Week 11 in Juneau: Tax credits, pension cost-shifting could derail session

  • Members of the House Majority Caucus hold a huddle at the back of the House's chambers March 10 while working on amendments to the operating budget. As the session nears its scheduled adjournment, oil tax credits, pension costs and Permanent Fund earnings to close the deficit all remain unresolved. Photo/Michael Penn/Juneau Empire

The 2015 legislative session is set to adjourn in about two weeks, on April 17.

Now is the time of the session, toward its end, that things spring from the woodwork and tempers can fray.  People are now watching closely for events that can derail an orderly end to the session, and abruptly end bills that have long been worked on.

It happens every session, but the situation seems more acute this year with a huge budget deficit and solutions to that being worked on that can at best cover only part of the financial gap.

At this point, two issues are emerging that could inflame tempers, or are already. One is an oil tax credit reform bill now in the House that is increasingly controversial and may cause a major blowup when it reaches the Senate.

Another is a package of bills introduced by the Senate Finance Committee that increase the required contributions by school districts and municipalities for teachers and public employees.

On the pension bills, the effect would be to reduce the state’s contribution, thereby easing the strain on the state budget. Under a long-standing agreement set out in state law, the state currently picks up the major shares of public employee and teacher unfunded pension liability contributions, leaving school districts paying 12.5 percent and local governments 22 percent.

These are contributions over and above what the schools and municipalities pay for their current pension obligations. These payments are toward an estimated $10 billion-plus unfunded pension liability that the state is working to pay down over 25 years.

The new bills, introduced last Monday, March 28, would ratchet up the local shares over three years to 22 percent for schools and 26.5 percent for municipalities, however. That would be a $17 million a year increase for local governments, and it will likely be more because of compounding, said Kathie Wasserman, the Alaska Municipal League’s executive director.

“We have very few ways to raise money. Taxes and fees are it,” Wasserman said.

“This is not an acceptable solution to the state’s fiscal situation. It’s just handing the bills to someone else,” meaning local governments, she said.

The projected savings to the state budget are not known for certain at this point. A consultant to the state is doing an analysis that will be presented soon to senators on the Finance Committee, said Sen. Anna MacKinnon, R-Eagle River, who is co-chair.

Where schools are within municipalities, such as in the state’s larger communities, the local government may be able to provide additional funds to offset the state cut.

But where municipalities are unable to do this, which may be the case in small communities, or in rural areas where the regional district is a state-created entity, there is no choice but to take the additional funds from the state’s education funding.

Critics of this move say it is an indirect way to take back, or at least cut into, a scheduled $50-per-student increase in the Base Student Allocation for schools that is planned this year.

There is another problem for municipalities. The larger share of the pension obligation taken on by local governments requires them, under new financial reporting rules, to carry it as an increased long-term obligation.

Wasserman said it will amount to about $1.2 billion over 25 years.

This will affect of the cost of municipal borrowing at a time when state capital appropriations are negligent and municipal debt may be needed for local capital improvements.

Oil tax credits

The oil tax credit bill is in the House Finance Committee. It was changed significantly in the House Resources Committee, which reviewed the bill at length through much of the session. It will likely be changed again in the Finance Committee.

Gov. Bill Walker introduced the original version of the oil tax credit bill with the goal of restructuring the tax credits incentives, and eliminate some, to reduce the heavy cost of the program. The governor intended to retain parts of it, however, such as incentives for explorers to get wells drilled.

Under the governor’s proposal the cash-outlay cost of the program would be reduced to about $100 million per year. The House Resources Committee made several important changes including phasing out several of the incentives over a few years rather than end them all at once and impacting companies in the middle of developing new projects.

However, a gradual phase-out would leave the program still with higher costs of several hundred million dollars a year.

One other change made by the Resources Committee in the House, which will probably be retained by the Finance Committee, is the elimination of the governor’s proposal to increase the minimum production tax paid by oil producers from 4 percent to 5 percent.

This is not part of the tax credit restructuring since it is a flat tax increase but was part of HB 247, the tax credit bill.

In the Senate, Sen. Cathy Giessel, R-Anchorage, chair of the Senate Resources Committee, has been noticeably quiet about her opinions and plans for the incentive restructuring bill when it comes to the Senate and to her committee.

Giessel chaired a working group on the tax credits that met several times last summer and is one of the most knowledgeable legislators about the issues.

However, the bill goes to Senate Finance Committee after Giessel’s committee, and that committee may also have plans for the bill.

The oil tax credit bill is one of the unknowns facing the state’s bottom-line budget number for fiscal year 2017 beginning July 1. The House and Senate have both passed their versions of operating budgets, with the House version, so far, at about $4 billion and the Senate, so far, at about $4.25 billion.

What’s not included are the oil tax credit expenditures and a few other items being resolved, but the tax credits are the larger of these. Combined, they could push the operating budget up to about $4.5 billion.

In comparison, current year fiscal year 2016 operating budget spending is about $5 billion.

Deficit swells past $4B

Another new development this week is a higher estimate for the current-year 2016 deficit, which has been pushed up by a higher supplemental spending budget for this year as well as a new oil revenue estimate released recently that is lower than the previous estimate, in December.

Pat Pitney, the state budget director, said the new estimates are $4.1 billion if the House version of the supplemental budget passes and $4.3 billion if the Senate version prevails.

The higher deficit will take a big bite out of available cash reserves. The Constitutional Budget Reserve, the state’s main cash reserve, held about $10 billion last July 1, according to state Deputy Revenue Commissioner Jerry Burnett, and if the deficit is $4 billion it could leave about $6 billion in the CBR next June 30.

That total might be adjusted upward somewhat by balances transferred from other funds.

If the FY 2017 deficit is again $4 billion it would deplete the CBR to about $2 billion by June 30, 2017.

Meanwhile, legislators in Juneau continue working on long-term structural solutions to the fiscal gap, which could stretch out those savings. The consensus is still that some mechanism for tapping earnings of the $50 billion-plus Alaska Permanent Fund will be adopted this year, with other revenue measures to be considered in 2017, after the 2016 elections.

Of three proposals for using Fund earnings on the table, in different bills, some version of Sen. Lesil McGuire’s SB 114 is said to be the favored option.

It converts the Permanent Fund to an endowment with a percent-of-market value payout mechanism for making funds available to the state general fund. The latest version of SB 114 would adopt a 4.5 percent annual payout, a rate that is low enough to compensate for inflation and keep the overall Fund sustainable.

McGuire’s bill would make about $2 billion a year available for the budget and retain the annual Permanent Fund dividend.

Another proposal, by Rep. Mike Hawker, also uses a percent-of-market value payout mechanism, also relying on a 4.5 percent annual payout, and would similarly provide about $2 billion a year for the budget.

A major difference is that Hawker’s bill would pay sharply reduced dividends in the near-term years to pay down the state’s deficit, with the possibility of much higher dividends after the deficit is eliminated.

However, both Hawker’s and McGuire’s proposals still leave annual budget gaps of $2 billion or more. For now, the gap would have to be covered by draws on reserves.

The third proposal, SB 128 by Gov. Bill Walker, comes closer to covering the budget gap. The governor’s plan changes the payout structure of the Permanent Fund in different ways than Hawker and McGuire but also “bulks up” the Fund with a $3 billion deposit of money transferred from the Constitutional Budget Reserve.

With this and a larger share of oil royalties paid into the Fund than is now the case, 50 percent rather than 30 percent, Walkers’ plan would have the state make a fixed $3.3 billion annual draw from the Fund’s earnings.

This is closer to covering the deficit, and the governor would have the remainder covered by a package of new taxes, which were also introduced this year. If the taxes are not enacted this year, and the governor’s bill was adopted, cash reserves would also be drawn from the cover the remaining budget gap.

Tim Bradner is a correspondent for the Journal. He can be reached at timbradner@pobox.alaska.net.

Updated: 
04/01/2016 - 3:44pm

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