Justices on the Alaska Supreme Court heard oral arguments Thursday morning in the lawsuit over oil and gas tax credit bonds that could have major ramifications for the state’s financial future.
Longtime Juneau attorney Joe Geldhof argued on behalf of former University of Alaska Regent Eric Forrer that House Bill 331 — a law passed in May 2018 allowing the state Department of Revenue to sell up to $1 billion in bonds to pay off outstanding oil and gas tax credits — violates the Alaska Constitution’s strict limitations as to what kinds of debt the state can take on and how.
If the Supreme Court strikes down HB 331, the Legislature and Gov. Mike Dunleavy’s administration would have to find a new way to pay off the remaining refundable oil and gas tax credit obligation, likely through partial appropriations over several years. Revenue officials say the outstanding tax credit certificates the state has not repurchased total roughly $700 million, compared to the $1 billion authorized by the bill.
That scenario would require the small, oftentimes financially vulnerable companies as well as the investment banks holding the credits to wait substantially longer to be repaid. Several companies have already delayed drilling work, left Alaska or filed for bankruptcy, citing the lack of expected tax credit payments as a reason for their actions.
However, Geldhof contended that upholding HB 331 would allow the state to take on debt that is not contemplated in the Alaska Constitution and could have “enormous” fiscal consequences to the state at-large.
“If you allow the kind of debt the state seeks to incur here for the state, keep in mind that there’s 162 municipal units that within a week or two of your decision are going to say, ‘Wow, this is a splendid opportunity for us to borrow and spend and we’ll worry about the debt in the future,’ ” Geldhof told the panel.
The justices subsequently questioned whether he was making a policy debate, which is outside of their purview.
Geldhof responded that he wasn’t asking them to second-guess the Legislature’s policy, but stressed that HB 331 is “a clever workaround” to the Constitution that “will allow a proliferation of debt” in Alaska if it stands.
Juneau District Superior Court Judge Jude Pate dismissed the suit in January on the grounds that Forrer failed to state a claim upon which the court could grant relief on the grounds that HB 331 “passes constitutional muster,” Pate wrote in his decision.
Forrer originally filed the suit in May 2018.
Hatched by former Gov. Bill Walker’s administration as a way to pay off the large tax credit obligation, HB 331 would allow the companies and banks holding credits to get their money relatively quickly instead of possibly waiting for the state to pay them off over years of appropriations according to current statute.
To get paid sooner the credit holders would have to accept a discount of up to 10 percent below the face value of the certificates. The state Department of Revenue would then use the difference between the credit values and the discounted amount actually paid to cover the borrowing costs.
Supporters of the tax credit bonds insist it is a way to restart investment by small producers and explorers in Alaska’s oil and gas fields that has been slowed by three years of credit payment amounts at levels less than what was applied for as the Legislature and the administration debated how to resolve the state’s large budget deficits.
At issue is whether the law, which passed with bipartisan support and was signed by Walker, runs afoul of Article IX of the Alaska Constitution as Forrer and Geldhof insist.
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 typically linked to a corresponding income stream and only obligate the corporation to make payments, not the state of Alaska as a whole.
HB 331 allows the Revenue Department to set up the Alaska Tax Credit Certificate Bond Corp. specifically for the purpose of issuing the 10-year bonds. But the only revenue the tax credit corporation would have would be direct appropriations from the Legislature, as the bonds would not be sold to support a project that would eventually generate funds to repay the bonds that originally funded it, as is the case in a traditional revenue bond scenario.
That’s why Geldhof and other critics of the plan often refer to the state tax credit corporation as a “shell corporation” with the sole purpose of passing money from the Legislature to the bondholders.
State officials counter that language in the bond certificates would notify potential buyers that their repayment would be “subject to appropriation” by the Legislature, which shields the state from recourse and makes the plan legal.
Department of Law attorney Laura Fox argued on the state’s behalf that prospective bond buyers would be aware of the appropriation risk, which is common in state contracts, and that risk would be accounted for through slightly higher interest rates.
“Those words tell creditors they can’t legally compel the state to pay,” Fox said of the subject to appropriation clause.
She noted the bondholders only recourse would be against the assets of the corporation — which the Legislature appropriated to it.
Geldhof questioned whether the state would truly be free from liability if the lawmakers failed to make the bond payments.
State attorneys have also pointed to previous court rulings that have allowed the state to take on debt outside the explicit constitutional provisions, but Geldhof asserts those deal with lease-purchase agreements and are not applicable to the bond sale contemplated in HB 331.
The intent of the framers of the Alaska Constitution was also contemplated during the arguments.
The justices asked Fox if she could discern through Constitutional Convention meeting records whether the delegates crafting the Constitution considered the HB 331 plan to be revenue bonds, or if such a plan was even contemplated.
Fox responded that revenue bonds in the traditional sense were likely the understanding at the time the Alaska Constitution was granted, but noted that other state corporations occasionally have revenue bond payments supported by legislative appropriations.
“Nothing in (Article IX) says where the corporation has to get its revenue from,” she said.
She acknowledged the state does not consider the tax credit obligation to be debt, but rather “it is indebtedness,” Fox said, as the Constitution does allow the state to refinance existing debt.
“I don’t know whether the semantic debate whether you call it debt or not really matters,” she said.
Geldhof said in his closing rebuttal that the state is trying to incur debt to cover operating expenses, which is not what the constitutional framers intended.
“We have enough financial problems in Alaska; don’t add to them by green-lighting debt that we can’t sustain,” he said.
No timeframe was given as to when the Supreme Court justices will issue their ruling.
Elwood Brehmer can be reached at email@example.com.