Gov’s budget aimed at economic recovery
Gov. Bill Walker’s budget proposal released Dec. 15 focuses on paying down growing state obligations and bolstering Alaska’s economy, actions which administration officials say should in the long run help address the ongoing budget deficits.
Overall spending from Unrestricted General Funds, known as UGF, in the governor’s fiscal year 2019 budget is $4.7 billion, down 1.7 percent from 2018. State agency spending is up about 1 percent due to $34 million in response to higher crime rates. That money will go to additional public safety spending to pay for more prosecutors, rural State Trooper positions and growth in drug treatment programs.
An additional $27.2 million is needed to cover increased Medicaid formula costs.
Walker said the two years of economic recession have pushed more out-of-work individuals to utilize the safety net and is a large contributor to the cost growth.
The $4.7 billion total also includes an increase of $82 million for state retirement liabilities and flat funding for K-12 education and the University of Alaska.
Accompanying legislative proposals start with bonding to end the state’s oil and gas tax credit obligation, which administration officials estimate will require $900 million to fully pay off over the next couple years.
In July, the Legislature passed a bill ending the refundable tax credits for small companies working in Cook Inlet and on the North Slope, but after three years of the state not paying the credits as they came due — first via governor vetoes and then a minimum payment by the Legislature — the sizable debt still needs to be paid.
Revenue Commissioner Sheldon Fisher said the state would sell subject to appropriation bonds to fund the payments and offer the credits at a discount of up to 10 percent, reflecting the decline in net present value companies would absorb if the state continued to pay the statutory minimum credit amount each year and prolong the payments for many years. Department officials expect the state can borrow the money for less than 6 percent interest over 10 years.
Fisher said his agency, in coordination with the Department of Natural Resources, could also work to lower the discount rate for companies with production through negotiating a slightly higher royalty rate on their leases. It’s a proposal he believes will be well-received after discussions with industry representatives.
“We believe the discount we will offer these companies will be significantly less than their cost of capital,” Fisher said.
While the state has technically followed the tax credit statutes by appropriating less than $100 million in the past couple years, the break in precedent from paying them in full each year has hurt Alaska’s credibility in the oil and finance industries, officials acknowledge. Lacking the payments has also kept small companies from leveraging the credit funds for larger private investments to pursue work in the state.
Another bill, dubbed the Alaska Economic Recovery Act, would allocate $800 million over three years from the governor’s 1.5 percent payroll tax that will sunset in 2021 to fund state deferred maintenance projects. The administration estimates the state has roughly $1.8 billion worth of backlogged projects from school and university building repairs to cleaning up contaminated sites and road projects.
With local and federal matches for some other projects, including funding for the much-needed Port of Anchorage rehabilitation, the package would be a $1.4 billion infusion to the state’s construction industry.
“We have the highest unemployment, I believe, in the nation and we need to put Alaskans back to work. We need to fix that part of our economy,” Walker said in a press briefing on the budget.
Alaska’s unemployment rate was 7.2 percent in October, compared to 4.1 percent nationally.
Walker added that the relatively small size of the more than 60 projects planned to receive funding means small, local contractors across the state will get most of the work.
The tax, introduced in the October special session, would sunset at the end of 2021 after the three-year construction program.
Walker first proposed bonding for capital projects every two years as part of his overall plan to balance the budget two years ago. However, with the fiscal situation much the same — and the state continuing to run annual deficits of more than $2.5 billion — the state’s ability to take on additional debt remains limited, according to the administration.
Senate Majority Republicans have blocked attempts by the governor and the Democrat-led House Majority to pass an income tax the past two years, contending government spending needs to be cut further before adding taxes to a strained economy.
Walker said he believes the sunset clause and committing the revenue to growing one of the industries hit hardest by the recession should change Republicans’ thinking on the tax.
“They thought it would grow government; it doesn’t. They thought it would go on forever; it doesn’t,” he commented.
House Finance co-chair Rep. Paul Seaton, R-Homer, commended the governor for holding education spending steady in a caucus release and Senate Minority Leader Berta Gardner similarly praised the plan to add public safety resources.
However, Gardner said she is skeptical that Alaskans will be comfortable with a tax to fund infrastructure projects while at the same time prioritizing the oil tax credit payments.
The rest of the capital budget is much as it has been for three years now; “very, very austere” is how Office of Management and Budget Director Pat Pitney described it.
At about $150 million, the basic capital budget funds the state’s 10 percent match to more than $1 billion of federal transportation program funds and supplies several small state energy efficiency and housing programs.
The governor’s budget appropriates $818 million for Permanent Fund Dividends — enough for about $1,200 per Alaskan. The PFD total is 30 percent of the 5.25 percent of market value, or POMV, draw from the fund that is in Senate Bill 26, the Fund reform bill that passed the House and Senate last spring and awaits conference committee reconciliation.
Administration officials said the 30 percent for dividends is simply a compromise to the 25 percent in the Senate version of the bill and 33 percent in the House’s SB 26. The remainder of the roughly $2.7 billion planned draw from the Earnings Reserve Account of the $61 billion Permanent Fund would go towards closing the deficit.
In the event SB 26 is not reconciled and dies in the Legislature, the governor’s budget includes the POMV formula language to draw from the Permanent Fund based on the bill. Either way, the state will likely pull about $800 million from the dwindling Constitutional Budget Reserve to close the rest of the expected fiscal 2019 budget gap.
“The wait-and-see program that some in the Legislature have adopted has cost us $14 billion,” Walker said, with most of that savings amount coming from the CBR over the past four years.
The administration, after a request from the Alaska Permanent Fund Board of Trustees, also included a nearly $2.4 billion inflation-proofing transfer from the Earnings Reserve to the corpus of the Fund. The Legislature has not inflation-proofed the corpus for three years, which APFC CEO Angela Rodell told the Journal is a growing concern for the corporation.
Budget process reforms
Walker also said he will submit legislation to move the state to a biennial budgeting format as well as stop legislator pay and per diem if budgets are not passed in the standard 90-day special session.
For three years the Legislature has blown past the 90-day regular session and the 120-day constitutional session limit without passing a budget.
Similarly, the proposal would cut the governor’s pay if the budget plan is not released by the Dec. 15 deadline; however, that is rarely an issue.
“There’s no question the process is broken that we use in Alaska for budgeting,” Walker emphasized. “It’s just a terrible way to run a state.”
Legislators have generally been open to the idea of a two-year budget cycle, in which they would focus on the budget in the first year of a two-year Legislature and, after making true-ups, focus on policy issues in year two. The large budget deficits of late have made seemingly every appropriation contentious in recent years, dragging out budget debates and tainting negotiations on other issues as well.
The budget delays have forced state agencies to issue “pink slips” notifying workers of a potential government shutdown and associated layoffs. It has also caused confusion among state ferry officials, commercial fishery managers and others in industries that have significant state oversight as to what exactly would happen to private businesses in the event of a government shutdown.
While he has declined to comment on many legislative proposals and preferred to push legislation from behind the scenes during session, Walker said he would aggressively pursue the pay and per diem restriction this year.
He called it “silliness” to use the budget as a negotiating tool with respect to other issues at hand during the legislative session.
“There has to be consequences for what you do and you don’t do,” Walker said. “(Delaying the budget) is expensive, it’s demoralizing and it gives us another sign of instability as a state.”
Elwood Brehmer can be reached at [email protected].