The Alaska Legislature is considering a proposal to borrow up to $1 billion from global markets to cover a debt it owes to oil and gas companies.
While the request might be a tough sell to Alaskans aware of the state’s multibillion-dollar annual deficit, members of Gov. Bill Walker’s administration say the borrowing could be a way to reduce that deficit at the expense of some longer-term risk.
In a presentation Wednesday to the Senate Resources Committee, Revenue Commissioner Sheldon Fisher and tax division director Ken Alper laid out the details of Senate Bill 176, the legislation behind the governor’s plan.
“The large, overarching goal of this is to provide additional stimulus into the economy,” Fisher said, then went on to explain the fiscal implications.
Between 2003 and 2017, the State of Alaska promised billions of dollars in tax credits to smaller oil and gas companies who pledged to drill for oil and gas in Cook Inlet and the North Slope. After petroleum prices plunged, the state could no longer afford the program, and lawmakers ended it with a pair of bills in 2016 and 2017.
While new credits are no longer available, the old credits are still around.
Under previous law, the state did not have to pay its debt immediately: Payments could be spread across years, and for the past several years, the state has been paying only the minimum amount on what it owes. This has left a huge unpaid debt that will come due starting this year. As of Dec. 31, the state owes $806 million in credits. If estimates hold true, the debt is closer to $1 billion, once expected applications are filed this year.
Without any action by the Legislature, that debt will be paid in installments. In the fiscal year that starts July 1, the state will be required to pay $206 million. In the following fiscal year, the payment is $167 million. Payments generally fall after that, but remain above $100 million per year for several years.
Fisher told lawmakers that when he was considering whether to become commissioner of revenue, Gov. Walker told him that he wanted to see the debt resolved.
What Fisher and the governor came up with was SB 176. Under the proposal, the state would borrow money to pay the credits. In order to receive that money immediately (instead of years down the line), oil companies would agree to take a haircut on their payments, as much as 10 percent under some circumstances.
That haircut would compensate for the fact that the state would have to pay interest on the money it borrowed.
“It’s almost free money, if you will, to be able to accelerate the payment into the current time period,” Fisher said.
“So far, I have not met anyone who does not want to participate,” Fisher said, explaining that many companies have taken out loans against their expected credits, and are in desperate need of cash.
Sen. Natasha von Imhof, a member of the resources committee, pointed out the principal risk to the state: If interest rates rise between the time the program is approved and the time the state borrows the billion dollars, it might end up paying more in interest than it expects.
“Hopefully, you’re not going to go underwater,” she said.
Fisher responded that the state has budgeted a 1.5 percent interest-rate “cushion” to guard against that possibility, and if lawmakers approve the bill, the state won’t wait around — it will seek to borrow the money in August.
Sen. Bert Stedman, R-Sitka, pointed out that the program doesn’t solve the debt, it merely spreads it out over years.
Instead of $206 million in the next fiscal year, the state would pay just $25 million, and while payments would escalate after that, they would extend for more than a decade.
“I’m concerned we’re just shifting this problem to the next governor or the governor after,” he said. “If the current governor gets re-elected, the next governor, if he’s elected twice, he’s got to deal with it — if he’s re-elected — his full two terms.”
He also said he was unhappy that the governor took this idea for granted in his proposed budget for the next fiscal year.
That inclusion puts lawmakers in a pinch because the governor’s budget already includes the savings SB 176 suggests. If lawmakers turn down Walker’s proposal, they have to come up with an additional $180 million in revenue, the difference between the required annual payment under the existing system and the payment under SB 176.
“The point is, we would have to appropriate more if we didn’t do this,” Fisher said.
He added that if lawmakers are tempted to reinterpret existing law as an alternative to passing SB 176, they shouldn’t. The state’s credibility is at stake, he said, because Alaska has promised to pay these credits. Failing to pay them on schedule would “send a signal to the industry” that Alaska can’t be trusted.
“I think it is frankly dangerous to contemplate a re-interpretation of the way that statutory minimum has been calculated for a number of years,” he said.
SB 176 remains in the Senate Resources Committee.
• Contact reporter James Brooks at email@example.com or call 523-2258.