HB 331 unconstitutional
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Alaska Supreme Court rules oil credit bonding prohibited under section 8
In a lengthy decision, issued Sept. 4, the Alaska Supreme Court found House Bill 331 unconstitutional.
The court ruled that the financing scheme under HB 331 “is the kind of constitutional ‘debt’ that the framers sought to prohibit under article IX, section 8 of the Alaska Constitution.”
The court said, “HB 331 violates the limitation placed on contracting debt,” and reversed the decision of the superior court which had granted a state motion to dismiss.
The bill, proposed by Gov. Bill Walker in 2018, would have allowed the state to pay off cashable oil and gas credits it held through issuance of up to $1 billion in bonds. Those bonds would have been paid off through legislative appropriations.
The constitutionality of the proposal was questioned when the bill was in the Legislature.
When the Legislative Legal Division was asked about the constitutionality of the Senate version of the bill, Senate Bill 176, Emily Nauman, the division’s deputy director, said in a legal memo that “there is substantial risk that a court may determine that SB 176 is unconstitutional.”
The Alaska Department of Law disagreed.
“The proposed tax credit bonds in SB 176 are not general obligation bonds under the Alaska Constitution,” Alaska Attorney General Jahna Lindemuth said in an April 2018 press release. “We’ve carefully reviewed the legal issues and are confident that these bonds are lawful under Alaska law.”
Sen. Bill Wielechowski, D-Anchorage, who raised the constitutionality issue, said in 2018 that the Legislature is prohibited under the Constitution from “bonding for state debt, and the two instances that are allowable must be approved by the voters.”
The bill created the Alaska Tax Credit Certificate Bond Corp. allowing the state to pay off its tax credit liability in a lump sum, the Department of Law said in 2018.
The alternative to the bonding proposal is for the state to continue to pay off the credits on an annual basis.
A Sept. 4 statement from the office of Gov. Mike Dunleavy on the Supreme Court ruling said the departments of Revenue and Law were reviewing the decision to understand its impacts and said the Department of Revenue shows $743 million in outstanding tax credits eligible for the bonding program.
DiscountingHB 331 allowed payment, at a discounted rate, of cashable credits which have been earned by small oil and gas companies - the state’s major oil producers were never eligible for cashable credits.
The program offering cashable tax credits ended in 2017.
The cost of the bonding for the HB 331 program would have been borne by the companies, which would have received payment at a discount of about 10% to cover the state’s costs and interest on the bonding. The bill contained provisions which allowed a discount closer to 5%, provided the companies met one of four conditions: agreed to provide the state an overriding royalty interest; committed to reinvest the money in Alaska within 24 months; agreed to an early waiver of confidentiality on seismic data; or had refinery or gas storage credits.
To qualify for the program a company had to commit all its cashable credits to the program.
The House added a 45-day time limit for constitutional challenges to the bond program; reduced the calculation of future appropriations to the tax credit fund - the source of current payments - for companies not participating in the bond program, with the effect of extending out the period over which payments would be made; added conditions and information related to the reinvestment provision including maximizing Alaska hire and use of Alaska contractors, moving a project toward production and clawback of incremental payment if investment targets not met.
Goals of billIn his February 2018 transmittal letter, Walker said the state’s ability to purchase oil and gas tax credits was ended by passage of a bill in 2017.
“These credits were earned by small producers and explorers; major producers have always been ineligible to participate,” Walker said, noting that since the program began in 2007 the state had purchased more than $3.5 billion of the credits.
But after the downturn in oil prices, the state could no longer purchase the credits as quickly as they were submitted, and since 2016 purchase funds were based on a statutory formula, he said, “resulting in large accrued balances.”
“The payment delay has resulted in significant uncertainty for Alaska’s small producers, some of whom have had a difficult time borrowing additional money to complete their projects,” he said. The end of the program in 2017 was necessary to restore the state “to a more stable fiscal foundation. This bill would allow the State to take the next vital step in resolving the State’s oil and gas tax credit obligation,” Walker said.
In a fiscal note accompanying the 2018 bill the Department of Revenue’s Tax Division said that for several years appropriation language in the annual budget was open-ended, so the state repurchased all certificates that were presented. That ended with the fiscal year 2016 budget, which capped repurchase of the certificates based on statutory calculation.
“The net result of this has been delay and uncertainty for these companies, as well as in some cases their inability to borrow additional funds.”