HB 370-MUNICIPAL TAX EXEMPTIONS  8:36:06 AM CHAIR TILTON announced that the final order of business would be HOUSE BILL NO. 370, "An Act relating to municipal tax exemptions." 8:36:48 AM REPRESENTATIVE SEATON moved to adopt the proposed committee substitute (CS) for HB 370, Version 29-LS1551\H, Shutts, 3/25/16, as a work draft. CHAIR TILTON objected for discussion purposes. 8:37:50 AM HEATH HILYARD, Staff, Representative Cathy Tilton, Alaska State Legislature, on behalf of the House Community and Regional Affairs Standing Committee, sponsor of HB 370, on which Representative Tilton serves as chair, stated that the proposed legislation would amend AS 29.45.050, which pertains to optional municipal tax exemptions for economic development projects. He explained that the current statute is too narrow for municipalities to effectively use, particularly for larger economic development projects. MR. HILYARD said Version H has a "tightened" title. Other changes were recommended by Legislative Legal and Research Services to restructure some provisions. He directed attention to [inserted] language on page 2, lines 13-18, and [deleted] language on page 3, lines 3-10, and he said, "Essentially what is now Section 1 was previously ... Section 3 of the existing statute." The most significant change, he explained, is that the original bill version provided that the tax exemption could exist for only five years; Version H would require municipalities to determine on a case by case basis how long they want to extend the property tax exemption for projects they want to incentivize. He said there were testifiers via teleconference and in the room who could testify regarding the proposed legislation. 8:40:15 AM REPRESENTATIVE DRUMMOND observed that the designated time period was up to five years, and she asked if there would be a limit under Version H on what the time period could be. MR. HILYARD clarified that the new language [on page 2, line 3, of Version H], states simply, "a designated time period"; therefore, it would be up to each municipality to determine what time period of necessary for a particular project. 8:40:46 AM REPRESENTATIVE HUGHES directed attention to language [beginning on page 1, line 10, through page 2, line 1], which read as follows: The municipality may provide for renewal of the exemption under conditions established in the ordinance. However, [UNDER RENEWAL,] a municipality that is a school district may only exempt for more  than five years all or a portion of the amount of taxes if that amount exceeds the amount levied on other property for the school district. REPRESENTATIVE HUGHES, regarding the use of the word "However", asked, "Is the exemption per school district somehow tied to the economic development concept also or is it separate?" MR. HILYARD deferred to Ron Long from the City of Seward. 8:41:56 AM RON LONG, Assistant City Manager, City of Seward, in response to Representative Hughes' question, related that the City of Seward does not have a school district; its schools are managed by the Kenai Peninsula Borough. He offered his understanding that "this relates to the local effort requirement throughout statutes for municipalities that have school districts," and he said that protection needs to be built in "so as not to affect the calculation for determining the ... required local contribution to education." REPRESENTATIVE HUGHES surmised then that there would be no economic development component in which the school must participate, but rather there would be just a five-year limit. MR. LONG responded that is correct according to his understanding. 8:43:05 AM REPRESENTATIVE SEATON queried whether there was anyone available to address the issue of school districts and property tax. Referring to the language previously highlighted by Representative Hughes, he said he was trying to figure out "if that's meaning 50 percent or we're talking about tax rates." MR. HILYARD deferred to Chris Shutte. 8:43:55 AM CHAIR TILTON removed her objection to the motion to adopt the proposed committee substitute (CS) for HB 370, Version 29- LS1551\H, Shutts, 3/25/16, as a work draft. There being no further objection, Version H was before the committee. CHAIR TILTON opened public testimony on HB 370. 8:44:39 AM CHRIS SHUTTE, Director, Office of Economic and Community Development (OECD), Municipality of Anchorage, in response to the question from Representative Seaton, stated that OECD is thrilled to see the proposed legislation. He explained that for a number of years his office has struggled with how to implement AS 29.45.050(m) and has "come up short." He said the proposed, relatively simple changes would provide the opportunity to be more proactive in the community development effort. He offered the example of a proposed distribution facility that is being brought forward by the Odom Corporation, which has two distribution facilities in Anchorage and is looking to combine them into a simple site. Because of the scarcity of suitable large industrial land in Anchorage, the site that the Odom Corporation has selected is less than desirable and would require tremendous amounts of infrastructure and investment to bring on line. The facility will cost $48-$49 million, and the corporation must invest up to $4 million just to improve the underlying infrastructure. He stated that for that project and a number of others in Anchorage, that amount of infrastructure investment can make or break particular projects, and there are no tools in place for the city to proactively partner with some of its private sector investors to facilitate that infrastructure investment. MR. SHUTTE said the changes being proposed under Version H would allow the Municipality of Anchorage to create local incentives that allow the city to participate in these infrastructure investments, which in turn foster increased private sector development investment in the community. He said being able to offset some of the infrastructure investment up front through the tax abatements that would be allowed through the proposed legislation would provide an opportunity to create "an exciting and dynamic program" that could not only facilitate development with existing investors in Anchorage, but also encourage investors outside Anchorage and the state of Alaska to do business with the Municipality of Anchorage. 8:47:59 AM REPRESENTATIVE DRUMMOND asked Mr. Shutte to describe more particularly how the Odom Corporation would use the tax exemption proposed under HB 370. MR. SHUTTE answered that the Municipality of Anchorage would enact local ordinance; it would create the criteria by which the Odom Corporation and others would demonstrate the need, the economic impact, and the return on investment (ROI) for any particular project so that the city has a strong sense of the value of its investment. He said the investment would typically come through a tax abatement - a reduction in the corporation's taxes - over a set amount of time to recoup the upfront investment that the Odom Corporation is required to spend for the infrastructure. For example, if the corporation has a requirement for $3-$4 million-worth of roads and sewer work, the city would tailor a tax abatement such that over five or six years most of, if not all, the upfront investment could be recouped by the corporation through reduced property taxes. In response to follow-up questions, he said the abatement is not a permanent tax reduction, but rather is designed to offset the initial investment and to help lessen the upfront capital outlay of the corporation and allow it to be spread out over a longer period of time. He said the time it takes the city to replenish or refund the infrastructure investment on the Odom Corporation's behalf would be the duration of the tax abatement, and after that period of time the taxation would resume at its full level. 8:51:23 AM REPRESENTATIVE SEATON offered his understanding that Mr. Shutte was not talking about tax deferral. MR. SHUTTE confirmed Representative Seaton was correct; [the tax abatement] would be a partial or total exemption of a total of the capital investment. REPRESENTATIVE SEATON surmised that the abatement could apply not just to the roads and infrastructure, but also to the development of the project itself. MR. SHUTTE answered that as currently worded, [Version H] focuses on the actual physical infrastructure required for a potential development. He offered his understanding that it would be up to the individual municipalities, once they enact their local ordinances, "to determine the extent of that." He said for Anchorage, the focus would be on public infrastructure that services the sight rather than the actual development of the building or project itself. REPRESENTATIVE SEATON asked Mr. Shutte, "You're not reading this - the bill the way it is - as limiting it to that; it could be the entire project. Is that correct?" MR. SHUTTE offered his understanding that was correct and that it would be up to the individual jurisdictions "to set the criteria or the definitions." 8:53:52 AM REPRESENTATIVE HUGHES asked how specific the ordinances would be. For example, one entrepreneur is going to start a winery and another is going to start a brewery. She asked if a city council, preferring beer to wine, could chose to give the exemption to the brewery but not to the winery. She explained her concern was regarding whether cities would be picking winners and losers or if the ordinance would encompass any developing business that met the criteria under the proposed legislation. MR. SHUTTE answered that he thinks that would be an issue for individual municipalities to address. For Anchorage, the criteria used to evaluate projects would be much more quantitative rather than qualitative. He said he did not think it would be fair for a council to determine who to give an exemption to, based solely on the product or service provided. He said, "The end goal is to look at this as an investor would look at it, so that the decisions that are being made by the local assembly or the local government ... are directed by the numbers rather than the qualitative aspects." REPRESENTATIVE HUGHES asked Mr. Shutte to confirm that he envisions the local ordinance could be written to support certain businesses or in a way that would accommodate any business that fit the city's criteria. MR. SHUTTE reiterated that it would be up to the local government to determine how it would like to structure its incentive program. He added that from a community development standpoint, having the flexibility to craft either a broad program or a neighborhood program has positive appeal, but he opined that the ultimate decision should be up to the individual jurisdiction. 8:57:02 AM REPRESENTATIVE DRUMMOND remarked that it is difficult to ask questions about a theoretical project. Notwithstanding that, she speculated that under HB 370 the Odom Corporation would be allowed to build the roads and do drainage and sewer work around its project that would normally be done by the municipality's Department of Public Works, and it would be able to pay for it by means of the tax abatement. She asked if that was also Mr. Shutte's understanding. MR. SHUTTE answered yes. He said, "This is essentially municipally required infrastructure ...." He explained that a lot of times the private sector investor is required to develop publically owned pieces of infrastructure as part of its development agreement. He indicated that the Municipality of Anchorage has witnessed this requirement be a "make-or-break" for certain deals. Mr. Shutte stated that because of the way the tare system works, for the utilities in particular, the "cost causer" is the "cost payer." He explained, for example, that [Anchorage Water & Wastewater Utility] (AWWU) cannot proactively create water and wastewater infrastructure in anticipation of a future development, because the cost has to be borne by the cost causer; therefore, the responsibility for spending the money on the infrastructure ultimately falls to the private sector developer. MR. SHUTTE said the proposed legislation is a tool that would allow the municipality to partner, in essence, with the private sector developer in exchange for the temporary tax relief to the private sector. The municipality, at the end of the tax abatement, would still acquire the public infrastructure. He concluded, "It's essentially a tool that will allow us to further build out our city and our infrastructure." REPRESENTATIVE DRUMMOND mentioned the construction of the new Natural Pantry [in Anchorage]. She offered her understanding "that firm" was required to shoulder the burden of building the entire road used by people to access the U.S. Post Office, a library, and to travel through a neighborhood. She asked, "Is this the kind of public infrastructure that this statute would support in the future?" MR. SHUTTE answered that is correct. He said often there is significant capital requests placed on private sector developers to meet the municipality's development standards. In the case of the Natural Pantry, [the developer] had to improve the street to a higher standard and connect it to existing transportation network in order to move forward with development. REPRESENTATIVE DRUMMOND said she had heard a lot of grumbling when "they were required to build that public infrastructure." She asked if [that developer] would, [under HB 370], be allowed to retroactively apply for a tax abatement. MR. SHUTTE offered his understanding that the proposed legislation would only apply to future development. 9:02:20 AM CHAIR TILTON asked Mr. Shutte if he was able to address Representative Seaton's previous question about the language in the bill regarding school districts. MR. SHUTTE responded no, but suggested that Mr. McGee would be able to address the question. 9:02:48 AM MARTY McGEE, State Assessor, Division of Community and Regional Affairs (DCRA), Department of Commerce, Community & Economic Development (DCCED), responded as follows: This particular portion of the existing law has never been tested in court, and there isn't much in the way of legislative intent to understand the meaning of the original language. The interpretation has been that it's intended to protect the school districts' source of revenue, so that these exemptions don't reduce the amount of required local contribution, but hold it stable, even though the new development is subject to the exemption .... The language is not very clear as to exactly what was intended or how to interpret the specific language in the existing code. Also, to add any optional exemption, the exempt value's added back to the full value of determination, which is then a component of the required local contribution for schools. ... That's true in any of the optional exemptions and true ... of everything exempted under the proposed changes to the current code. 9:04:43 AM REPRESENTATIVE SEATON said he is confused. He said, "If it gets added back into the school district formula, then it's not applicable there." He continued: And so, I'm not sure why there's a 50 percent -- I mean, I think it's 50 percent. ... As I read page 1 ..., you can exempt ... all or a portion of it if it exceeds the amount levied on other property of the district. ... Is your reading of that ... the new development is more than 50 percent of the tax base or are we talking about the tax rate would be less than that levied on other property in the school district? MR. McGee offered his interpretation that [under Version H], the tax rate would change for the area. He said in terms of public infrastructure there is the potential that the special service area would be created, which would change the tax rate. He said he cannot explicitly answer Representative Seaton's question, because the law is not clear and has never been tested. He said, "The language, to me, could be improved, but I don't know the intent." He said normally, when talking about a levy, the discussion is about the amount of tax - not the tax rate. However, both components could be included in that term. REPRESENTATIVE SEATON proposed that the committee may wish to clear up the language, considering that even the state's assessor could not determine "whether we're talking about the tax rate or the tax amount." 9:06:56 AM REPRESENTATIVE DRUMMOND asked which municipality in Alaska is also a school district. REPRESENTATIVE SEATON offered that Juneau is, and he indicated that in Anchorage there are municipal boroughs that also are school districts. CHAIR TILTON suggested that Representative Drummond could get an answer from Kathie Wasserman, whose testimony would be forthcoming. 9:07:29 AM JOHN BITNER, Vice President, Anchorage Economic Development Corporation (AEDC), testified in support of HB 370. He said, "As an economic development organization in the Southcentral area for over 30 years, we're always excited to get new tools in the economic development tool box." He said Mr. Shutte did a great job of explaining the excitement of municipalities over the proposed extension of the timeline for the property tax exemption. He said AEDC works with a variety of private sector businesses - over 230 companies make up its membership - and the corporation has heard repeatedly over the past years the difficulties that have arisen when trying to make deals, particularly for new construction in the Anchorage area. He said giving local governments the ability and power to tailor economic development tools and tax reductions to a specific level of economic development needs in their communities is "a wonderful way to incentivize growth on a local level, without impacting the state budget." 9:08:59 AM MR. BITNER, in response to a question from Representative Seaton, said his understanding of the proposed legislation is that it would be up to the local government to determine the scope of the exemption. He said he does not know if there would be any upward limitations on that scope, but nothing he read in the language limited the application to utilities. REPRESENTATIVE SEATON asked Mr. Bitner, "Would the intent of your group be that this should be to public infrastructure and that being abated, or would it be other elements of the project, as well?" MR. BITNER answered that the goal of AEDC has always been to generate and expand new businesses, and whatever tools can be used to accomplish that will be supported, as long as it is part of a fiscally responsible solution. He said in this case, when looking at national trends and incentives of this kind that are implemented in the Lower 48, in the short term the municipality or local government has a reduced tax income from the property, but benefits in the long term from newer construction and expanded infrastructure, utilities, and transportation. He said it would be up to the local governments to determine their risk profile and tolerance to reduced tax rolls, which he indicated is what makes the proposed legislation interesting. 9:12:31 AM MR. LONG observed that the proposed legislation would introduce two new provisions. First, it would remove the five-year limitation on the original term of the exemption or deferral, which recognizes that a five-year initial limit is not something that a larger, more capital-intensive project can build into a business plan with any certainty about its renewal. He said the proposed provision would remove the uncertainty. He noted that the second new provision would be to add an additional level of protection, which would require that at the end of the deferral or exemption, the project expands the tax base, thus increasing tax revenue to the local government. He offered his understanding that the requirement for it to be public infrastructure is not in existing language and is not built into the bill language, but, as Mr. Shutte pointed out, is a creative use for finding a way to offset some costs. MR. LONG suggested there may be projects developed in municipalities that don't require a public infrastructure component or there may be a project that already has all the public infrastructure "at its doorstep" and needs only to develop the private side. He stated, "The exemption here or the deferral is for taxable property that is private property, and then the local government would need to pass the needs test in the eye of their public ... to find the right measure that's ... politically and socially acceptable locally." He opined that that determination is best made at the local level. He stated the City of Seward's support for HB 370. He reminded the committee that other than the two provisions he outlined, everything else mentioned in the bill is part of already existing statute. 9:15:15 AM REPRESENTATIVE SEATON, regarding expanding the five-year time period, said, "Previously the bill has up to five years and then the municipality may provide for renewal." He asked, "If we're doing something that may be a 20-year tax deferral or tax exemption, is there a need to retain this renewal exemption here if we eliminate the five years?" MR. LONG responded that he would agree that there is no need to retain it. He said, "If it is up to the local municipality to determine the initial terms, it would be up to them to determine subsequent terms if needed." 9:16:26 AM KATHIE WASSERMAN, Alaska Municipal League, testified that AML supports HB 370. She outlined a couple issues that are important to AML. The first, she said, is local control. She said AML believes municipalities are best situated to make decisions that will affect them and their tax payers. She said that is why the proposed legislation is inviting, because it would give that local control. Further, she said that "in light of some of the bills that were dropped yesterday by Senate," she thinks municipalities need "every single tool they can get." She said she thinks municipalities will not be able to invite much economic development "if we are totally broke." MS. WASSERMAN echoed Mr. Long's comments about language in the bill being in current statute, and she concurred with Mr. McGee's statement about the language being confusing, but remarked that that is how current statute read. To Representative Seaton, she said, "Back to this full and true value that we talked about on another bill, it's all to make sure that the school contribution is dealt with in a way where it's clear to us. This is not necessarily clear, but I think that was the intent." Regarding Representative Drummond's question about school districts, she said all 18 boroughs in Alaska have control over their schools and have school boards, "so, those are the municipalities they're talking about." She added that there are also "about 20-something first-class cities in the unorganized borough, which also have school districts," for example, the City of Craig, the City of Pelican, the City of Klawock, and the City of St. Mary's. 9:19:08 AM REPRESENTATIVE SEATON asked Ms. Wasserman if she thinks the proposed legislation should include a renewal time related to the municipalities being given the ability to make exemptions. MS. WASSERMAN answered that she sees no reason to make a date, because she opined that should be the call of the community, which knows what it can afford. She expressed certainty that if a municipality does not do something correctly, then their voters will respond. CHAIR TILTON closed public testimony on HB 370 after ascertaining no one wished to testify. 9:20:58 AM The committee took an at-ease from 9:21 a.m. to 9:23 a.m. 9:23:12 AM REPRESENTATIVE HUGHES said she thinks there are still questions that need to be answered in Section 1. She said she believes the committee wants to ensure the bill will allow the economic development exemption option that is the intention of the proposed legislation; therefore, she expressed concern about moving HB 370 out of committee before that issue has been addressed. 9:23:49 AM REPRESENTATIVE SEATON offered his understanding that Mr. McGee, as state assessor, had said that "although this is exempt, it is part of the tax base for ... the school district, but it's unclear in here." He said he would like the committee to "bring back an amendment" that clearly states that the money that is exempt would still be used for "the calculation of ... local required effort." He said he thinks such an amendment would clear up both existing and modified language, and it would be helpful before HB 370 is sent to the House floor. He said, "We've got this other thing that's superfluous in there now - that they may provide for a renewal - when we've taken away the five-year timeframe." He indicated that the amendment he desires would address language on page 1, lines 10-11, and on page 2, lines 3-4. He opined that would clarify [existing] statute. 9:25:29 AM REPRESENTATIVE HUGHES offered concern about the clarity of HB 370 in that she understands the House Community and Regional Affairs Standing Committee is the only committee of referral for the proposed legislation. 9:26:00 AM REPRESENTATIVE SEATON clarified that some testimony addressed public infrastructure; but HB 370 is not limited to public infrastructure. He reviewed that HB 370 would address local options, wherein local governments would determine time frames and decisions could include economic development properties having deferrals, as shown on page 2 of Version H, or exemptions, as shown on page 1. He said there would be, under HB 370, a tremendous amount of flexibility for local communities, which he appreciates. [HB 370 was held over.]