Former Alaska Attorney General Craig Richards, now an aide-on-everything to Gov. Bill Walker, Friday made a pitch to the Alaska Permanent Fund Corp. to invest in the state’s economic future in the form of a new financial derivative.
He didn’t specifically call his deal a derivative, but that’s what he was peddling.
Richards suggested to the Permanent Fund board of directors that they buy Alaska oil tax credits. Most of the credits are at the moment worth nothing because Walker earlier this year vetoed the $430 million appropriated to pay them.
But the credits remain valid IOU’s backed by the state of Alaska, and the oil companies holding approved credits are free to sell them. The credits aren’t worth as much in cash to a buyer as they would be worth as tax credits to the oil companies, most of them small producers.
But, as Richards noted, there aren’t a lot of North Slope oil producers making money in these days of depressed world oil prices. As a result, there are no taxes against which to use the credits.
Some oil companies are also reported to be having cash flow problems because the state money they were promised isn’t getting paid, and Richards said there are some banks in a bit of a box for the same reason.
The banks loaned the oil companies money – call it bridge financing – to keep the companies running until the credit checks arrived. But now the credit checks aren’t coming.
Juneau, we have a problem
So the banks either need to go back and tell the oil companies to renew the loans and keep paying the interest, which the companies may or may not be able to do, or the banks need to call the loans, which might push some companies into bankruptcy.
Richards suggested the $54.4 billion Permanent Fund could help everyone out by negotiating deals to buy the credits at cut rates and holding them until the state can pay. As an investment, he suggested, credit derivatives bought at a state-sparked fire sale would be a better deal than public bonds yielding 4 to 5 percent and probably just as secure in a financial climate that has seen some major bond defaults.
Sold as a win-win-win for everyone, but coming as it did after the fund’s board debated its status as a private corporation or state entity, the Richards proposal had a bit of a Latin America/southern continent feel to it:
One arm of government pays you with an IOU that is no good now but might be good someday. Maybe. This, the government admits, is a problem for you. So one of its agents suggests the best way for you to get any money out of the IOU anytime soon is to sell it at a cut rate to another arm of government.
In fairness to Richards, it wasn’t totally clear if he was making his pitch for the government, ie. Alaska Inc. (he once referred to state taxes on oil as state “income”) or the oil companies. He suggested that if the Permanent Fund bought some credits it might encourage private equity firms to invest in credits as well.
PT Capital, an Anchorage-based equity firm Alaska Dispatch News publisher Alice Rogoff helped get started, has been looking for investments. Rogoff is a friend of and adviser to the governor. PT chairman and CEO Hugh Short is on record saying the company has more than $60 million it is interested in investing in the state.
Permanent Fund Corp. status
The Permanent Fund is a state-owned corporation, which makes it sort of a business and not a business. The best comparison might be with Chinese state capitalism. In that country, state-owned enterprise are intended to function as private businesses, but at the end of the day they remain under the control of the government.
The Permanent Fund board got a telltale lesson in its independence earlier this year when Walker announced that an approximately $2,000 dividend the board intended to pay Alaskans from the earnings of the fund was being capped at $1,000 and the rest of the earnings diverted to help pay the costs of a state government running a deficit of more than $3 billion.
State Sen.Bill Wielechowski threatened to sue, arguing the law says that “at the end of each year, the Permanent Fund Corporation shall transfer the amount to pay the dividend.”
The Alaska Department of Law countered that the governor – not the Permanent Fund Corporation – has legal authority over the earnings of the fund. As of this writing, there is no record of a PFD suit being filed against the state, but Wielechowski said to stand by. It’s coming.
Walker is the first governor to tap permanent fund earnings to fund any government operations.
The last time the state faced serious financial problems, then Democrat gubernatorial candidate Fran Ulmer ran a campaign in which she pledged no use of the fund earnings without a “vote of the people.” Republican Frank Murkowski, who bested Ulmer in the 2002 general election, came into office having adopted the same position.
Oil prices, which had bottomed out at $11.91 per barrel in 1998, were by 2002 already well onto a steady rise that wouldn’t end until they hit $91.48 six years later. Prices would stay high, and the governor’s who followed Murkowksi into office over the course of the next dozen years never had to even think about tapping the fund for cash.
The state was so flush with oil revenues for most of the early years of the new millennium that Republican Gov. Sarah Palin in 2008 convinced the Legislature to give every Alaskan, including infants and children, an extra $1,200 energy rebate on top of a $2,069 permanent fund dividend.
The 2008 payout for a family of four in the 49th state was a healthy $13,076.
Where did it go?
Eight years later, the state can’t afford to pay the bills it owes on a plan designed to promote more oil exploration and production. It is facing a budget shortfall of more than $3 billion. The governor has raided the permanent fund earnings to help close part of that gap. And the state saving’s account, the Constitutional Budget Reserve Fund, is slowly being drained.
The fund stood at more than $10 billion in 2015. It is now down to under $6.4 billion, according to the Department of Revenue.
“The old-timers in Alaska have a saying that ‘travelling at 50 below is all right as long as its all right,” Archdeacon Hudson Stuck observed more than a decade ago after spending more than 10,000 miles on the runners of dog sleds crossing what was then a wild, unmapped country.
His observation can be applied to almost everything in the north that has happened since. It is “all right as long as it all right.” And the minute something goes wrong, everything can turn into a mess.
Alaska has a mess. Maybe Richards should have gone farther and suggested setting up over-the-counter derivatives in which all Americans could invest:
“Take a gamble on Alaska’s future. Buy some oil tax credits. If Alaska emerges safely from the financial desert, you might make a nice profit. If not, well, it’s not a big loss. Think of it as a state lottery with much, much better odds of your winning. Alaska has always paid its debts.”
At least so far.
CORRECTION: This story was edited on Sept. 3, 2016 to fix a faulty reference to bankruptcy categories.