Tuesday, July 25, 2017

If this is the "deal" on the capital budget, we will urge a "no" vote ...

Last week Rep. Jason Grenn -- a member of the House Finance Committee -- posted the following tweet, referring to a piece that first appeared on Alliance blog, Alaska Headlamp.
There are several things about the infographic that are not accurate.  For example, to date the state has paid out over $3.5 billion in cash credits, not the "$700 million" referenced at the top of the graphic. The "$700 million" presumably refers to the additional, nearly $700 million accrued in past cash credits yet to be paid even with the termination of the program effective this past July 1.

The accurate total amount that Alaskans are projected to pay in cashable credits? $4+ billion.

For another, the "billions" claimed at the bottom of the graphic in "new, recoverable resources" and "state royalties over the life of the new fields" have yet to be proven.  Estimates related to the "Smith Bay Discovery," for example (on which the claim of billions is predicated), are based on the results of two wells, have not yet been affirmed by independent reservoir engineers and have not even remotely yet been demonstrated to be commercially recoverable.  If they aren't, they won't pay a dime in additional state royalties.

And even if they ultimately do, there has been no demonstration that Alaskans will financially benefit to a greater -- or to even the same -- extent than if the $4+ billion spent on the program had been invested instead by the Permanent Fund Corporation.  If they don't, measured against the alternative use of the funds on a net present value basis (the way investments typically are measured), Alaskans will have lost money from the program, not made "billions."

But while Grenn's naive gullibility about the claims made in the infographic ("This infographic ... shows what tax credits did for our state") are problematic in their own right, that isn't what concerns us most about his post.

Instead what concerns us most is his use of the term "obligations," especially given the upcoming vote this week on the capital budget (which potentially may include additional funds toward the $700 million in accrued credits).

That phrasing in Grenn's tweet mirrors that included at the bottom of the Alliance's graphic and typically, when used by the Alliance and other oil company allies, refers to the $700 million in accrued credits.  Their claim usually is that the state has an "obligation" to fully fund those credits as they are being accrued.

For example, in a post the week before last, the Alaska Oil & Gas Association ("AOGA") claimed that the state's refusal to fully fund the credits as they are being accrued constituted a "continued failure to fully reimburse companies for earned tax credits." As we pointed out in a commentary last week AOGA's claim is simply not true.  See "We aren't done yet with cashable oil credits," https://goo.gl/7uv11F.

The scope of the state's "obligation" with respect to the accrued credits is clearly defined by AS 43.55.028, http://bit.ly/2tYCbyJ).  Under that statute, the state's only "obligation" is to deposit each year in an "oil and gas tax credit fund" a percentage of the revenues projected to be received in that year from production taxes. The accumulated cashable credits are then paid according to statute up to the amount existing in the fund. If the fund doesn't contain an amount sufficient to pay all of the accumulated credits in any given year, the statute clearly contemplates that the remaining, not yet funded credits are rolled over to the next year.


According to the Administration, the amount required to be deposited in the fund this year -- and thus, required to be paid out to oil companies holding credits -- is around $77 million, a far cry from $700 million.

In short, the state's "obligation" with respect to the credits only arises as funds are required to be allocated under the statute to pay the credits.  In the coming year that amount is $77 million. There is no "obligation" beyond that.

Under the statute, the state may appropriate additional amounts to the fund annually, essentially to pay some credits in advance of the time at which they otherwise are required to be paid, and in past years of high oil revenues the state did that. But there is no "obligation" to make any additional payments.  The only "obligation" is to make the annual payments required by AS 43.55.028(c) -- and as we explained in our column, to date the state consistently has done that.

As a result, Rep. Grenn's claim that "[n]ow we must create a plan to honor those obligations" is hugely misleading.  There already is a plan to honor them. It's codified in statute. The fact that some in the oil industry and its hangers on want more than what the statute currently requires doesn't justify "creating" a new plan." There already is an existing plan in place to honor the only obligations that actually exist.

Rep. Grenn's statement also is especially ironic given his earlier vote this year for an operating budget that shortpays the Permanent Fund Dividend.

As noted above, AS 43.55.028 establishes the extent of the state's obligation with respect to cashable oil credits.  The equivalent statute defining the state's obligation to its own citizens with respect to the PFD is at AS 37.13.145(b).  That statute provides as follows:
At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140.
Notwithstanding that explicit language, Rep. Grenn voted with others earlier this month in passing the FY 2018 operating budget only to transfer to the dividend fund roughly 25 percent of the income available for distribution.

It is ironic -- and hugely disappointing --  that a Representative now focused on creating a new "plan to [over] honor ... obligations" when they relate to oil companies, voted explicitly to under 'honor" the state's obligations clearly set forth in statute when it came to Alaskan families.

Moreover, as we have outlined in other posts, cutting the PFD:
  • "Has the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised," https://goo.gl/ZxR1Hw at A-15;
  • "[W]ill likely increase the number of Alaskans below the poverty line by12-15,000 (2% of Alaskans)," https://goo.gl/iuTjv2 at 14.
We understand a legislator advocating that the state "honor" its obligations to oil companies if at the same time he or she advocates that the state honor its obligations as well to its own citizens -- and its own economy.  

Grenn, however, is not doing that.  Instead he is arguing for "honoring" -- indeed, over honoring -- the state's obligations to the oil companies while at the same time he has voted to dishonor (i.e., shortpay) the state's obligations to Alaska families and economy.

We certainly hope that is not the "deal" that has been cut on the capital budget by the state's legislative leaders.  If it turns out that it is, we will be strongly urging a no vote.