewide pool to be redistributed through revenue sharing statewide. SENATOR MACKIE asked if that will require a constitutional amendment. SENATOR DONLEY stated it is just like issues that suggested to the legislature that this issue should be the source of funding. Number 500 MR. KEVIN RITCHIE, Alaska Municipal League (AML) and Conference of Mayors, stated the tax cap and revenue sharing are key issues for the State. AML has not taken a position on SB 242, it is working with the State assessor and the municipalities to try and gauge the issues. If the tax cap passes, the Municipality of Anchorage will lose $73 million in revenue out of the current $230 million in tax revenue. If the initiative does pass, it will add $125 million to the State's fiscal gap. Those funds need to be found somewhere else for schools, public safety and other services provided by municipalities. When the public understands about the tax cap, the initiative will not pass. CHAIRMAN KELLY asked Mr. Ritchie if he has seen polling data about the initiative passing. MR. RITCHIE replied yes. The polls from Anchorage showed 50 percent opposed, 41 percent in favor, and 9 percent uncommitted on the initiative. A large group of people that it would impact have children and it will hurt education. The pressure would be strong for the State to re-examine all tax exemptions. The public understands that property taxes fund schools, police, and other services. SENATOR PHILLIPS asked who the Municipality was polling. Senator Phillips talked about an initiative in the State of Washington. He stated that the State should just pass legislation limiting the cap at 10 mills, and work with it from there. Number 549 MR. RITCHIE said the municipalities understand that it is a threat to a revenue source and they will take very serious steps. AML is working with different groups who don't like the initiative. One concern is to make everyone aware of the impacts of the initiative. CHAIRMAN KELLY asked if Mr. Ritchie heard about a potential lawsuit questioning the constitutionality of the initiative. MR. RITCHIE said putting it on the ballot and the constitutionality of the initiative are two separate issues. It is possible that lawsuits will be filed if the initiative passes. CHAIRMAN KELLY asked about lawsuits being filed prior to the initiative going on the ballot. MR. RITCHIE replied he is not aware of any. Number 574 SENATOR MACKIE asked what the impacts from the initiative are going to be on the municipalities. MR. RITCHIE stated that Anchorage expects to lose $73 million immediately; the impacts of that are going to be huge. The total bonded debt of municipalities for the entire state amounts to $1.4 billion. The public doesn't realize part of the problem is the assessment cap. TAPE 00-01, SIDE B MR. RITCHIE discussed the impacts to Sitka. No matter how much the value of the property increases, the property tax increase is restricted to two percent. Property value is set at the true market value when the property is sold. This creates a significant disincentive for buying, selling, or building new homes. SENATOR MACKIE asked if there is a constitutional question about that. MR. RITCHIE said it is a Proposition 13, just like California's. It is not in violation of the U.S. Constitution. Number 570 SENATOR MACKIE asked if AML was worried about people coming out of the woodwork to vote because they will be paying less in property taxes. MR. RITCHIE said the public understands what local governments produce. Parallels can be drawn, and the public can see if it loses that funding, it loses libraries, teachers, and police. SENATOR PHILLIPS cited statistics from his district from an annual questionnaire. MR. RITCHIE said AML will work hard to explain the impacts to the public. Mr. Ritchie referred to a survey taken by Senator Pearce. Number 522 SENATOR MACKIE explained if people think they will pay less in property taxes, they will vote for the initiative. CHAIRMAN KELLY asked, with a 10 mill cap, what community will lose revenue that will be shared in different districts. SENATOR DONLEY said different communities lose different amounts depending on the number of years estimated and depending on the existing debt accumulated by communities. It will be disproportionate in the beginning. Eventually the communities with oil & gas properties will lose access to wealth they currently have: NSB, Fairbanks, and Valdez. SB 242 will not hurt those communities if the initiative doesn't pass, it will help them if it does pass because it gives back revenue that they will lose. Number 498 SENATOR MACKIE asked if downsizing municipalities is an option. MR. RITCHIE said currently AML doesn't have a position on that. CHAIRMAN KELLY asked if it is too early for NSB, Fairbanks, and Valdez to oppose the bill. SENATOR DONLEY stated the bill doesn't hurt those communities, it will return money to them they would lose if nothing happens. SENATOR MACKIE asked how the bill returns a portion of the money back to those communities. Number 482 SENATOR DONLEY said this is money the State doesn't have and wouldn't get unless the initiative passes. If the initiative passes, the extra money that would have gone to the communities will go to the State. It seems reasonable to send the money back to the communities. SENATOR HOFFMAN said if the public sees the money returning to the communities, it will be more likely to vote for a tax cap. SENATOR MACKIE moved SB 242 out of committee with individual recommendations. There being no objection, the motion carried. CHAIRMAN KELLY adjourned the meeting at 2:49 p.m.#