Legislature(2003 - 2004)

04/07/2004 01:44 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 333                                                                                                            
An Act  relating to  an endowment  for public education;  and                                                                   
providing for an effective date.                                                                                                
Co-Chair Harris  MOVED to ADOPT Work Draft  23-LS0991 Version                                                                   
O dated 4-2-04. There being NO  OBJECTION, it was so ordered.                                                                   
REPRESENTATIVE  DAN OGG  explained that  the bill  recognizes                                                                   
the  long-term  desire  of  Alaskan   residents  through  the                                                                   
Legislature  to fulfill  a land  grant to  the University  of                                                                   
Alaska, and it creates the Public  School Trust Fund.  HB 333                                                                   
creates a  tenants in common  with the state,  whereby public                                                                   
education would  receive a 3%  undivided interest  from state                                                                   
land  and  the  University  would   receive  a  2%  undivided                                                                   
interest.  The Department  of Natural  Resources (DNR)  would                                                                   
retain  the  rights  and  management of  the  land,  and  the                                                                   
heightened  fiduciary  duty would  not  apply  to either  the                                                                   
University or the public schools.                                                                                               
Representative Ogg  described receipts. All  receipts derived                                                                   
from  development  leases on  the  land would  be  calculated                                                                   
after  deducting Constitutionally-mandated  contributions  to                                                                   
the Permanent Fund, the existing  receipts of .5% of revenues                                                                   
for  the Public  Schools  Trust,  as well  as  administrative                                                                   
service  fees, sales  fees  and lease  fees  assessed by  the                                                                   
Department of Administration.   He pointed out the difference                                                                   
between Version N and Version  O of the bill is that receipts                                                                   
are limited.                                                                                                                    
Representative  Ogg noted  that  there had  been  discussions                                                                   
between  the  DNR  and  the University  to  define  when  the                                                                   
receipts would start. Receipts  are addressed in the language                                                                   
on page 6, Sec.8, lines 25-27,  "income received by the state                                                                   
under  contracts for  royalties,  rents,  sales, leases,  and                                                                   
other disposals  of state land  entered into on or  after the                                                                   
effective  date  of  this  Act."  He  clarified  that  a  new                                                                   
contract  with  Bristol  Bay  would  be  included,  while  an                                                                   
existing contract at National  Petroleum Reserve-Alaska would                                                                   
Representative Ogg pointed out  that HB 333 rescinds SB 7 and                                                                   
its  250,000-acre  land  endowment   to  the  University.  He                                                                   
discussed the  legal battle over  SB 7. Former  Governor Tony                                                                   
Knowles  had  vetoed  SB  7  almost   immediately  after  its                                                                   
passage, and  the Legislature overrode  his veto with  a 2/3-                                                                   
majority   vote.  Governor  Knowles   released  an   attorney                                                                   
general's opinion stating that  the bill was an appropriation                                                                   
requiring  a  three-fourths  vote  to  override.  The  Alaska                                                                   
Legislative  Council sued to  question the  constitutionality                                                                   
of  the veto  override.  In January  2004  the Supreme  Court                                                                   
showed  that  the  Legislature's  override  was  proper.  The                                                                   
granting  of land  is  not  an appropriation,  and  therefore                                                                   
subject to the  two-thirds vote. Representative  Ogg referred                                                                   
to  the copy  of the  Supreme  Court Opinion  in the  packets                                                                   
(copy on file.)                                                                                                                 
Representative  Ogg  explained  that the  Supreme  Court  was                                                                   
unable  to decide  whether the  law granting  the land  was a                                                                   
dedicated fund  because it was  not brought up on  appeal. It                                                                   
remanded the case to Superior  Court, which may take a couple                                                                   
years to decide the issue.                                                                                                      
Representative Ogg concluded that  HB 333 would grant land to                                                                   
the University in a different  fashion than SB 7, by allowing                                                                   
the State  to manage  it. Over  time, it  may not ever  fully                                                                   
fund the  University, but he said  that it would  augment its                                                                   
He referred  to "Legislative Research Report,  Number 04.176"                                                                   
(copy on  file), noting that the  projections on page  2 show                                                                   
$21 billion of revenues in 2030  from new oil exploration and                                                                   
gas line contracts.  The K-12 trust fund would  be about $600                                                                   
million, with  5% totaling another  $30 million for  the K-12                                                                   
school   system.  The   University   trust   fund  would   be                                                                   
approximately $400 million, with an extra $20 million.                                                                          
Representative  Ogg noted  that  the new  fiscal notes  total                                                                   
zero.  There is a  savings to  the State  and the  University                                                                   
system to  grant the land in  the manner proposed in  HB 333.                                                                   
He pointed out  that if SB 7 were retained,  the fiscal notes                                                                   
on the selection of land and its  management would total many                                                                   
millions of dollars over a period of time.                                                                                      
Representative Fate asked if an  in-depth comparison had been                                                                   
done  of  the  revenues  that might  have  derived  from  the                                                                   
250,000  acres in  SB 7,  and HB  333's provision  for 3%  of                                                                   
revenues from new land lease contracts.                                                                                         
Representative  Fate also  questioned  the bill's  provisions                                                                   
allowing  the  DNR  to  manage the  lands  and  removing  the                                                                   
management  prerogative   of  the  Board  of   Regents.    He                                                                   
recounted, from  his sixteen years  on the Board  of Regents,                                                                   
that when DNR had management responsibility  the profits from                                                                   
the  land  in the  endowment  weakened,  with little  if  any                                                                   
profitability until the University  took it over. He asked if                                                                   
the sponsor had concerns regarding the DNR's management.                                                                        
Third, Representative  Fate asked  if the bill  inadvertently                                                                   
takes  away the  Board of  Regents' management  of its  other                                                                   
lands   in   endeavoring  to   relinquish   this   management                                                                   
Representative  Ogg replied  to  Representative Fate's  third                                                                   
question first, stating that there  is a separation of lands,                                                                   
and  HB  333  only addresses  the  lands  granted  under  the                                                                   
percentage  basis. The bill's  intent is  to not restrict  in                                                                   
any way the existing lands that the University manages.                                                                         
Representative  Fate questioned the  deleted language  at the                                                                   
bottom of page 2, [LAND CONVEYED  TO THE UNIVERSITY OF ALASKA                                                                   
UNDER AS 14.40.365].  Representative  Ogg clarified Sec. 2(a)                                                                   
adds "except  for land  transferred under  AS 14.40.505,"  so                                                               
the University  land is  not treated  as State public  domain                                                                   
land. It  is not subject to  the DNR, and the  University can                                                                   
manage it however  it wishes, except for this  new portion of                                                                   
lands granted to them as tenants in common.                                                                                     
Representative Fate  thought that it is only  specific to the                                                                   
new land  grant, and  again asked  if it inadvertently  takes                                                                   
away  management   of  the  other   endowment  land   of  the                                                                   
University. He felt  that the Board of Regents'  authority is                                                                   
unclear in  the bill. Representative  Ogg did not  believe it                                                                   
takes away  the clarity, because  the intent of  the language                                                                   
is that the  University would continue managing  its existing                                                                   
112 acres.                                                                                                                      
JOE BEEDLE, VICE  PRESIDENT, UNIVERSITY OF ALASKA  added that                                                                   
Representative   Ogg  was   correct  in   stating  that   the                                                                   
University  would  retain  its authority  over  its  existing                                                                   
lands after passage of the bill.                                                                                                
Regarding Representative  Fate's second question,  Mr. Beedle                                                                   
clarified that  the DNR manages  land in the  public interest                                                                   
and holds the land in public domain.   The University manages                                                                   
its  land more  as  a  fiduciary responsibility,  to  maximum                                                                   
revenue and educational opportunity  consistent with all laws                                                                   
and regulations, but it is not designated as public domain.                                                                     
Representative Ogg  responded to Representative  Fate's first                                                                   
question  of whether  there is  a cost  analysis of  revenues                                                                   
that  would  derive from  this  land  and revenues  from  the                                                                   
250,000 acres of  land selected in SB 7. A  cost analysis had                                                                   
not been done  because the University has not  selected lands                                                                   
under SB 7; however, under the  fiscal note passed with SB 7,                                                                   
it  would  cost $2.1  million  every  year in  the  selection                                                                   
process and  development, adding  about $10 million  in costs                                                                   
over five  years, with no receipts  coming in.  He  said that                                                                   
even if the land were obtained  today, under SB 7 it would be                                                                   
10 to 20 years before it would  be developed. Under HB 333, a                                                                   
revenue stream would begin to  flow as soon as new state land                                                                   
contracts are let.                                                                                                              
Representative Fate pointed out  that fiscal notes often show                                                                   
the  expense  side and  not  the  revenue side.  Any  derived                                                                   
revenues from oil or gas development  would be long term, and                                                                   
he  stated that  Representative  Ogg would  be  misled if  he                                                                   
thought that  the revenues  would arrive  in the short  term.                                                                   
He argued that  a cost comparison would be useful.   He noted                                                                   
that Mr. Beedle had answered his second question.                                                                               
NICO  BUS,   ACTING  DIRECTOR,  DIVISION   OF  ADMINISTRATIVE                                                                   
SERVICES, DEPARTMENT  OF NATURAL  RESOURCES, stated  that the                                                                   
three fiscal notes  for the Department were  based on Version                                                                   
N of  the bill, and  would change for  the new Version  O. He                                                                   
pointed  to  the  Fund  Source section  on  the  fiscal  note                                                                   
Component No.  423, dated 4-6-04,  explaining that  after the                                                                   
Permanent Fund  distribution has been  made, 4% of  the DNR's                                                                   
total revenue stream, or $36 million  of revenue would go out                                                                   
of the General Fund and out of  the Land Disposal Income Fund                                                                   
to  the University  endowment  and  the public  school  trust                                                                   
fund.  It would  change by about $9 million for  the extra 1%                                                                   
in Version O.                                                                                                                   
Mr.  Bus  stated  that  fiscal  note  Component  No.  424  is                                                                   
basically  a  traditional  note  that explains  the  cost  of                                                                   
administration  would be  $25  thousand for  the first  year.                                                                   
This would set up all the accounting,  with ongoing costs for                                                                   
future  years at  7% because  it  increases the  size of  the                                                                   
account structure and reconciliation requirements.                                                                              
Mr. Bus explained that fiscal  note Component No. 435, Forest                                                                   
Management &  Development, takes  $18 thousand out  of timber                                                                   
sale receipts  from the timber  program.  Retaining  the same                                                                   
program   would  require   an  $18   thousand  General   Fund                                                                   
replacement. It  assumes all receipts,  not new  receipts. He                                                                   
said that fiscal note Component  No. 2459, Title Acquisition,                                                                   
is no longer needed.                                                                                                            
Representative  Ogg  clarified   that  because  the  bill  is                                                                   
written on all new receipts from  new contracts in FY 05, the                                                                   
number on  fiscal note Component  #423 is zero  because there                                                                   
aren't any new contracts yet.                                                                                                   
Representative  Hawker  requested clarification  because  the                                                                   
fiscal notes  show a 2% conveyance  to the University  and 2%                                                                   
to the education trust, and he  asked if Work Draft Version O                                                                   
changed it to 2%  and 3% respectively.  Mr.  Bus replied that                                                                   
he is correct,  and it would bring  an extra $9 million.   As                                                                   
Representative Ogg  pointed out, if it is all  new contracts,                                                                   
the DNR would  have to completely start over,  and assume the                                                                   
revenue of the new contracts.                                                                                                   
Co-Chair Harris  asked how much  land this legislation  would                                                                   
give to the private sector.  Representative  Ogg replied that                                                                   
it would be  the State's decision under this  proposal of the                                                                   
tenancy in  common. The  DNR would manage  the lands,  and it                                                                   
would determine which  lands to lease or sell  to the private                                                                   
sector. The University would not  actually receive any of the                                                                   
land.  In  response   to  a  question  by   Co-Chair  Harris,                                                                   
Representative Ogg noted that  the University would receive a                                                                   
percentage of the  revenue generated by the sale  or lease of                                                                   
the land.                                                                                                                       
CO-CHAIR HARRIS asked  if this bill would make  it easier for                                                                   
the public to get land.                                                                                                         
DICK MYLIUS,  DEPUTY DIRECTOR,  DIVISION OF MINING,  LAND AND                                                                   
WATER,  DEPARTMENT  OF  NATURAL RESOURCES,  replied  that  it                                                                   
would, if SB 7  persists, because some of the  lands that the                                                                   
University  would  pick would  be  the better  land  disposal                                                                   
parcels that DNR  has identified for future land  sales.  The                                                                   
Department  has held off  on land  sales in McCarthy  because                                                                   
the University desired the land under SB 7.                                                                                     
Co-Chair  Williams asked  how  the 2%  POMV  would work.  Mr.                                                                   
Beedle  replied  that  Fiscal Note  #4  contains  assumptions                                                                   
based on  DNR having eligible  land and resource  earnings of                                                                   
$100 million per year.  If the  Department were successful in                                                                   
getting 2% of $100  million, the $2 million would  go into an                                                                   
endowment. Under the five-year  averaging approach, 20% would                                                                   
total $400,000 and  DNR would earn 5% of that,  so the second                                                                   
year revenue  to the  University  would be  $20,000.  By  the                                                                   
year 2010, it would  grow to $300 thousand a  year, and about                                                                   
$700,000 by  2014. It  would take  years to build  meaningful                                                                   
revenue for the University.                                                                                                     
Co-Chair  Williams asked  about the public  school trust  and                                                                   
any  concerns  the Attorney  General's  (AG's)  office  might                                                                   
EDDY JEANS,  MANAGER, SCHOOL FINANCE AND  FACILITIES SECTION,                                                                   
DEPARTMENT OF  EDUCATION AND EARLY DEVELOPMENT,  replied that                                                                   
he  hadn't talked  to the  AG's  office about  Version O.  He                                                                   
assumed  that the separate  account of  the contributions  to                                                                   
the trust  is acceptable,  but he would  check with  the AG's                                                                   
office.   The  current  public school  trust  is a  dedicated                                                                   
fund,  and the  Department  receives one-half  of  1% of  the                                                                   
proceeds annually.                                                                                                              
Co-Chair Harris asked the University's  position on the bill.                                                                   
PETE  KELLY,  DIRECTOR  OF  STATE  RELATIONS,  UNIVERSITY  OF                                                                   
ALASKA, stated that  the University is in favor  of the bill,                                                                   
and it would  benefit from receiving a steady  flow of income                                                                   
even though it is long term.                                                                                                    
Co-Chair Harris asked  if this bill would bring  more revenue                                                                   
from  lands allocated  under  the University's  control.  Mr.                                                                   
Kelly noted  that the  lands envisioned  under SB 7  wouldn't                                                                   
produce for some time, with no  guarantee that the land would                                                                   
be marketable,  or of  the exact  revenues that would  derive                                                                   
from the  land. He noted  the liabilities and  costs involved                                                                   
with managing that land.                                                                                                        
Co-Chair Harris  asked if  it would all  be State land.   Mr.                                                                   
Kelly affirmed that it would be  State land currently managed                                                                   
under Title 38.                                                                                                                 
Co-Chair  Williams  asked the  University's  viewpoint  after                                                                   
fighting for the 250,000 acres  in SB 7. Mr. Kelly noted that                                                                   
SB 7  is still in  the courts and  a long way  from producing                                                                   
revenue, while the provisions of HB 333 are simple.                                                                             
Co-Chair  Williams asked  the University's  viewpoint if  the                                                                   
Legislature does not  repeal SB 7.  Mr. Kelly  responded that                                                                   
he couldn't speak  for the Board of Regents, but  it would be                                                                   
better to  have income  both from land  and a trust  account.                                                                   
Choosing between  the two, he  said that this  legislation is                                                                   
simpler. Co-Chair  Williams commented  that he supported  the                                                                   
University land bill.                                                                                                           
Representative  Fate asked if  there was federal  legislation                                                                   
accompanying the  land bill that  passed last  year. Co-Chair                                                                   
Harris answered that it was a federal match.                                                                                    
Representative  Ogg  commented  that  Senator  Murkowski  was                                                                   
unable to get  legislation through Congress  that would match                                                                   
250,000 acres  of State  land with  250,000 acres of  federal                                                                   
land. Mr. Kelly  added, one of the problems  with the Federal                                                                   
land   is  that   the  unreserved,   unrestricted  land   the                                                                   
University would  receive from the Federal government  is not                                                                   
that productive.                                                                                                                
Representative  Croft commented that  the bill would  be more                                                                   
beneficial for K-12 than for the University.                                                                                    
Co-Chair Williams replied that  he was suggesting doing both,                                                                   
not one or the  other.  He thought that the  University might                                                                   
need more money in the future.                                                                                                  
Representative Hawker  asked about SB 7 and  the issue before                                                                   
the  court.  Representative  Ogg replied  that  the  Superior                                                                   
Court must  still decide whether  it was an  unconstitutional                                                                   
dedication.   With   some  exceptions,   under   the   Alaska                                                                   
Constitution,  "the  proceeds of  any  state  tax or  license                                                                   
shall not be dedicated to any  special purpose." He said that                                                                   
if  HB 333  passed  and SB  7 is  rescinded,  the court  case                                                                   
becomes moot.                                                                                                                   
Representative Hawker  asked if this bill is  also subject to                                                                   
the  same  criticism  of an  unconstitutional  dedication  of                                                                   
funds.  Representative Ogg  replied  that it  is crafted  the                                                                   
same way as  SB 7 in passing  a vested title in  State lands,                                                                   
and both are subject to that issue.                                                                                             
Representative Croft asked the  timeframe in reaching the $36                                                                   
million   figure   on   fiscal  note   Component   No.   423.                                                                   
Representative Ogg referred to  the background information on                                                                   
page  2 of  the Legislative  Research Report  (copy on  file)                                                                   
showing new cumulative  revenues of $21 billion  from 2006 to                                                                   
2030. The  University  portion would yield  $400 million  and                                                                   
the  K-12  would  be  $600 million  off  the  revenue.    The                                                                   
University    would    receive    $20    million    annually.                                                                   
Representative  Ogg  thought that  the  revenues  under SB  7                                                                   
would not reach those levels.                                                                                                   
HB  333  was   heard  and  HELD  in  Committee   for  further                                                                   

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