HOUSE BILL NO. 287 "An Act making an appropriation for oil and gas tax credits; and providing for an effective date." 9:24:54 AM REPRESENTATIVE GEORGE RAUSCHER, SPONSOR, thanked the committee for hearing the legislation. He introduced the bill with prepared remarks: House Bill 287 provides the $60 million that is still owed for the oil tax credits that were overlooked in the 2022 state budget. A promise made should be a promise kept and a statute written should be a statute followed. An oversight occurred for the legislators in 2021 that while trying to decide the proper funding source for the oil tax credits in the amount of $60 million, we ended the year with an amount owed to certain companies in the oil industry that actually never got paid. HB 287 rights that wrong and pays it from the undesignated general funds. Hundreds of millions of dollars were still owed certain oil companies their portion of these oil tax credits, and the state had an agreement to repay them by making our installments each year from the budget. As we move this state forward, we must protect our credit rating and put confidence back in our investors by paying our business partners what we owe them by law, we'll do just that. Last year we were $60 million short and by rights we're behind in our payments today. HB 287 will reverse that by paying this overdue note. Representative Rauscher asked his staff to review the sectional analysis. 9:27:10 AM RYAN MCKEE, STAFF, REPRESENTATIVE GEORGE RAUSCHER, reviewed the sectional analysis (copy on file): Section 1: This section appropriates $60,000,000 from the general fund to the oil and gas tax credit fund (AS 43.55.028) Section 2: This section specifies that the appropriation made in section 1 is for the capitalization of a fund and does not lapse. Section 3: This section provides that this act would take effect immediately under AS 01.10.070(c) Mr. McKee listed other individuals available online to speak to the bill. 9:28:11 AM KARA MORIARTY, PRESIDENT AND CEO, ALASKA OIL AND GAS ASSOCIATION (via teleconference), thanked the committee for the opportunity to provide testimony. AOGA is the professional trade association for the oil and gas industry in Alaska and we do represent most of the companies exploring, producing, refining, and transporting oil and gas resources in our state. Our mission is to advocate for the long-term viability of the industry and one of our organization's main priorities is to constantly advocate for the industry's fiscal stability and consistency, which in this case includes a long-term payment of the roughly $600 million in outstanding liabilities for the refundable tax credit program, which has been stated has ended, but of course the payments remain. Just as a reminder, the legislature created the oil and gas tax credit program over a decade ago to incentivize and encourage small producers to explore and produce in Alaska. To be eligible for these credits, companies had to have less than 50,000 barrels per day of production. I always like to clarify that companies like ExxonMobil, ConocoPhillips, and BP were never eligible for, nor did they ever receive these credits, nor would they receive any of the suggested $60 million appropriation in the bill before you today. Originally these credits were not cashable, but the legislature later allowed for direct cash payments after the program started and the program worked. We had a number of small companies that came to Alaska. Other existing small companies and refineries invested money in exploration projects, production enhancements, and refining upgrades and expansions. These credits for those that remember, were originally designed to bring new companies to Cook Inlet. Especially, at a time when the Southcentral region was preparing for natural gas shortages and were conducting rolling brownout drills throughout the Railbelt. Not only did the state benefit from investors coming to Alaska, like Hilcorp did, to Cook Inlet ten years ago, but the state also obtained data from companies they would not have been privy to before because companies needed to provide that information to justify the expenditures to approve the credits. So, the state gained by learning more about the resources through these credits. As the credit program was no longer feasible, given the state's unfortunate fiscal position several years ago, all of these investment-based cashable credits for the North Slope and Cook Inlet were completely phased out with the passage of House Bill 247 in 2016 and House Bill 111 in 2017. The gas storage facility and refinery credits have also sunset. This means the state no longer offers refundable or cashable oil and gas tax credits. I think it's also important to note that the money was spent by the companies prior to being eligible for these credits. So, the liability before you in this bill and the remaining balance is for work that has long been done. While there are other entities around the state that hold these credit certificates awaiting payment such as the Interior Gas Utility, almost half of my membership is impacted by this outstanding balance. Including one in-state refinery, Petro Star, which is a wholly owned subsidiary of Arctic Slope Regional Corporation, explorers like Repsol, which is a 49 percent owner of the Pika Unit, and other small producers like Blue Crest, ENI, Furie, HEX, and Glacier Oil and Gas, are all part of the overall credit liability. 9:33:03 AM Ms. Moriarty continued her prepared remarks: I think the question today, as you all know, is not whether the state should have offered this tax credit program or not, but the question is really should the state pay the minimum statutory payment as outlined in AS 43.55.028 for the credits that have already been earned. Statewide, hundreds of millions of barrels of oil along with trillions of cubic feet of gas still sit in the ground waiting to be developed. Many by the very same companies influenced to invest here by the state's tax credit programs. Even Alaska focused companies rely on owners and investors from all over the world and while prices are certainly higher today than a month ago, let alone a year ago, the fact is the industry is still trying to come out of the pandemic. Our workforce has not recovered, and we see more and more companies, unfortunately, like AIG yesterday, announcing that investors do not want to invest now or insure in the Arctic. This is an attempt, as Representative Rauscher mentioned, to make the minimum payment whole. As we know, there was an attempt to resolve this entire outstanding debt in 2018 when the legislature passed House Bill 331, a bond program. But unfortunately, that program was deemed unconstitutional by the supreme court and so we actually had a couple of years while we were waiting for that court decision where the legislature did not fund anything at all. In positive news, the governor has included the minimum statutory payment in his budget for FY 23. We at AOGA recognize the structural fiscal challenges that the State of Alaska is facing and so we are not advocating for a full immediate payout of the credits nor for the credit program to return. But we do support the state funding the minimum statutory payment and I know many of the committee members support that as well. We thank you for the opportunity to testify today and for your consideration of this bill. 9:35:21 AM Representative LeBon referenced Ms. Moriarty's mention of the list of tax credit holders. He asked if there was a bank holding some of the credits. Ms. Moriarty answered the state had updated its report earlier in the year, but she did not have it on hand. She stated it was likely a bank may hold the credits because a company may have sold its credits as a note for financing. She highlighted that the Department of Revenue (DOR) had a list of the credit certificate holders. Representative LeBon recalled from several budget cycles past there was a bank holding some of the credits. He explained the situation meant a bank had secured a loan with the tax credits and the borrower was unable to pay the loan back, and the bank now owned the credits. He stressed that it was not a success. 9:36:56 AM Representative Wool thought Ms. Moriarty likely could not share the companies waiting for payment. He mentioned a past document the committee had received showing prior credits paid. He detailed it was possible to interpolate about some of the companies on the list. For example, he believed there were likely some natural gas developers and providers from Cook Inlet. He asked if his statement was fair. Ms. Moriarty confirmed there were natural gas developers in Cook Inlet that earned the credits. She did not know whether the specific developers had been paid what they were owed. She stated that DOR maintained the list and published it annually. She did not have the list on hand. Co-Chair Foster stated in the past there had been significant focus on some of the companies being from out of state as opposed to Alaskan. He pointed out that in the current year there had been at least one Alaskan company come to legislative offices to let legislators know there were Alaskan companies on the list. 9:38:20 AM Representative Josephson asked if any AOGA members had ever indicated a preference on the payment source from the state Treasury. Ms. Moriarty replied that AOGA members did not have a preference in regard to the fund source. She understood the funding source had been part of the debate the previous year when the legislature had been trying to determine how to get the credits paid. She informed members that AOGA recognized and appreciated the intent [to pay the credits] was there. Co-Chair Merrick stated she had offered an amendment in the past to pay the credits in full, from the Constitutional Budget Reserve (CBR). She asked about the rationale for paying the credits at present versus the previous year. Representative Rauscher recalled the difficulty the legislature had trying to get the $60 million in credits paid the previous year. He detailed that paying the credits had bounced back and forth between different ideologies over the funding source. He explained that the chosen funding source had ultimately been the CBR, which had caused a problem because many House members believed the CBR was a savings account that had been robbed from $17 billion down to $1.5 billion and lower. He elaborated that those members also believed that the money taken from the CBR was never paid back as it should be according to statute. He believed the difference in ideologies over the CBR fund source had caused the payment to not be made. He believed there had been an idea that there would be a correction on the Senate side, but that had not occurred. He speculated using the CBR as the fund source may pose the same problem in the current year. He explained it was the reason he had selected a different funding source in the proposed legislation. 9:41:15 AM Co-Chair Merrick asked if the ideology was that keeping money in savings was more of a priority than paying the tax credits. Representative Rauscher disagreed with the phrasing. He believed if the state had a checking account with sufficient funding to pay, it should be used as the funding source instead of a savings account that had not been repaid as specified by law. Vice-Chair Ortiz stated his understanding the bill would provide a makeup payment for the [FY] 22 payment that had not been made. He remarked that the $60 million funding in the governor's budget was the FY 23 payment. He asked for verification the intent of the bill was to makeup for the payment that had not been paid the previous year. Representative Rauscher confirmed the funding in the bill made up for a payment that had never been made in FY 22. He clarified that the funding in the governor's budget was for the FY 23 payment. 9:43:28 AM Co-Chair Merrick remarked that Co-Chair Foster noted the FY 23 operating budget contained $199 million to pay the credits. Representative Wool noted that the committee had put some time into oil and tax credits the previous year. He believed for the most part, the committee had been supportive of the concept. He recalled that at one point the funding would have come from Alaska Industrial Development and Export Authority (AIDEA) reserves and he believed an amendment proposed by Representative LeBon had ultimately passed. He stated that at the end of the day the committee wanted to pay the credits. He stated the legislature had drawn from the CBR on multiple occasions. He recognized that technically the CBR was owed over $10 billion. He referenced Ms. Moriarty's testimony that credit holders did not care where the funds came from. He had been somewhat surprised that many people had voted against the bill on the floor the past year. He pointed out that some of the companies were Alaskan, some were natural gas companies in Cook Inlet, and some employ many Alaskans. He highlighted the Statutory Budget Reserve (SBR) was another savings account that had been used in the past to pay the PFD. He asked if the same ideological issue existed around the SBR as with the CBR. 9:45:37 AM AT EASE 9:47:43 AM RECONVENED Representative Wool clarified his previous question. He explained there had been objection to paying the oil tax credits from the CBR the previous year. He recalled the majority of the House Finance Committee members had wanted to pay the credits. He asked if there would be a savings account problem if the funds were taken from the SBR in the future. He noted things had been paid from the SBR in the past. Representative Rauscher answered that he had not considered the idea. He did not know the current balance of the SBR and did not know what was funded by the SBR in the current budget. He did not have enough information to answer the question currently, but he would follow up. Representative Carpenter directed a question to DOR. He understood there was a forthcoming spring revenue update. He stated his understanding that oil prices and revenue were up. He stated the legislature could continue to posture about what had taken place in the past or it could ask whether there was sufficient funding in the General Fund with higher prices of oil to pay debts from general funds. Alternatively, he wondered whether debts needed to be paid from savings due to insufficient general funds. 9:50:03 AM COLLEEN GLOVER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE (via teleconference), replied that the funding and the budget was not really a Tax Division question. She detailed that DOR had published a revised forecast showing general fund receipts were expected to be much higher in FY 22 than projected in the fall forecast. She believed the question pertaining to the budget could be better answered perhaps by the Office of Management and Budget. Representative Carpenter asked if there was $60 million in additional revenue in excess of the amount projected in the fall forecast that could be used to pay debts from the previous year. Ms. Glover replied affirmatively. She encouraged members to look at projections from mid-February on the DOR website. She reported that updated cashflows projected additional FY 22 General Fund revenues of $572 million. Representative Carpenter stated the philosophical question was whether to pay the state's debts from the General Fund or savings account. He reasoned the state had plenty of money to pay the debt from the General Fund. Representative LeBon clarified that he had supported the amendment to pay the $60 million out of the CBR, but he believed the co-chair had offered the amendment. He asked if it was inappropriate for a member of the committee to amend HB 287 to pay the $60 million from the CBR. Representative Rauscher replied that he did not oppose the option; however, it had not worked the last time. He was trying to eliminate the possibility of treading the same ground over and getting the same result. He referenced an earlier comment he had made that the previous year legislators who had voted against the use of the CBR funds had relied on the Senate to come up with a fix, which had not occurred. He stated he had used the word "oversight" related to the Senate. He apologized for any potential misunderstanding about his remark. 9:53:27 AM Representative LeBon directed a question to Ms. Moriarty. He highlighted that the FY 23 budget currently included almost $200 million for oil and gas tax credits. He asked if the industry believed the dollar amount included the missing $60 million from FY 22. Ms. Moriarty answered that the $199 million in the governor's FY 23 budget was the minimum calculation for FY 23 and did not include the unfunded $60 million from FY 22. Co-Chair Foster stated his understanding that the minimum amount could increase because it was driven by formula. He explained that if the numbers in the spring forecast were higher than the fall forecast, the amount owed for oil tax credits in FY 23 could potentially be much higher than the $199 million currently in the operating budget. He asked Ms. Glover if his understanding was accurate. Ms. Glover answered that the formula was based on projected production tax revenue. She explained that as the department was projecting increased tax revenue it would [increase the amount in credits owed]. She relayed that the current projections, released mid-February, were shown on the department's website. She elaborated that the updated number for the FY 23 tax credits owed was $263 million. She informed the committee that the number could potentially increase under the upcoming spring forecast. 9:56:11 AM Vice-Chair Ortiz asked if including the $60 million for the amount owed from the previous year in addition to the FY 23 amount owed for tax credits in the operating budget would accomplish the intent of HB 287. Representative Rauscher agreed. Representative Carpenter stated his understanding that any formulaic increase in the amount owed due to an increase in revenue would only apply to the statutory minimum for FY 23. He asked for verification the increase would not apply to the amount owed from the past year. Ms. Glover answered that the statutory formula was for the appropriation and the appropriation amount was at the legislature's discretion. She explained it was at the legislature's discretion to choose to add $60 million on top of the amount owed based on the spring forecast. She referred to a letter mentioned earlier in the meeting that had been provided to the legislature the previous month and showed the current outstanding tax credit balance at about $565 million. Representative Carpenter stated his understanding that if there was a larger number for FY 23 tax credits, the legislature would still have to appropriate an additional $60 million to cover the past year's shortfall. Ms. Glover replied affirmatively. She explained that the formula for FY 23 only included the amount for FY 23. She highlighted the $263 million owed for FY 23 based on the updated February numbers and detailed that the $60 million would need to be added to the figure if the legislature wanted to make up the funds from the previous year. Representative Carpenter asked Ms. Moriarty if industry cared how the credits were paid via HB 287, the supplemental budget, or the current budget bill. 9:59:44 AM Ms. Moriarty replied in the negative. The industry did not have a preference related to the funding source or mechanism. She explained that the industry had long advocated for the minimum statutory amount to be paid annually. Co-Chair Foster provided a summary pertaining to the payments owed. He detailed that the $60 million for FY 22 was set; therefore, even if prices were up in the current year, it did not mean the FY 22 number would increase. He elaborated that the current committee substitute for the operating budget included the governor's original request of $199 million for FY 23. Once the spring forecast came out in mid-March, any member could choose to offer an amendment either in committee or on the House floor (depending on the location of the budget bill) to increase the number from $199 million to $263 million. Likewise, legislators could also offer an amendment to bump up the FY 23 amount to account for the $60 million. Representative LeBon asked Ms. Glover for the current value of the CBR. Ms. Glover responded that she would follow up with the information. Representative LeBon replied that it was not necessary for Ms. Glover to follow up with the information. He referenced earlier comments made by Representative Rauscher indicating there had been some voter remorse by some legislators (who had voted against the CBR draw to pay the tax credits) over the expectation that the Senate would fix the oil and gas tax credits payment. Representative Rauscher thought Representative LeBon was reading more into the statements he had made previously. He believed the vote likely expected the Senate to fix the situation. He was not certain where Representative LeBon's word "remorse" came from and did not believe it fit. He added that he agreed with part of Representative LeBon's statement. Representative LeBon stated that he had supported paying the $60 million in credits from the CBR in the past. He understood it had not been the preferred funding source because it had failed on the House floor. He communicated his preference and support for returning the funding source to the CBR. 10:03:28 AM CAROLINE SCHULTZ, POLICY ANALYST, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR, answered that based on the DOR forecast that had been updated in February, the estimated CBR end balance for FY 23 was about $1.9 billion and $2.9 billion in FY 24. Representative Josephson asked what made the projected numbers grow from $1.9 billion to $2.9 billion. Ms. Schultz answered a considerable reason for the projected growth was the increased revenue projection included in the February numbers. She reported that the revenue projection had increased from the fall forecast by approximately $1 billion. She elaborated that given the CBR estimate was based on the governor's budget, the $1 billion increase in revenue was functionally projected to be deposited into the CBR. Representative Josephson asked if it was because until it was allocated somewhere else, it would be swept. He surmised it assumed the legislature would leave the funds in the General Fund because the legislature had not communicated otherwise. Ms. Schultz agreed. Co-Chair Merrick thanked Representative Rauscher for his presentation. HB 287 was HEARD and HELD in committee for further consideration. 10:05:30 AM AT EASE 10:13:50 AM RECONVENED