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Audit Report #08-4551-97

De
73 pages
In accordance with the provisions of Title 24 of the Alaska Statutes, the attached report isprivate nonprofit hatcheries. Specifically, our review focused on the Fisheries Enhancementrelative to the efficiency and successes of the FERLF and the hatchery program. While theLegislative AuditorWelker, CPA Randy S. this report are discussed in the Objectives, Scope, and Methodology section of this report.Fieldwork procedures utilized in the course of developing the findings and discussion presented inThe audit was conducted in accordance with generally accepted government auditing standards.financial stability of the FERLF.hatchery programs have rebuilt depleted fish stocks we do have reservations on the prospectiveMany of the hatcheries have been operational for a sufficient period of time to draw conclusionsDevelopment and hatchery permitting and monitoring by the Department of Fish and Game.Revolving Loan Fund (FERLF) administered by the Department of Commerce and EconomicThis audit documents our review of various issues surrounding the funding for and operation of 08-4551-97Audit Control NumberAugust 22, 1997PRIVATE NONPROFIT HATCHERIESREVIEW OF FUNDING AND OPERATION OFDEPARTMENT OF FISH AND GAMEAND ECONOMIC DEVELOPMENTDEPARTMENT OF COMMERCEsubmitted for your review. and Audit Committee:Members of the Legislative BudgetAugust 22, 1997ABLE OF CONTENT71 ............ ................................ ................................ Legislative ...
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August 22, 1997
Members of the Legislative Budget  and Audit Committee: In accordance with the provisions of Title 24 of the Alaska Statutes, the attached report is submitted for your review.
DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT DEPARTMENT OF FISH AND GAME REVIEW OF FUNDING AND OPERATION OF PRIVATE NONPROFIT HATCHERIES
August 22, 1997 Audit Control Number  08-4551-97 This audit documents our review of various issues surrounding the funding for and operation of private nonprofit hatcheries. Specifically, our review focused on the Fisheries Enhancement Revolving Loan Fund (FERLF) administered by the Department of Commerce and Economic Development and hatchery permitting and monitoring by the Department of Fish and Game. Many of the hatcheries have been operational for a sufficient period of time to draw conclusions relative to the efficiency and successes of the FERLF and the hatchery program. While the hatchery programs have rebuilt depleted fish stocks we do have reservations on the prospective financial stability of the FERLF. The audit was conducted in accordance with generally accepted government auditing standards. Fieldwork procedures utilized in the course of developing the findings and discussion presented in this report are discussed in the Objectives, Scope, and Methodology section of this report.
Randy S. Welker, CPA Legislative Auditor
TABLE OF CONTENTS
Objectives, Scope, and Methodology........................................................................................
Organization and Function.........................................................................................................
Background Information............................................................................................................
Report Conclusions....................................................................................................................
Findings and Recommendations................................................................................................
Private Nonprofit Hatchery Profiles..........................................................................................
Appendix A: Relative Values of Hatchery Organization Contribution                              to Common Property Fisheries.....................................................................
Agency Response:
Department of Commerce and Economic Development.............................................
Department of Fish and Game......................................................................................
Legislative Auditors Additional Comments............................................................................
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OBJECTIVES, SCOPE, AND METHODOLOGY
In accordance with Title 24 of the Alaska Statutes and a special request of the Legislative Budget and Audit Committee, we updated our previous audit (dated December 12, 1992) of private nonprofit hatchery operations and their funding. The committee also requested a further and more current analysis of hatchery operations and their relative strengths and weaknesses.
Our review focused on the Fisheries Enhancement Revolving Loan Fund (FERLF) administered by the Department of Commerce and Economic Development (DCED), Division of Investments (DOI) and the permitting and monitoring of hatcheries by the Department of Fish and Game (DFG), Division of Commercial Fisheries Management and Development (CFMD). We also reviewed the salmon enhancement tax (SET) collections administered by the Department of Revenue (DOR). Finally, we reviewed fisheries statistics from the Commercial Fisheries Entry Commission to develop harvest data as well as detailed information relative to enhanced fish harvest versus wildstock harvest and the benefits of enhanced fish to the various gear groups.
Objectives
The specific audit objectives were:
· effectiveness, fiscal status, and prospective financial stability of the FERLF.Assess the · programmatic and economic viability of the state hatchery program.Review and assess the · Determine the degree to which DOI scrutinizes loan recipients. · Evaluate CFMD’s division policies and procedures for compliance with statutes and regulations. · Review the collection and distribution process of the SET. · Determine which gear groups are benefiting from hatchery-produced fish and compare the benefits to the SET paid by each gear group.
Scope
The scope of our audit involved reviewing the operations of nine of the largest borrowers of the FERLF. These nine borrowers comprise 99% of the fund’s outstanding loans receivable as of March 31, 1997.
Methodology
We based our examination of the FERLF, SET program, and DFG’s permitting process on interviews with nine hatchery organizations. Staff at the DCED, DFG, and DOR were interviewed regarding the administration of the FERLF, the hatchery permitting procedures, and the salmon enhancement tax program.
In addition, our audit also included review and analysis of the following: - 1 -
 
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.
Alaska Statutes 16.10.375 - .480. Salmon Hatcheries. Alaska Statutes 16.10.500 - .560. Fisheries Enhancement Loan Program. Alaska Statutes 43.76.010 - .040. Salmon Enhancement Tax. Pertinent regulations of the Departments of Revenue, Commerce and Economic Development, and Fish and Game as well as those of the Alaska Board of Fisheries. Loan files maintained by the Division of Investments. Alaska Fisheries Enhancement Program Annual Reports prepared by Commercial Fisheries Management and Development Division. Annual Operating Reports prepared by hatchery operators. State-owned hatchery contracts with various hatchery operators. Statistical salmon data prepared by Commercial Fisheries Entry Commission. Salmon enhancement tax information from Department of Revenue. Various financial and operational information maintained by hatchery operators contacted during the course of the audit, including review of operator’s financial statements. Hatchery Policy GroupReport to the Salmon Industry Response Cabinet. Final report of theLegislative Review of the Alaska Salmon Enhancement Program. Discussions with personnel familiar with the Alaska hatchery programs and fish related policies including University of Alaska faculty, representatives of the Alaska Commercial Fishing and Agriculture Bank, and a staff attorney within the Office of the Attorney General. Review of recent legal decisions relevant to wanton waste statutes and related issues. Discussions with the state debt manager.
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ORGANIZATION AND FUNCTION
Title 16 of the Alaska Statutes sets out the duties and organization of the Department of Fish and Game (DFG). The statutes authorize the commissioner to designate regions of the State for the purpose of salmon production and the development of a comprehensive salmon plan for each region. Comprehensive salmon plans1 developed by regional planning teams consisting of are three department personnel and three representatives of the appropriate qualified regional association. Under statute, a regional association may be established for the purpose of enhancing salmon production and is qualified to do so if (a) it is composed of representatives of commercial fishermen in the region, (b) it includes representatives of other user groups interested in fisheries who wish to belong, and (c) it possesses a board of directors that includes at lease one representative of each user group2that belongs to the association.
The commissioner of DFG may issue a permit to a nonprofit corporation for the construction and operation of a salmon hatchery or for the operation of a hatchery under AS 16.10.480,3 after the application has been reviewed by the regional planning team. A qualified regional association has preference rights to a permit if the proposed hatchery is provided for in the region’s comprehensive salmon plan. Before and after issuing a permit, DFG is required to make every effort to advise and assist applicants or permit holders in the planning, construction, or operation of salmon hatcheries.
A public hearing conducted by the department must be held at least 30 days before the issuance of a permit. At the hearing for a permit to construct and operate a salmon hatchery, the applicant presents a plan for the proposed hatchery describing the planned capacity and other relevant facts that may be of interest to the department or the public. The department records and considers objections and recommendations from the public.
If a permit holder fails to comply with the conditions and terms of a permit, the permit may be suspended or revoked at the discretion of the commissioner, after the regional planning team has an opportunity to comment. The commissioner may alter the conditions of a permit or terminate the operation under a permit if operation of a hatchery is not in the best interest of the public.
Hatchery permit holders are required to submit an annual report to DFG and to their respective regional association no later than December 15 of each year. The report includes information pertaining to species; brood stock source; number, age, weight, and length of spawners; number of eggs taken and fry fingerling produced; and number, age, weight, and length of adult returns attributable to hatchery releases.
                                               1plan” is a document that integrates and assembles all relevant information regarding“Regional comprehensive salmon  the development and protection of the salmon resource, for a specific long range period of time, into a strategic plan for an established region of the State. 2User groups include but are not limited to, sport fishers, processors, commercial fishers, subsistence fishers, and  representatives of local communities. 3the State to contract out operations of Contracts for the Operation of State Hatcheries. This section of statute permits state-owned hatcheries. When deciding to do so, preference is given to the established regional association in which the state-owned hatchery is located. - 3 -
Fisheries Enhancement Revolving Loan Fund
The Fishing Enhancement Revolving Loan Fund (FERLF) was created in 1977 (AS 16.10.505) within the Department of Commerce and Economic Development (DCED), Division of Investments (DOI). The fund was established to promote the enhancement of the State’s fisheries by means of long-term, low interest loans for planning and implementation of fish enhancement and rehabilitation activities, including lake fertilization and habitat improvement. Grants are also available to regional associations for organizational and planning purposes.
Borrowers fall into three categories: (1) qualified regional associations that have formed a nonprofit corporation, (2) independent, local nonprofit corporations approved by a qualified regional association, or (3) independent, local nonprofit corporations that have not requested or received regional association approval. A single fisheries enhancement loan may not exceed $10 million for a hatchery or other enhancement or rehabilitation project under a permit granted to a qualified regional association, or to a local nonprofit corporation approved by a regional association. Loans to independent nonprofit corporations not approved by a regional association are limited to $1 million. The rate of interest for each loan may not exceed nine and one-half percent per annum with a payback period not to exceed 30 years. The commissioner of DCED may not require the repayment of principal of a loan during the initial period.4 Interest on the principal of the loan does not accrue during the initial period.
The Alaska Commercial Fisheries Entry Commission issues special harvest area permits to holders of private nonprofit hatchery permits. These permits are renewed annually and are not transferable. A permit is issued for a specific area. Fish caught under the authority of a special harvest area permit are the property of the permit holder. Proceeds from the sale of special harvest area catch (“cost recovery”) may be used for hatchery costs including debt retirement, facility expansion, rehabilitation projects, fisheries research, or operating costs of the hatchery.
Salmon Enhancement Tax
Title 43, Chapter 76 of the Alaska Statutes establishes the Salmon Enhancement Tax (SET) program. A qualified regional association may conduct an election to adopt a SET rate of either one, two, or three percent. Assessment of a SET must be approved by a majority vote of the limited entry permit holders in the region. Commercial fishers in the region must pay SET on the salmon sold.
Generally, a buyer who acquires fisheries resources that are subject to the SET is required to collect the tax at the time of purchase. Total SET collected during the month is remitted to the Department of Revenue (DOR) the last day of the following month. All buyers who collect SET are required to maintain records reflecting the region in which the fish were caught. Monthly reporting to DOR identifies SET collected and the value of salmon purchased on a “where caught and where bought” basis. DOR summarizes this information monthly by regional association.
                                               4Initial period of the loan is defined as a period of time not less than six years or more than ten years from the date the loan is made. - 4 -
SET collections are deposited in the General Fund. The legislature may make appropriations based on this revenue to DCED for the purpose of providing financing for qualified regional associations. Appropriations to a qualified regional aquaculture association are based on the value of fish caught in that region rather than on the value of fish bought in that region.5
Annually DOR provides to DCED a calendar year summary of all SET collected. This summary includes: (1) the amount of SET collected (in total and by regional association), (2) total value of fish based on where bought, and (3) total value of fish based on where caught. DCED develops a 6 budget request for the regional associations’ operating grants based on regional SET collections. Actual calendar year SET revenues collected by DOR are appropriated the following fiscal year.
The SET may be terminated by the commissioner of DOR. At least 25% of the limited entry permit holders who approved the tax must petition the commissioner of DCED. After DCED determines there are no outstanding FERLF loans to the regional association an election may be held to determine status of the SET for the region. A majority of the limited entry permit holders must approve any changes to the SET for the region.
                                               5Fish caught in one region can be transported and eventually sold in another region. 6 Regionalcollections directly. They technically receive an appropriated grant associations do not receive SET from the legislature, the amount of which may be based on SET collections. This is necessary in order to comply with the State’s constitutional prohibition against dedicated state revenues. 5 - -
(Intentionally left blank)
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BACKGROUND INFORMATION7
Concerns over depleted wild stocks prompted major enhancement efforts
The development of Alaska’s hatchery program was driven by concern over the depletion of salmon stocks in the 1960s and 1970s. The public became increasingly concerned over the depletion of the wild salmon stocks. Around the same time the State received $900,000,000 from the sale of oil and gas leases on the North Slope. The legislature responded to public concern by channeling some of its income from its nonrenewable resources (oil and gas) into a renewable resource (salmon).
When first considered, many people were doubtful that salmon hatcheries would be successful. Many professional fishery biologists opposed the program and raised concerns about the unknown biological and management problems that may be generated by hatcheries. Although there were concerns expressed about the program, the pressing problem of the depressed fisheries prompted the legislature to take action. The legislature hoped that potential problems could be averted by incorporating biological safeguards into the program and segregating hatchery runs from wild stocks through careful hatchery site selection. It was felt that by protecting the wild stocks, the base
FRED created to oversee development of hatchery efforts In 1971 the State created8a division within the Department of Fish and Game (DFG) to aid in the restoration and enhancement of fisheries. By 1974, the newly created Fisheries Rehabilitation, Enhancement and Development (FRED) Division9 had several enhancement projects underway. Over the past 20 years the public has shown their support for fisheries enhancement by supporting general obligation bond issues which, with interest, exceeded a cost of $119 million. These bond issues were used for construction and operation of state facilities. As the program developed, the legislature increasingly felt that the private sector would be more efficient and effective than the State in operating hatcheries.
As a result of this sentiment, the private nonprofit hatchery program was developed. In the initial nonprofit hatchery program, fisheries organizations were encouraged to build and operate private nonprofit hatchery facilities. It was envisioned that the operation of the hatcheries could be funded from the harvest of returning fish and from tax assessments (SET) on the fishers who had access to the hatchery production. This would allow the State to shift the cost of the facilities from the
                                               7Much of the historical information presented in this section of the report has been extracted (and updated where necessary) from the previous Division of Legislative Audit ReportDepartment of Commerce and Economic Development, Department of Fish and Game, the Funding and Other Operation of Private Nonprofit Hatcheries, dated December 10, 1992, report number 08-4445-93. 8113, Session Laws of Alaska 1971.Chapter 9Executive Order No. 86, transferred FRED divisional responsibilities to the In 1993, the governor, by departmental level within DFG. Once accomplished, FRED and the Division of Commercial Fisheries were merged into the new Commercial Fisheries Management and Development Division (CFMD). CFMD assumed all responsibilities of the former FRED, including oversight of hatchery programs. - 7 - 
shoulders of the general public to the people who most directly derived benefits from the hatcheries.
Large up-front capital costs and risk made it necessary to develop other sources of financing
As the private nonprofit hatchery program progressed, it became apparent that the risk and start up costs to construct and operate hatcheries was too great to be borne by the private sector. It was necessary for the State to take an active role in funding hatchery start up costs to ensure the program’s economic viability. The State took its first step in this direction in 1974 when it made funds available to hatcheries through the Renewable Resources Development Fund. Additional state loans for the construction of hatcheries became available in 1975 when the commercial fisheries loan program was expanded to include hatcheries. A separate fisheries enhancement loan program was established in 1976.
The legislature struggled with the problem of financing private nonprofit hatcheries. Building a hatchery required a large amount of capital outlay and it could take up to ten years for a hatchery to establish enough fish returns to service the original debt and cover operating costs. Statutory terms of the enhancement loan program were tailored to address the intrinsic nature of hatchery operations. For example, borrowers were given from six to ten years interest free before loan repayment began.
In 1977, the legislature restructured the loan program as a revolving loan fund within the Department of Commerce and Economic Development (DCED). The fund is administered by the Division of Investments (DOI). In 1979, legislation was approved that allowed the issuance of special harvest area permits to private nonprofit hatchery operators. This permitted operators to harvest their own brood stock and cost recovery fish rather than hiring a permitted fisher to perform the task.
At the time of its creation, there was some debate about what department should be given administrative responsibility for the Fisheries Enhancement Revolving Loan Fund (FERLF). Some argued that it would be better for professionals with a background in fisheries to be responsible for making loans and evaluating the merits of proposed hatcheries. Others felt that it was better to have financial professionals in DCED administer the loan program with due consultation and coordination with DFG. Some even felt that placing FERLF in DCED avoided a potential conflict of interest for DFG fishery biologists. In this view, it was felt that biologists may be accused of manipulating the commercial fishing harvest in order to maximize the cost recovery at state-financed hatcheries.
As of March 31, 1997 the FERLF had direct loans receivable of $93,635,709.10 These loans are held by twelve borrowers consisting of four regional aquaculture associations and eight non-                                               10Alaska Industrial Development and Export Authority (AIDEA) owns eight loans totaling $4,259,482 that were made under the terms of the FERLF program. Chapter 67, SLA 1985 transferred 14 fisheries enhancement loans to AIDEA. Six loans have been repaid and eight are still outstanding. Payments on these loans are forwarded to AIDEA instead of being credited to the FERLF. These loans are included in the $93,635,709 loan receivable figure and when added to deferred interest the total FERLF loan balance is $109,125,868 as reflected in the schedule on page 13. -- 8
regional organizations. In recent years there has been limited funding for the FERLF. DOI has adopted a priority system for allocating the limited funds (see insert). Operational loans have the highest priority because they are essential for the continued operation of the hatchery and thus the protection of the State’s prior investments. A hatchery request for an operational loan is indicative of the organization’s operating costs and debt service requirements exceeding cost recovery revenues or the existence of insufficient financial reserves.
The Division of Investments contactsAllocatin Limited Loan Funds regional aquaculture associations and private nonprofit hatcheries to compile aPriority A listing of anticipated loan demand from erational  each potential borrower. From theOwphich have bleoeann ss upmpaodrtee dt ob y epxriestviinogu s pFrEojRecLtFs aa ntbiucidpgaette dr elqoaune std efmora ntdh e DFCEERD LdFe. veLlooapnscapital and/or operating loans. rperiqoureitsyts.  aPrrei ocriattye goAri zelod ana ndr eqfuunesdtes d abryePriority B funded first. Legislative appropri i ns Capital loans made to existing projects which at o have been supported by previous FERLF capital determine to what extent the loan requests and/or operating loans. are funded. Priority C Of the 191 loans outstanding as of Loans made to exis cts which have March 31, 1997, 110 were operating ting proje loans.baened/no r suoppperoarttiendg  lboya nsp rtehvaito uasl loFwEs RfLacFi litciaeps ittaol increase h Two types of private nonprofitcontribu tiofins to tphreo cdoucmtimoon,n  ptrhoepreerbtyy  fiisnhcerreya.sing organizations operate salmon hatcheries  D/Prior Theprer ofairte thwatoc hdeirsyti ncot rfgoarnimzsa tioof nsp:r iv(at1e)POrpieorraittiyng andictaypEital loans, respectively, for non new projects not supported by previous FERLF regional associations and (2) non-regional loans. corporations. Both regional and non-regional organizations operate hatcheries and carry out other enhancement projects.
Regional associations are given some preferences over non-regionals in Alaska statutes. These preferences include hatchery site selection, maximum FERLF loan amounts, salmon enhancement tax revenues, and priority in assuming operation of state hatcheries.11 associations are Regional comprised of representatives of commercial fishers and other user groups interested in fisheries within the region.
                                               11states a single fisheries enhancement loan may not exceed $10,000,000 for a hatchery or other 16.10.520  AS enhancement or rehabilitation activity conducted under a permit granted to a qualified regional association which has formed a nonprofit corporation, or to a local nonprofit corporation approved by a qualified regional association. A loan for any other nonprofit hatchery corporation project may not exceed $1,000,000. 9 --
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