Sunday, August 20, 2017

But you promissssssed ...

Recently some have argued that the state should pay more than the statutorily required level of cashable oil credits because the companies allegedly were "told" that the state would do so.

This from Twitter denizen "Hank," not his real name which he declines to give "for business reasons," is a good example:
While they did not earlier in the debate, over time those making the argument effectively have come to concede that they have no legal basis for their assertion  Again, "Hank":
But they nevertheless claim an entitlement because:
Frankly, that rationale is utter nonsense.

Even if some state officials did make promises unqualified by references to the statutory limitations (and we doubt that they did), the officials making them had no authority financially to obligate the state beyond the terms of the underlying statutes.  And as we consistently have made clear on these pages (and even "Hank" effectively concedes), those statutes limit the state's actual cash obligation each year to a percentage of the revenues the state receives from production taxes. See "How gullible is Alaska,"

To argue that "the companies" somehow were misled into overlooking those statutory limitations isn't credible.  All of the companies involved and their lenders -- all of them, every last one -- have lawyers, financial officers and financial advisers.  And the first thing that those professionals do when engaging in their "due diligence" before participating in any governmental program is to read the fundamental statutes that establish and govern it.

If those professionals didn't do their reading, or did and nevertheless concluded that some state officials verbally could somehow magically bind the state beyond the terms of the underlying statutes, perhaps the companies have grounds for looking for compensation to the malpractice or liability insurance of their advisers.  But the State of Alaska certainly isn't the one on the hook for that.

Some argue that payments beyond the limits of the state's statutory obligations are nevertheless also justified because the state's credibility somehow is on the line.  In a recent interview, for example, Senator Cathy Giessel, head cheerleader for the effort to get the state to pay more than what the statutes require, argues:

"There’s now a phenomena out there spoken about by companies and investors called the ‘Alaska risk factor,’ and it refers specifically to the unpredictability of the State of Alaska, particularly in paying off the credits that we agreed to pay, said Giessel."
See "Alaska ended cash credits to oil companies, but still owes nearly $1 billion,"

But that isn't a state issue.  If anything, it involves only the individual credibility of those who purported to commit the state to more than the statutes provide.  Individual government officials may promise what they think they can deliver or how they may vote when the issue arises, but until the statutes are actually changed the state hasn't agreed to anything.

Those officials -- if there are any who made such "promises" -- shouldn't now be heard to push the state to pay more because their individual credibility is on the line.  If they promised -- or in Sen. Giessel's words, "agreed" to do -- more than the statutes provided, any consequences should fall to them.  The state's bank account shouldn't be tapped to come flying to the rescue of their tattered individual credibility.

Frankly, the statements made by those who claim the state is obligated to do more than the statutes require increasingly is striking us as the equivalent of the classic child's whine when confronted with a parental "no" -- "but you promissssssed."

As most parents will know, usually that situation arises when the child selectively hears what they want to hear, not what the parent actually said.

That is the case here.  The statutes lay out what the state is obligated to do.  The claim by the companies that they are "entitled" to more is nothing more than a whine hoping to motivate the state into giving more than the statutes provide.

As we said in an earlier column the relevant question comes down to "just how gullible is Alaska."

We hope the answer is, not at all.

Saturday, August 19, 2017

Now, Alaska Public Media spreads "fake news" ...

A piece Friday by Rashah McChesney of Alaska Public Media's "Alaska Energy Desk" discussing the cashable oil tax credit program contains "fake news."  There isn't any other way to describe it.  See "Oil company sues over Alaska’s beleaguered cash-for-credits program,"

Here is the part that's fake. "The state will owe an estimated $1 billion in unpaid cash credits this year and the legislature appropriated $77 million."

And here's the reason it's fake.  The state "owes ... each year" only what the statutes obligate it to pay.  The statutes authorizing the cashable oil tax program -- which in this respect have been the same since the program was established -- provide that the state is obligated to pay annually no more than a statutorily established percentage of the production tax revenues the state is anticipated to receive.

This year that percentage works out to the $77 million appropriated by the legislature. The statutes don't obligate the state to pay any more than that amount this year.  And without an obligation, no more than that is "owed ... this year."

This isn't the first time McChesney and Alaska Public Media have wandered down this path.  In a piece the previous week McChesney generally took the same tack in a story about another company, saying "[c]ompanies waiting to get reimbursed for cash credits they’d already earned — they’re going to be waiting for awhile."  See "BlueCrest is latest company to stop work, citing state’s defunct cash-for-credits scheme,"

And McChesney and Alaska Public Media aren't the only news sources that have repeated this particular piece of fake news.  Last week we analyzed a piece in which KTVA's otherwise credible reporter Liz Raines fell for the same spin, hook, line and sinker. See "KTVA (and others) still don't get it about cashable oil credits ...,"

This past week on our Michael Dukes Show segment we also talked about another, similar story from KSRM's Dorene Lorenz, which went so far as to assert that the state is "delinquent" on the payments. See "State Pushes In Clutch On Oil Exploration Incentives,"  (We discuss it at the beginning of our Michael Dukes Show segment. See "This week (August 15, 2017) on The Michael Dukes Show,"

If Lorenz (Raines or McChesney) wanted to dig into a story where the state truly is "delinquent" on its statutory obligations they would be much better off analyzing this and last year's PFD, where first the Governor and then the legislature blatantly have ignored explicit statutory language which says at the end of each fiscal year the state "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."  See "The Alaska Legislature tosses out the Rule of Law,"

The state's unilateral reduction of the PFD in both years to 25 percent of the income available for distribution is an actual delinquency.

But the cashable oil tax credit payments?  Nope, not "delinquent" or "owed .. this year."

The actual facts?  The state's statutory obligations each year are being met as they come due.  That is the factual story that all three reporters have missed.

Saturday, August 12, 2017

Who has been for and against preserving the PFD thusfar in the 2017 sessions ...

Yesterday we reacted to Rep. Chris Birch's announcement of his intention to run for reelection, or if Sen. Meyer decides not to run for reelection, that seat.  Here is what we said (
"Chris Birch lost me when he voted to cut the PFD. 
According to every economic study done the last two years, cutting the PFD has the "largest adverse impact" on the overall economy of all the new revenue options, is "by far" the worst option for Alaska families and at the level of cuts supported by Birch, put an additional 12 - 15,000 Alaskans (2% of the population) below the poverty line. 
By supporting PFD cuts Birch has prioritized continued government spending and protecting the Top 20% of Alaskans from paying their fair share of those costs, at the expense of the overall Alaska economy (at the very time it continues to slip deeper into recession), working Alaska families and those teetering on the poverty line. 
We will be looking forward to supporting other candidates in his district who bring a brighter outlook for the overall Alaska economy and a fairer outcome for all Alaskans."
Later in the day a reader asked us who else we viewed similarly in this coming election cycle -- who has "lost us" by voting to cut the PFD this session.  Here is the gist of our response:
"There are several votes this past session that could be used as a litmus test, but most involve the same vote split and Rep. Birch is on the wrong side of all of them.

From the House side, probably the most charitable (from the perspective of giving members the benefit of the doubt) was the floor vote March 17 on Amendment No. 102 to the FY 2018 Operating Budget.
The Amendment read: "Delete "The sum of $793,795,000." Insert "The amount authorized under AS 37.13.145(b) for transfer by the Alaska Permanent Fund Corporation on June 30, 2017, estimated to be $1,501,000,000."

Here was the vote ( 
Yeas (a vote for paying the full FY 2018 PFD): Chenault, Eastman, Johnson, Millett, Neuman, Pruitt, Rauscher, Reinbold, Saddler, Sullivan-Leonard, Talerico, Thompson, Tilton, Wilson 
Nays (a vote to cut the FY 2018 PFD): Birch, Drummond, Edgmon, Fansler, Foster, Gara, Grenn, Guttenberg, Johnston, Josephson, Kawasaki, Kito, Knopp, Kopp, Kreiss-Tomkins, LeDoux, Ortiz, Parish, Seaton, Spohnholz, Stutes, Tarr, Tuck, Westlake, Wool 
On the Senate side, the most direct measure likely was the vote on SB 26, which would restructure the Permanent Fund going forward by, among other things, permanently reducing and capping the PFD. 
Here was the vote on that ( 
Yeas (a vote permanently to reduce and cap the PFD): #Bishop, Coghill, #Costello, #Egan, Giessel, #Hoffman, #Kelly, #MacKinnon, #Meyer, #Micciche, Stedman, Stevens, von Imhof

Nays (a vote for retaining the PFD as is): Begich, Dunleavy, Gardner, Hughes, Olson, Wielechowski, Wilson
All of the House members are up for reelection this coming year. Those Senators voting "Yes" on SB 23 (in other words, to cut the PFD) up for reelection this year are preceded by an #."

Thursday, August 10, 2017

KTVA (and others) still don't get it about cashable oil credits ...

In a story Tuesday KTVA tried -- and failed yet again -- to get the cashable oil credits story right. See, "Alaska ended cash credits to oil companies, but still owes nearly $1billion,"
In an apparent effort at a deeper dive, KTVA bought hook, line and sinker the story line being peddled by some oil companies that the state is not performing on obligations related to the program.  

Here is KTVA's take:
"Alaska advertised itself to companies in the Lower 48 with brochures carrying a promising message: 
'For the entire lifecycle of your project, the State of Alaska is there for you. We do not just talk big, we follow through big — with cash!,” a 2014 brochure published by the Alaska Department of Revenue reads. ... 
"For years, Alaska did follow through on its promise — with cash. But suddenly, everything changed. Low prices meant less money for state coffers, and ... the state hasn’t paid them off since. 
"Companies began halting projects in Alaska — saying they’d been banking on the state’s promise.
'There’s now a phenomena out there spoken about by companies and investors called the ‘Alaska risk factor,’ and it refers specifically to the unpredictability of the State of Alaska, particularly in paying off the credits that we agreed to pay, said Giessel."
As was clear in the materials circulated at the time what the state agreed to pay was defined by statute, not what some are now backreading into brochures.  And this is what the applicable statute, AS 43.55.028, at the time, provides now, and indeed has provided from the beginning of the program :

(a) The oil and gas tax credit fund is established as a separate fund of the state. The purpose of the fund is to purchase transferable tax credit certificates issued under AS 43.55.023 and production tax credit certificates issued under AS 43.55.025 and to pay refunds and payments claimed under AS 43.20.046, 43.20.047, or 43.20.053. 
(b) The oil and gas tax credit fund consists of: 
(1) money appropriated to the fund, including any appropriation of the percentage provided under (c) of this section of all revenue from taxes levied by AS 43.55.011 that is not required to be deposited in the constitutional budget reserve fund established in art. IX, sec. 17(a), Constitution of the State of Alaska; and 
(2) earnings on the fund. 
(c) The applicable percentage for a fiscal year under (b)(1) of this section is determined with reference to the average price or value forecast by the department for Alaska North Slope oil sold or otherwise disposed of on the United States West Coast during the fiscal year for which the appropriation of revenue from taxes levied by AS 43.55.011 is made. If that forecast is 
(1) $60 a barrel or higher, the applicable percentage is 10 percent; 
(2) less than $60 a barrel, the applicable percentage is 15 percent.
The only obligation of the state is to appropriate annually the percentage of the production taxes received by the state ("all revenue from taxes levied by AS 43.55.011") provided in subsection (c).  And the state has done that every damned year since the start of the program.

While the state could appropriate more money to the fund, as it did in some prior years, it is not now and never has been obligated to do so.  No one representing the state could promise or, contrary to Sen. Giessel's claim, agree to pay more because the statutes -- which were referenced in the materials distributed to the potential participants and clear on their face -- didn't authorize anything more.

What Sen. Giessel and others are urging now is for Alaska to go beyond, indeed far beyond, the obligations made in the statute, not live up to them.  They want the state now to pay annually to the oil companies additional monies that the state never promised, agreed to pay or have even the remotest statutory or legal obligation to pay.

The reasoning behind the statute was clear.  In times of high revenues the state would pay more into the fund and companies would recoup their claims (by cashing in the credits) at a fairly fast rate.

In times of lower revenues, however, the state was "obligated," "promised," and "agreed to pay," only lower amounts into the fund and the companies would recoup their claims at a slower rate.

Now that oil prices have dropped and the lower revenue -- and thus, slower recoupment rate -- apply, the companies are trying to change the rules through a PR effort.  It is bad enough that some legislators, trade groups and industry mouthpieces are going along with that.

It is just plain disappointing that one of the state's news organizations continues to fall for the "alternative facts" hook, line and sinker.

Come on, KTVA, you are better than that.

Saturday, August 5, 2017

Must Read Alaska has this one wrong ...

Thursday, Must Read Alaska posted a commentary headlined "In Alaska, it’s unions vs. workers in the private economy,"

The gist of the commentary was that, by supporting Governor Walker and various other candidates, the unions have helped to create an "anti-development" state government which is undermining supposedly "shovel ready" construction projects which otherwise would employ Alaska workers.

Must Read Alaska is reading the situation wrong.

We believe the struggle really is between those in the Top 20% who want to maintain continued state spending on things that benefit them (like construction projects) while paying no taxes on the one hand, and the remaining 80% of Alaskans who would end up bearing the burden of such projects through the continuation of deep PFD cuts to fund them.

What Must Read Alaska attempts to paint another way, is actually the remaining 80% fighting back and saying, "no more capital spending" until the state figures out some way to do it other than by shoving the financial responsibility onto their backs.

If the Top 20% were prepared to pay a proportionate share of their income even remotely equal to what they propose the other 80% give up through PFD cuts, then there might be enough funding available to pursue the projects.

Without that, however, all that Must Read ultimately is advocating is that 
a large majority of Alaska families continue to suffer significant reductions in their income in order largely to benefit a handful of Top 20% construction contractors and subcontractors.

Whether or not they realize it, Must Read also is advocating a position which would significantly worsen the overall Alaska economy. According to the March 2016 ISER study, there is a huge difference in the effect on the overall Alaska economy between money spent on construction budgets and, alternately, to fund the PFD.

Because a large part of 
a state dollar spent through the capital budget leaves the state immediately for steel and other speciality goods, spending a state dollar on capital projects only returns $0.65 in overall Alaska income. According to ISER, a dollar distributed through the PFD, on the other hand, ultimately returns $1.40 in overall Alaska income, more than two times that spent on a state capital item.

Continuing to suck dollars out of the private sector through PFD cuts in order to recycle them through government capital spending certainly would benefit a few -- particularly state construction contractors and subcontractors -- but at the expense of the large majority of Alaska families and the overall economy.

Frankly, it's thinking like this -- "let's build big projects" -- that led to the surge in state overspending during the 2010-14 Parnell-era timeframe and sowed the seeds of the state's current fiscal difficulties. While some in the Top 20% want to continue to "let the good times roll" through continued government capital spending directed to projects that will benefit some of them, that will only send the overall Alaska economy even further into a tailspin.

From the perspective of the overall Alaska economy and the large majority of Alaska families, the state is much better off restoring the PFD and letting individual Alaskans and Alaska families decide where to spend the money, instead of redirecting the money through government in order to benefit a select few construction contractors and subcontractors.

Bottom Line:  At least in this case the conflict isn't between unions and the private sector workers, it's between what some in the Top 20% want for themselves and their friends on the one hand, and the health of the overall Alaska economy and Alaska families on the other.

Friday, August 4, 2017

How gullible is Alaska ...

A rash of news articles and commentaries this week are focusing on oil company BlueCrest's announced decision to "pause" activity at its Cook Inlet Cosmopolitan Unit while it arranges a new round of financing.

From all of the headlines and commentary many seem to think that the project has been cancelled, and that it's the state's fault that it has. 

For example, this is how the Alaska Dispatch News headline read, "Oil company says it likely can’t continue to drill unless state pays tax credits," KTVA's lead was "BlueCrest Energy halts project on the Kenai, says state credits are the cause,"

In response, many are calling for the Governor and legislature to reverse course and "honor" the state's alleged "commitments." For example, the Alaska Chamber has started running a Facebook ad campaign based on that very theme.

But for those that read further down -- and you have to read all the way to the 26th paragraph, fourth from the bottom, of the ADN article to get there, but for those that do -- you soon realize this really is about something else: BlueCrest only has hit a "pause" while it deals with a financing issue.
"Johnson said BlueCrest officials decided on Tuesday to pause drilling after they realized they can't secure a loan fast enough to drill a third well.
"'There's a limit on how quickly you can borrow tens of millions of dollars,' he said. 'It's not easy to do.'"
So, what is really going on here?

It's all about financing options.  Blue Crest, like any profit-maximizing enterprise, wants to arrange the lowest cost financing it can.

Financing from the State of Alaska through the cashable oil tax credit program is the cheapest of all -- it doesn't cost the company a thing:  no interest, no equity stake, no obligation to repay if things don't work out, no obligation even to continue drilling if you decide it's not worth it.  It's just a straight up, no cost subsidy, designed to artificially lower the cost of exploration and development in Alaska (and in doing so, subsidize Alaska's high cost oilfield service sector) by transferring part of the cost to the state.

The financing does come with one risk, however.  As we have discussed previously on these pages, under the program the participants share with the state the risk of lower oil prices and production levels.  If the state's revenue from oil production taxes -- which are largely driven by oil price and production levels -- decline, so does the extent of the state's obligation to contribute to the fund that cashes out the credits.

In short, if lower oil prices result in the state receiving reduced revenue from oil production then the state has the right -- and indeed, from an overall fiscal policy perspective, some would argue the obligation -- to stretch out the rate at which it pays the credits.  See "Oh good lord,"

The companies participating in the program knew -- and by participating in the program, accepted -- that risk from the outset; the terms have been in the statutes since the program first began.

But that doesn't mean they agreed not to try to push the envelope a little -- or a lot -- if the risk of lower oil prices, and thus stretched out payments, materialized.

And as those risks have materialized, the companies -- BlueCrest is only the latest -- have done exactly that: tried to push the envelope.

Many companies, like many consumers, treat financing terms as negotiable.  They respect the terms if the future stays as anticipated (or turns out better for them than) at the time the financing was negotiated.

But if things change adversely, then companies try to change the terms of the financing as well.

During the current oil downturn banks and other sources of debt financing have become accustomed to approaches from oil companies seeking a variety of changes in the terms of their loans, such as extensions of their repayment obligations or even the conversion of all or a portion of the debt (with the attendant obligation of repayment) to some sort of equity.

What is going on here with BlueCrest is the Alaska version of that.

As the tie between the terms of the cashable oil tax credit program and oil price levels has become a constraint, BlueCrest and others are attempting essentially to renegotiate the terms of the financing by pushing the state to contribute additional funds to the program earlier than (i.e., in advance of) when required.

As BlueCrest's Johnson admits (albeit in the 26th paragraph of the ADN article), it's not that the companies don't have other financing options, it's just that they cost more and take some time to arrange.

If instead Alaska can be convinced essentially to waive the terms of its program, so much the better.  Zero cost financing always trumps other options.

And unlike dealing with other sources of financing (which always extract some sort of fee for changing the terms of their deals), the costs involved in such efforts appear to be minimal.  All that it appears to require to persuade at least some (like the Alaska Chamber
) is a dash of extreme verbal hyperbole (about no one ever "trusting" Alaska again) and some lobbying fees.

Other, commercial sources of financing quickly would see through -- and even more quickly dismiss -- the hyperbole.  The response would be essentially, "let's see, the terms of the program explicitly give us the right to do what we are doing. You are way off base (i.e., "nuts") to claim that it's 'untrustworthy' to utilize those rights when the risks we explicitly agreed to share materialize."

And they would be immune to political lobbying.

But BlueCrest and others are hoping the state will react differently to the hyperbole (what some call "puffing" or in other contexts, "alternative facts") and lobbying. 

Maybe Alaska is that gullible -- some in the business community and legislature, see, 
appear to be -- but we certainly hope those making the final decisions aren't.

Wednesday, August 2, 2017

Oh good lord ...

The Alaska Journal of Commerce's Andrew Jensen and I must have different Alaska Statute books sitting on our desks (or in my case, in my browser bookmark list).  I just checked; mine is up to date.  Jensen may want to check his.

In yet another of his editorial screeds, Jensen writes this under the headline "The deadbeat, do-nothing Legislature,"
"Instead of beginning to settle the hundreds of millions in unpaid liabilities owed to small oil companies that already spent the money in good faith, the Legislature ended the program and will stiff those companies for a third straight year after Gov. Bill Walker vetoed $630 million in payments in 2015 and 2016. 
"Deadbeat and do-nothing barely begins to cover it."
When used as a verb, Google defines "stiff" this way,
1. cheat (someone) out of something, especially money. ("several workers were stiffed out of their pay")
2. ignore deliberately; snub.
Let's set the record straight in the event anyone relies on the Journal of Commerce editorial page anymore accurately to report the facts (surely a dwindling subset of the population these days).

The state has "stiffed" none of the oil companies -- none.  As we have explained repeatedly, the last two years as well as this coming one the state has paid annually exactly what it has owed the oil companies involved in the cashable oil tax credit program under the statutes as they have been in effect since the day the program began.  See "
Today's vote will demonstrate whether Alaska legislators believe in the rule of law,"

Let me say that again. Each. Year. The. State. Has. Paid. The. Oil. Companies. Exactly. What. They. Are. Owed.

The statute provides that the state shall pay each each year into the "oil and gas tax credit fund" -- from which payments are then made to the qualifying oil companies -- a statutorily-established percent of the production tax revenues projected to be taken in by the state that year.  The state may pay more each year, but the state's statutory annual obligation is limited to the percentage.

The state has paid the specified percentage every year of the program, including the last two and, as a result of the capital budget, the next upcoming.  It has complied with the statute and has paid exactly what it has owed.

In some past years the state used the discretion provided under the statute to pay more, but that doesn't obligate it to do so in other years.

Under the statute, the oil companies share with the state some of the risk of falling oil prices and production levels.  If production tax revenues decline, so do the state's annual obligation to pay into the fund.  Now that the risk has matured, the oil companies would like to dodge their share of it by cajoling the state into voluntarily paying more into the fund than required by the statute.

Understandably given the state's fiscal situation, the state has declined.  That isn't "stiffing" the oil companies; it's simply applying the statute as written.  Those truly concerned about the state's overall fiscal situation -- instead of one subset of it -- would be screaming if the state did anything else.

Jensen clearly needs to go read the statutes -- and maybe his dictionary -- again.

But we do agree with Jensen on this -- the Legislature is a deadbeat.

While not the oil companies, we agree the Legislature in fact has "stiffed" someone this session; well, approximately 635,000 someones.

As we have explained previously on these pages, the Alaska Statutes clearly require the state each year 
(by using the word "shall") to "transfer from the earnings reserve account to the dividend fund established under AS 43.23.04550 percent of the income available for distribution under AS 37.13.140."

For the first time since the founding of the Permanent Fund Dividend program in the early 1980's, the Legislature has refused to comply with that obligation, transferring less than half of the amount required under the statutes.  See "The Alaska Legislature tosses out the Rule of Law,"

The result?  The Legislature is shortpaying -- yes, "stiffing" -- each and every one of the 635,000'ish Alaskans that likely will qualify for the PFD this year a little north of $1,200 (or nearly $5,000 for the archetypical family of four).

And in doing so, the state also is shortpaying -- again, "stiffing" -- the overall Alaska economy the nearly $1.1 billion in additional income, counting the multiplier effect, that otherwise would flow into the hands of Alaska families and individuals, and through them, Alaska businesses, in the coming year.

That's an additional reduction in overall Alaska income of roughly 2.5% in an economy that already is in a worsening recession.

You would think the editorial page of an organization that publishes under the name the Alaska Journal of Commerce and claims to provide "the most in-depth and accurate information about business in Alaska" would be concerned about -- or at least mention -- such an effect on the overall Alaska economy and Alaska business when writing under the headline the "deadbeat" Legislature.

But no, the Journal's editorial page apparently prefers to focus instead only on what essentially amounts to fake news -- that the state is "stiffing" oil companies.

One of the problems Alaska faces currently is that its government continues to lurch from one side to the other trying to help out specific segments of the economy at the expense of the whole. It is focusing on saving specific trees while the forest as a whole withers.

Similar to the important role played by the editorial pages of the Financial Times, the Wall Street Journal and The Economist at the national and international level by 
keeping policymakers eyes focused on the overall economic prize, the editorial page of the Journal of Commerce could do at the state level.

Unfortunately, it's not.  It's become just another special pleader in a state that already has more than enough.