ALASKA PERMANENT FUND TO BUY DEBT FROM STATE OF ALASKA?
Craig Richards, the former attorney general of Alaska and the governor’s closest ally, wasted no time today.
He had but one half hour in front of the Alaska Permanent Fund Board of Directors to make the case that the State of Alaska’s Permanent Fund Corporation should buy up the State of Alaska’s debt.
To summarize, the governor proposes that the Permanent Fund Corporation buys the hundreds of millions of dollars in tax credits it owes oil producers.
This would be done through complicated financial mechanisms that would make State government owe the Permanent Fund Corp. the $775 million, instead of owing it to the oil and gas companies who have been waiting for their payments.
$775 million is the current approximate value of what Gov. Bill Walker has yet to pay a handful of independent producers.
Permanent Fund CEO Angela Rodell described it this way to KTVA reporter Liz Raines: “[y]ou pay a dollar out of the general fund that then, or would have paid a dollar out of the general fund, but then pays 60 cents out of the permanent fund to buy that dollar and then the general fund pays the permanent fund a dollar, so the permanent fund gets an extra 40 cents on that.”
On the one hand, this would be a way for the government to offload a great big bill it has — a debt that is causing financial stress and bankruptcy for many of the smaller oil companies that came to Alaska to explore in the smaller or more risk-laden oil patches that the majors like ConocoPhillips, ExxonMobil, and BP are not interested in.
The tax credits can generally be traded, but different rules apply to different conditions. Sometimes the tax credits can be sold to other producers to help them offset a taxable profit. But right now, there’s no real market among the producers for tax credits; they simply aren’t making enough money to need more credits.
If the Permanent Fund Board doesn’t bite on the worm dangled by the governor, Craig Richards said some private equity investors were “sniffing around” for an opportunity at buying the credits. Someone will bite.
The basis of the board’s decision might hang on whether they believe the State of Alaska will make good on its payments. It has always done so in the past, but as the old investment disclaimer goes, “Past performance does not guarantee future results.”
HOW WOULD THIS HELP?
If you’re a small producer and you’re owed millions of dollars from the State of Alaska, getting your money allows you to pay your creditors and possibly avoid financial collapse. From the companies’ perspective, this would be beneficial. They could get on with their lives, although they might never bank on Alaska tax credits as part of their business model again, now that they know the governor can just veto those credits or delay to the point where they are effectively worthless.
If you’re shareholder in the Permanent Fund Corporation (and that’s all of us Alaskans), you might see a better return on your fund’s investment by buying up these credits. That’s the fiduciary decision that the board must make. Past State investments by the Alaska Industrial Development and Export Authority — have not always ended up profitably. Think of the dairies and farms and grain terminals that were a “sure bet.” Enough Alaskans remember those investments that they might doubt whether this one is more prudent.
If the State of Alaska drags its feet and doesn’t pay for four or five years, there’s the problem of the time value of money, which is the idea that money is worth more the sooner it is received.
And what could the Permanent Fund do if the State did not pay? Not much, since the board is appointed by the governor and has to walk a narrow path.
Having the Permanent Fund Corporation be the lienholder on state government would fundamentally change the relationship between the two entities. Our own savings account would now have a lien us.
What’s more, it’s seen by some as the camel’s nose under the tent: If Walker can get the Permanent Fund to buy his debt, what else can he get the Fund to do once he replaces one more director, which he’ll be able to do next August.
HOW TO EXPLAIN IT TO THE PUBLIC?
Derivatives are complicated instruments. This one walks like a credit derivative, something few Alaskans are knowledgeable enough about to make a good judgment on. But plainly, there is risk with trading in debt. Debt only needs to be traded when things have gone rather badly and then.
The Alaskan public will not get to witness an actual Permanent Fund Dividend announcement this year, as it has every year since the dividend was started.
Usually it’s one of those great events in September that we all look forward to. There’s no announcement, because the governor vetoed more than half of the funding for the dividend, and announced in June what the dividend will be: $1,000. There’s certainty, so no secret envelope needed.
That means he doesn’t have to face the awkwarad juxtoposition of announcing a check that should have been $2,300 or so, and at the same time using the Permanent Fund to pay up to $1 billion to small oil and gas companies.
An alternative way to sell it to the public would be to create a fund within the Permanent Fund, into which Alaskans could invest. This fund would be used to buy up the debt that the governor cannot pay.
But that, dear reader, would be called a bond. (And yes, it would likely violate SEC rules.)