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August 30 and 31, 2005
Natrona County Agriculture Building, Mills and Evansville Rooms
2011 Fairgrounds Road
Casper, Wyoming
Senator Robert Peck, Cochairman
Representative Rodney “Pete” Anderson, Cochairman
Senator Pat Aullman
Senator Stan Cooper
Senator Bill Hawks
Representative Gerald Gay
Representative Mary Meyer Gilmore
Representative Steve Harshman
Representative John Hastert
Representative David Miller
Representative Bryan Pedersen
Representative Tom Walsh
Senator Jayne Mockler
Representative Kurt Bucholz
Mark Quiner, Assistant Director
Joe Rodriguez, Staff Attorney
Don Richards, Senior Research Analyst
Dean Temte, Legislative Analyst
Please refer to
Appendix 1 to review the Committee Sign-in Sheet
for a list of other individuals who attended the meeting.
Craig Grenvik, Department of Revenue (DOR) Mineral Tax Division Administrator, provided the Committee a brief background regarding the valuation of producer-processed natural gas. He expressed the Department’s concerns as to whether 2003 HB 87 would have provided the necessary authority to DOR. Mr. Grenvik requested a couple of additional months to continue discussions with industry in order to identify potential compromises.
Mr. Grenvik stated that there is agreement between industry and DOR on the calculation of the return on investment (ROI), under the modified netback method, as well as the basis to determine ROI – gross investment rather than the net balance that remains on the companies’ books. He added that the Department will use a capitalization study to determine the appropriate rate for determining ROI and that industry would have an opportunity to appeal any Department decision.
Mr. Grenvik explained that the proportionate profits method determines value through a ratio. When prices are high, the processing deduction is high. When prices are low, the deduction is low. When prices are low, the method probably overstates taxable value; and when prices are high, it probably understates taxable value. The netback method allows a deduction for return on investment. When prices are low, the floor kicks in to assure that the state receives some taxable value. Otherwise the valuation determined under the netback method could return a negative value. Finally, for the comparable value method, there may be winners and losers, depending upon how the contracts are written.
In response to Committee questions, Mr. Grenvik stated that the Department believes that the comparable value method should be used whenever possible, and that the netback method could be used as a fall back.
Also responding to questions, Mr. Grenvik indicated that there has not been agreement as to the duration of a selected methodology. He stated that the Department would like to have a concrete trigger that requires the use of specific methodologies.
Mr. Grenvik concluded his remarks by stating the difference of disputed taxable value is about $1 billion, which translates into severance taxes of about $60 million and ad valorem taxes of roughly $70 million. He believes that the sticking point in any compromise will be the hierarchy of what valuation methods to employ.
Bruce Hinchey, Executive Director, Petroleum Association of Wyoming, appeared before the Committee to provide an update on the valuation of producer-processed natural gas from industry's perspective. He indicated that DOR and industry have been working on definitional issues and have re-scheduled a meeting for September 15th. Mr. Hinchey stated that industry may have some disagreement regarding the Department's proposed definition of processing facility and the three-year cycle for establishing a valuation methodology. He added that industry is willing to pay more with the modified netback method in order to resolve litigation.
In response to Committee questions, Mr. Hinchey explained that within the comparable value method, there may be instances where one party is favored in a contract. He also suggested that the proportionate profits method has, and continues to be, surrounded by litigation. He concluded his presentation by suggesting he anticipated about 90 -95 percent of the issues might reach agreement between DOR and industry, leaving the balance for Committee consideration.
Joe Rodriguez, LSO Staff Attorney, explained 06LSO-0090.W1, Sales tax exemption-oil & gas well. (Appendix 3) The draft removes activities associated with deepening an existing oil and gas well from sales taxation.
Robert Tomkins, Department of Revenue Excise Tax Manager, presented an alternative approach to exempting these activities using language previously incorporated in statute. (Appendix 4)
The Committee discussed concerns as to whether horizontal and directional drilling would be included within the proposed language. Mr. Tomkins indicated that both DOR and the Department of Audit wanted to bring this issue up for discussion.
Next, the Committee discussed if the exemption could be tied to whether a company pursues a permit to drill from the Wyoming Oil and Gas Conservation Commission (WOGCC), or whether it could be appropriately addressed with additional definitions in statute. Mr. Tomkins indicated a preference for the proposed language and suggested that DOR rules could reference the permitting process.
Mr. Hinchey, PAW, indicated that there have been a couple of cases of horizontal drilling in Wyoming, according to Don Likwartz, OGCC director. He suggested the Committee may wish to amend the language to allow for "extending” rather than "deepening."
Representative Walsh moved to amend paragraph (B) of the DOR draft by saying, “the deepening or extending of any well previously drilled for oil or gas beyond the maximum point onto which they were initially drilled.” Representative Anderson seconded the motion. The motion passed.
In relation to this issue, Mr. Tomkins raised an additional point stating that services must be completed within a “well site” in W.S. 39-15-105(a)(viii)(B), and language could be included to create parity for the treatment of real tangible property. Cochairman Peck directed DOR to get with LSO and develop draft language for this issue, to be presented at the next meeting.
Dean Temte, LSO Legislative Analyst, addressed the Committee regarding the relationship between state fuel taxes and average fuel prices on a specific date. (Appendix 5) Mr. Temte’s presentation included an analysis of both gasoline and diesel fuel and a specific analysis of fuel taxes in the surrounding states.
Next, Mr. Temte discussed revenue directed to WyDOT for highway funding back to 1923. (Appendix 6) Specifically, he discussed fuel tax as a percentage of total funding for highways. Mr. Hibbard, WyDOT Budget Analyst, indicated that the Legislature did divert $10 million from the LUST account to the SFP, and Cochairman Peck suggested that this might be referenced in Mr. Temte's handout.
Del McComie, Chief Engineer, WyDOT, and Kevin Hibbard, Budget Officer, WyDOT, addressed the Committee on the issue of highway funding and highlighted the results of a recent poll regarding the support for multi-lane highways. In the poll, slightly over 50 percent supported a personal tax to fund multi-lane highways and about 80 percent supported the use of state revenue surplus funds.
Mr. McOmie indicated that Wyoming will receive a base amount of roughly $200,500,000 in federal highway funds, or a little more than 30 percent increase over prior law, not accounting for larger amounts available in the federal highway fund. Specifically, in 2005 Wyoming spent $220.7 million. In 2006, Wyoming will receive an estimated $216 million, in other words a reduction in the actual amount we received, without consideration of additional “demonstration” funds that might account for an additional $6 to $8 million, which would represent a slight increase in the overall total.
Mr. Hibbard stated that Wyoming receives more back from the federal highway trust fund than Wyoming pays into the fund. Off-road use is deducted from the contribution to the federal highway trust fund. When Wyoming sets aside off-road funds, it reduces the amount Wyoming receives back from the federal government. Mr. Hibbard indicated that whatever this body determines is fair is used in the federal negotiation. Since all off-road vehicle use is deducted, funding snowmobile and trail programs with general funds or severance taxes would not alleviate the issue.
Mr. Hibbard indicated that about 53 percent of fuel is paid by nonresidents, but that interstate trucking pay diesel fuel tax based upon where it is burned, not where it is sold. He added that a one-cent increase with exemption generates $6.4 million and is roughly split 50/50 between diesel and gas. In contrast, a one-cent increase in fuel taxes without exemptions generates about $10 million, split 70/30 between diesel and gasoline, respectively.
The Committee inquired about the capacity of the contracting industry. Mr. McOmie indicated there are about 400 plus approved contractors. He suggested that WyDOT now has fewer projects costing more. He would expect contractors from out-of-state would bid on new projects, but the out-of-state contractors would likely hire local labor and purchase locally to some extent. The five percent preference to Wyoming contractors would apply; and WyDOT might look at allowing a general contractor to do less than 50 percent of the work to encourage larger contributions from Wyoming subcontractors.
Representative Edwards, Cochairman of the Joint Transportation Committee, addressed the Revenue Committee, stating he is in favor of some increase in fuel tax. However, he added that he did not believe the Legislature could sell a five-cent increase. He suggested amending the proposal to a one or two-cent fuel tax increase.
Marion Loomis, Wyoming Mining Association, commented on the committee proposed legislation to tax off-road fuel. (An outline of his remarks is included as Appendix 7.) His organization believes the mineral surplus should be used to support multi-lane highways. He indicated that the mining industry does pay a sales tax on all of the fuel the mining industry consumes. He encouraged the exemption of off-road fuel tax.
Sheila Foertsch, Wyoming Truckers Association, indicated that her organization had not yet taken a position on the proposed fuel tax increase for purposes of multi-lane highways. She added that the five-cent tax would be a difficult sell. She also clarified that if a carrier purchases fuel in Wyoming and burns the fuel in another state, they pay the difference.
Ken Hamilton, Wyoming Farm Bureau Federation indicated that his members are not in support of the increase in fuel taxes, especially in light of the recent increase in fuel prices.
Dick Hartman, Union Pacific Railroad, stated his opposition to the fuel tax being applied to railroads. He indicated that the railroads are not highway users. (His full testimony is provided in Appendix 8.)
Jim Magagna, Wyoming Stockgrowers Association, concurred with Mr. Hamilton’s testimony. He commended the Committee for looking at the infrastructure of the state but suggested it can be built with the revenues available from the mining industry. He also concurred with Mr. Loomis’ recommendation to insert the exemptions on off-road diesel fuel.
Representative Anderson asked LSO to hand out flow charts illustrating the current distribution of severance taxes and federal mineral royalties (FMRs). (Appendix 9) He suggested the following option: raise the severance tax cap to $200 million from $155 million; keep the General Fund amount at the same expected level of expected revenue under the $155 million cap; and direct the additional amount the General Fund would receive under the $200 million cap to a new account within the Highway Fund for purposes of multi-lane construction. In addition, he proposed increasing the federal mineral royalty (FMR) cap from $200 million to $250 million, with the amounts that would have been directed to the Highway Fund to be used for multi-lane construction.
The Committee discussed the impact of the FMR proposal on cities and towns and the Hathaway Endowment Account. Cochairman Anderson indicated that both of his options increase opportunities for entities and address some highway funding issues. Representative Harshman indicated that a multi-lane construction account of similar magnitude could be incorporated if $25 million totally dedicated to highways was added to the $155 million cap on severance taxes.
Representative Gay moved that LSO draft two bills regarding both the severance tax and federal mineral royalty proposals, consistent with Representative Anderson's proposal. His motion was seconded and the motion passed.
Representative Harshman moved the LSO draft legislation, 06LSO-0092.W1, Multi-lane highways-fuel tax increase. (Appendix 10) The motion was seconded and Representative Harshman then moved the bill be amended to reflect a one penny increase with exemptions. Representative Hastert seconded. Senator Hawks reminded the Committee as to the rationale behind the original motion to raise $50 million in fuel taxes and $50 million through an appropriation. After further Committee discussion, the amendment failed.
Senator Peck moved the draft be amended to reflect a two-cent fuel tax increase with traditional exemptions. The motion was seconded, and then the motion failed.
Representative Hastert moved to exempt diesel from the off-road fuel tax. The motion was seconded and the motion carried.
Senator Cooper moved to remove the amended language, including all tax increases, preserve the creation of the special account and raise the appropriation to $75 million from the budget reserve account (BRA) for the exclusive purpose of multi-lane highways. The committee directed LSO staff to make all conforming amendments, including the short and long title of the bill. The motion was seconded, and it passed.
Representative Harshman moved to separate the appropriation for multi-lane highway construction and create another account exclusively for purposes of acquiring corridors: the transportation corridor account. He continued his motion to have the appropriated money initially be directed to the corridor account and then later find away to fund the construction. He continued the motion to add $25 million to the total appropriation and provide that any unused funds would revert to the construction account. The motion was seconded.
The Committee discussed whether the motion would result in micromanagement of WyDOT. The Committee also discussed whether the name of the two accounts was appropriate. After discussion, the amendment failed.
Representative Walsh called for the question on the bill and to have the Committee review the full bill, with amendments incorporated at the next meeting. The motion was seconded, and it passed.
Robert Tompkins, Department of Revenue Excise Tax Division Manager, addressed issues of streamline taxes. (See Appendix 11 for a copy of DOR's draft proposal.) He discussed the need for the conforming language for the repayment of bad debt and provide for specific direction for Wyoming to adopt SSTA rules on sourcing.
Cochairman Anderson and Peck informed the Committee on the status of Wyoming’s involvement as an associate state within the Streamlined Sales Tax Agreement (SSTA).
Senator Peck moved that LSO prepare a draft bill of DOR's proposal (Appendix 11). The motion was seconded, and the motion passed.
Mr. Tompkins also provided a brief background as to the status of the Woodworker’s legal action against the state regarding the procedure in which the sourcing rules had been adopted. He indicated that oral arguments had been made before Judge Grant, but no decision had yet been announced.
George Parks, Wyoming Association of Municipalities indicated that the discussion of raising the capped amounts under both the severance tax and FMR formulas would be very popular among his members. He indicated that inflation has risen about 20 percent in five years, and that any direct revenue flow assists cities and towns in terms of financial planning.
He also advised the Committee that an issue on the forefront is franchise fees, and who is responsible for these fees.
Laurie Kadrich, City of Cody, testified in support of increasing the caps on severance taxes and FMRs.
Minutes from the July 17-19, 2005 Committee meeting were approved.
There being no further business for the day's activities, the Committee recessed for the day at approximately 2:45 p.m.
Cochairman Peck called the meeting to order at 8:35 a.m.
State Treasurer Cynthia Lummis addressed the Committee and provided a history of the authority of the State Treasurer to invest in equities. She explained that all of the equity investments are currently administered by external contractors, though fixed income investments are largely handled in-house. Ms. Lummis indicated that the state is working toward a 50/50 split between equities and fixed income investments and should obtain that ratio about the time of the end of her term. She also explained the diversification of the equity portfolio, including large cap stocks, small and mid-cap stocks, and international stocks.
Next, Treasurer Lummis summarized her Office's "flash report" which provides the balances and historical returns of each of the five major accounts invested by the State Treasurer's Office: the Common School Account, Permanent Wyoming Mineral Trust Fund, State Agency Pool, Tobacco Settlement Trust Fund, and Workers Compensation Fund. (See Appendix 12 for the balances and historical returns.) The two funds with the greatest return are the two which have the most investment flexibility and allow for equity investments.
Treasurer Lummis explained the use of covered calls to generate an additional one to two percent of cash per year. Cochairman Peck asked whether the Workers Compensation program is completely funded to cover future needs. Ms. Lummis responded that it is not 100% covered, but nearly so. She explained the state’s discretion regarding treasuries, agencies and corporate bonds, and explained that they have not yet given authority to purchase international bonds or high yield bonds.
Treasurer Lummis explained the history of the state’s investment in private equity funds, dating back to the Geringer administration. She stated that the prior Attorney General signed off on this type of investment; however, the subsequent Attorney General did not agree with that position. She explained the investment of private equities is triggered by a call from the investment manager on the state and that prior to that call, the state invests that money elsewhere. The private equity managers are generally involved in the management of these companies as well. Ms. Lummis indicated that in private equity investments, the companies do not have the wide distribution of pubic information available, making available opportunities for higher returns.
Cochairman Peck asked if there was any indication of negative investment impacts from the aftermath of Hurricane Katrina. Treasurer Lummis indicated there was no indication of impact at this time. She added an explanation of the state’s investment in real estate investments, and that one of the hotels that is in line to become part of the portfolio is located in New Orleans. She added that since real estate investments are so over-allocated, there would be delay in the state's opportunity to invest in real estate.
The Committee also discussed the state’s response to agriculture loan defaults. Ms. Lummis described the state’s policy, including a work out plan administered by the Office of State Land and Investments as well as potential foreclosure in order to protect the state’s investments.
Senator Cooper asked why there was a need to develop a sub fund to the PWMTF for private equity investments. Ms. Lummis recounted the recent history regarding this proposal, primarily among legislative House members to increase the state’s return. She indicated it had not been the State Treasurer’s initiative. She added that the CSA and PWMTF are the only funds that can be invested in equities, per a recent Attorney General’s opinion. Therefore, the mechanism used in 06LSO-0091.W2 creates a sub fund within the PWMTF in order to allow for equity investment. (See Appendix 13 for a copy of 06LSO-0091.W2, Private equity investments.)
Treasurer Lummis indicated that a bill is not needed to invest in private equities. However, to develop an investment community in Wyoming, this bill provides an avenue to do that. She explained the need for any industry to develop supporting environments, and that given the goals articulated by legislators and prior testimony, this draft would provide a vehicle for this support development. She also suggested that there are not adequate opportunities to entirely invest the maximum $175 million in Wyoming, but the draft allows the following direction, “The agreement may provide incentives for the general partner to consider investments which enhance the economic development of this state, provided such investments offer a rate of return and safety comparable to other similar investments available to the fund.” She qualified her statement that a dual goal of economic development is not always consistent with pursuit of the greatest return. That is why the recommendation is to pursue the greatest return.
Senator Cooper moved the bill, and the motion was seconded.
Representative Pederson walked through the bill, explaining the various features and contrasting private equity investment in existing companies versus venture capital investment in start-up firms. He explained the time lines proposed for investment and liquidation and the deposit of all earnings into the General Fund.
Ms. Lummis indicated that the industry standard for management fees has been a 2 percent fee plus a 20 percent carry (after the investors have received 100 percent of their investment back, with negotiation), although it can vary.
In response to a question, Treasurer Lummis indicated that it would provide for the development of an investment community, and management that could be housed in the business incubator. She highly recommends higher investments in alternative choices, as it also adds to the expertise available to the State Treasurer. The goal would be different from the investment of permanent funds.
Representative Pederson stated the $50 million investment provides a minimum to attract qualified investment professionals. The Committee discussed the appropriate level of state participation and appropriation toward the fund and what would be required for an adequate number of deals. The Committee also discussed the reporting provisions for oversight and review.
Representative Walsh moved the bill for adoption as a House bill. Representative Pederson seconded the motion. The motion carried unanimously. (See Appendix 14 for a copy of the roll call vote.)
Mr. Quiner passed out testimony of James Patterson, in his absence, for the Committee’s review. (Appendix 15)
The Committee discussed opportunities for their next meeting, and decided on Wednesday and Thursday November 9th and 10th in Cheyenne, beginning at 8:30 a.m.
There being no further business, Cochairman Peck adjourned the meeting at 10:30 a.m.
Respectfully submitted,
Senator Peck, Cochairman Representative Anderson, Cochairman