Tax credit bond scheme shot down

  • An employee of Caelus Energy is seen at the Smith Bay well in this 2016 courtesy photo. Still owed an estimated $100 million in tax credit rebates from the State of Alaska, Caelus has sold off most of its North Slope assets in recent years and small independent explorers like it will keep waiting after a Supreme Court decision struck down a bill passed in 2018 to sell bonds to pay off the balance now totaling more than $700 million. (Photo/Courtesy/Caelus Energy)

The Dunleavy administration is going to ask the Supreme Court to reconsider a unanimous decision barring the state from selling bonds to pay off more than $700 million worth of oil industry tax credits, according to the attorney that won the case.

Juneau-based attorney Joe Geldhof said a representative from the attorney general’s office called him Sept. 7 to discuss the administration’s plan to file a request for a rehearing of a lawsuit challenging the state’s complex plan to pay off its outstanding oil and gas tax credit obligation, which currently stands at $743 million, according to a statement from the governor’s office.

The five-justice court in a Sept. 4 ruling unanimously overturned a January 2019 Superior Court decision that dismissed the lawsuit over the constitutionality of House Bill 331, the legislation to enact the bond plan first proposed by former Gov. Bill Walker’s administration.

Passed by the Legislature in the spring of 2018, HB 331 authorized the Department of Revenue to establish Alaska Tax Credit Certificate Bond Corp. for the sole purpose of issuing 10-year bonds to pay off the large sum of accumulated tax credits.

The plan was pitched as a way for the state to improve its standing with large investors following Walker’s decision in 2015 and subsequent decisions by the Legislature that the state could no longer afford to pay off the balance of the credits earned in a given year. Prior to Walker’s $200 million tax credit budget vetos in 2015 and $430 million in 2016, the Legislature had appropriated, and the administration had spent, funds to pay off all of the industry activity credits earned by small oil and gas companies each year.

The credits were largely issued to small exploration companies that did qualifying work, but they were then often used as collateral for loans issued by investment banks to support additional exploration work. A commonly used credit for explorers with no production and no tax liability had the state paying 35 percent of the cost of qualifying work in cash.

The Legislature largely ended tax credit program in 2017 as state revenues remained low and savings started to dwindle. However, the credits earned but unpaid in previous years remained.

When the earned credits weren’t paid off in full in the fiscal years 2016-18 state budgets, as had previously been done, the banks holding them mostly stopped lending into the Alaska oil sector.

Walker administration officials and Republicans in the Legislature — often at odds over oil tax policy — particularly touted a provision requiring the companies to accept a 10 percent discount off of the face value of the credits they held. The 10 percent discount would allow the state to cover interest on the bonds and administrative fees without ultimately paying more than the sum of the actual tax credit certificates.

The court’s 63-page ruling, written by now-retired Justice Craig Stowers, states that along with other factors, “the plain text” of Article IX of the Alaska Constitution controlled the justices’ decision to invalidate HB 331.

The state Constitution generally limits the Legislature from bonding for debt to general obligation, or GO, bonds for capital projects, veterans’ housing and state emergencies. In most cases the voters must approve the GO bond proposals before the bonds are sold.

State corporations can also sell revenue bonds, but those are usually linked to a corresponding income stream and only obligate the corporation to make payments, not the State of Alaska as a whole.

State attorneys contended HB 331 was legal because the bonds would’ve been “subject to appropriation” by the Legislature and therefore would not legally bind the state to make the annual debt payments. They also noted the state has used similar bonding plans to fund projects, such as prisons, without objection.

However, Stowers wrote that “sanctioning subject to appropriation bonds would create ‘two classifications’ of bonded indebtedness, solely for the sake of legislative expedience” and records from the state’s constitutional convention indicate the framers rejected that concept in multiple ways.

Eric Forrer, the retired contractor and former University of Alaska regent who filed the public interest lawsuit said in an interview that from the outset he believed HB 331 was “unconstitutional on its face” given the tight constitutional sideboards that control state debt.

The ruling, he said, will force the oil companies and banks holding the credits to compete for funds alongside traditional government expenses such as education and public safety as the constitutional framers intended.

While he objected to the specifics of the plan in HB 331, Forrer said he was particularly concerned over what local governments might do if the law went unchecked, as they could have been able to set up similar bond corporations to fund many types of work.

“(The ruling) will prevent municipalities and lighter-weight governments from getting themselves into serious trouble,” Forrer said. “Borrowing has grave consequences regardless of the worthiness of the subject.”

A statement from Gov. Mike Dunleavy’s office noted that the administration will not move forward with a bond sale in light of the ruling.

“The Department of Revenue and Law have undertaken an in-depth review to understand the impacts of the Forrer decision,” the statement reads.

Geldhof said he took the statement — combined with the expectation that the state will petition the court for a rehearing of the case — to mean the administration is looking a way around the court’s ruling.

“It’s clear the administration has embarked on a review to come up with a new scheme,” he said. “The creativity and the ability to find workarounds in the financial industry is awesome.”

Under Alaska Court Rule 506, the court can order a rehearing if it determines a fact, statute, or other relevant matter has been overlooked or misconstrued but the petition must be filed within 10 days after the decision is issued.

When asked about a petition for a rehearing, Department of Law spokeswoman Maria Bahr wrote via email that the state “needs more time to analyze its options, and to that extent, will be asking for an extension of time to consider filing a petition for rehearing.”

Dunleavy spokesman Corey Young wrote in response to a question about the administration’s plan to pay down the obligation that the governor is considering all available options to deal with the situation.

“He looks forward to working with the Legislature to come up with solutions that are fiscally responsible for the entire State of Alaska,” Young wrote.

Republican Senate President Cathy Giessel, a staunch defender of the initial tax credit program who was defeated in the August primary election, said in an interview prior to the Supreme Court decision that she was unsure if the state could afford to either pay off the credits if HB 331 were shot down or even follow through with the bond plan given a roughly billion-dollar deficit is projected for the current 2021 state fiscal year and state savings accounts are nearly dry.

Sen. Bill Wielechowski, D-Anchorage, was one of the first lawmakers to question the constitutionality of HB 331 in committee hearings. He said in an interview that he supported paying off the accumulated credits annually when the state had the money, but now the lesser, formula-driven amount called for in statute should simply be used again until the credits are paid off.

“The oil companies have to come in and make a compelling argument that we should pay above the statutory amount,” Wielechowski said. “Now they’re competing with everything.”

According to Department of Revenue projections, the state should have appropriated $36 million in the current fiscal year to meet the statutory calculation but lawmakers and administration officials chose to rely on a favorable ruling from the Supreme Court, which turned out to be a losing proposition. In the future the state would have to pay between $40 million and $78 million per year to meet payment obligation laid out by the statutory formula.

Initial interest-only payments on the bond debt were calculated at $27 million when HB 331 was passed in 2018. At the time, with higher oil prices and more production tax revenue, the statutory payment formula called for the state to make a credit payment of $184 million.

Alaska Oil and Gas Association CEO Kara Moriary said the decision is a “huge disappointment” for the industry and also questioned how it would impact the state’s attempt to fund other activities.

“Clearly it reinforces an impression that the investment world has about Alaska — about being an unstable place to do business,” Moriarty said.

She noted that the companies that earned the credits simply took what the state was offering for their work.

“Those companies are caught up in it. They have done nothing wrong,” she said. “I think the state has a moral obligation to pay them at the very least.”

Geldhof insisted there will be a lot of pressure on the administration and the Legislature to prioritize paying the tax credits in the lead up to the January start of the legislative session even with the state’s bleak financial outlook.

“There’s too much evidence that the lobbyists and the companies holding these things want to go to the front of the line,” he said.

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Elwood Brehmer can be reached at [email protected].

Updated: 
09/09/2020 - 9:33am