Law Dept. seeks clarity on potentially broad impact of bond ruling
The Dunleavy administration is asking the Alaska Supreme Court to clarify whether a recent ruling invalidating a plan to sell bonds to pay oil tax credits impacts hundreds of millions of dollars worth of bonds sold for local governments across the state.
Department of Law attorneys on Sept. 28 technically filed a petition for rehearing the lawsuit against the state for a legislative plan passed via House Bill 331 in 2018 to sell up to $1 billion in bonds to pay off outstanding oil and gas tax credits owed to banks and small exploration companies. The state’s tax credit obligation currently stands at $743 million, according to the Revenue Department.
However, administration officials are not asking the court to reconsider its unanimous Sept. 9 ruling that HB 331 violates the Alaska Constitution’s strict sideboards on the state’s ability to acquire debt.
They want to know whether the ruling applies to much of the work done by the Alaska Municipal Bond Bank Authority, which sells bonds on behalf of local governments across the state and can almost always secure a lower interest rate than the individual communities.
“The State does not ask the Court to change its holding invalidating HB 331 and, by extension, directly analogous bonding schemes. But the Court’s opinion has unfortunately created significant uncertainty about debt that is structurally much different from HB 331,” state attorneys wrote in their petition.
“Because the debt markets are very cautious, this uncertainty could hinder the ability of Alaska’s state and local governments to obtain reasonable access to capital programs that were not considered by the Court or addressed by the Court’s decision. The State seeks rehearing to request a limited clarification to the scope of the Court’s decision so that existing, important programs that differ significantly from HB 331 may continue to effectively operate.”
Joe Geldhof, the longtime Juneau attorney active in state politics who won the case against the state, said the root of the issue is the “subject to appropriation“ clause contained in the bond materials that could ultimately put the state on the hook if a local government fails to repay its debt.
Juneau resident and former University of Alaska regent Eric Forrer filed the lawsuit.
It is a serious open question as to whether the bonds sold by the bond bank are impermissible under the ruling, Geldhof said, because the state is using its credit rating to secure lower-cost financing for local governments. The local government bonds used for facility and infrastructure projects are backstopped by language assuring buyers that the State of Alaska will repay the debt if need be via a legislative appropriation.
Over the past decade the approach has funded 158 loans and saved $216 million statewide, according to figures in the petition.
Geldhof said the ruling should deal with bond sales going forward, not bonds already sold by the state bond bank, and also accused state officials of ignoring the issue.
According to the petition, the bond bank board authorized two bonds totaling $247.8 million to refinance 31 existing municipal bond issues. A sale planned for Sept. 14 — shortly after the ruling was published — to refinance 22 bonds and save $8.8 million has also been delayed.
“There is 100 percent certainty that the Department of Revenue knew this was problematic,” Geldhof said.
Department of Law and Revenue officials did not respond to questions in time for this story.
State attorneys wrote that state corporations have a “long-established and important” practice of selling revenue bonds backed by a “moral obligation pledge.” The bonds are repaid with revenue — municipal funds in the case of the bond bank — from other sources than the state general fund and therefore meet the revenue bond exemption in the state constitution, according to the petition.
“But these entities’ bonds also include, as a backstop, a non-binding pledge that if those revenues and other security for the bonds are insufficient to pay debt service, then the entity will request that the Alaska State Legislature make an appropriation to replenish a reserve fund that further secures those bonds,” state attorneys wrote.
The underwriting is similar to how the bonds contemplated in HB 331 were to be structured; Revenue officials would sell bonds with the “subject to appropriation” clause that would not legally bind the state to make payments, but could impact the state’s credit rating, which the court decisively concluded made the scheme unconstitutional.
Alaska Municipal League Executive Director Nils Andreassen said the Alaska Municipal Bond Bank Authority’s work on behalf of local governments is important for the financial considerations but also because of state officials’ expertise in the bond arena
“That capacity just doesn’t exist for small or medium-sized municipalities,” Andreassen said.
He added that the bond bank can also bundle small government bond packages together to make them more attractive to buyers and thus achieve better rates.
“It’s incredibly important to keep (borrowing) costs low,” Andreassen said.
Municipal League leaders would be following the case closely, he said.
The Alaska Constitution requires most bonds sold by the state other than true revenue bonds be approved by voters and Geldhof said state officials have put the state’s credit rating on the line without the public’s consent with the municipal bond sale practice.
Bond buyers want to know the state will backstop the debt otherwise owed by local governments often with limited financial resources, he said.
“This is the politicians in bed with the money boys,” Geldhof said.
Elwood Brehmer can be reached at [email protected].