Kenai borough outlines budget impact of losing oil property taxes

  • The Kenai Peninsula Borough is opposing a plan in Gov. Michael J. Dunleavy’s budget that would repeal the ability of local governments to levy taxes on oil and gas infrastructure, such as this platform in Cook Inlet. (Photo/Andrew Jensen/AJOC)

Though the community of Nikiski on the Kenai Peninsula only has about 6,500 residents, its fire department boasts a $5 million budget. Most of that hinges on the fact that it’s the seat of the oil industry on the Kenai Peninsula.

The community has reaped the benefits of local property taxes levied on the oil and gas properties nearby to pay for services since the first oil boom in Cook Inlet in the 1960s.

That would change should the Legislature pass Senate Bill 57, Gov. Michael J. Dunleavy’s request to repeal municipalities’ ability to tax oil and gas infrastructure.

The Kenai Peninsula Borough would lose out on about $14.7 million, or about 11 percent of its annual revenue. Impacts would ripple all over the borough, according to Borough Mayor Charlie Pierce. Nikiski’s fire department would lose about $3 million of its budget; to recover those expenses, the property taxes there would have to be raised to about 17 mills, or $17 on every $1,000 of property value.

“You could see a Nikiski fire department with 17 mills to pay for the current level of services or a fire chief, an assistant fire chief and a bunch of volunteers,” he said. “…You cannot tax your way out of this.”

The Kenai Peninsula Borough Assembly passed a resolution requesting that the Legislature amend SB 57 to simply reduce municipalities’ tax authority on oil and gas properties from 20 mills to 15 mills rather than eliminate it entirely. SB 57 has not yet been scheduled for any hearings in the Legislature.

A second-class borough, the Kenai Peninsula is divided up into service areas, where property taxes are applied at different rates to pay for services like hospitals, emergency medical services and roads for its approximately 57,000 residents. Nikiski’s fire and emergency service area contains the oil platforms in the Inlet as well as Marathon’s refinery and the former Agrium plant, allowing it to collect taxes from that infrastructure and serving those platforms.

But cutting 11 percent its total revenue would mean cuts elsewhere in the borough as well, Pierce said. The road service area, which incorporates the entire borough, also draws funds from the oil and gas infrastructure and would take a hit. Pierce noted the cuts would likely mean staff cuts, reduced services and delayed construction projects.

While the Kenai Peninsula Borough is affected by many of the cuts, it’s not hit as hard by the oil and gas tax change as the North Slope Borough.

The borough is home to the lucrative Arctic oil and gas fields and expected to collect about $313.7 million in property taxes from the 17.99 mill levy it applied to them in 2018, according to the North Slope Borough’s budget.

The borough has to approve its draft budget by March 30, before it knows what the Legislature will do, so it’s planning for status quo at present.

If SB 57 passes in its current form, the borough’s property tax revenue will fall to about $14.3 million, said Fadil Limani, the deputy finance director for the North Slope Borough. Much of the borough’s 95,000 square miles of area is on federal land and many of the residents live on Native allotments, making them exempt from property tax. The borough’s obligation to the North Slope Borough School District alone is $15 million, Limani said.

“We’re facing extinction,” Limani said. “We won’t be able to survive if we don’t have the ability to tax … there’s nowhere else for us to tax.”

The North Slope Borough is a high-cost place, with its villages scattered far and wide with no roads to connect them. The borough provides a number of services that others in the state don’t, including its own police force, search-and-rescue and wildlife management departments.

The reductions in state services in Dunleavy’s budget and the cuts to its own revenue would send the villages back into a pre-modern lifestyle, Limani said. It would also limit the borough’s ability to issue bonds by damaging ratings; they likely wouldn’t be able to issue bonds at all, he said.

D.J. Fauske, the government and external affairs manager for the North Slope Borough, said Dunleavy’s office did not discuss its plans with the municipalities before introducing them on Feb. 13.

Instead of correcting the entire budget gap this year by cutting hard into the borough’s budget, he said the governor should take a slower approach and noted that the Permanent Fund Dividend paybacks included in the budget consume an enormous chunk of the state’s revenue.

“They know the damage this will do to bond ratings,” Fauske said. “He’s not making any cuts. Where are some of the cuts (to operations) … if we don’t have a ferry system, why do we have state offices open in Southeast?”

Municipalities all over the state have objected that the governor’s budget cuts at the state level but, instead of entirely eliminating expenses, shifts them to municipalities to provide.

For those municipalities, that may mean local tax hikes to maintain the current levels of service. But for others, there is no way to make up that revenue.

The Alaska Municipal League identified a number of items of concern in its response to Dunleavy’s budget, with some as cost-shifts and others as state preemption of tax collection. SB 57 is an example of state preemption, as is the proposal to stop sharing the fisheries business tax and fisheries landing tax, said Nils Andreassen, the executive director of the Alaska Municipal League.

Dunleavy’s budget also proposes cutting the school debt reimbursement program and not funding the entire formula for public schools. Both of those are cost-shifts, Andreassen said, which the boroughs will have a hard time making up.

The cuts to Medicaid are also likely to hit locally owned hospitals hard, especially in rural areas where Medicaid patients make up a higher percentage of the payer base.

Not every municipality has the same types of taxes available, and some also have voter-imposed taxed on rates. The Kenai Peninsula Borough, for example, has a voter-imposed cap of $500 on taxable sales.

Such limits reduce municipalities’ abilities to find revenue elsewhere, and many already struggle with deficits, Andreassen said. Some costs are fixed, such as municipalities’ participation in the Public Employee Retirement System and having to fund schools between the minimum and maximum funding allowed.

“There’s already a struggle at the municipal level to have stable budgets,” he said. “I think we looked at (fiscal year 2017) budgets and roughly a third of municipalities budgeted for more expenses than revenues.”

There’s no precedent in the state for boroughs ceasing operations, but cities have, Andreassen said. If the state preempts collection of certain taxes, the boroughs and cities will have to find other ways to make up the revenue, which may mean new taxes on industries, he said.

“There’s not a precedent, but boroughs are statutorily required to tax, and if the state takes away one tax, it only means they have to find a different tax,” he said.

“It means that industries and residents in those regions will have a different burden based on that. If you look at the petroleum tax and fisheries tax being preempted by the state, you can imagine that those industries would have other taxes levied on them.”

The governor intends the impact on municipalities to be a conversation, one which began on Feb. 14, said Matt Shuckerow, press secretary for Dunleavy.

“Where we are as a state is that we have spent $14 billion (from savings) in four years,” Shuckerow said.

“We can no longer spend money that we don’t have, and we cannot spend on all programs … Municipalities have the option to do what the governor has done and find efficiencies and programs and find programs that may be no longer best serving their residents.”

He said the governor has already talked with a number of municipalities and plans to continue to do so, including with the North Slope Borough. The hope with SB 57 is to find a fair and equitable distribution of the state’s wealth with the oil and gas property tax, he said. Dunleavy’s message is that the topic is “open for discussion,” he said.

The budget was built on the principle of reducing state spending to match revenues without implementing any new taxes, and the governor is “fairly serious” about getting it done this year, Shuckerow said.

“Here we are (six years after oil prices began to decline) and we’ve made very little changes to the amount of that we spend,” he said. “We’re up against the fiscal cliff, and we have to make a choice. The governor in the priorities of his campaign (said) that we have to put Alaska on a permanent fiscal plan. There’s no question Alaskans are now engaged. We hope that they continue to engage.”

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Elizabeth Earl can be reached at [email protected].

Updated: 
03/13/2019 - 9:54am

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