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BUDGET-COMBERS FIND SHELL, HEAR STATE PAY RAISE INSIDE

Mar 21, 2002

By JEFF AMY
Capital Bureau

Millions received from oil giant could help finance 3 percent boost for Alabama employees


MONTGOMERY -- A key budget writer said Wednesday that millions of dollars received from Shell Oil Co. will help finance 3 percent salary increases for state employees.

The election-year pay boost, backed by Gov. Don Siegelman and many senators, had been in doubt. Earlier this month, the House passed a $1.19 billion General Fund budget without the pay raises, which would cost about $13 million to $14 million.

Shell wired $27.11 million to the state Tuesday to settle a Mobile County Circuit Court lawsuit in which Alabama claimed the company defrauded the state by deliberately underpaying royalties from natural gas drilling.

Of the total, $13.44 million was classified by state officials as punitive damages, which means Alabama doesn't have to put those moneys into a savings account, but instead can spend them for most non-education purposes.

"It's already included in the budget," said Sen. Roger Bedford, D-Russellville, who is chairman of the Senate's General Fund budget committee. "It will be used to prop up the state agencies and to help pay for the state employees' pay raise."

The General Fund pays for most agency operations except education and transportation. The 2003 budget passed by the House already depends on $48 million in other one-time transfers, a situation some legislative leaders warned will create a cash crunch in 2004.

The House did agree to a 3 percent increase for school employees, paid for in the separate education budget. That could serve to increase pressure to provide the raise for other state employees.

"The governor is still very supportive of a cost-of-living adjustment for state employees," said Rip Andrews, a spokesman for Siegelman. "If this is the way they choose to do it, this is the way they choose to do it."

Sen. George Callahan, R-Theodore, decried putting the money into the 2003 budget, saying it would be better off in the $2.1 billion savings account, known as the Alabama Trust Fund.

"I think it has more to do with the governor's current budget proposal than it does with justice," Callahan said.

But representatives for Siegelman and Attorney General Bill Pryor defended the accounting decisions which kept some of the money from being put into the $2.1 billion Alabama Trust Fund, a state savings account for royalties paid by companies producing natural gas in Mobile Bay and state waters in the Gulf of Mexico.

The fund produces interest income which helps pay for General Fund operations. Some of the royalties also pay for bridge repairs and economic development.

Shell paid a total of $33.5 million. The Mobile firm of Cunning ham, Bounds, Yance, Crowder and Brown earned 14 percent, or $4.69 million, as a contingency fee. The firm, hired by Siegelman to sue five gas drillers, also received another $1.69 million in expenses. That left $27.11 million for the state.

Siegelman, Pryor and the hired lawyers decided to classify $13.68 million of the settlement as compensatory damages, reimbursement for money the state would have collected if Shell had always paid according to the guidelines Alabama claims are proper. The other $13.44 million were described as punitive damages, money extracted as punishment over and above any actual injuries.

The decision is crucial, because compensatory damages are locked away in the Trust Fund where state officials can't spend them directly, but punitive damages are available now. The lure of such damages sparked weeks of wrangling in the state Senate earlier this session, as senators argued over proposals to send the money to various programs.

"If they're compensatory, it goes to the Alabama Trust Fund. If they're punitive, it goes to the General Fund," said Richard Dorman, a lawyer with Cunningham, Bounds.

"That's the way we felt it should be apportioned," Dorman said. When asked who specifically made the decision, he declined comment, saying he felt that would require an improper discussion of his client's affairs.

Kelly Coone, a spokeswoman in Shell's New Orleans office, said the company didn't consider any of the total it paid the state to be punitive damages.

"Ours are compensatory damages," she said.

Houston-based Shell is the American unit of Royal DutcShell, a Dutch-British firm that reported $10.9 billion in profits last year.

The state had claimed Shell owed $25.4 million in compensatory damages when it filed the suit in 1999, using figures from a state-commissioned audit. At the 12 percent interest rate mandated for royalty disputes, that amount would have grown to more than $31.9 million by now. But Dorman said consultations with other experts indicated that amount was probably too high.

Pryor's office provided a March 6 letter from Dorman to Siegelman that discussed the settlement. In the letter, Dorman notes that Shell claimed it only owed $12.26 million in compensatory damages. Dorman and Pryor recommend to Siegelman that the state allow Shell a $6.2 million write-off for transporting gas, and that it split the difference on some remaining items, placing the compensatory amount at $13.68 million.

Because that was the cap on compensatory damages, a spokeswoman for Pryor argued that by definition everything else had to be classified as punitive damages.

"It wouldn't have been a legal option to have the rest of the money be considered compensatory. It would have had to be punitive," said Joy Patterson, a spokeswoman for Pryor.

She said the attorney general approved of the division between punitive and compensatory damages. Patterson said Pryor believed the maximum amount the state could collect in compensatory damages was about $15.1 million.

Lt. Gov. Steve Windom, a director of the Alabama Trust Fund, declined comment. State Treasurer Lucy Baxley, another of the nine directors, said that she didn't know much about the issue.

"If there are dollars that are due to the fund by law, then by all means they should go there," Baxley said.

Appeals are pending for two previous trial verdicts the state won against natural gas drillers. In December 2000, a Montgomery County jury ordered Exxon Mobil Corp. to pay $3.5 billion to the state, of which $3.42 billion were punitive damages. Last year, the state won $24.5 million from Hunt Petroleum Corp., of which $20 million were punitive damages.

Suits are still pending against the former Amoco Corp., now absorbed into British firm BP PLC and against Mobil Corp., now part of Exxon Mobil.

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