On May 7, 2018 the Juneau Empire published a My Turn titled “Barbarous Banks at Alaska’s Gates,” in which I essentially sounded the alarm of the Legislature’s intent to contract for a billion dollars in debt to pay off something called oil company tax credits. A small group gathered collectively under the heading “Forrer” sued, lost at the superior court level, appealed, and on Sept. 4, 2020, prevailed with a unanimous decision by the Alaska Supreme Court. So, no $1 billion of debt for the State of Alaska.
This case has political as well as financial aspects, and there are several misunderstandings that have been repeated so many times in the press that they have taken on the aspect of cultural, ideological and political truth, when they are in fact myth. I would like to clarify a couple of these.
The first is that the state owes hard cash to pay for, or redeem, all the tax credits awarded over the years. This is emphatically not the case. They are just what they say they are — tax credits. If a company brought product to market and owes production taxes, then the credits are usable, if not, then no deal — no tax debt, no credit. This relatively simple structure was made impenetrably complex by the credits being used as market chits, sold to other companies, used as collateral for loans and who knows what else. Nobody, including the state of Alaska, knows the percentage of total tax credits that are legitimate credits versus the credits that have been used as a market commodity. If there was rigorous management of this program, the credits would not be redeemable unless there was a tax debt at issue.
The point here is that the dollar value of the credits that must be redeemed under the terms of the initiating legislation is less than the total value of all the credits issued. It was disingenuous for the state to claim knowledge of a hard number like 735 million as they did in describing the bond proposal. To listen to the state on this issue is to believe that they were just going to buy back all the credits whether there was tax due or not. I think they would have done just that: free money for the oil industry for no understandable reason.
The second myth that is treated like fact is that the bond program would pay for itself. In order for an oil company to qualify for payment under the bond- funding rules, the company would have to take up to a 10% cut in the total credits held. Working with a long-time bond and investment broker two weeks ago, we went through the arithmetic. In today’s market, state, municipal or University of Alaska bond debt is marketable at under 2%. This is debt underwritten by the full faith and credit of Alaska or its political subdivisions. For the total program cost of 10-year bonds at less than 2%, the up-front discount on the principle would have to be just under 20%, so the 10% discount that is presented as paying for the program was just at half what it needed to be. However, the state was not proposing bonds underwritten by full faith and credit. That was exactly the trick that they were using to try to make the bonds constitutional––the bonds were defined as “not state debt.” Under those conditions the market interest rate would have been between 3 and 4%. Consequently, the company up-front discount would have had to be in the ballpark of 35-40%. Obviously, no company would take that kind of a haircut, so the description of the debt program being paid for by a 10% cut in principle would seem to be a sham from the beginning.
It would be an encouraging development if the leadership of this state would stop bending over backward to figure out how to pay a debt they don’t owe and work to help out the state’s citizens who are enduring world-scale crisis conditions.
• Eric Forrer is a Juneau resident.