Building Trust with sound coastal
investment policies

Chapter Three: Major Sources of Funding

Hundreds of millions of dollars have flowed through the Coastal Fund and billions more will follow, thanks mainly to the oil spill settlements. By comparison, the fund’s regulated allocation of state revenue is much more modest. The state mineral revenues that flow into the Coastal Fund are the only predictable state funding source. Because the price of oil entered a period of decline, the CPRA took a year after year reduction in state funding. In fiscal year 2014, the CPRA received $29.4 million through the state royalties and severance taxes deposited into the Coastal Fund. However, the CPRA received $16.2 million in fiscal year 2016 and is slated to get $13.5 million in fiscal year 2017. These levels could change with sustained rises in oil and gas prices.

The bigger dollars forthcoming will flow from offshore oil revenue and the Deepwater Horizon’s civil and criminal penalties and federal damage assessments. The governance and regulations vary with each of these sources. Many of the Deepwater Horizon settlement funds are limited to certain categories or types of projects that states can undertake. That means most of the money cannot be used freely by the state to pursue whatever projects it wishes.

Table1

GOMESA

The Gulf of Mexico Energy Security Act of 2006 created revenue sharing provisions for the four Gulf oil and gas producing states of Alabama, Louisiana, Mississippi and Texas, and their local government subdivisions, such as parishes and counties, on the coast. Phase I of the act provides for an allocation of the federal revenues collected from oil and gas operations in relatively small designated areas of the outer Continental Shelf for fiscal years 2007 through 2016. Under Phase II for fiscal year 2017 and each year thereafter, a portion of the federal revenue from much larger areas (and from a certain time span of leases) shall be allocated to the states based on a formula established by the Secretary of the Interior by regulation. The Department of Interior has recently, after a significant delay, promulgated regulations, which are critical to establishing the formula for revenue sharing among the states and the coastal political subdivisions for Phase II.

Federal decision makers are annually seeking to change the law to use the offshore oil royalties for general spending in the federal budget instead of dedicating these funds to the Gulf states. GOMESA revenues could fluctuate based on market conditions. The amount that could be received by the four states is capped at $375 million.

In the past, the Coastal Protection and Restoration Financing Corporation has discussed securitizing this funding stream for coastal restoration and protection. In order for that to happen, the Corporation will need an econometric study and will need to make recommendations regarding securitization. It is important to note that after the prior administration made a recommendation to the CPRA Board to use unidentified “cost savings” from restoration projects for elevating the remaining segments of LA Highway 1 (LA1), the CPRA board chose not to divert these savings and instead approved a resolutionxxviii that allowed for the use of up to 10% of Louisiana’s GOMESA revenues beginning in 2017 for that purpose.

Criminal penalties

In 2012, the U.S. Department of Justice announced a plea agreement whereby BP would pay $2.4 billion over five years for federal criminal charges against the parties responsible for the 2010 Deepwater Horizon oil spill. The National Fish and Wildlife Foundation (NFWF, pronounced “nif-wif”), which maintains an office in Baton Rouge, was engaged by the federal government to provide oversight of the distribution. The state is estimated to receive about $1.3 billion for Louisiana projects, which must fit particular purposes as outlined in categories determined by the Court in the Criminal Plea Agreements.

Deepwater Horizon Settlementxxix

Louisiana’s state share of the BP Settlement Agreement in Principle is $6.8 billion and is comprised of the following components:

  • $5 billion for the Natural Resource Damage Assessment (NRDA) to be paid over 15 years beginning 12 months after the agreements are executed. This includes $368 million in previously allocated early restoration.

  • A minimum of approximately $787 million of Clean Water Act civil penalties distributed through the RESTORE Act, to be paid over 15 years beginning 12 months after the agreements are executed. Louisiana’s amount of the RESTORE Council distributed funds has yet to be determined but CPRA estimates that the state’s share should be around $620 million.

  • $1 billion for state economic damages to be paid over 15 years. State law requires the funds to be deposited into the Deepwater Horizon Economic Damages Collection Fund and allocates them as follows:xxx

    • 45% to the Budget Stabilization Fund (Rainy Day Fund), up to its cap

    • 45% to the Medicaid Trust Fund for the Elderly

    • 10% to the Health Trust Fund

    • Fund earnings allocated to higher education

However, the Gov. Edwards and the Legislature used the first economic losses claims payment of $200 million to help address the 2016 fiscal year deficit.

As the information above illustrates, Louisiana is poised to receive and spend billions of dollars for coastal protection and restoration in the next several years. The most significant source of new funding will come from the Deepwater Horizon oil spill settlements and adjudication of civil or administrative claims against responsible parties. The RESTORE Act funding is overseen by the RESTORE Council, a body comprised of representatives from federal agencies and the Gulf Coast states. Louisiana has a seat on the Council. The Natural Resource Damage Assessment is overseen by the NRDA Trustee Council.

However, the RESTORE Council decision-making process could prevent Louisiana from getting its fair share through allocation formulas and project submission limits. The RESTORE decision-making process remains unclear and Louisiana must remain vigilant and engaged in order to ensure that it receives the funding that reflects Louisiana’s importance to the Gulf of Mexico ecosystem and economy and the impact sustained during the 2010 oil spill. The projects must fit the RESTORE Act guidelines as well as the state’s Master Plan. Some funds will be allocated on a reimbursement basis. These funds are project specific and not a recurring source of funding for CPRA.

For the purposes of the RESTORE Act, Louisiana is better positioned than the other Gulf States due to the establishment of the CPRA as a single oversight agency and the state’s Coastal Master Plan. The other states have not evolved that level of organization and planning. The current governor and CPRA leadership have affirmed their commitment to investing the RESTORE dollars in coastal protection and restoration through the Coastal Master Plan.

Recommendations:
The governor should ensure that Louisiana maintains a vigilant leadership role within the RESTORE Council and NRDA Trustee Council.

The governor should ensure that the Act is carried out as intended and advocate that the protection and restoration of Louisiana’s coast is in the nation’s best interest. As such, the governor should urge the RESTORE Council to:

  • Consider establishing a project specific comprehensive plan, instead of the process of creating the first funding priority list, to fulfill the intent of the law;

  • Adopt a process similar to the CPRA decision-making process based on science, transparency and public input not politics or equal distribution; and,

  • Make specific recommendations that will facilitate the expeditious and efficient implementation of the projects in Coastal Louisiana. This Council has the authority to make such recommendations and should do so to ensure the projects are implemented in the most efficient manner.

The governor should foster and maintain a relationship with the Executive Office of the President and the Office of Management and Budget (OMB) for the purposes of expediting federal permitting, and identifying and executing regulatory best practices in an effort to expedite Louisiana’s Master Plan.

Other Sources of Funding

Significant sources of funding, such as GOMESA, CWPPRA, Natural Resources Damages and the RESTORE Act, have strict uses under federal law. Also, several of these program funds are provided on a cost reimbursement basis.

When the past administration exercised its authority to handle mid-year budget cuts, it included these federally regulated sources of funds in its tally to figure the amount of money it could sweep from the Coastal Fund, even though the administration was allowed only to sweep state funds. By counting these other sources of money in the fund rather than just state funds, the administration could calculate a bigger fund sweep. This was cause for concern. There are requirements for the use of federal funds and they may not be used for other state government functions. Further, a number of these programs have non-federal match requirements that may be violated by using other federal or non-state program funds to satisfy non-federal match requirements.

Recommendation:
Explore the concept of a constitutional amendment to clarify the governor’s limitations for taking these dollars.

Gap in Funding

The 2012 Coastal Master plan represents coastal protection and restoration projects throughout coastal Louisiana at an estimated $50 billion budget over 50 years comprised of existing and potential funding sources. Even with such significant investments, the planned investments will not completely compensate for the land loss that will occur over the next half-century. However, if these investments were doubled, based on CPRA’s analysis, Louisiana could build or sustain between 910 and 1240 square miles by 2061, depending on future coastal conditions.

The Tulane Institute on Water Resources Law and Policy published a report, “Financing the Future, Turning Coastal Restoration and Protection Plans Into Realities: The Cost of Comprehensive Coastal Restoration and Protection,” that concludes that the cost of restoring and protecting coastal Louisiana will significantly exceed the $50 billion budget set forth in the 2012 Master Plan. Because the $50 billion cost estimate is stated in constant dollars and fails to include certain operating and maintenance costs, the paper concludes that the estimate is significantly lower than what is necessary to restore coastal Louisiana and protect its residents.

With the BP Oil Spill settlement and GOMESA funding, Louisiana has an opportunity to get out of the planning phase of its Master Plan and begin to execute some critical coastal protection and restoration projects. However, as illustrated by Tulane’s issue paper, Louisiana must invest these dollars wisely.

Related to the gap in funding is an unresolved issue that could significantly impact the funding stream for the Master Plan. That problem is the payback of an estimated $2.9 billion debt (with interest) for the Greater New Orleans Area Hurricane Storm Damage Risk Reduction System (HSDRRS) that the state owes the federal government. This is projected to be $93 million per year over 30 years, beginning in FY 2017.  However, there are questions regarding whether the state actually owes this money, or whether the federal government should accept responsibility for the necessity for the HSDRRS. Further, if it is determined that the state should repay the debt, the federal government should provide the necessary cost information so that CPRA can verify the amount owed and also ensure that the state does not pay any interest accrued for the amount of time that the US Army Corps of Engineers spent building the system.

Recommendations:
The new Governor and his Administration should explore all avenues to renegotiate the HSDRRS cost share payments. Further, if it is determined that the state must repay the debt, the federal government should provide the necessary cost information so that CPRA can verify the amount owed and also ensure that the state does not pay any interest accrued for the amount of time that the US Army Corps of Engineers spent building the system.

The Governor, Legislature and local governing authorities should develop a plan for the HSDRRS cost share payments.

Authority for Borrowing for Coastal Projects

Governments, just like businesses or even individuals, often borrow for large infrastructure projects. Just as a family might take out a mortgage to buy a house, a state might sell bonds to build a new bridge. Debt should not be incurred to cover short-term operating expense. However, borrowing money for infrastructure can make sense if the period to pay back the bond is shorter than the lifetime of the infrastructure created. For example, a bond that takes 20 years to pay off is justified for a highway that could last 30 years or more.

While borrowing for infrastructure is a common practice for roads and buildings, it has not been done for coastal projects in Louisiana. So far, all of the projects have been done on a pay-as-you-go basis. While this approach is fiscally conservative, it may make sense to look at bonding out larger projects as more consistent sources of revenue flow to the state.

The Louisiana Constitution gives the State Bond Commission authority over debt for any state or local agency: “No bonds or other obligations shall be issued or sold by the state, directly or through any state board, agency, or commission, or by any political subdivision of the state, unless prior written approval of the bond commission is obtained.” Therefore, any effort to securitize revenue dedicated to coastal projects would appear to need Bond Commission approval. The Bond Commission is made of up representatives of the governor,other statewide elected officials and members of the Legislative leadership. A governor often has strong control over the Bond Commission, but not always.

Coastal Protection and Restoration Financing Corporation

To manage the process of borrowing for coastal projects, the state established the Coastal Protection and Restoration Financing Corporation .xxxi The corporation “shall have the authority and powers, to carry out the financing, purchasing, owning and managing of the Offshore Royalty Revenues and the Offshore Royalty Revenue Assets.” This includes the power to sell the revenues and issue bonds. Any bonds issued would need the approval of both the State Bond Commission and the Joint Legislative Committee on the Budget (JLCB). As of yet, the corporation has yet to sell any bonds, but it is probably too soon to do so anyway.

The members of corporation’s board include the governor, the state treasurer, attorney general, president of the Senate and speaker of the House of Representatives, chairman of the CPRA, secretary of DNR, secretary of DOTD, or their designees, and seven members appointed by the governor with one member appointed from each congressional district and the remaining member or members appointed from the state at large. The CPRA Chairman currently serves as chairman of the corporation as well. Similar to many of the state’s boards, the governor controls the majority of seats. It can also enter into agreements with the offices of the state treasurer and attorney general to provide staffing.

While no coastal bonds have been issued, the law lays out a model very similar to another state financing authority, the Tobacco Settlement Financing Corporation. The Tobacco Corporation sold bonds that were backed by yearly proceeds from a settlement with large tobacco companies. If the process is similar, the coastal corporation will sell bonds. These bonds will be backed by specified sources of revenue such as the offshore coastal royalties. The point of using a corporation, as opposed to just having the state sell bonds, is to mitigate risk. As stated in law: “Bonds issued under the provisions of this Subpart shall not be deemed to nor constitute a debt or obligation of the state of Louisiana or a pledge of the full faith or credit of the state, and all bonds shall contain on the face thereof a statement to the effect that neither the full faith and credit nor the taxing power nor any other asset or revenues of the state or any political subdivision thereof is or shall be obligated or pledged to the payment of the principal of or the interest on such bonds.” This language essentially means that if the offshore revenue is not sufficient to pay off any debts incurred, the lenders cannot go after the state. This can happen if either offshore oil wells do not produce as expected or if there is a change in the federal law that sends the money to Louisiana.

The corporation has yet to sell any bonds but has done some preliminary work. Until there is a track record of how much GOMESA money Louisiana can expect, any bond sales will face revenue uncertainty. This uncertainty will make getting a good financing deal difficult. However, Louisiana can expect its full allocation of GOMESA funding starting in 2017. When this happens, this corporation will start to seriously investigate the possibility of securitization to meet coastal project needs, including any legal impediments or risks that exist to securitizing the various revenue streams.

Recommendation:
The Coastal Protection and Restoration Financing Corporation should begin to explore the best opportunities to secure and leverage the anticipated GOMESA revenues. Factors such as the critical rate of land loss, the cost of construction inflation, and the cost savings for quicker implementation of certain projects should be carefully analyzed to determine the best financing options. It would make sense for the Financing Corporation to also explore how to best leverage all revenue streams, including the existing and anticipated RESTORE Act funding to implement the Master Plan; however, the legislation that established the Financing Corporation may need to be amended to include this additional scope of work.

The Governor’s Advisory Commission on Coastal Restoration and Protection should reengage in the work called for by House Concurrent Resolution No. 144 of the 2012 Regular Legislative Session, to analyze the funding opportunities available for the Master Plan. This work should be used to inform the Coastal Protection and Restoration Financing Corporation.