AJOC EDITORIAL: Breaking LIO lease will signal state can’t be trusted
Legislators were rightly concerned when Gov. Bill Walker, without warning, vetoed $200 million in appropriations from the current fiscal year budget designated for the oil and gas tax credit program.
Walker noted at the time — and his Revenue Commissioner Randall Hoffbeck had to spend a lot of time in the aftermath reiterating to the financial community — that the State of Alaska was not reneging on its obligation to pay the credits.
The consequences of not honoring its debts would be terrible for a state trying to protect its top-notch AAA credit rating as it faces multi-billion deficits and now plans to finance its $13 billion share of the Alaska LNG Project.
Yet here the Legislature is, through its Legislative Council that handles out-of-session affairs for the body, contemplating breaking a 10-year lease for its downtown Anchorage office building.
Like all leases the state government enters, payment is “subject to appropriation,” meaning it can break the lease simply by refusing to pay the rent.
The Senate passed an operating budget last session that withheld the rent payment while the House passed a budget that did. That early April action by the Senate was so concerning that it spurred the Alaska Bankers Association to convene a meeting of its seven member institutions on Easter Sunday to craft a letter to the budget conference co-chairs Sen. Pete Kelly and Rep. Mark Neuman.
The language was not ambiguous. ABA President Steve Lundgren of Denali State Bank wrote that, “We alert you that this action will likely impact the State’s credit worthiness and the cost of borrowing in the future.”
Lundgren closed with this: “Alaska should not put itself in the position of having to react to a narrative that it will not live up to its commitments. How long creditors would remain accommodating is a great question to which we do not have the answer. What we do know is that some ideas have unintended consequences, and the current funding proposal would be as a good a bellwether as any signaling a risk aversion to the greater credit markets.”
Thomas F. Klinker of the law firm Birch Horton Bittner & Cherot, was similarly blunt, citing Moody’s Investor Service guidance that states that “depending on the circumstances involved in a lessee’s decision to not appropriate, this risk could be reflected in that entity’s other debt ratings, including its general obligation and other tax-supported debt.”
Klinker noted that while it is true the lease on the Legislative Information Office is not securitized, “a decision to not appropriate rent for the lease without a specific justification, such as the lessor’s failure to perform, could have a similar adverse effect.”
He further stated that breaking the lease — which in this case is being contemplated for no reason other than public scrutiny, not because the state lacks the ability to pay — “could be considered material to investors in future state financings, and a required subject of disclosure to prospective investors in such financings under federal securities law, particularly financings based on a lease that is subject to annual appropriation.”
Not only is the state considering financing its capital budget for the next two years with general obligation bonds, but Walker has also proposed issuing pension obligation bonds to help cover the 11-figure unfunded liabilities of the public employee and teachers retirement systems.
Pension obligation bonds are also “subject to annual appropriation.” Hoffbeck said in a recent interview that while the Legislature has previously approved the issuance of such pension bonds in 2008, a new vote would reassure investors the state would make good on payment if the bonds are sold.
“If the Legislature is not willing to voice support of it, we don’t want that kind of noise going into the market when we try to sell bonds,” Hoffbeck said.
In other words, if the Legislature won’t pay what it owes on something as small as a $3.3 million annual appropriation, investors aren’t going to lend the state money to finance billions of dollars in bonds or they will do so at much greater interest rates.
It is irrelevant at this point whether the decision to renovate and improve the downtown office space was right or not. The fact is the Legislature signed a contract and it should live up to it.
If the Legislature can’t make what’s a difficult but necessary decision to pay its debts, how in the world will its members find the intestinal fortitude to do what needs to be done to put the state on a more sustainable fiscal path?
A shortsighted action bowing to political pressure or just the optics of the whole thing will signal to private investors that the state can’t be trusted when times get tough, and they sure aren’t getting easier any time soon.
Given the circumstances we find ourselves, that should be the last way the Legislature wants to ring in the new year.
Andrew Jensen can be reached at [email protected].