The Senate Resources Committee took up Senate Bill 176, which would have the state sell bonds to pay off the credits, for the first time Feb. 21.
Administration officials characterized the proposal as a cost-neutral way to pay off the credits immediately while hopefully spurring industry activity and at least partially restoring the state's business credibility.
Under the proposal, the Department of Revenue would issue a series of 10-year bonds equal to the total outstanding tax credit obligation. The money generated from the bond sales would then be paid out to the primarily exploration and small producing companies holding credit certificates.
Central to the plan is getting the companies to agree to take a discount of up to 10 percent off the face-value of the credit certificates in order to be paid immediately — in essence take a haircut to end the prolonged tax credit saga and get on with life.
Revenue Commissioner Sheldon Fisher called it a "unique opportunity" for the state.
"It's almost free money, if you will, to be able to accelerate the payment into the current time period, pay off these debts, result in a stimulus, but moving forward the cost of that borrowing will be borne by the credit holders themselves," Fisher testified to the Senate committee.
Walker vetoed a total of $630 million from budget bills in 2015 and 2016 while the state was running annual deficits in excess of $3 billion. The actions drew sharp and continued ire from the industry and Republican legislators who argued the governor was not keeping the state's commitment to fully pay off the credits each year as companies claimed them.
Those annual tax credit bills reached $700 million, which Walker said was unsustainable as the state was cutting other services and facing such large budget shortfalls.
Prior to the 2016 veto the Walker administration proposed legislation to phase out the credits and appropriate $1 billion to pay off the obligation then — if the Legislature would pass the fiscal reforms needed to resolve the deficits.
Subsequent legislation in 2016 and 2017 effectively ended the cashable tax credit program in Cook Inlet and then on the North Slope, respectively, but the previously earned obligations remain.
Current law requires the state to pay only a portion of the credit certificates each year based on a percentage of the year's expected oil production tax, which some Democrats have stressed as proof that the state has actually kept up its end of the bargain.
However, Fisher said the state bears some responsibility in creating an atmosphere that the credits would be fully paid off each year. Walker's veto was the first time the full balance of credits earned in a year was not paid.
Fisher characterized paying off the obligation as a "matter of ethics" that would also help restore the state's business credibility.
In 2017 the Legislature appropriated the statutory minimum payment of $77 million to the Oil and Gas Tax Credit Fund amid larger battles over spending cuts and taxes to solve the state's fiscal problems.
The tax credit bill was $806 million at the start of the year, according to the Revenue Department. Tax Division Director Ken Alper said officials anticipate about $100 million of the existing credits will be sold to large producers that can't receive cash for them but can use the certificates to pay down their own production tax obligations.
Another roughly $200 million in credits that have not yet been claimed or will be earned through ongoing refinery and LNG storage credits that were not killed with the legislation last year but will sunset in a couple years is likely to be added to the obligation before the issue is finally settled, according to Alper.
Further complicating the matter is the fact that credit holders — particularly small operators with little cash flow — have borrowed against the credit certificates and banks lent money on the presumption the credits would always be paid at the end of each fiscal year.
As a result, not funding the credit payments has led to companies defaulting on those loans. In turn, planned oil and gas work has been delayed for lack of cash and banks working in the industry are now generally hesitant to lend for work in Alaska.
"While this money may be pledged and go to pay off debt we are confident that (companies) are going to be able to access additional sources of capital and bring it into the economy," Fisher said.
Numerous field operators working in both Cook Inlet and on the North Slope such as Caelus, Blue Crest and Furie Operating Alaska have cited unpaid tax credits as a reason they have deferred or cancelled work plans in recent years.
Southeast Republican Sen. Bert Stedman said bankers he's talked to regarding the credit issue have said they simply missed the "subject to appropriation" language in the tax credit program statute during their due diligence and assumed the certificates would always be paid.
"I think (banks) are going to be a lot more cautious and do a much tighter review of their underwriting as they go forward," Stedman commented.
Details of the discount
To the intricacies of the bill, of which there are several, Fisher said the administration settled on the 10 percent discount rate as a general midpoint between what the state can borrow for and the interest rates in the 15 percent range that oil industry borrowers often face.
"They need the money now and even though 10 percent is well above the state's cost of capital we believe it's well below their cost of capital," Fisher explained.
At the 10 percent discount rate a company or bank holding $100 million of certificates would be paid $87.2 million, according to Fisher, because under the status quo that $100 million would be spread over several years and the per annum discount is applied starting in the second year.
A second option would give credit holders the option of taking a smaller discount of 5.1 percent, but that would come contingent on negotiating with the Department of Natural Resources on an overriding royalty interest on future oil and gas production or commitments to further invest in projects in Alaska.
A small number of companies holding seismic exploration credits could also agree to waive the 10-year confidentiality provision in state law and make the data gathered with the expected credit funds public immediately.
The first round of bonds would likely be sold in August, giving credit holders until about late July to decide if they want to participate, according to Fisher.
He said the administration is doing its best with the bill to balance several competing interests.
Paying the credits in-full using savings is politically unlikely and at this point might not be fiscally advisable given the state is expected to have less about $2.3 billion in savings when the current fiscal year ends June 30.
Administration and legislative budget managers insist the state needs at least $1 billion on-hand at all times for cash flow management and responding to unforeseen emergencies.
Fisher also noted that if the legislation does not pass, the Legislature would have to add about $180 million to the governor's budget proposal — an unsavory thought with dwindling savings — because the minimum payment for fiscal year 2019 is $206 million, up significantly from prior years.
The governor's budget appropriates $27 million to make the first interest-only payment on the bonds but presumes SB 176 or its mirror version in the House will pass and as such does not include the traditional tax credit appropriation.
The administration is still feeling out what companies might want to participate, but none of the roughly dozen banks and oil industry companies holding credit certificates have wholly dismissed the idea.
"So far I haven't met anyone who has said they don't want to participate," Fisher said.
Casey Sullivan, a spokesman for Caelus Energy said the company is happy the administration is taking on the issue and is trying to find new ways to solve the credit problem but wants to see what happens to the bill as it moves through the Legislature.
Caelus operates the small Oooguruk oil field on the North Slope and has been forced to delay its adjacent Nuna oil project for several years because it hasn't been paid the credits it is owed in addition to the sharp drop in oil prices since 2014.
Caelus has also put off further evaluation of its large Smith Bay oil prospect discovered in 2016 due to the credit issue and prices, according to company leaders.
Ahtna Inc., the regional Native corporation for the Copper River area, said in a statement to the Journal that the company is in favor of the state trying to find a solution to pay the owed money sooner.
"While it's good that the state is working to pay obligations, it's unfortunate that payments won't be made at 100 percent," spokeswoman Shannon Blue wrote. "Ahtna has paid our vendors at 100 percent and the lack of tax credit payments has slowed business investment when it's needed most to get out of a severe recession."
Ahtna and Interior Native regional corporation Doyon Ltd. have drilled exploration wells near Glennallen and Nenana, respectively.
A spokeswoman for Doyon said the company is still reviewing the bonding proposal and couldn't comment on it yet.
House Bill 111, which passed last year and largely ended the refundable tax credit experiment, included a provision allowing the Native corporations owed money to apply the production tax certificates against their state corporate tax payments.
Other oil industry representatives said they are amenable to the concept of SB 176 but need to know more about how it would impact their specific situation and what happens if they don't opt in if the bill passes.
Fisher said the Legislature would have to appropriate additional funds for companies that decide not to participate in the bonding program.
Senate Republicans on the committee were generally receptive to the idea as well, but questioned why the administration wants to start with interest-only payments and backload the bond payments over 10 years.
Fisher responded that putting off the lion's share of the bond payments to future years gives the state some time to get on better fiscal footing and noted the largest annual payments would be $115 million from fiscal years 2024 to 2028, with final payments of $82 million and $65 million in 2029 and 2030.
The statutory minimum payment schedule has the state paying out at least $119 million each year until 2024 under the current formula.
"Central to this proposal is a desire to produce a savings to the state budget in the near term," Fisher added.
Anchorage Sen. Bill Wielechowski, the lone Democrat on the Resources Committee, emphasized that the state has done all it is obligated to by paying the annual minimum and questioned the constitutionality of the subject to appropriation bonds.
Article IX of the Alaska Constitution generally prohibits the state from taking on debt outside of voter-approved bonds for capital projects and revenue bonds issued by a state corporation.
State Debt Manager Deven Mitchell said the Revenue Department would form a public corporation for the purposes of selling the bonds; and the situation would be similar to how the state financed the Goose Creek Correctional Facility in the Matanuska-Susitna Borough. In that case the borough issued revenue bonds on the state's commitment to pay through its lease of borough lands.
"This would be what I've heard lawyers refer to as lowercase 'd' debt," Mitchell said.
"There's a commitment to pay," he continued. "It's pledge to third parties; it's the basis of the rating on those bonds and the basis of the investors' risk weighting."