Gov’s budget plan scrutinized by legislators on both sides
Both Republicans and Democrats in the Legislature are beginning to pick apart Gov. Bill Walker’s fiscal plan as details come to the surface after its unveiling Dec. 9.
Senate President Sen. Kevin Meyer, R-Anchorage, said Dec. 11 that the Senate Majority would not support a broad-based tax on Alaskans without spending cuts beyond what Walker is proposing in his 2017 fiscal year budget. The fiscal year begins next July 1.
Most legislators agree that revamping how the Permanent Fund is used — it was established with foresight to fund the State of Alaska when oil ran out — is a necessity to start closing the state’s deficit that is approaching $3.5 billion as oil prices keep falling.
The fine points of the change will be the focus of continued debate in the fast-approaching session.
For starters, Walker’s New Sustainable Alaska Plan would filter most state oil and gas revenue through the Permanent Fund, allowing it to earn an investment return, rather than putting the revenue directly into the general fund, as has been the case throughout the state’s history.
The investment return earned from future revenue, on top of the $51.3 billion already in the Permanent Fund, as of Sept. 30, that is already earning a return each year, should stabilize the state’s revenue stream and allow it to draw about $3.2 billion each year from the Permanent Fund Earnings Reserve account. The Legislature currently has access to money in the earnings account, but has shied away from spending it.
Historically, a portion of annual earnings has gone to pay Permanent Fund Dividends, while some of the money has been left in the Earnings Reserve account and some has been used to grow the Permanent Fund.
Walker’s budget proposal calls for about $100 million in overall operating budget cuts in fiscal 2017, a statewide income tax, industry tax hikes and further budget cuts that, with the revenue rearrangement, would theoretically balance the state budget by 2019.
The income tax would generate about $200 million per year that would go directly towards paying down the remainder of the deficit.
However, Meyer said more cuts need to come first.
“I think we’re ok with having a little (budget) gap every year,” he said.
The state’s primary remaining savings account, the Constitutional Budget Reserve, or CBR, fund, has about $9.1 billion in it.
While minority Democrats in the House and Senate don’t have the votes to directly overrule the Republican-led majorities, the 12-member House Independent Democratic Coalition does have enough votes to derail a vote to draw from the CBR, which requires a three-quarters vote from each chamber.
The Independent Democratic Coalition used its CBR leverage to get education funding restored in the current fiscal year budget, and could seemingly do something similar in the upcoming session if its members feel the need to push back against budget cuts pushed by Republicans.
Cutting government spending beyond Walker’s proposed 3.4 percent cut to agency operations will not be easy, Meyer noted, but he said instituting taxes to balance the budget disincentives the Legislature and the administration from seizing an “opportunity to right-size government,” he said.
Meyer said he would like to see 5 percent to 10 percent cut from the unrestricted general fund spending portion of the current $5.1 billion operating budget shortly after the governor announced his plan Dec. 9.
“We like the $100 million reduction; we want more. We like (Walker’s) concept,” he said.
Cuts to the 2017 budget would come on top of about $400 million in agency cuts to the current budget.
From fiscal years 2015 to 2017, Walker’s plan would cut agency spending by 27 percent overall, Office of Management and Budget Director Pat Pitney said.
The University of Alaska System would face a $15 million cut in the governor’s budget, bringing its two-year cut to $35 million, or about 10 percent of the university’s 2015 unrestricted state budget.
The governor also indicated he will work to cut agency spending by about $50 million in both 2018 and 2019, if the Legislature agrees.
From the Legislature, spending and associated cuts will be examined closely by Finance Subcommittees tasked with reviewing each agency budget to ensure there are no “bureaucrats playing games,” Meyer said.
The Department of Transportation and Public Facilities announced this fall that it might not be able to maintain winter road conditions enjoyed in the past because this year’s budget cuts forced the department to lay off some equipment operators and end their overtime.
“We think DOT has plenty of money,” Meyer said succinctly.
If, after several years, spending cuts and a revamped Permanent Fund-revenue system do not balance the budget, a statewide sales tax would likely be more palatable to Republicans, according to Meyer.
Despite almost certain opposition from rural Alaska, a sales tax would capture cash from the nearly 2 million tourists that come to the state each year, a group Meyer said the state needs to do a better job of maximizing revenue from.
His caucus would generally prefer to cut state assistance to local governments and let taxes be implemented at the local level to recoup the difference, Meyer added.
Walker said he opted against a sales tax because it would unfairly shift the tax burden to rural Alaska, where higher cost goods means higher taxes — the tax levied as a percentage of an item’s cost. An income tax would capture revenue from nonresident workers in the state, he noted, who make up about 20 percent of the Alaska’s workforce.
PFD change equals tax
Minority Democrats in the House and Senate have pushed back against the governor’s plan to shift how dividends are paid and base them on half of the resource royalty revenue the state takes in each year, rather than on Permanent Fund earnings, which is largely decoupled from the state’s budget situation.
Walker’s royalty dividend would start at about $1,000 per Alaskan, or about half of this year’s PFD.
Rep. Scott Kawasaki, D-Fairbanks, said Walker should be complimented for pushing a comprehensive budget plan, which the governor has said he is open to amending, but that it puts too much of the burden to fill the state deficit on low-income Alaskans.
The PFD change is in essence a flat tax that would disproportionately hurt rural Alaska, Kawasaki said.
Focusing on government spending cuts and picking apart the governor’s plan “misses out on the bigger picture,” he said.
“We should’ve looked to oil taxes and we should’ve looked to the industry that’s making a huge profit in the state before we looked to individual Alaskans,” Kawasaki said.
The House Independent Democratic Coalition has in years past proposed raising the 4 percent minimum production tax floor on the state’s largest oil producers to 10 percent, a change that would bring in more than $600 million per year at today’s prices, according to Kawasaki.
Oil and gas production taxes are expected to generate just $172 million in fiscal 2016, according to the latest Revenue Department forecast.
The cost to extract and export a North Slope barrel of oil is just more than $36, according to the Department of Revenue, meaning Slope producers are basically breaking even at current market prices in the $35-$40 per barrel range.
The average Alaska North Slope price for fiscal 2016 so far is $49 per barrel.
Walker proposed raising the minimum production tax to a 5 percent floor and preventing companies from deducting operating losses to take their tax liability below the tax floor.
He has said he will not accept a wholesale oil production tax change, which minority Democrats continue to push for.
Walker’s 2017 capital budget looks a lot like this year’s: bare.
It would spend $195 million in unrestricted state money to match $957 million of federal funds and make small contributions to some traditional state assistance programs.
Members of the administration have said the hope is to build a $500 million general obligation, or GO, bond package in conjunction with the Legislature to fund maintenance and unfinished projects the state would otherwise have to pay cash for.
The GO bond package would need to be approved by voters in the November general election and would fund projects over two years, until the next general election.
Revenue Commissioner Randy Hoffbeck said bonding for capital projects that don’t need to be addressed immediately makes fiscal sense because the state can earn more interest keeping its money in the bank than it will pay out for the bonds over the long run.
The Alaska Energy Authority’s popular Renewable Energy Fund gets $5 million small projects across the state, down from $11.5 million this year.
The Alaska Housing Finance Corp.’s home Weatherization Program, another popular one, would get $1.5 million in federal funds and no state assistance. This year, the Weatherization Program received $5.6 million from the state general fund in addition to the federal appropriation.
Kawasaki said the proposed cuts to the energy assistance programs “don’t make a lot of sense” given Alaska’s climate and rural energy situations.
The governor’s capital request also includes funding for badly needed school upgrades, he said.
Tops among school fixes is replacing the K-12 Kachemak Selo School near Homer, a $10.8 million unrestricted general fund line item.
Fully-funding the Kivalina School replacement obligation will cost another $7.2 million in the capital budget. It was a late $43 million addition in this year’s budget.
Finally, repairing the Bethel Regional High School’s kitchen, badly damaged by fire earlier this fall, added $7.2 million to the capital budget.
Elwood Brehmer can be reached at [email protected].