HOUSE SPECIAL COMMITTEE ON FISHERIES January 24, 1995 5:15 p.m. MEMBERS PRESENT Representative Alan Austerman, Chairman Representative Carl Moses, Vice Chair Representative Gary Davis Representative Scott Ogan Representative Kim Elton MEMBERS ABSENT None OTHER LEGISLATORS PRESENT Representative Vic Kohring COMMITTEE CALENDAR Limited Entry Commission Overview and Current Issues NMFS Update and Overview on IFQs WITNESS REGISTER FRANK HOMAN, COMMISSIONER Commercial Fisheries Entry Commission 8800 Glacier Highway #109 Juneau, AK 99801 Phone: 789-6160 POSITION STATEMENT: Presented overview of commission BRUCE TWOMLEY, COMMISSIONER Commercial Fisheries Entry Commission 8800 Glacier Highway #109 Juneau, AK 99801 Phone: 789-6160 POSITION STATEMENT: Assisted with the overview JESSICA A. GHARRETT, OPERATIONS MANAGER Restricted Access Management Division National Marine Fisheries Service 709 W. 9th, Suite 413 P.O. Box 21668 Juneau, AK 99802 Phone: 586-7344 POSITION STATEMENT: Provided the IFQ presentation ACTION NARRATIVE TAPE 95-1, SIDE A Number 000 CHAIRMAN ALAN AUSTERMAN called the meeting to order at 5:15 p.m. He noted for the record Representatives Ogan, Elton and Davis were present and noted for the record a quorum was present. Number 027 CHAIRMAN AUSTERMAN began with introductions and said, "This committee under my direction will be heading down the line, trying to hold a neutral ground when it comes to sport fish and commercial fish, and hopefully we will go along the basis that the resource is the number one issue. Its protection and enhancement is our goal." Number 058 REPRESENTATIVE CARL MOSES joined the committee at 5:08 p.m. REPRESENTATIVE GARY DAVIS described the district he represents as having both commercial and sports interests. REPRESENTATIVE KIM ELTON described his two year commercial fishing background and his recent job experience as the Executive Director of the Alaska Seafood Marketing Institute and said, "I have a very strong interest in the commercial fisheries industry and what we need to do to keep it as one of our major economic machines in the state of Alaska." REPRESENTATIVE SCOTT OGAN said to the chairman, "I think we share the common goal of managing fisheries on a resource base... One of the issues in my district is the decline of the king salmon fisheries in the Susitna River drainage. The Deshka River which used to be the largest producer of king salmon, is off limits to sport fishing entirely... If we lose the resource, then everybody loses: Sport, commercial and tourism combined." REPRESENTATIVE CARL MOSES introduced himself as the representative from District 40, "where over 50 percent of all of the commercial fishing takes place (in Alaska)." Number 155 FRANK HOMAN, COMMISSIONER, COMMERCIAL FISHERIES ENTRY COMMISSION, (CFEC or Limited Entry Commission) testified describing the Limited Entry Commission by saying, "It was designed to protect the resource and to protect the livelihood and the economic dependence of Alaska's fishermen." He gave committee members information which included the commission's annual report that showed a list of permit prices that the commission generates each month by following the transactions of permit sales. The report also showed a chart of the salmon harvests, and charts and graphs that shows the organization of the commission, their budget, and what they actually do. He said, "To begin with, the Limited Entry Commission is 20 years old. It was created actually in 1973 by legislation but actually never issued the first permit until 1975. But what led to the creation of the Limited Entry Commission was the disastrous fishing of the 1960s. Actually starting about the 1930s. But at the same time, the fishing effort and the numbers of fishermen were going up each year. In fact, in Bristol Bay between 1960 and 1970, the effort doubled and throughout the state it increased by thousands between 1960 and 1980. What this did was not only to impact the resource significantly, but the average individual fisherman was also not able to make an economic living because of the competition and the reduced resource." Commissioner Homan discussed a chart the committee members had before them. "In 1975 Limited Entry started issuing permanent permits and I don't want to suggest that we had very much to do with this, but we were at least a factor. Since that time the resource has particularly improved. That's due to a lot of reasons; management being one of the significant reasons. Other reasons were natural causes and hatchery production around the state. A significant part was that the numbers were limited to those that had been in the fishery at the time of limitation." COMMISSIONER HOMAN continued, "In the 60s there were several attempts at limited entry program but none of them survived court rulings because they tended to create a closed class of fishermen where there was no ability for anyone to enter into it, the permits were not transferable and didn't have a value in some of the schemes, and, to a large part it excluded nonresidents which the courts didn't allow. So, through a whole series of court cases and Board of Fishery attempts and legislation, in 1971, the Alaska courts ruled that limited entry scheme that they had at that time was unconstitutional and violated the Alaska Constitution. One was in Article 8 of Section 3, the Common Use Clause, which says in one sentence, `Whenever occurring in their natural state, fish wildlife, and waters are reserved to the people for common use.' Then in Article 8 of Section 15 there was a no exclusive right of fishery, which at the time said `No exclusive right of special privilege of fishery shall be created or authorized in the natural waters of the state.' It was hard to get through those constitutional restrictions and the court said that, and they said it would take a constitutional amendment by the people to allow the limited scheme to work. An initiative was placed on the ballot in 1972 which won with overwhelming support from the public. An addition was made to Article 8, Section 15, on the no exclusive right and I'll just quickly read that so you can see where the focus was. `This section does not restrict the power of the state to limit entry into any fishery for the purpose of resource conservation, to prevent economic distress among fishermen and those dependent upon them for a livelihood and to promote the efficient development of aquaculture in the state.' That gave the basis for 1973, when Governor Egan put in a limited entry bill that passed the legislative session. That created the Alaska Limited Entry Commission, and as I mentioned before, our first permits were issued in 1975. But that wasn't the end of the challenges. There were still a couple of major events to occur. One was in 1976, another initiative was on the ballot that asked the public, `Shall we repeal the Limited Entry section of the Constitution?' That was defeated, almost two to one, and the public again said that they wanted to keep limited entry. Number 425 COMMISSIONER HOMAN then described some of the limited entry case law challenges such State v. Ostrosky. He said the Alaska Supreme Court upheld limited entry as a system of protecting the resource. It was appealed to the U.S. Supreme Court and they failed to take up the issue which meant that it would stand the Alaska Supreme Court decision. From those legal basis, the current Limited Entry program exists. Commissioner Homan said the program's purpose is similar to what is in the Constitution, which is to promote conservation and the sustained management of Alaska's fishery resource and the economic health and stability of the commercial fishing industry in Alaska by regulating and controlling entry into commercial fisheries. He said to accomplish that, it created the Commercial Fisheries Entry Commission as a regulatory and quasi- judicial agency of the state. It is independent, but attached to the Department of Fish and Game. COMMISSIONER HOMAN discussed the composition of the Limited Entry Commission using a document before the committee members entitled, "CFEC Overview for House Special Committee on Fisheries" dated January 24, 1995, and described the organization, procedures and functions of the Limited Entry Commission. (A copy of this document can be found in Room 434 of the Capitol Building and after adjournment of the second session of the Nineteenth Legislature in the Legislative Reference Library.) COMMISSIONER HOMAN explained the commission issues about 30,000 permits and 18,000 to 20,000 vessel licenses. He said they issue about 50,000 licenses each year and they derive a significant revenue of about $5 to $6 million a year. He noted the cost of doing business is about $2.6 million. COMMISSIONER HOMAN pointed out that the commission has lost one position per year for the last few years. He then talked about the commission's data processing capabilities referring to a database of twenty years of fish tickets. COMMISSIONER HOMAN pointed out that the commission's caseload is very heavy because in the last 20 years, fifty new fisheries have been limited. He clarified, "The early fisheries were limited because they were distressed fisheries but in the later years we limit by petition and it's usually by petition from fishermen who come to us and ask us to look into a limitation system for their fishery. And we do extensive research and analysis and it takes some time to make that decision to limit it. We don't limit all the fisheries." COMMISSIONER HOMAN emphasized, "The perception out in the public is that many nonresidents are coming into Alaska and getting permits and that simply isn't the case. There are some, of course, and there always have been nonresidents in the fisheries." He specified, "For all fisheries, in 1994, we had 29,250 active permits and those included limited and unlimited (fisheries). Residents had 80 percent of those permits, nonresidents had 20 percent. If we look at just the salmon permits for 1994, we had an active 12,071 permits in Alaska which 77 percent were resident and 23 percent were nonresident. If we look at all limited fisheries, including salmon, crab, herring and others. The total resident (count) is 78 percent and nonresident is 22 percent. So there's a very high percentage of residents in the fisheries and those permits that are owned by residents are their access to the fishery. More than half of the permanent permits are held by rural Alaskans in rural areas where that may be the only means for livelihood in a lot of small communities." COMMISSIONER HOMAN continued, "Because of the free transferability of permits, some of those permits are sold to nonresidents. On the other side of things, some of the nonresidents sell their permits to residents. It goes back and forth each year. But in the 20 years that the Limited Entry permit system has been operational, their have been only 203 permits, on a net basis, that have gone from resident to nonresident from over 14,000 permits. So it's not a flood." He pointed out that the Bristol Bay Native Association and the state's Division of Investment loan program also help keep fishing permits in the state. COMMISSIONER HOMAN added, "A limited entry permit is not a negotiable instrument in that it is prohibited from being lienee upon or used as security in a loan. And only two agencies are allowed to loan on limited entry permits and one is the Division of Investments from the state, the other is CFAB, the Commercial Fishing and Agriculture Bank. And this was done in the early days to protect the permit from falling into the hands of financial institutions or processors or banks or creditors and it was done to protect the livelihood of the fishermen because it allowed them access to the resource and in many areas of the state, it was the family's livelihood." COMMISSIONER HOMAN informed the committee about current legal challenges. He said, "The Internal Revenue Service, we're in court with now in a case called Gatter v. IRS and it's over the involuntary transfer of a limited entry permit for tax obligations. In 1992, there was a case cited called Lorensen v. United States and Lorensen was a permit holder and the IRS foreclosed on his permit and it went to court and the federal court ruled that the IRS could seize a limited entry permit to pay for taxes. The limited entry law that was passed by the state of Alaska didn't have any provisions in it for involuntary transfer. So in 1992, through legislation, there were a series of restrictions put on the transfer of an involuntary foreclosure. These restrictions were put on to protect the state's interest in the limited entry permit. The state created it and had some interest protecting the transfer of that permit even though it was involuntary, because once it was an involuntary transfer, then the IRS could sell it at an auction. Most of the restrictions follow the lines of what our normal transfer restrictions are and that you have to be an individual, you can't be a company and you have to be actively able to participate and a number of other things. The significant thing was: If the permit holder could show a hardship by the loss of that permit and the loss of that income to himself and his family that was dependent on that family. That in certain cases the limited entry commission could restrict the transfer even though it was seized by the IRS. To date, no permits have transferred, but the IRS has the ability to seize the permit and no one's questioning that, but we have never had one brought to us for transfer, but the IRS has filed suit to the court to ask them to transfer the permit immediately. We haven't been approached by the permit holder yet, so it's not quite ripe for a showdown yet but we are in court this very moment with the IRS and the outcome of that court case will be very significant. It's not to say that the IRS doesn't have that power, but the state also has an interest in protecting the people of the state, particularly those that depend on fisheries." COMMISSIONER HOMAN also described Carlson v. Commercial Fisheries Entry Commission in which nonresidents have sued the state for back payments of nonresident fees for limited entry permits. He emphasized, "The stakes are very high. It's now estimated to be about $25 million, that the state could lose if it loses this case." COMMISSIONER HOMAN concluded, "While limited entry is not the most popular program in a lot of areas, it has protected a lot of Alaskans' access to the fisheries and without it, it would be easy to see that the continuing rush into the fishery would have had disastrous effects. A completely open fishery with a limited resource, eventually would affect not only that resource and the commercial fishermen that depend on it, but all other users of that resource: Subsistence or sport or personal use." REPRESENTATIVE OGAN asked for comparison to the game board issues which has experienced legal problems. COMMISSIONER HOMAN said, "There may be a distinction in that commercial fishermen with limited entry permits, do pay a fee for that permit based on the value of that permit. So as the permit goes up and down, the annual fee does too. In a sense, that's making a contribution back to the state for the use of the resource." REPRESENTATIVE OGAN voiced concern about the process for appeals within the commission. TAPE 95-1 SIDE B Number 000 COMMISSIONER HOMAN described the levels of the appeal process within CFEC. COMMISSIONER BRUCE TWOMLEY interjected, "The people who sit on the Limited Entry Commission can't hold permits, can't own a piece of a fishing vessel. We're pretty much divorced from the industry and that's unlike other regulatory boards, like the Board of Fish. That's one distinction that helps insulate us from conflict. Another thing is the court is most immediate and our direct supervisor. The court is looking over our shoulder every time we make a decision and we know it's going to be subject to review." REPRESENTATIVE DAVIS asked about the numbers of nonresidency and residency permit holders. COMMISSIONER HOMAN reiterated the numbers he previously gave the committee. JESSICA GHARRETT, Operations Manager, Restricted Access Management Division, National Marine Fisheries Service (NMFS), began her presentation on IFQs (Individual Fishing Quotas) describing the Restricted Access Management Division of NMFS and added, "The program includes a number of safeguards that were designed by the Council (North Pacific Fisheries Management Council) and the secretary to preserve the nature of the fishing fleet and protect the coastal communities that are known to be dependent on fishing. That includes the fact that quota shares are issued in vessel categories. There are restrictions in transferring quota share, restrictions on how much a person may hold, restrictions on how much fish a particular vessel may land in a given year." MS. GHARRETT continued, "We are now in the process of completing issuance of quota share. We anticipate fishing beginning sometime this spring," and then described the limitations of IFQs ownership. MS. GHARRETT proceeded, "Our program has just withstood the first court challenge by the Alliance Against IFQs. The challenge had a number of points to it and the judge ruled from the bench in favor of NMFS on all counts. That lawsuit is in appeal now." She then described other responsibilities of the division. MS. GHARRETT added, "The reauthorization of the Magnuson Act which did not occur during the last congressional session: Senators Kerry and Stevens have introduced legislation and in there, I believe, there is a provision for fee collection for IFQs. This presumably would be some kind of a percent basis, based on value." MS. GHARRETT then brought up that the council is considering limitation on charter fishing for halibut and said, "So restricting access in various methods and ways is certainly a response in several areas to the kinds of open access problems that all fisheries are beginning to experience." MS. GHARRETT concluded, "We have about 8300 individual quota share permits that have been applied for. We have already issued about 5400 to 5500 so we still have about 2800 hundred to go that will occur in the next several weeks. We have about 88 halibut and 53 sablefish applications in conflict, primarily over whether or not a lease existed. The council recognized that many of the business arrangements were oral in this industry and wanted us to allow oral leases to be captured." She then talked about the approximately 199 applications which have been denied and indicated, "We had a six month application window and a number of persons couldn't get theirs in on time for one reason or another. Of those we have had 15 appeals filed." Number 280 REPRESENTATIVE OGAN asked, "You spoke of a limitation on charter fishing on halibut?" MS. GHARRETT replied, "Right (but) I'm not really prepared to discuss that, but the council has formed a working group which is concerning itself with the question of whether or not it's desirable to limit charter fishing," and added, "It's not just in the commercial fishing area that people see a need to limit the continued entrance to the fisheries." Number 295 REPRESENTATIVE OGAN indicated that he would like to "keep abreast of that issue" and asked if there was a point system like the one in the Big Game Commercial Services Board and referred to that one as a "liar's contest." MS. GHARRETT said, "Our problem is not an in or out type of system. We have an eligibility in which you're in or out and once you're eligible, the question is what is the size of your quota share award. This program was designed to award quota share initially to vessel owners who may or may not have been fisherman at any particular time and leaseholders. And the idea behind that was that primarily these are the people who shoulder the financial burdens of fishing by having a large capital investment... The eligibility criteria were U.S. citizenship and owning or leasing a boat during that three-year window and you must have had legal fixed gear commercial landings... It does not include sport fish, charter fish, or fish taken under state limited entry programs which are separately regulated. The other part of the answer to your question is that they have at least 150 days on the harvesting crew of a U.S. Commercial Fishery. The council and the secretary deemed this as a substantial dependence and risk-taking involved in that fishery and therefore may apply to us for a certificate saying they are transfer eligible and may buy into the fishery. This was seen as a way for children of persons who owned or leased boats to move into the fishery." Number 344 REPRESENTATIVE DAVIS asked if there was the distinction in permits varies by boat size. MS. GHARRETT explained the variations in quota share issued. REPRESENTATIVE DAVIS asked if one company could purchase many IFQs. MS. GHARRETT spoke about the purchase limitations of IFQs saying, "You may only hold an amount of quota share in a particular person's name. So let's just say a corporation was initially issued quota share, we would restrict them from acquiring more beyond their use limit. Also, we have only a certain amount which may be used on a particular vessel in a given year..." Number 486 REPRESENTATIVE ELTON asked about the specifics of transferring permit shares. He asked, "So you won't approve transfers to brokers?" MS. GHARRETT agreed, but qualified that a certain number of IFQs will transfer by a security agreement or operation of law and would be honored by them. She specified, "A bank could collateralize their quota share purchases. The bank might repossess it. We would effect that transfer in that the bank could not just find someone to go fish it. One of the restrictions is that, in Southeast Alaska..., you may not transfer to a corporation or a partnership. It must be transferred to an individual." ADJOURNMENT CHAIRMAN AUSTERMAN thanked his guest and adjourned the meeting at 6:30 p.m.