SENATE FINANCE COMMITTEE LOG NOTES 02/02/00 GENERAL SUBJECT(S): Review of Departments Accomplishments for FY'99 and FY'00 Department of Revenue The following overview was taken in log note format. Tapes and handouts will be on file with the Senate Finance Committee through the 21st Legislative Session, contact 465-4935. After the 21st Legislative session they will be available through the Legislative Library at 465-3808. Time Meeting Convened: 9:05 a.m. Tape(s): SFC-00 #18, SIDE A & B PRESENT: Senator Wilken Senator Adams Senator Torgerson Senator Green Senator Leman Senator Phillips NOT PRESENT: Senator Parnell Senator P. Kelly Senator Donley ALSO PRESENT: WILSON L. CONDON, COMMISSIONER, DEPARTMENT OF REVENUE LARRY PERSILY, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE LOG SPEAKER DISCUSSION 00 CO-CHAIR TORGERSON Stated that the Committee would not address bills today, but rather the Department of Revenue would present their missions and measures. 021 WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE Noted that Larry Persily, Deputy Commissioner, Department of Revenue joined him at the Committee table. Offered the Department's mission statement as follows: "Collect, manage, invest and distribute revenue and child support payments for the State and provide administrative support [indiscernible] of the Department." The Department essentially provides money when and where needed, such as, public services, capital improvements, charities, and to families when child support enforcement is necessary, etceteras. He listed three important operating divisions within the department, these being the Tax Division, the Child Support Enforcement Division and the Permanent Fund Dividend Division. He summarized what responsibilities these Divisions held, along with a list of the Department's boards, corporations and authorities. He then spoke about the importance of implementing audits once taxes are collected. In regards to the severance tax, the Department completes an audit two years behind the current taxes, which are due. The Department closes out audits with final resolution on an average of three and a half years behind the currently due taxes. In respect to corporate income tax, the Department audits "three years back, closing things out, five years out." The income tax presents a more complex set of issues and as a consequence, the closure dates on an audit is lengthier. 154 CO-CHAIR TORGERSON Asked what was the average audit closure for income tax. 150 COMMISSIONER CONDON The income tax audit closing period is five years back. 161 CO-CHAIR TORGERSON Stated that he understood the Department was attempting to set up on-line, electronic filing for tax purposes. He asked if this would be a time saver for the Department. 165 COMMISSIONER CONDON Responded that he did not think this would close the gap, but it will definitely allow the Department to redirect resources. He then explained his rationale. He then stressed the importance of concise regulations that inform the taxpayer of their obligations. As the oil and gas business in Alaska changes, the Department must be ready to reflect these same changes in regulations. This is an on-going process. Tobacco tax changes has lead to a need for more focus on it, including the initiation of related enforcement efforts. The Department is making efforts to redo the motor fuel tax regulations and related forms in order to make them more user friendly for the taxpayer. 211 SENATOR WILKEN Asked what the Charitable Gaming number was last year. 213 COMMISSIONER CONDON Responded that this figure was close to $300 million in business yearly, of this about $23 million goes to charities. He then explained how the rest of this money was allocated. 224 CO-CHAIR TORGERSON Asked if this was the same profit ratio as the year before. 226 COMMISSIONER CONDON Responded that the law, which triggers all the related charitable gaming obligations are divided into annual periods rather than fiscal ones. He then outlined those responsibilities the Department has within their Treasury Division. In terms of the Department's result performance measures, all of the managed money is invested against a performance benchmark. The Treasury is responsible for $19.3 billion in assets. Of these, $2.2 billion are self-directed by state or former employees through the Supplemental Benefit System or the Deferred Compensation System. The other $17.1 billion is under the fiduciary responsibility of the Pension Investment Board or the Commissioner of Revenue. $13.1 billion constitutes the Pension Board funds. The other $3.9 billion comes under the Commissioner's management. Commissioner Condon then gave a specific breakdown of funds under various other boards. The benchmark for fiscal 1999, for the Public Employees and Teacher's Retirement systems, was a 10.62 percent annual return. The Public Employees Retirement system achieved a 10.59 percent annual return, 3 basis points below the benchmark, and the Teacher's Retirement Fund at 10.67, which was five basis points over the performance benchmark. He then outlined the earnings of other funds under the Department's jurisdiction. 309 CO-CHAIR TORGERSON Asked why the Constitutional Budget Reserve (CBR) fund was one point below its benchmark. 313 COMMISSIONER CONDON Responded that the reason for this was complex. The year saw low oil prices and it was decided that the funds in the CBR fund would not be significant for the next five years or more. The Department decided they needed to get out of the equity market in respect to the CBR fund and they did. The timing of this move, in conjunction with the measured benchmarks, accounts for the one point differential. Outlined details related to the Child Support Enforcement. There are 50,000 children who rely on this program, which accounts for one out of four of Alaska's children. Last year, SB 169 set forth the benchmarks used for performance measures related to this program. The benchmarks were current collections compared to total current obligations. The benchmark figure was set at the FY99 performance of 46.2 percent. The ongoing obligations for payments to families in FY99 were $96.3 million and the Child Support Enforcement Program was able to collect $44.5 million for distribution. 357 SENATOR PHILLIPS Noted that during the interim, he received an usually heavy load of complaints related to the Child Support Enforcement program. 391 COMMISSIONER CONDON Responded that there have been complaints all the way around. Two years ago the Department was receiving between six and seven complaints a week. Today they receive between one and two. He noted that one factor contributing to the level of past complaints was the focus of the Agency to bring on line a new computer system. This changeover occurred in March 1998. For more than the following year, the Agency tried to procure federal certification for the system and to make sure it was working. Alaska is one of 13 states to get this new computer system up and running. 420 SENATOR LEMAN Noted that his experience was quite the opposite of Senator Phillips. In the last eight months the complaints Senator Leman's office has received has dropped to zero. He praised the Agency's efforts. He asked about charge back costs from the Administration to the Child Support Enforcement Division (CSED) and noted that there was a big jump in this figure. He asked for clarification and what if anything the Department was doing about this. 430 LARRY PERSILY, DEPUTY COMMISSIONER Responded that the new computer system instituted in the Spring of 1998 took a lot longer to run on the State mainframe. This system processes a larger volume and more complex data. It takes more hours to run every night and the charge backs from the Department of Administration are based on many factors, the biggest of which is how much time the computer takes to process this information. Hence, the expenses are much higher than what was budgeted for. 444 CO-CHAIR TORGERSON Noted that he had a problem with the inability of the court or the CSED systems to recognize an individual's responsibilities or a change in their circumstances. He did not wish to single out CSED and knew that in most cases a court order exists, which cannot be changed. He found that there is a great reluctance of the judiciary to recognize that a person, for example, might have a job for $30 an hour one year and the next at $10, while keeping child support payments at incredibly high rates. 483 SENATOR GREEN Reminded the Committee that two or three years ago, they were requested to empower the agency with more administrative decisions of which they flatly refused. On another subject, she made mention that her office was on speed dial with the Commissioner's office in Anchorage. One of her staff in Wasilla is working on a project in connection with CSED. She then gave a specific synopsis of what this project entailed. 507 COMMISSIONER CONDON Noted four other measures, which the legislature asked the Department to implement as follows. Arrearage cases (how much the Department collects in regards to the total arrearage, although the Department is unable to compute this number). Collections on behalf of government (people supported through the Alaska Temporary Assistance Program (ATAP) or the Aid to Families with Dependant Children (AFDC), where child support is assigned to government.) On a current basis the Department billed $16.6 million in FY99 and collected $5.7, which is 34 percent for this program. Another measure requested was government collections with respect to arrearages. Again, the Department is unable to compute this due to incompatible computer programming. Finally, of the cases currently being billed, the Department has attempted to determine how many are completely current and how many are behind a little or a lot. The Department is currently billing on 37,000 cases. Of these, 11,500 are current, or at about a one-third percentage. Two-thirds are behind some or a lot. With respect to the Permanent Fund Division, the legislature requested the total number of dividends that are issued to eligible Alaskans and instituting an efficient way to track these numbers. 533 COMMISSIONER CONDON Referred to the Department's boards and commissions. The Alcohol Control Board focused on measures centered on the prevention of serving alcohol to minors, which is at a 98.6 percent compliance. In regards to serving patrons already intoxicated, their success rate is at a 99.7 percent compliance. Compliance for server training is at a 98.4 percent. All of these figures are for FY99. Noted the Permanent Fund Corporation with a net income of $2.5 billion. The Housing Finance Corporation, for the fourth consecutive year in a row, received a 100 percent score for management of public housing. The Mental Health Trust Authority has a list of specific accomplishments, which go to the use of their trust dollars to support mental health programs. They have made efforts to support the acquisition of a replacement facility for Alaska Psychiatric Institute (API) and the dollars they have used to leverage service delivery, particularly in women's substance abuse, domiciliary care, fetal alcohol syndrome effects, and the initiation of a mental health consumer affairs program. 570 CO-CHAIR TORGERSON Referenced the Department's goals and strategies to protect the state's interest in responding to major tax initiatives that would lower North Slope oil and gas revenues evaluation. This could result in lower property tax payments to the State. He asked whether the Commissioner anticipated the 10-mill cap initiative to have an impact on the state's ability to tax the North Slope, Valdez, or otherwise. 574 COMMISSIONER CONDON Responded that this cap would not, but noted the following in relation to the 20- mill property tax. This tax does permit a taxpayer to show that if they were to read, "the taxes imposed on replacement costs less depreciation." If a taxpayer can make a suitable showing that given changes in technology that the present facilities, if built today, would cost an awful lot less, they would be entitled to a consequent reduction in their taxes. There are taxpayers that have tried to make this argument. He used the Kaparuk oil field as an example. 586 9:50 SIDE B 584 COMMISSIONER CONDON Because of this showing, these individuals could ask for a reduction in their property tax. The Department does not agree with this line of reasoning, but it will be something that needs addressing. 580 CO-CHAIR TORGERSON Clarified that if they built these facilities for $100 million and they claim that this same construction now could be completed at $50 million, this property could be valued at the lower amount. 579 COMMISSIONER CONDON Noted that under certain circumstances, this is what the law would permit, if this lower figure could be justified. 578 CO-CHAIR TORGERSON Asked if this was true on only oil and gas producing properties. 577 COMMISSIONER CONDON Answered affirmatively, as of the particular provisions of AS 43.56.00. 576 CO-CHAIR TORGERSON Asked if there was any type of timeline that disallows this new methodology, say for example, in ten years. He wondered if a facility could be built and then within a year a showing for reduction applied. 572 COMMISSIONER CONDON Responded that this was possible, but it's an expensive proposition for them to engage in. Engineering services, etceteras are used to compile a study for justification. He used the example of Kaparuk, and noted the corresponding study cost $500,000. He didn't think a taxpayer would undertake such an effort unless they thought they could prevail. 566 SENATOR ADAMS Asked if a situation such as this would affect new exploration or development. He used the National Petroleum Reserve Alaska (NPRA) or the Port of Authority and the gas line as examples. 563 COMMISSIONER CONDON Answered that, no, it would not, but he noted that there is this relationship that taxpayers raise. 559 SENATOR PHILLIPS Asked to what entity the taxpayer would demonstrate this valuation of facilities. 556 COMMISSIONER CONDON Responded that the Tax Division has the responsibility in the first instance of doing this assessment. As a part of this procedure, there is an appeals process, which first goes to the State Assessment Review Board. However this board rules, the taxpayer can appeal this board's findings to the court. The Department cannot appeal, but must live with whatever the board decides. 549 SENATOR PHILLIPS Asked how the board was constituted and whether it was appointed or elected. 548 COMMISSIONER CONDON Responded that this board is appointed by the governor, but not confirmed by the legislature. Noted that there were five people on this board, but he was not sure about the lengths of terms. 543 CO-CHAIR TORGERSON Noted that this process would not affect the Port Authority, but in reality he wondered if this same law would apply to this entity in how they value whatever is within their jurisdiction. 541 COMMISSIONER CONDON Responded that the Port Authority is exempt from property tax. It pays itself in payment of lieu of taxes. They do so at the 20-mill rate. Whatever the project costs initially, this determines the annual payment in lieu of taxes. As time goes by, this amount would not depreciate as it does with respect to the 20-mill property tax. 534 CO-CHAIR TORGERSON Asked if this appeal process is confidential and asked to see a summary on how this process works. He was particularly interested in how the taxpayer captures the cost based on the original depreciation schedule. He used the variation of employee wage schedules as something that could affect this process. 527 COMMISSIONER CONDON Responded that this appeal is not confidential and that he would provide this material to Co-Chair Torgerson. 525 CO-CHAIR TORGERSON Continued to ask very specific questions about this process. 518 SENATOR PHILLIPS Referred to the 10-mill initiative, which was certified a few days ago, he asked if this would have any affect on what the Commissioner is doing. He also wondered if this effort would be shouldered at the local level. 515 COMMISSIONER CONDON Responded that this would not have any affect on what he is doing. This program could affect the amount of money that comes into the state treasury because there may be some instances where the 10-mill cap will limit the amount of local taxes collected on oil and gas property, so the state would actually get more from this tax. 512 CO-CHAIR TORGERSON Asked about the two percent, which would not apply to the state but this amount would still apply to what the local government would collect. Even if there were a huge increase in gas and oil producing properties on the North Slope and the initiative passed they would only be able to take the two-percent of the state's evaluation on oil and gas. 511 COMMISSIONER CONDON Responded that there was the "grand parenting" provision of the initiative related to bonds and such, but this would limit the level of local taxation. If the local tax share goes down, the state's share will rise. 499 SENATOR WILKEN Asked if there were any significant, outstanding cases to be settled and applied to the CBR this year. 496 COMMISSIONER CONDON Noted that there were some significant cases, but the Department does not know when these will settle. The projections for the CBR total $480 million counting last year, this year and the next two. He felt as though this was a responsible number for what the settlements would be over this entire period of time. 491 SENATOR WILKEN Asked about a previous idea to publish the top 100 deadbeat parents in Alaska. He noted that the other states that had done the same, enjoyed tremendous success in increasing the level of collections. He added that one of the reasons the Department was reluctant was because the computer system at the time wouldn't support this list. He wondered if the state was closer to implementing this idea. 483 COMMISSIONER CONDON Noted that the state was certainly much closer than it was, to generate this information along with a good comfort level. He wondered about this system from a philosophical point of view though. Alaska is Alaska and he was not sure if its citizens would support this idea. 470 MR. PERSILY Added that other states have had great success with this program. The computer problem is only an issue to the extent that if they would do this, the Department would hand audit every case to make sure that the individuals belonged on the list. The Administration feels that any "good will" accomplished would be far outweighed by the ill will that such a system would create. The complaints from people, who do not like the Department taking their money, far outweigh the numbers of custodial parents, which want the Department to collect the money. 456 SENATOR LEMAN Pointed that the language used on the web site and the detail book for the Department of Revenue does not completely agree with the language in SB 169. 453 MR. PERSILY Stated that he did not realize that this situation existed until recently, but said the necessary changes would be made. 446 CO-CHAIR TORGERSON Adjourned the Senate Finance Committee meeting at 10:05 a.m. SENATE FINANCE COMMITTEE LOG NOTES 02/02/00 Page 1