House approves tax credit bonds in split vote
Tangible action in Juneau is ramping up as the session winds down in the final week before legislators bump up against the 121-day constitutional limit.
Amidst passing one of the most momentous pieces of legislation in the state’s history May 8 to use the earnings of the Permanent Fund for government services, the Legislature continued to plug away at the other big bill from this year’s session: the Walker administration’s plan to sell bonds to pay off the state’s $800 million-plus oil and gas tax credit obligation.
House Bill 331 didn’t gain traction until late into the session but it has been moving along promptly in the past several weeks. It is largely seen as a substantial piece of end-of-session budget negotiations.
The House passed its version of HB 331 May 3 on a 22-16 vote that split members of both the Democrat-led majority and Republican minority. The lion’s share of concern with the bill among those who voted against it related to questions about its constitutionality raised by Sen. Bill Wielechowski, D-Anchorage, about Senate Bill 176, its companion legislation .
Others voting against the plan argued it would pit the need to make the debt payments against other funding priorities like education and public safety.
HB 331 would create the Alaska Tax Credit Certificate Bond Corp. within the Department of Revenue to sell the bonds and pass the proceeds of the sales on to the bondholders, of which there are 37, according to Deputy Revenue Commissioner Mike Barnhill.
The bonds would be “subject to appropriation,” meaning the revenue to pay for them would be contingent upon the Legislature appropriating money to pay the debt service each year.
The legislation would also require credit holders to accept up to a 10 percent discount on the amount they’re owed to cover the cost of the state’s borrowing and avoid spending additional state money on the all-but defunct tax credit program.
Credit holders could also opt for a lesser discount rate in the 5 percent range if they agree with the Department of Natural Resources to negotiate a higher state royalty in future oil and gas production or commit to reinvest a portion of the payment back in Alaska projects.
The bonds would be paid off over 10 years. The annual debt payments would be up to $115 million, according to the Revenue Department, and would be smaller than the largest projected payments the state would make paying off the debt under the current statutory formula.
Another roughly $200 million bond sale will likely be needed in a couple years to pay off a few remaining credits that are expected to be claimed before the remaining LNG storage and Interior basin credits sunset in 2020, according to Revenue officials, bringing the total bond amount to about $1 billion.
Wielechowski, with the support of an April 13 opinion from Legislative Legal Services attorneys, contends the plan could violate the state Constitution, which generally restricts the Legislature from taking on debt outside of voter-approved general obligation bonds for capital projects and times of emergency.
The administration, backed by its own legal opinion from Attorney General Jahna Lindemuth, argues the “subject to appropriation” nature of the debt makes it constitutional because it requires annual approval of the debt payments by the Legislature. And while failing to service the debt would undoubtedly damage the state’s credibility among financial markets, there would be no legal requirement to make the payments.
The House Finance Committee attempted to address the possibility of a legal challenge by adding a provision to HB 331 requiring any challenges be made within 45 days of a bond sale, the first of which is expected to happen in late summer if the bill becomes law, according to Revenue officials.
Additionally, Fairbanks Democrat Rep. Scott Kawasaki pushed an amendment during floor debate to hold a public advisory vote before the bonds are sold in an attempt to mirror the vote needed to sell general obligation bonds.
“I think at the very least we owe it to the people of Alaska when we’re passing such large legislation with such a large fiscal impact that will be seen 10 to 15 years to come that we have an advisory vote basically to assert that it is something the people would like to see,” Kawasaki argued on the House floor.
The amendment failed 10-28.
House Resources co-chair Rep. Andy Josephson, D-Anchorage, suggested that not passing the bill and paying the credits to the small companies that have earned them could lead those companies to sell the credits to the large producers at a steep discount and further “basin control” on the North Slope by the major producers, which was one of the primary things the credit program aimed to change.
Eagle River Republican Rep. Dan Saddler said the bonds would provide a predictable payment plan for the Legislature that in recent years has not known what the credit obligation would be in any given year until the Revenue Department published its Spring Revenue Forecast.
This year the statutory minimum credit payment would be $184 million, according to the administration. The interest-only debt payment would be $27 million.
“These credits are a cloud hanging over our economy and this allows us to clear those clouds up. It’s a practical business deal,” Saddler said in floor debate.
A May 1 financial analysis of the plan by former Department of Natural Resources commercial analyst and economist Ed King found that back loading the debt payments, as is Revenue’s plan, could save the state nearly $680 million compared to following the statutory formula repayment schedule that would require payments of nearly $400 million in the next two fiscal years.
That’s because it would leave investment return-bearing money in the Permanent Fund Earnings Reserve longer and allow that money to grow. King is the principal at King Economics Group.
However, that assumes the Permanent Fund’s investments continue to earn strong returns over that time, and that the legislature does not spend down the savings.
Revenue Commissioner Sheldon Fisher has said repeatedly that the administration back loaded the debt payments to give the state several years to get on better financial footing before having to make $100 million-plus annual payments to service the bonds.
As of early May 9, HB 311 was in the Senate Finance Committee awaiting amendments from the committee before heading to the Senate floor for a vote.
Elwood Brehmer can be reached at [email protected].