Budget deal overshadowed by inaction on oil tax credits, Fund earnings

State legislators managed to pass a budget last week funded by cash reserves, but at week’s end an impasse continued over a long-term plan to restructure state finances and changes to a complex oil tax credit bill.

The House Minority agreed to the votes needed to fund the budget after Republican leaders in the House and Senate agreed to add about $74 million in funds that had been cut, mainly in education, back into the budget.

Lawmakers are still in a special session that was called by Gov. Bill Walker after the Legislature failed to agree on the budget and other matters in the regular session ending May 18. Friday, June 3, was the 10th day of the special session, which can last 30 days.

The approved spending plan for fiscal year 2017, which begins July 1, is now about $4.264 billion in state unrestricted general funds, or UGF, the most widely watched category of spending, according to data compiled by the Legislative Finance Division.

This is down from $5.078 billion in UGF spending in the current year ending June 30 and the $5.42 billion in fiscal year 2015.

Some of the reductions are in one-time savings, however. Also, Walker has challenged the Legislature’s tally of the numbers, arguing that some of its cuts are not real because of shifts in the fund sources and mixing appropriations from the current year’s budget to pay for items in the upcoming year budget.

However, for the longer-term trend, the important numbers to watch, Legislative Finance Director David Teal says, are the reductions in state agency operating budgets.

Those are down to $3.87 billion in the budget approved for FY 2017, down from $3.99 billion in FY 2016 $4.5 billion in FY 2015.

The reduction in agencies is between the current fiscal year and next year is $216.7 million, or 5.3 percent, according to the Legislative Finance documents.

The House Minority had leverage to get money added back because of the requirement for a three-quarters vote in both the Senate and House to approve a withdrawal of funds from the Constitutional Budget Reserve, the main cash reserve for the state.

The Senate leadership has the needed three-fourths majority with 16 members of its caucus, but the House needs the votes of its 13 minority members to get its approval for the withdrawal.

The estimated withdrawal estimated by legislative leaders is about $3.17 billion, which is the difference between a total state budget of $4.42 billion of all UGF funds (including the capital budget) and revenues now estimated at $1.25 billion.

The governor said the draw on the CBR would really be much higher, however. That’s because about $642 million in FY 2017 programs will be funded from the FY 2016 budget, which is still in place.

That pushes total spending in FY 2017, including the funds from FY 2016, to $5.059 billion. Given that, the actual draw on the CBR will be about $3.8 billion.

The effect of this is that it will deplete the CBR to the point that a similar-size draw cannot be made next year from that fund if the Legislature fails to pass new revenue measures, either the Permanent Fund earnings restructuring or new taxes.

After the CBR is drained only the Permanent Fund’s Rarnings Reserve account is left. That fund, which now holds about $7 billion, could be tapped to pay for the deficits but it would make continued payment of PFDs problematic, since these also come from the Earnings Reserve.

The Legislature can now appropriate from the Earnings Reserve with a majority vote, but the proposal in HB 245 and SB 128 is to establish an orderly mechanism to do this so Fund earnings will not be spent in an ad hoc manner.

The bills are currently in the House and Senate Finance committees and are identical. They would basically shift the Permanent Fund to operate more like an endowment, with a percentage of the Fund’s total value set as an annual payment for the state general funds.

The percentage for withdrawal is currently at 5.25 percent in both bills. That amount to be made available is now estimated at between $2.2 billion to $2.5 billion a year.

That is still well short of eliminating an approximate $4 billion deficit, so ultimately other revenues will be needed, most likely from new taxes.

Meanwhile, no progress was reported on the restructuring of the state’s oil and gas exploration and development tax credit program.

The tax credit bill, House Bill 247, is seen as informally linked to the Permanent Fund restructuring bills.

Versions of HB 247 have now passed both the House and Senate but they are substantially different, and a House-Senate conference committee has been appointed to negotiate the differences. As of late Friday, June 3, the conference committee hadn’t met.

That doesn’t mean nothing is happening, however. Reports are that talks are still underway behind closed doors at possible compromises. Once the agreement is made, the conference committee will meet in public to ratify the compromise.

Actually, the House-passed and Senate-passed bills agree on many points, mainly a phase-out of the most parts of the tax credit program by 2019.

There are sharp disagreements on the points that remain, however, including the ability of larger North Slope producing companies to use tax credits to reduce their state production taxes to zero, and to “bank” the tax credits against future year tax payments.

For their part, the producers argue that fears of a “tidal wave” of unused tax credits wiping out future state tax payments are overblown.

That’s mainly because those claims are based on estimates of continued high spending and capital investment by industry, which isn’t happening under current low oil prices.

If the spending is lower the loss is reduced, and therefore the tax credit liability for the state. Also, to the extent oil prices do edge up, up from a low of about $26 per barrel in January to about $48, the loss is reduced, and likewise the tax credit liability.

Legislators are extremely sensitive to the oil tax credit issue because they fear constituents’ reaction to the state paying hundreds of millions of dollars in tax credits to oil and gas companies while also cutting the state budget and passing legislation that reduces the annual citizen Permanent Fund Dividend, one of the effects of HB 245 and SB 128, the Fund restructuring measures.

Those bills (one or the other would be enacted) would cut the dividend to about $1,000 for the next three years. Otherwise it would be over $2,000 per PFD this year and at similar amounts over the next few years.

At $1.4 billion estimated to FY 2017 the PFD payout would be the largest single program expenditure of state government, eclipsing state support for schools and the state’s share of Medicaid, the health-care program for lower-income Alaskans.

If the dividend is reduced through passage of the Permanent Fund earnings bill it would reduce the cost of the PFDs to about $700 million, resulting in an additional $700 million made available to the state general fund.

Meanwhile, other bills are also pending in the special session, such as the proposed increases in mining, fish, fuel and other taxes and a proposed reenactment of a state personal income tax.

Alaska’s prior personal income tax was repealed in 1981, after large oil revenues began flowing into the state treasury.

As the special session started the tax bills were combined into a single bill but Walker subsequently broke that apart so that the tax bills are now separate.

The mining tax increase is in HB 4005; fisheries tax increases are in HB 4006, and the fuel tax increase is in HB 4003. The same bills are in the Senate in separate measures and bill numbers.

A big complication for the extended session is a large celebration in Juneau planned by Sealaska Corp., the regional Alaska Native corporation for Southeast Alaska. Hotel rooms have been booked months in advance for June 8 through 11 for the event. The result will be a lot of legislators being kicked out of hotel rooms and a possible move to Anchorage to continue the session.

06/03/2016 - 1:29pm