CS FOR HOUSE BILL NO. 379(FIN) "An Act relating to the limitation on the value of property taxable by a municipality; and providing for an effective date." 9:16:44 AM REPRESENTATIVE BENJAMIN NAGEAK, SPONSOR, introduced himself. Co-Chair Meyer asked if Representative Nageak had any additional comments. Representative Nageak thanked the committee for considering the legislation. He stated that the legislation had been in the works for forty years. Vice-Chair Fairclough wondered if the bill would affect the assessment of property value for the state. STEVE VANSANT, STATE ASSESSOR, ANCHORAGE (via teleconference), responded that the legislation changed the way the limitation was calculated for oil and gas property based on the initial mil-rate that was calculated for two municipalities: the North Slope Borough and the City of Valdez. He stated that there were some calculations that moved the percentage around 300 percent and 375 percent for the North Slope Borough. The legislation would allow the borough to have more funds in their operating revenue, as opposed to their bond debt, so they could maintain the facilities that had been bonded over the years. Currently, there was no limitation on bonding, so if the borough needed more money for certain items they could bond and take as much revenue as was needed. The borough had consistently been at 18.5 mil rate, so there was no anticipation for a change. He also stated that the Valdez mil-rate was 20 percent, which was very high for the tax payer. He shared that the conversations with the North Slope Borough showed that the bond debt reduce, and the revenue would be put in the operating revenue, so the maintenance program could function as desired. He felt that the bill would not cost the state money, but it could cost the state money. Vice-Chair Fairclough queried the instance on how the legislation might cost the state money. Mr. Vansant responded that the North Slope could charge a 21.3 mil- rate, and generate an extra $58 million. This would require payment from everyone in the borough, including the oil companies and the local tax payer. He stressed that the borough intended to lower their bonded debt, so they would not need to raise more than an 18.5 mil-rate in the operating revenue in order to generate more revenue for the maintenance program. Vice-Chair Fairclough queried the effect of the state. Mr. Vansant replied that the borough could raise their mil-rate to 21.3 it would cost the state the extra revenue. If the borough did not lower the bonded debt, they could still raise $58 million, which would cost the state $58 million. He stressed that the borough intended to lower their mil- rate by paying off some of the bond debt, so keeping their mil-rate at 18.5 would give them more operating revenues and not need the bonded revenues. 9:22:44 AM Vice-Chair Fairclough wondered why the state paid the property taxes dollar for dollar to the borough. Mr. Vansant responded that the state collected a mil-rate of 20 on all of the oil and gas property in the state. Of that, the state gave back to the local municipalities at the locally charged mil-rate. Vice-Chair Fairclough surmised that there was a statewide mil-rate, and if a local community taxed, the state would forgo revenue at the state level and allow the local community control of the funds. Mr. Vansant agreed with that summation. Senator Olson pointed out that the borough could reduce their mil-rate, which would bring more revenue to the state. Co-Chair Kelly asked for an explanation of the bonded indebtedness versus the operating costs. Mr. Vansant explained that currently, municipalities had a mil-rate limit of 30 for operating revenues. There was no limitation of what a municipality may charge to repay bond debt. He stated that there were two sets of funds that a municipality could accumulate: revenue and bond debt. The tax limitation would change the current statute from 225 percent to a variation of 225, 300, or 375 percent. That would change the total amount of dollars that a municipality may collect under operating revenues. The bond debt still had no limitation, so a municipality could bond as long as there was a vote to pay for the bonds. He stated that the bill would change the calculation, so the municipality could collect more operating funds. He remarked that the borough wanted to lower their bond debt, but was facing a limitation on the operating revenue, which inhibited maintenance. 9:27:21 AM Senator Bishop wondered if the legislation only affected two boroughs. Mr. Vansant replied in the affirmative. The only two boroughs that were reaching the limit: the North Slope Borough and the City of Valdez. Co-Chair Meyer queried the number of boroughs that would be impacted by the legislation. Mr. Vansant replied that there were only two municipalities that would be impacted. He said that there was potential for Valdez, Kenai, Anchorage, and Mat-Su to get more oil and gas properties. Co-Chair Meyer remarked that there was oil production in the Cook Inlet, but wondered if it was not enough to matter. Mr. Vansant replied that the production did not bring enough dollars to be impacted by the formula. Senator Olson queried Mr. Elkins position on the legislation, how he planned to lower the debt service and its obligations in order to keep the taxes at a manageable level. ROB ELKINS, DEPUTY DIRECTOR, ADMINISTRATION AND FINANCE, NORTH SLOPE BOROUGH, ANCHORAGE (via teleconference), replied that under the adopted budget for FY 15 there was $146 million available for debt service. The borough had been working for ten years to pay down its debt. He stressed that there were several years when the borough had over $1 billion of debt. He stressed that the effort to pay down the debt was done with assumption that the legislation would pass. On an average year, there would be an additional 14 to 16 percent owed on top of the principle payment. Therefore, by bonding for light duty vehicles and other operating items, it costs an additional 14 to 16 percent over the life of the bond. By altering the calculation, the North Slope Borough could move the purchases into the operating budget to save tax dollars. He felt that the bill would provide the borough with flexibility, and the borough had worked hard to systematically reduce its bond debt. Senator Olson pointed out that the North Slope Borough would lower its debt service in order to keep the tax at an affordable rate. 9:32:46 AM Senator Dunleavy wondered if there was opposition from the sponsor's district to the legislation. Representative Nageak replied that he was not aware of any opposition to the bill. Senator Hoffman wondered if the City of Valdez was supportive of the legislation. Representative Nageak replied that he was not aware of any opposition to the bill from anyone, including the state. Co-Chair Meyer wondered if there was any opposition to the bill from the City of Valdez. Senator Bishop replied that he was not aware of any opposition to the legislation. Vice-Chair Fairclough wondered if there was a cap on the mil-rate for anyone under the state's jurisdiction. Representative Nageak responded that the North Slope was under a cap for the previous 40 years. He stressed that there was some strain when there was a substantial restriction. He thought that the North Slope Borough was the only municipality with a cap. Vice-Chair Fairclough remarked that, in her experience, when there was a property tax issue the tax payers demanded to be taxed less. She noted that there was only representation from the community, not the tax payer on this legislation. She asked if there was a cap in the legislation. Vice-Chair Fairclough wondered if there were exemptions from the state in local communities that established local exemptions. Mr. Vansant wondered if she meant residential exemptions. Vice-Chair Fairclough clarified that she was concerned over the question of raising a mil-rate. She noted that the people would be taxed, if the mil-rate was increased. She wondered if local communities established exemptions that transferred responsibility of the property tax payments to another entity. Mr. Vansant replied that Anchorage had a $20,000 residential exemption, and six municipalities offer exemptions some up to $100,000. He stated that the North Slope Borough offered a residential exemption up to $50,000, and offered a residential optional exemption for senior citizens up to and additional $150,000. 9:39:51 AM Vice-Chair Fairclough wondered if Valdez offered similar exemptions for their property tax payers. Mr. Vansant responded that Valdez only offered a $20,000 exemption for residential property, and did not offer any exemption above the state-mandated $150,000. Vice-Chair Fairclough wondered if the state had state authority over Valdez for the mil-rate setting. Mr. Vansant responded that all municipalities were required to exempt certain properties such as churches, schools, charitable properties, etc., whether it was the city of Valdez or any other municipality. The City of Valdez had also opted out of all personal property exemptions. Vice-Chair Fairclough wondered if there were contributions to schools. Mr. Vansant replied in the affirmative. He stated that the North Slope Borough was required to participate at a 45 percent need. Vice-Chair Fairclough understood that a community might believe that there was a disadvantage with a mil-rate cap, and wondered if there should be a consideration for a cap. Mr. Vansant responded that the bill had a cap, and would only raise it from the 225 percent formula cap to a 300 percent formula cap. He stated that there was a cap under AS 29.45.090 to all municipalities of a 30 mil-rate, which was 3 percent for operating revenues. Vice-Chair Fairclough wondered if the reference was in Section 6 regarding "not more than 19 mil." Mr. Vansant replied that the percentage was outlined, and were set caps for assessments, which would set caps for the collected revenues. The other cap was for a 30 mil rate, which applied to all municipalities. Senator Hoffman announced that the bill did not change the taxable mil rates, but rather asked for flexibility about how the municipality was limited to move money between the operating and capital budgets. 9:46:17 AM Senator Olson stressed that this legislation was the top priority for the North Slope Borough. Vice-Chair Fairclough wondered if the mil-rate cap was voted on by the people. Representative Nageak replied that there was an ordinance that was passed each year. Vice-Chair Fairclough stressed that she was not in opposition to the bill, but was attempting to understand the consequences to the state. She announced that the state could receive extra money or could lose up to $30 million. MATT FONDER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, ANCHORAGE (via teleconference), replied that the bill could cause either increased or decreased revenue to the state, because it depended on the municipalities' responses to the bill. 9:50:21 AM Co-Chair Meyer wondered how the North Slope Borough's response to the bill would impact the state's revenue. Mr. Fonder replied that, if the borough reduced their debt service payments and kept their mil-rate to the state, there would be no impact to the state's revenue. If their debt service remained the same, and they needed more funds for operating costs, they would need to increase their mil- rate. Co-Chair Meyer asked if DOR had a position on the bill. Mr. Fonder replied that DOR did not have a position on the legislation, but was available for questions. Senator Hoffman surmised that the legislation would not impact the current work of the North Slope Borough; it only gave the borough flexibility to meet their operational needs. Co-Chair Meyer felt that the discussion was more complicated than necessary. Senator Olson stressed that there was no incentive to increasing the amount. Vice-Chair Fairclough stated that it was impressive that the North Slope had decreased $1 billion of debt and reduced it to $300 million. Senator Bishop felt that the bill would allow the borough to pay down the debt even faster. Vice-Chair Fairclough MOVED to REPORT CSHB 379(FIN) out of committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CSHB 379(FIN) was REPORTED out of committee with a "do pass" recommendation and with previously published indeterminate fiscal note: FN2(REV). 9:54:25 AM AT EASE 9:56:50 AM RECONVENED