Last week on the eve of the House Finance Committee meeting and subsequent House floor debates on HB 331 -- the bill authorizing the issuance of state bonds to pay for oil tax credits -- a new analysis emerged asserting that the bonds might be a "good deal" for Alaska. Bonding for Tax Credit Purchases may be a Good Deal for Alaska (May 2018).
The analysis claimed that, by issuing bonds and using them to pay the oil credits currently, the state might "make" as much as $600 million on the "spread" between earnings on the amounts that the state would have paid out currently in credits but was able to defer because of the bonds, and the amount of interest owed in paying the bonds back.
The analysis was immediately adopted and hailed by proponents of the bill during both the Committee and House floor debates, and picked up and repeated by some blogs.
But the analysis is built on a number of assumptions and in the din of the week, one particularly important assumption went missing.
That assumption is that, in the current and subsequent years, the "savings" produced by using the bonding approach -- that is, the difference between the amount that would have been spent to pay off the credits under the current statute and the amounts due on the bonds -- will be retained in the Permanent Fund earnings reserve and not spent on other things.
In other words, if during the period the bonds are projected to produce a savings (roughly FY 2019 - FY 2023) the budget otherwise would be $4.5 billion with $0.2 billion paying the credits, then the budget needs to be reduced to $4.3 billion (the difference in the spending between the statutory and bonding approaches), with the difference not spent on other things.
Anyone who has been around the legislature for any period of time knows it is highly unlikely that the legislature can exercise that level of constraint. If there is current money available, the legislature will find someplace to spend it.
Certainly, a commitment to exercise such constraint is not contained in the statute, and went unmentioned in the Committee and floor debate.
What happens if the legislature does not exercise the constraint? Bad things. Instead of the bonding approach "making money" for Alaskans (compared to the current, statutory approach), it will lose even more of it.
To measure the potential effects we extended the calculations done in the original analysis.
Here are the results from the original analysis. Under the assumptions made in the analysis, the results show that the bonding approach potentially could result in retaining ("making") an additional $623 million ($1.301 billion, minus $678 million) over the life of the program.
But here are the results if, instead of saving the differences between the amounts "Appropriated for Next Year Credit Purchases" (the payments due under the current statutory program) and "Debt Service Payments Required for Next Year" (the payments due under the bonding approach), the legislature spends all or a portion of them.
If the legislature spends all of the savings on other things, the state loses $940 million over what it is obligated to pay under the current, statutory program (the difference between the $678 million FY 2031 balance under the statutory formula, and the -$262 million FY 2031 balance if all of savings are spent on other things).
Even if the legislature only spends 50% of the savings on other things, the state still loses $96 million over what it is obligated to pay under the current, statutory program (the difference between the $678 million FY 2031 balance under the statutory formula, and the $582 million FY 2031 balance if 50% of the savings are spent on other things).
In short, if the legislature is unable to restrain itself from spending the "savings" on other things, from a fiscal perspective the state will end up even worse off than complying with the current statutory repayment approach.
When approached about these results one legislator who voted for HB 331 this past week said that he "hoped" future legislators would be able to exercise the necessary constraint.
But such past "hopes" are how the state has found itself in the fiscal shape it is now. And relying on the same "hope" going forward will quickly result in turning what some claim is a "good deal" for Alaskans into an even worse one than we have now.
In the past some in the Senate have claimed that in order ultimately to instill fiscal discipline the state needs to reduce the revenue it has to spend. That hasn't seemed to work too well in the past; when it hasn't had current revenue, the legislature has simply drawn down savings more.
But giving some weight to that view here is one way the legislature could demonstrate it is somewhat committed to saving the amounts assumed in the earlier analysis.
Under SB 26, the legislature proposes to limit the annual draw on the Permanent Fund to approximately 5% of the fund's value. Assuming an average value of roughly $50 billion, that results in an annual draw of roughly $2.5 billion.
If the legislature is committed at least to attempting to turn the bonding approach into a "good deal" for Alaskans it could agree to limit the draw to 5% of the fund's value, minus the annual savings projected to be achieved by the bonding program.
At least in the first instance, doing so would leave in the earnings reserve the amounts necessary under the analysis to achieve the potentially "good deal." Of course, nothing would prevent the legislature from end running the limitation by making a separate, additional draw on the earnings reserve in future years or by achieving the same objective through making an additional draw on the amounts remaining in the CBR.
But at least that step would demonstrate some recognition of the issue and some commitment to taking it seriously.
On the other hand, following in the footsteps of the House and failing to make even that minimum commitment will demonstrate that HB 331 is really about something else (i.e., providing an additional state subsidy to certain oil companies) and the legislature is fine with it ending up costing Alaskans even more than the current statute provides.