Week 6 in Juneau: House makes budget recommendations

JUNEAU—Friday was day 39, and wrapped up week six of the 2016 legislative session. Next week, day 45 will the halfway point of the 90-day session.

Things are busy in the capitol building. Budget subcommittees of the House Finance Committee closed out their work, handing in recommendations to the full Finance panel, which will hold public hearings this week. Meanwhile, Senate budget subcommittees continue working, to be ready when the House formally transmits its version of the operating budget, which is expected in early to mid-March.

Some subcommittees recommended substantial reductions for agencies, others did not. One of the largest cuts so far is to the University of Alaska, which would see a 30 percent reduction of its state general funds, a budget subcommittee headed by Rep. Tammie Wilson, R-North Pole, has recommended.

Wilson’s subcommittee recommended a large cut last year of over $50 million to the university’s budget but that was modified to about $25 million by the full House Finance Committee.

Gov. Bill Walker proposed cutting the university appropriation by $15.5 million in his 2017 fiscal year budget.

On the university budget, the Legislature does not reduce specific programs but rather makes an overall cut and allows the Board of Regents and university administrators to allocate the reductions.

Legislators were easier on the Department of Labor and Workforce Development, partly because it is a smaller agency with much of its work funded by the federal government.

“For the Department of Labor we recommended a 12 percent to 13 percent reduction (of state general funds), but that follows a 20 percent reduction last year,” said Rep. Charisse Millett, R-Anchorage, who is a member of the labor department subcommittee.

Every legislator sits on a budget subcommittee.

The Department of Transportation and Public Facilities also got off relatively lightly in its House subcommittee, with a $2 million reduction in the highways maintenance budget, which will be absorbed by extending the service life of the state equipment fleet, and a $2 million cut to the state ferry system, which will be softened this year with funds taken from the system’s revenue account. Additional revenues will have to be generated to refill that account for next year, however.

The light touch on DOT was done partly because the agency took a 12.5 percent cut of state funds last year, totaling about $34 million.

Most important, the state ferry system will be able to operate this summer with its published schedule. Last year, budget cuts threatened to change ferry schedules and disrupt travel plans before reallocation of money from a special fuel account was used to fill the gap.

Reductions to the Department of Commerce, Community and Economic Development budget were generally in agreement with cuts Walker proposed in amendments to the administration’s FY 2017 budget released recently.

Those included cutting all money, for next year at least, in the Alaska Energy Authority’s Renewable Energy Fund grants, a program that helps finance small renewable energy projects mostly in rural communities.

Walker had proposed $5 million for the program in his original FY 2017 budget released in December but cut the funds in his budget amendments. In more flush times lawmakers have funded $20 million to $25 million annually for REF grants, which require contributions from the local community that typically match or exceed the state money.

The department’s budget also reduced money for the Alaska Energy Authority to train rural power system operators and its “circuit rider” program where the agency provides technicians to assist rural plant operators with maintenance or respond to emergencies.

Funding was also cut for state tourism marketing and for the Alaska Seafood Marketing Institute, a state agency that works with the seafood industry in marketing. ASMI does generic Alaska marketing and is widely credited for having established an Alaska brand identity for wild-caught fish, helping Alaska harvesters compete with farm-raised salmon.

In the case of ASMI and tourism marketing, the state will pass more of the promotion work to private partners in both industries, mainly seafood processors in the case of ASMI and for tourism the Alaska Tourism Industry Association, a trade group of mostly smaller Alaska tour operators.

But for the Alaska Energy Authority’s rural power plant assistance, “we’ll just have to do the best we can,” the authority’s director, Sara Fisher-Goad, told the agency’s House budget subcommittee.

Legislative “intent” language in the proposed budgets for both the AEA and ASMI expressed the Legislature’s desire that both agencies be able to operate without state general funds in two years.

A recommendation was also made that AEA link itself with a sister-agency, the Alaska Industrial Development and Export Authority, to save money. It isn’t immediately clear what savings are possible because AEA and AIDEA already share many administrative support functions, including shared building space, but also have different functions.

With ASMI, some ongoing state money would be required as a match to federal funds for overseas seafood marketing. Alaska is the only seafood-producing state with substantial international sales.

As for the Legislature itself, Millett said in a House Majority press briefing that a 12.4 percent cut is recommended for lawmakers’ budget, which will require putting some legislative staff on furlough. Also, Millet said there is no money in the budget to pay rent for the new Legislative Information Office building in Downtown Anchorage, which has become controversial.

The owners of the building have made an offer to sell it to the Legislature, and plan is also being considered to break the lease and move legislative offices to the state-owned Atwood Building, also downtown.

Once the House and Senate Finance committees complete work on the operating budget a House-Senate conference committee will convene to iron out differences.

Permanent Fund earnings

On the overarching issues of the 2016 session, work continues on the major question of the session, a decision to use Permanent Fund earnings and enact new taxes to reduce a massive $3.5 billion-plus budget deficit.

There are now three distinct plans before lawmakers, one proposed by the Walker administration, a second by Sen. Lesil McGuire, R-Anchorage, and a third by Rep. Mike Hawker, also an Anchorage Republican. McGuire’s bill is in the Senate but Millett has introduced a version of McGuire’s bill in the House.

Walker’s proposal involves a series of changes in the way earnings of the Permanent Fund are managed, how revenues flow into the Fund, and how the annual citizen dividends are funded. The governor would set a fixed annual draw from Fund earnings for the budget – $3.3 billion, adjusted for inflation – an amount that would not impair the Fund’s long-term sustainability.

Dividends would be $1,000 for 2016, a reduction from just over $2,000 last year, and would then be determined by the amount of state resource royalty income in future years. Most projections are that the dividend would gradually decline unless major new oil discoveries are made.

McGuire’s approach is similar in concept to Walker’s, including funding dividends with oil royalties, but would make Permanent Fund earnings available under a percent-of-market-value, or POMV, approach, similar to the way large endowments are managed.

Hawker would also adopt a POMV approach for making money available for the state budget but would make a major change in the dividend financing in that any surplus Permanent Fund earnings would first go to reduce the state budget deficit. If there is any money left over it would be used to fund dividends.

The Senate State Affairs Committee and the House Finance Committee have been holding extensive hearings on the bills (Hawker’s bill is only in the House) along with public hearings.

There’s no real sense of direction yet as to what the Legislature may do. Most lawmakers want to finish work on the fiscal 2017 budget and show budget reductions to constituents before they turn to the new revenue options.

In a briefing early last week Sen. Pete Kelly, co-chair of the Senate Finance Committee, said there is a general consensus, at least in the Senate, that some way of using Permanent Fund earnings should be adopted, but that budget cuts should be demonstrated.

Senators seem more aligned behind a version of McGuire’s Permanent Fund earnings bill than the governor’s proposal, which is seen as overly complicated. Hawker’s bill is seen as the simplest of all the proposals, but there is a concern that it does away with the PFD, for at least the near-term, until budget deficits are erased. All three proposals would substantially reduce the dividend compared to last year, however.

Tax bills

Another issue before legislators is proposals for new state taxes. As a part of his overall fiscal plan the governor has proposed a series of tax increases on almost every major Alaska industry, including the oil industry, along with a state personal income tax and an increase of state fuel taxes.

Last week the Senate Labor and Commerce Committee began hearings on the income tax, and the Senate Transportation Committee adopted a version of Walker’s fuel tax increase and sent it on to the Finance Committee.

The new version raises the state’s motor fuel tax from 8 cents per gallon to 16 cents per gallon, similar to what Walker proposes, but only as long as crude oil prices are below $85 per barrel — now about $30 per barrel. If crude oil prices rise above the $85 threshold the tax would revert to 8 cents a gallon. A similar version of the fuel tax bill, with its link to crude oil, is pending in the House Transportation Committee.

As for other proposed tax increases, such as those proposed for mining and fisheries, nothing has moved. Rep. Louise Stutes, R-Kodiak, who chairs the House special Fisheries Committee, plans no near-term action on the bill.

In a House Majority briefing late in the week she pointed out that while the proposed one percent hike in the state fish tax sounds relatively light, it represents an increase from three percent to four percent, or about a one-third increase. Being from Kodiak, Stutes represents a major fisheries center.

On a related matter, University of Alaska economist Gunnar Knapp presented results of modeling of the economic impacts of different options being considered, budget cuts, reduced PFDs and new taxes.

The report, still in draft and to be finished in March, was prepared for the Department of Revenue by the University of Alaska Anchorage Institute of Social and Economic Research, or ISER.

It illustrates the possible short-term effects of a $100 million reduction in state workers, or the elimination of those jobs; a $100 million reduction in state employees’ pay; a $100 million reduction in the Permanent Fund dividend, and a $100 million increase in revenues from a broad-based tax such as a personal income tax or state sales tax.

The economic effects of a state income tax or sales tax are roughly similar, Knapp said.

Of the scenarios modeled, ISER found a direct reduction of state workers that equates to saving $100 million in the state budget, would have the greatest negative impact. The total loss to the economy would be 1,677 jobs. An across-the-board $100 million cut in spending, which would include some state workers as well as other kinds of state spending, would cost the economy 1,260 jobs.

A $100 million reduction in dividends paid out to citizens would have less of a negative impact, a loss of 917 jobs in the economy. A cut in state worker pay would have the least impact, a loss of 897 jobs.

Using these calculations, if spending were cut $3.5 billion at one time, to eliminate a $3.5 billion deficit, it would cost the state’s economy 44,100 jobs. For reference, in December there were about 325,000 people working in Alaska in jobs of all types.

Tim Bradner is a correspondent for the Journal. He can be reached at [email protected].

02/27/2016 - 7:42am