SENATE BILL NO. 186 "An Act establishing a limit on the general obligation debt that may be authorized and issued by home rule and general law municipalities; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Donley moved to adopt CS SB 186, 22-LS0851\C as a working draft. There was no objection and the committee substitute was ADOPTED. Co-Chair Donley testified this bill would set limits on bonding exposure to local governments in Alaska by placing a $10,000 per resident ceiling on municipal general obligation bond debt. He noted the bill also limits the mil rate to one-percent for oil and gas property tax for municipalities with a per capita assessed value of property over $500,000. Co-Chair Donley stated this legislation is partially in response to the recent Bullock vs. State of Alaska, Alaska Supreme Court decision. He noted this legislation would not impact any existing bonded debt and would only apply to additional debt incurred by a local government after the effective date. Senator Wilken asked why the bill has no fiscal note other then the indeterminable fiscal note and analysis submitted by the Department of Revenue. Co-Chair Donley surmised there would be a fiscal impact to the state but that it would take several years before there was a major impact. Senator Wilken suggested the Committee could issue a fiscal note for the Department of Revenue to assist in consideration of the bill. SFC 01 # 93, Side B 07:56 PM AVRUM GROSS, Attorney representing the North Slope Borough, testified to the 20 years he has represented the borough primarily on this and related issues. He asserted this bill is aimed at the North Slope Borough (NSB) as a result of the Bullock case and would prohibit the borough from issuing any bonds for the next ten to 11 years. He added that it would prohibit the borough from refinancing existing bonds even if lower interest rates could be procured, which would save the borough money. Mr. Gross told the Committee the bill contains language in the committee substitute, which he did not understand. Mr. Gross expressed, "You must realize that this is a life and death bill as far as the North Slope Borough is concerned." Mr. Gross gave a background on the statute this bill would change, which he said came out of a legislative special session in 1973 called by Governor Bill Egan because delays to the Trans-Alaska pipeline project were threatened. This special session, Mr. Gross reminded, was called to resolve lawsuits filed by oil companies against the state in response to legislation adopted during the 1972 regular legislative session that attempted to regulate the pipeline in ways the oil companies "found offensive." He informed that he was present at this special session as council to the Atlantic Richfield Company. Mr. Gross recounted the special session addressed the regulation of the pipeline, which he said was removed and that the "state caved in on its ability to regulate the pipeline." In addition, he informed, the special session addressed the matter of taxation, specifically property taxation of the values that would be created by construction of the pipeline and related facilities along the pipeline from the North Slope to Valdez. He stressed that other taxes were already established to "make sure that the oil wealth would be spread across all the citizens of the state." He listed severance, income and royalties, as these taxes, noting they remain in existence and generate revenues from oil production for the state. Mr. Gross pointed out two issues that arose in this special session; "how much the oil companies should pay" and "who they should pay it to." He stated that property taxes are traditionally municipal taxes and are the way local governments are financed. However, he stated, some argue that during the time of the special session as well as in the present, that this was "too much for too few" and that it would be unfair to let the citizens of the NSB, Valdez, Fairbanks, and other communities along the pipeline route, to tax these properties in the same manner other property is taxed across the state. He listed salmon canneries in Kodiak and Bristol Bay, and office buildings in Anchorage and noted these communities do not share the revenue garnered from property taxes on these properties with the state. The fact that one municipality has more property than another, he stated, up to the point of the special session had never been considered an issue. Mr. Gross told the Committee the special legislative session resulted in some compromises. He said the first agreement was that oil companies would pay 20 mils tax to the state on all oil properties and that any property tax paid to municipalities would be credited against the 20 mils owed to the state. Secondly, he noted municipalities with oil and gas properties within their boundaries would be allowed to tax these properties to raise money for their operating budgets under "a very complicated formula". Co-Chair Kelly interjected to request the witness address his earlier statement that there is a flaw in the bill regarding the NSB ability to bond in the future. Mr. Gross continued that the last element of the compromise is to allow boroughs to issue bonds based on the fair market value of the oil and gas property within their borders and without limits. He said the specific intent was that the NSB, which he stressed was specifically discussed in the legislature, would be able to bond, realizing that prior to that time the borough had no assets on which to base bonds. He emphasized the borough had no public facilities and that the oil and gas activities are from a nonrenewable resource. Mr. Gross raised this issue, he said because the sponsor testified that the intent of the legislature during the special session has been ignored or mistaken. Mr. Gross countered that the intent of the legislation adopted during the special session "is crystal clear" in stating there is no limitations on the ability of boroughs to issue bonds based on the value of property. In addition, he said, it was specifically discussed during the special session that the NSB would be allowed to issue bonds to, "try to catch up to some of the things that every other municipality in the state has had for years." Mr. Gross gave an example of Ketchikan, which has had infrastructure for about one hundred years, and has bonded over that period of time to built schools, sewer systems, parks, etc. and would continue to do so. He informed that prior to passage of the legislation from the special session, the NSB had no sewers, water systems, schools, public safety facilities, fire facilities or any other infrastructure. He remarked that the legislature was aware of this and specifically authorized the NSB to bond, knowing that it would be "very expensive." The NSB, he said, has subsequently issued many bonds totaling "a lot of money". He emphasized that because the population in the borough is sparse, and because of higher costs for infrastructure, the per capita bonded indebtedness is "extremely high." Mr. Gross addressed SB 186 before the Committee saying it purports to prohibit boroughs from issuing bonds if they have a certain level of per capita bonded indebtedness. He stressed this punishes the NSB for "doing exactly what the legislature authorized it to do." He expressed, The North Slope Borough would be prohibited from issuing bonds for ten to eleven years; any bonds, of any kind, for anything." Mr. Gross continued that this bill would also prohibit the NSB from refinancing any existing bonds. He pointed out that even if lower interest rates were available, the borough could not take advantage of them. Mr. Gross remarked "this is a devastating bill for the North Slope Borough," and requested the Committee give the legislation more review. He told the members, "You are literally going to destroy the bonding power of the NSB if you pass this" which is a "drastic step to take in the name of helping state finances at this late hour." Co-Chair Kelly countered that the earlier legislature "could have never imagined the extravagance" with which the residents of the NSB would utilize this bonding authority "to the detriment to the rest of the state." He remarked that if there are technical problems with the bill he was interested in them. However, he expressed, "I'm having a hard time buying in to the old 'poor North Slope' and all they're doing is what everyone directed of them because I don't think the people back then imagined what they'd use their bonding power for." Mr. Gross replied the NSB has utilized its bonding authority to produce "the kind of life that people in Anchorage take for granted." He stressed that most residents of the state take infrastructure items, such as sewer for granted, but there were no sewer systems on the North Slope. He emphasized the higher construction costs in northern regions. Co-Chair Kelly repeated his request that the witness address the problem areas of SB 186 regarding refinancing of current bonds. Mr. Gross emphasized that the entire bill was a problem. He qualified he did not understand the first section, which was added earlier in the day. He cited Sections 6 and 7 as prohibiting the NSB from issuing new bonds or refinancing existing bonds even at lower rates. Co-Chair Donley offered that if there is a way to rewrite these sections to allow refinancing ability without extending the terms of the bonds, he surmised the Committee would be open to it. He suggested the witness prepare such language to accomplish this while maintaining the intent of the legislation. Mr. Gross asked if the sponsor's concern is that the borough would refinance its existing bonds. He asked what the sponsor wanted the language to provide. Co-Chair Donley responded, "The goal is very clear, to hold bonded indebtedness down below $15,000 per capita." He said he does not oppose allowing refinancing so long as it does not extend the amount of time it would take to bring the debt below the proposed maximum. Mr. Gross replied that language allowing such, would address one of his concerns with the bill. Senator Wilken agreed that the 1973 legislation provided a vehicle to allow the NSB to fund its infrastructure. He referenced an analysis prepared by Fitch IBCA, Duff and Phelps [Portions of this report are on file] He read, "The borough's significant current capital needs are primarily to extend water and sewer and other utility services to seven outlying villages, build schools and complete mandated projects. Much of the infrastructure is funded so future needs would decline from prior levels." Therefore, he ascertained there is an ability to reduce the bonded indebtedness of the borough. Senator Wilken remarked that this issue would not concern him except that it takes funds from the 20-mil tax rate imposed on oil and gas properties. He pointed out that every dollar that goes to the NSB to support debt is a dollar that is not deposited into the general fund and distributed across the state. Senator Wilken suggested the intent of the original legislation was to prevent "pools of wealth," which he emphasized, creates "pools of debt." He stated this is what has actually occurred in the last 30 years and remarked, "This is the disparity that I see that needs to get fixed." Senator Wilken informed that assessed value determines property taxes and the economy in most of Alaska. He divided the number of people by the full and true assessed value and calculated the statewide average per person, not including the NSB, as $72,000. He listed Fairbanks residents at approximately $57,700, Anchorage at $63,000, Ketchikan at approximately $80,000, and the lowest amount is in the Lake and Peninsula Borough at $38,000. He explained the assessed value "engine" on the North Slope is $1,160,000 per person, which is 16 times the statewide average. He did not think the legislature, in 1973, envisioned this leverage on assessed value, of which, 97 percent is from oil and gas property. He then calculated the average debt per Alaskan is $2,573, including residents of the NSB. On the contrary, he stated, the per capita average of the NSB is $64,409, which is 20 times the statewide average. Senator Wilken surmised these figures are "so far out of reason" and that he could not understand this. He explained the proposed debt limit of $15,000 per capita is still five times the amount of any other municipality. He pointed out that the community of St. Paul has a per capita debt of $13,000, but is primarily because of a large port project. Senator Wilken opined that the Bullock vs. Alaska case is a message from the court to the legislature that it is time to address the issue. Senator Wilken predicted, "This is a $100 million deal ten years from now for the general fund." He stressed this legislation does not "clamp down" on the NSB but rather gives an ability to fund five times the amount of the remaining communities in Alaska." Co-Chair Donley added that he did not believe in 1973 it was envisioned that oil and gas property taxes would not provide the full amount of property tax revenue. He also did not think the earlier legislature predicted that the oil supply would last as long as it has. He continued that in 1973 it was not understood that one borough would develop a $490 million permanent fund savings account. Therefore, he stressed many things have changed since the adoption of the original bonding authority. He did not find the argument that the original legislation was adopted 30 years ago and "it's worked great" persuasive because he did not think it has worked great. This, he said, is because none of the current conditions could have possibly been foreseen. Mr. Gross responded that he did not testify that just because the legislation was adopted 30 years ago it was great. Rather, he remarked, it is unfair to retroactively determine that because the NSB issued the amount of bonds it has, the borough could not issue additional bonds for the next ten or eleven years. He stressed that this legislation does not provide that the borough could issue up to five times the amount of per capita bonded debt, as Senator Wilken stated. Mr. Gross expressed the legislation instead penalizes the borough for issuing bonds as the legislature permitted. Mr. Gross admitted that the concerns raised are valid. However, he stressed that in 1973 the NSB had no tax base and that in 20 to 30 years it would again have no tax base after oil production has ceased. He also noted the value of the oil and gas properties decreases every year, resulting in less revenue, and remarked, "that is all they have, and when it's gone, that's it." Therefore, he informed that the borough has "a brief window of time" to make capital improvements. He agreed that the borough has bonded "enormously" but noted it would not be able to do so, regardless of whether this legislation passes. Co-Chair Kelly requested reviewing the refinancing issue and the possibility of a "ramp down provision so these next eight to ten years, there isn't just this brick wall that they run into." He assured this was not the intention of the Committee. However, he voiced concern that if proposed natural gas development occurs, relative property taxes could be "sucked up" by the NSB, resulting in a similar situation to this. Co-Chair Kelly addressed the witness' comparison of infrastructure of the NSB to that of Anchorage and Fairbanks, stressing there are many amenities the NSB has that are not provided in other municipalities. He said he does not begrudge NSB residents from receiving these, but opined the current system has been abused. He admitted there is disagreement between him and Mr. Gross on whether there has been abuse. Senator Olson requested an explanation of how the decision in the Bullock vs. Alaska case and subsequent rulings are related to this legislation. Mr. Gross detailed the history of the case brought by Don Bullock, a former employee of the Department of Revenue, that unsuccessfully advocated that the manner in which the statutes governing taxation of oil and gas properties in the NSB and other areas, were being improperly interpreted. Mr. Bullock, according to Mr. Gross, alleged that the administrators of the oil and gas property tax for the past 25 years had been mistaken. Mr. Gross relayed that the Alaska Supreme Court ruled it was plaintiff who was mistaken and that the state officials administering the tax were correct. Mr. Gross continued that some people hoped the court would rule in favor of the plaintiff primarily because they felt the NSB was getting too much money. He said this is the reason for SB 186, which would change the law to reflect what had been hoped for in the court decision. Senator Olson shared that this raised more questions and he requested time to consider them before action was taken on the bill. Co-Chair Kelly stated that the bill would be held for the purpose of addressing the issue of refinancing of existing bonds. Co-Chair Donley chaired remainder of the meeting. Senator Wilken commented that he has a more optimistic view of the future of the North Slope in twenty or thirty years. Mr. Gross pointed out that he is the former chair of the governor's Gas Pipeline Commission 1975 charged with determining the pipeline route. He stated that he is therefore more pessimistic. Senator Ward referenced the sponsor statement [copy on file], which states that the NSB currently has approximately $65,000 per resident for bond indebtedness and that this legislation reduces that amount to $15,000. He asked if there was an amount between these two that the borough could support. Mr. Gross replied that any amount less than $65,000 would mean the borough could not issue any bonds until the bonded indebtedness is paid down to that level. Co-Chair Donley announced the bill would be held to determine how to allow refinancing without extending the date the bonds expire. He also wanted to research the "ramp down" option that would limit the amount of debt to no more than the statewide average. He predicted this would allow for any emergencies. He stressed that the NSB has a permanent fund that would "be the envy of any community in America." Therefore, he ascertained the borough has adequate resources with which to draw to fund any projects it is prohibited from bonding. Senator Wilken requested the Department of Revenue detail the fiscal note further. Co-Chair Donley ordered the bill HELD in Committee.