Billion-dollar plan for oil and gas tax credits is unconstitutional, Alaska Supreme Court rules

The Alaska Supreme Court has ruled against a state plan to borrow as much as $1 billion to pay tax credits owed to oil and gas companies in Alaska.

The plan was proposed by the administration of former Gov. Bill Walker and approved by the Alaska Legislature in 2018, but the court’s justices ruled that the Alaska Constitution forbids the state from taking on debt for those credits.

The ruling means the state must come up with another way to pay $743 million, the bill left over from now-defunct subsidy programs for oil and gas drilling and exploration. That figure could be higher in the future: The holders of more than $100 million in additional credits haven’t yet applied for payback.

Writing in a unanimous decision, Justice Craig Stowers said, “We reverse and hold that this financing scheme — even if unforeseeable in the mid-twentieth century — is the kind of constitutional ‘debt’ that the framers sought to prohibit under article IX, section 8 of the Alaska Constitution.”

Stowers retired in June but heard the case before retirement.

In a written statement, the state said it has “undertaken an in-depth review to understand the impacts of the .... decision. In accordance with the Court’s decision, the Department of Revenue will not proceed with an issuance of tax credit bonds.”

The lawsuit was brought by attorney Joe Geldhof on behalf of Juneau resident Eric Forrer, a local carpenter and writer who formerly served on the University of Alaska Board of Regents.

“We took it by unanimous vote, and now we’re putting some strong stuff in our coffee,” Forrer said Friday morning after hearing the result.

Kara Moriarty, executive director of the Alaska Oil and Gas Association, said the decision is “a huge disappointment for those companies that thought it might be a way for them to get their project financing figured out.”

“This decision today puts the burden right back on the state to try to find another mechanism when the state’s already in a fiscal crisis,” she said.

Costly credits

The roots of Friday’s decision are in a pair of oil and gas programs created by the Alaska Legislature in 2003 and 2006 to encourage drilling in Cook Inlet and the North Slope. Those programs awarded tax credit certificates to small firms that performed certain work.

Companies could either keep the credits, using them once they started production, or sell them to another company.

The programs were successful — they helped resolve a gas shortage in Cook Inlet — but incredibly costly: From 2010 through 2016, the state paid $3.14 billion to purchase various credits.

After oil prices slumped in 2015, the Alaska Legislature voted to end the programs. By the time that vote took place, the state had issued $800 million in additional credits, with another $200 million possible.

State law requires those credits to be paid off only gradually, using a formula based on the amount collected in production taxes.

That has caused problems for smaller credit holders, some of whom had taken out loans based on the value of the credits. In 2019, Furie Operating Alaska declared bankruptcy, saying in court documents that slow payments by the state were at least partly to blame. Texas-based Caelus Energy sold its Alaska assets and pulled out of the state. It’s still owed some credits.

“Some of these companies have already left Alaska. Some of them have been refinancing, thinking there’s going to be an eventual payment,” Moriarty said.

To fix the issue, Walker proposed in 2018 to borrow as much as $1 billion to pay the credits immediately. In order to get their money immediately, the companies would have to agree to a 10% cut in the value of their credits to compensate for the state’s cost of borrowing.

To get around constitutional prohibitions, the state would create a separate company, funded only by appropriations from the Legislature, that would borrow the money on its behalf.

The arrangement passed the House 22-16 and the Senate 14-5. Days after the Senate voted, Forrer sued.

Two years of legal arguments

Geldhof, arguing on behalf of Forrer, said the Alaska Constitution allows the state to incur debt only for specific reasons, and an oil and gas tax credit isn’t one of those reasons.

The case was heard in Juneau Superior Court, but in January 2019, Judge Jude Pate dismissed it, saying Forrer didn’t appropriately make a claim. Geldhof appealed to the Alaska Supreme Court, getting volunteer help from former lawmakers and commissioners.

“You never get the time back. My God, we spent a lot of time on this. It was eye-watering,” Geldhof said.

The court heard oral arguments in September 2019 but took almost a full year to issue a decision.

In the resulting 63-page document, the court cites the discussions of Alaska’s constitutional delegates, prior case law and even dictionaries from the 1950s and 1960s to conclude that the framers of the Alaska Constitution forbade a program like the one proposed by the state. During the drafting of the Alaska Constitution, its writers specifically voted against giving the Legislature the power to issue debt in most cases.

“Granting the state’s request would give to the Legislature a broad power specifically withheld by the framers,” Stowers wrote.

Extended implications

Sen. Bill Wielechowski, D-Anchorage, voted against the program in the Alaska Senate and has consistently criticized it. He said that in addition to the $738 million that remains on the books, Friday’s decision means the state can’t use similar programs for other projects.

“It’s huge. It’s going to have a lot of implications on a lot of different things,” he said.

Geldhof said that’s the big takeaway from the decision.

“It’s a delight to win, but as I said to someone else, the real winner here is the Alaska Constitution and the citizens of Alaska. They’re not going to be inflicted with real debt that future Alaskans are going to have to pay off,” he said.

“You know who really lost? The lobbyists and those who belly up to the bar — everybody’s got to compete now on an equal level for funding. You can’t try to bypass things by borrowing money. That’s what I like about this case,” he said.

The ruling could also affect this fall’s vote on Ballot Measure 1, which seeks to raise production taxes on select North Slope oil fields.

Citing a Wednesday presentation to the Resource Development Council, Moriarty said Alaska already has the reputation of having a frequently changed oil tax system.

“Alaskans can’t control court decisions like this,” she said. “But if Alaskans want to change this worldview of being one of the most unstable fiscal systems, they can start by voting no on one.”

Meanwhile, proponents of the measure issued a written statement saying that the decision “makes it even more urgent that we pass Ballot Measure 1″ because other tax credits remain in effect.

“Alaskans have been paying the cost of these credits with their jobs, their ferries, their dividends, and higher local taxes,” the statement said.

Read the ruling: