HOUSE FINANCE COMMITTEE April 20, 1998 8:30 A.M. TAPE HFC 98 - 117, Side 1. TAPE HFC 98 - 117, Side 2. TAPE HFC 98 - 118, Side 1. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 8:30 A.M. PRESENT Co-Chair Hanley Representative Kelly Co-Chair Therriault Representative Kohring Representative J. Davies Representative Martin Representative G. Davis Representative Moses Representative Foster Representative Mulder Representative Grussendorf ALSO PRESENT Representative Eric Croft; Representative Con Bunde; Representative Ethan Berkowitz; Senator Gary Wilken; Senator Randy Phillips; Scott Brandt-Erichsen, Borough Attorney, Ketchikan Gateway Borough, Ketchikan; Don Bullock, Legislative Liaison, Ketchikan Gateway Borough, Ketchikan; Rick Cross, Deputy Commissioner, Department of Education; Eddy Jeans, Manager, School Finance Section, Education Support System, Department of Education; Steve Van Sant, (Testified via Teleconference), State Assessor, Division of Municipal and Regional Assistance, Department of Community and Regional Affairs, Anchorage. SUMMARY SB 36 An Act relating to transportation of public school students; relating to school construction grants; relating to the public school foundation program and to local aid for education; and providing for an effective date. SB 36 was HELD in Committee for further consideration. SENATE BILL NO. 36 "An Act relating to transportation of public school students; relating to school construction grants; relating to the public school foundation program and to local aid for education; and providing for an effective date." Co-Chair Therriault noted that the meeting would consist of presentation addressing full and true value determinations and the school size factor. He advised that there are a number of very complicated issues associated with this concern. SCOTT BRANDT-ERICHSEN, BOROUGH ATTORNEY, KETCHIKAN GATEWAY BOROUGH, KETCHIKAN, presented information regarding the State's revenues from oil and gas property taxes. [Copy on File]. He noted that the Ketchikan Gateway Borough School District will be severely impacted by the current school funding formula. This issue is about all districts who are inequitably funded under the current program. Juneau, Sitka, Kenai and Ketchikan are funded the maximum allowed by law and yet they must cut programs and services as inflation reduces the buying power of that funding ceiling. The proposed legislation addresses the rural districts that do not have a significant tax base. Mr. Brandt-Erichsen pointed out that districts like the Northwest Arctic Borough has more students than North Slope Borough but has a per capita income so low that it would take a person almost three year's total income to earn enough to pay one year worth of the per capita property taxes collected by the North Slope Borough. Every community which has seen reduced municipal assistance and revenue sharing and every community which is concerned about the level of transitional funding available for SB 36, has a vested interest in seeing that the State gets every dollar of revenue to which it is entitled. That will allow the communities who rely upon transfer payments from the State not to have to face cuts or inequitable levels of funding because it has always been done that way. Mr. Brandt-Erichsen commented that any potential increase in State revenue, which could make funds available to restore educational equity, is an option worth considering. The Ketchikan Gateway Borough proposes to increase revenues; specifically the State's share of oil and gas property tax. The relationship between the tax and potential fund sources came to light during a Senate hearing at which time it became obvious that the North Slope Borough appeared to be working off of two widely different tax base values; one approximately $2 billion dollars and the other $12 billion dollars. The apparent conflict came to the attention of Don Bullock who then worked for the State of Alaska but now works as a legislative liaison for the Ketchikan Gateway Borough. He has done extensive research into the history around this concern and application of the oil and gas property tax. Mr. Brandt-Erichsen provided a history of the issue. In an effort to avoid huge disparities in wealth between municipalities and to use the proceeds from the development of natural resources owned by all residents for the benefit of all residents, the Legislature in 1973, established a state property tax on oil and gas properties of 20 mills. At that time, the Senate Committee on Community and Regional Affairs expressed its concern over fabulously rich communities which have oil and gas development adjacent to poor communities which do not. Through the State level tax and a specifically limited delegation of authority to municipalities to tax only part of the oil and gas property, the Legislature sought to prevent such disparities, particularly where resources creating the wealth belong to the people of the entire State. Two types of limits were selected: ? On the total amount of revenue per resident which could be raised, and ? The other on the portion of oil and gas property which the local communities would have the jurisdiction to tax. Each year, each community must select one of these two calculated methods by February 1st of that year. The Senate Committee recognized that allowing communities to tax was the same as if the State levied the tax itself and then appropriated the funds to the local government for its purposes. The Committee noted that the State Legislature should not vote to appropriate $3000 dollars per person to Fort Yukon while voting State per person revenue sharing in the amount of $25 for Koyakuk. Such a result would be unfair and unconscionable. Mr. Brandt-Erichsen remarked that twenty-five years later, the result, which the Senate in 1973 called unfair and unconscionable, is exactly what exists in Alaska. He claimed that the North Slope Borough and Valdez are "rich" while their neighbors are "poor", and that the State's failure to properly implement the protections that the Legislature enacted in 1973 is the chief cause. According to the 1997 Alaska Taxable, the value of all oil and gas properties in the State as of January 1, 1997 was fourteen billion six hundred twenty-three million four hundred thirty-six thousand and two hundred ten dollars ($14,623,436,210.00). At a tax rate of 20 mills, that could generate a State tax in the amount of approximately $292,470,000 dollars. Mr. Brandt-Erichsen continued, the State does not receive all this revenue. At the time AS 43.56 was enacted, the Legislature realized that there would also be some impacts from oil and gas development on local municipalities. The State tax was imposed because of the strong belief that oil and gas resources belong to all Alaskans and when developed should benefit everyone. In drafting the legislation, a compromise was struck between maximizing the revenue from the tax for needs throughout Alaska and ensuring local governments had the revenues to meet local impacts. Mr. Brandt-Erichsen explained that the limitation amount was a calculated number and that by taking the population as determined by the Department of Community and Regional Affairs (DCRA), multiplying that by $1500 would provide the number. For the North Slope, the calculated number would be $19,407,000 and for Valdez, the amount would be $6,381,000. The pro-ration of value limitation is also a calculated number. DCRA is responsible for designating the portion of the oil and gas property tax base which may be subject to the municipal tax, AS 43.56.101(c). The State assessor provides the calculation each year in the Alaska Taxable. Each municipality must decide by February 1st of each year which method it will use. Over the years, there have been some disputes about how these limitations are applied. In a 1978 Alaska Supreme Court case, there was a judgement regarding how the credit against the State mill levy would apply. The case also addressed the impact of AS 29.45.100, which waives the statewide 30 mill tax rate limit and the $1500 per resident amount limit as they apply to taxes needed to pay debt service. Mr. Brandt-Erichsen continued, the Court implicated that taxes for bonds might exceed the 30-mill limit. It also held that this credit applies on a statewide basis. Thus, a municipal levy, which exceeds 20 mills, will create a credit for the taxpayer which could be applied against state taxes on oil and gas property the taxpayer owns elsewhere in the State. The debt service exception in AS 29.45.100 stipulates that taxes to pay bonds may be levied without limitation as to rate or amount. The term "rate" refers to the mill rate. The mill rate limitation referred to in AS 29.45.090(a) is 30 mills. The amount limitation refers to the total revenue cap and is $1500 dollars per year per resident. He emphasized that it is important to remember in regard to the debt limitation, that there is not a "carte blanche" authority to tax at will. ? First the debt limitation statute has been on the books since 1960. Since 1960, the same phrase has remained unchanged: "Without limitation as to rate or amount". That was in place long before there was any statute relating to taxation of oil and gas property, and long before the concept of apportioning shares of the oil and gas property tax base was used. ? Stepping back and looking at the concept of the $1500 per resident limit and the pro-ration of value limit, one realizes that if reading AS 29.45.100 as providing an exception to pro- ration, then the per person limit has no meaning once the statewide per person assessed value exceeds $22,222. The $1500 per person limit is the same as 30 mills per person on a $50,000 assessed value. If the statewide per person assessed value exceeds $22,222 dollars, and the method applied by the North Slope was used, then the pro-ration value method will always give the local government more money without any increase in the mill rate. It is unreasonable and contrary to the statutes to eviscerate the $1500 per person limit in that manner. ? The North Slope method repeals the $1500 limit in AS 29.45.080(b). At the same time as the Court was looking at the bond payment limit, the Department of Revenue responded to a question on the prorated value calculation. In a March 6, 1978 letter to the North Slope Borough by the Department of Revenue, a method was established for calculating the prorated value under AS 29.45.080(c). Mr. Brandt-Erichsen pointed out that letter contained a couple of errors. It erroneously prorated the non-oil and gas property. The method nullified the $1500 limit. The ratio of local property and oil and gas property ends up the same under both methods. The local property is 2.42% of the total assessed value. Thus, under the $1500 per person method, the local property bears only 2.42% of that cost. Under the pro-ration of value method, you prorate both the local and the oil and gas property, then the ratio of 2.42% is preserved and even though the mill rate may increase, the true dollar tax burden stays the same, only the amount ceiling of $1500 per person is removed. Mr. Brandt-Erichsen pointed out that looking at the statute being interpreted here, the error is clear and that AS 29.45.080(c) contains the key phrase. The statue says that a municipality can levy and collect a tax on the full and true value of "that portion of taxable property taxable under oil and gas property as assessed by the Department of Revenue which"; the second clause "when combined with the value of the property otherwise taxable by the municipality" would not exceed the limit. Thus, the statute calls for prorating the value of the oil and gas property only, not houses and commercial buildings. Despite the error, the 1978 letter is helpful in explaining pro-ration value. Putting the 1998 numbers in this format for the North Slope Borough demonstrates that the North Slope Borough tax base is limited to taxing 18.5% of that full and true value of oil and gas property in the Borough if it elects the prorated value method. Mr. Brandt-Erichsen commented that two other Supreme Court cases addressed the oil and gas property tax, but are not as significant in regard to these issues. A 1986 decision upheld the method used to calculate population. The North Slope Borough population used in the formula is 12,938 people, whereas, the actual Borough population is listed as 9,189, on Page 17 in the 1997 Alaska Taxable. That number includes an adjustment counting remote site workers whose primary residence is elsewhere. The higher population figure benefits the North Slope Borough because it increases the $1500 per person amount. In 1990, an effort was rejected by Valdez to set up a special taxing district comprised of oil and gas property which amounted to how the oil and gas property tax base got converted to revenues. The calculation in the Alaska Taxable does not follow the statutes on that point. When the assessor calculates the impact of the mill levy, he overlooks the fact that the Borough elects the prorated value method. Instead of using the tax base permitted under AS 29.45.080(c) and AS 43.56.010(c), he has been using the entire assessed value for the Borough. In effect, this switched methods without reverting to the total tax limitation amount of $1500 per person. Mr. Brandt-Erichsen summarized that in order for the North Slope Borough to reach the entire assessed value, they would need to use the $1500 per person method. If they elect the prorated value method, then their tax base is only 18.5% of oil and gas property, which would amount to about $2,167,000,000 dollars for that area. This error reduces revenues due the State by over $43 million dollars per year under the $1500 method or over $18 million per year under the value method. Representative Foster expressed frustration with the complexity of Mr. Brant-Erichsen's testimony. Co-Chair Therriault acknowledged that this issue is complicated, although, noted that it is important to understand the issue and how it applies to the foundation formula. In response to Representative Foster, Mr. Brandt-Erichsen stressed that funds which the State is missing, should be going into the general fund. That money could be used for numerous projects such as increased municipal revenue sharing, etc. He advised that this is a State money source which the State has not been collecting. Representative Grussendorf inquired if the Department of Law or the Department of Revenue had previewed this information packet before it was distributed to Committee members. DON BULLOCK, LEGISLATIVE LIAISON, KETCHIKAN GATEWAY BOROUGH, KETCHIKAN, replied that the issue has come up many times in previous years and there has not yet been a regulation adopted. The Administration has not looked at this particular proposal. (Tape Change HFC 98- 117, Side 2). STEVE VAN SANT, (TESTIFIED VIA TELECONFERENCE), STATE ASSESSOR, DIVISION OF MUNICIPAL AND REGIONAL ASSISTANCE, DEPARTMENT OF COMMUNITY AND REGIONAL AFFAIRS, spoke to the method used to establish the taxable base, and the selection method chosen for this taxable year. Each community makes their payment to the Department of Revenue, with a choice of two methods. He added that concerns raised by Mr. Brandt-Erichsen had also been raised in 1989 at which time the Senate appointed a research committee. They found that the present system was reasonable for the structure of municipal finance in the State. Although, the Committee believed that the interpretation was ambiguous and advised that it be clarified through adopted regulations. Mr. Van Sant emphasized the complexity of this issue when addressing bond and revenue sharing. Co-Chair Hanley pointed out with the legislation in the House Finance Committee, there has been much discussion regarding the actual impact. Depending on which valuation method is used, the Department has run numbers specifying various amounts of contribution to the North Slope Borough (NSB). Co-Chair Hanley asked Mr. Van Sant if he thought the assessed value should be $2 or $12 billion dollars. Mr. Van Sant replied that DCRA has taken an official position in which they calculated on the $2 billion dollars, but in lieu of education's Title 14 the Department continues to use $12 billion dollar figure. Co-Chair Hanley asked for clarification if the NSB would then pay all of its own education costs at that level. Mr. Van Sant replied that under that scenario, the North Slope would be responsible for paying the entirety of education. Co-Chair Hanley asked which method the North Slope Borough has currently chosen. Mr. Van Sant replied that no municipality had used the $1500 dollar cap because it yields a lesser revenue number. NSB and Valdez will continue to use subsection (c), 225%. Co-Chair Hanley interjected that was the $2 billion dollar position. He questioned if the mill rate would be larger in order to pay for that operating budget and how that difference would be reconciled. Mr. Van Sant explained that the $2 billion dollar level would be used for the operating budget, whereas, for the revenue sharing and bond indebtedness, they choose the $12 billion dollar level. In reconciling that, the State has continued using the same $12 billion dollar level, the Department of Education for school allocation. Co-Chair Hanley understood that the debt service would use the $12 billion dollar level and that the school would come within the operating budget portion. Mr. Van Sant clarified that the operating budget was limited to the $2 billion dollar cap and that the total mill rate is calculated into the $12 billion dollar level. When revenue sharing is taken advantage of, the $12 billion dollar level is also used. Mr. Van Sant pointed out that a part of Title 14 had been written to help accommodate this concern. Co-Chair Hanley pointed out that a complicated $2 billion dollar formula is available although nothing is being applied to it at this time. He questioned if there was any calculation which truly utilizes the $2 billion dollar figure. Mr. Van Sant explained that the $2 billion dollar figure was used when determining the cap in operating revenues. That is the per capita value of $74 thousand dollars times 225% of the population which provides the assessed value limit for operating funds. The 30 mills are multiplied, providing the total statutory limit for the operating budget. Co-Chair Hanley asked what the NSB mill rate is. Mr. Van Sant replied that the effective overall rate would be calculated on the total $12 billion dollars, which has dropped them back down to 5.12 mills in FY98. He stressed that this is "only" the effective mill rates in regard to the $12 billion dollars. Co-Chair Hanley inquired the mill rate written in North Slope Borough ordinance. Mr. Van Sant thought that it was 18.51% including operating and debt service. Co-Chair Therriault asked if there was anything written in statute which would stipulate that maximum tax could be established under one method and then switching and assessing using a different method. Mr. Van Sant explained that the 225% was capped; the maximum revenue, which could be collected from that, would be $65 million dollars. Co- Chair Therriault asked if there was any correspondence with the Department of Law or the Department of Revenue, clarifying that section of statute. Mr. Van Sant replied that he was not aware of any and agreed that if the statute is changed, it should be changed through legislation and not by regulation. Mr. Bullock added that AS 43.56.030 specifically addresses the grant of the municipality to tax oil and gas property. A municipality may levy and collect taxes on taxable property only by using one of the methods established in Section (b) or (c). Each area is responsible for choosing one of these methods. Representative J. Davies asked for clarification of the case code. Mr. Bullock explained that before 1973, there were no restrictions on what municipalities could tax. In 1973, Governor Egan recognized that oil and gas resources belonged to all people in Alaska and desired that revenue generated from development of these resources be shared effectively. At the same time, the Legislature and Governor realized that there would be local impacts, at which time the next tax base was established, separate from the local assessment. Mr. Bullock noted that this case looks at the relationship between how a municipality can tax oil and gas property and what the amount of oil and gas property is that can go to the municipality. The municipality makes the first choice. Mr. Bullock believed that the best choice would be the (b) method because that method spreads the revenue needs over the entire tax base. The $1500 per person method is insufficient, and that they can not use the (b) method which resulted from that court decision. When a municipality makes a choice, that becomes their tax base and the only way to receive the full tax base would be to choose that option. The North Slope Borough is not doing that. Representative J. Davies asked for a copy of the decision made by the Supreme Court case asserting that decision. Representative Mulder pointed out that decision had been made 20 years ago and that other school districts are being disenfranchised because of this inequity. Mr. Brandt- Erichsen suggested that this could be better understood when analyzing who is doing the paying and who is likely to benefit if it is fixed. The oil companies are going to pay 20 mills regardless of the policy. They have no vested interest in complaining. He added that change between the local community and the State has no affect on what they pay. The local community has a vested interest in continuing to do it this way. The State will be the entity to gain money by doing it the correct way. There are individuals who want the status quo to continue. This question was not raised until 1989, when that State assessor wrote a report pointing out the inequity of the situation. Representative Mulder inquired the amount which the State has been shorted over the years. Mr. Brandt-Erichsen replied that determination would depend on the method used. If the NSB were to shift to the $1500 dollar per person method, the State lose would be $43 million dollars per year. If they used the other scenario, the State would have lost approximately $18 million dollars per year since 1978. Co-Chair Therriault interjected in regard to the interaction between the municipalities and the Department of Revenue, the State does not have the authority to go back and recoup money, although, from this point forward, a clarification should be made. Representative Kelly asked the mechanism in which the State lost money. Mr. Brandt-Erichsen explained that the credit was greater; if a local community receives a higher amount, the State's share would be smaller. Representative Foster compared the Ketchikan school allocations to those received in the village areas. He pointed out that most of the 30 village schools in his district do not have a school nurse, art or music program or librarians. He took offense that Ketchikan was attempting to get greater education funding at the expense of the rural school districts. Representative Kelly asked that the presentation provided by Mr. Brandt-Erichsen be consolidated and written in understandable language for the Committee's information. (Tape Change HFC 98- 118, Side 1). RICK CROSS, DEPUTY COMMISSIONER, DEPARTMENT OF EDUCATION, spoke to the school size concern. He provided the Committee with a handout "Alaska Department of Education - Foundation Program". [Copy on File]. He stated that this chart would indicate how the State has applied the schools to the table listed in the bill. Mr. Cross referenced Page 6, Lines 4 -21 of the House HESS version of the bill. For the purposes of calculating a school's Adjusted Daily Membership (ADM) to determine State aid, the ADM of each school in a district shall be computed by applying such a formula. The formula is indicated in that section of the bill. He pointed out that this portion of the bill comes directly from the McDowell study and represents the funding shift in the communities current formula. Mr. Cross pointed out that the charts list the schools and their districts. He noted that this is important in understanding how many funding communities are in a district to understand the significant reallocation of funds. To the Department of Education, there has been a request to define what a "school" is. He continued, in a large school district with 800 students or more, it is easier to define a school. Problems arise when a small program operated by the school district, decides to be independent or grouped together with the rest of that school district. Mr. Cross admitted that situation could be addressed by the school district providing a definition, clarifying what goes through the table and what does not. Additional problems arise in defining in the smaller to middle-size communities throughout the State. The purpose of the table is not to determine the fixed operating school costs. That information should be covered in the district cost factor. The chart does take into consideration the personnel costs associated with the operation of the schools. Mr. Cross advised that the current formula does not address those communities that have one school and which attempts to serve all of an area's education population needs. The question returns to how to define a school in order that the above concern be fixed. He directed that a definition of "school" for those communities below 750 would not be the place to start. A new model must be created so that two similar communities with separate needs are treated differently. Mr. Cross recommended that the Legislature analyze how schools are applied on the referenced table. Co-Chair Therriault noted that the bill is attempting to create a formula which addresses the "true" costs of education. Mr. Cross agreed that there needs to be greater efficiencies. He advised that the table provided in the handout is quite aggressive and believed that this is what is needed, although, the criteria was not applied to real data. Additionally, alternative programs within the school systems need to be defined. Mr. Cross agreed that the issues surrounding larger communities can be more easily be addressed, whereas, in communities with a student population size around 10, it becomes more complicated to create a definition of "school". Co-Chair Therriault asked if the Department recommends that smaller schools be removed from the current definition and treated differently. Mr. Cross noted that it has been recommended to treat them as communities with a different education need or perhaps to define those schools in context of their program. Representative Martin reminded Committee members when Representative Ron Larson worked long and hard on this issue and had encouraged legislators to reevaluate that information. SB 36 was HELD in Committee for further consideration. ADJOURNMENT The meeting adjourned at 10:25 A.M. H.F.C. 13 4/20/98 a.m.