Parnell cuts budget as prices drop


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Gov. Sean Parnell revealed his $12.4 billion 2015 fiscal year state budget plan Dec. 12, which includes a $3 billion pension payment and significant cuts to spending.

The proposal calls for $5.6 billion in state general fund appropriations for fiscal year 2015, which begins July 1, 2014. That’s down from $6.9 billion in fiscal year 2014 (which ends next June 30) and about $8 billion in fiscal year 2013 (which ended this past June 30).

“I have consistently led with the principle that the state should live within its means, just like we all have to and should in our own households,” Parnell said in his address to the Anchorage Chamber of Commerce.

He said a decline in forecasted Alaska North Slope oil prices for the upcoming fiscal year — from $109 per barrel in spring to $105 per barrel in a Department of Revenue report issued Dec. 4 — anticipates a $1.4 billion decline in revenue, which weighs heavily on budget numbers.

“The state builds its budget base on forecasted oil prices,” Parnell said.  Oil revenues account for more than 90 percent of all unrestricted state revenue.

In legislators’ reactions to the governor’s proposal, Republicans were supportive and Democrats critical.

Sen. Kevin Meyer, R-Anchorage, co-chair of the Senate Finance Committee, said he was pleased at the direction the governor is going on the operating budget.

“With oil production down, our revenue is down and our corresponding spending must do the same,” Meyer said.

Sen. Pete Kelly, R-Fairbanks, the other co-chair of the Finance Committee, voiced similar feelings:

“This is the second year of budget constraints and I appreciate the Governor’s and the Legislature’s willingness to cut back. State government has been eating a pretty high-fat diet the last 10 years and its pants are getting pretty tight. We have no choice to but to put it on a diet,” Kelly said.

House Democratic Minority Leader Rep. Beth Kerttula, D-Juneau, had a different view: “With a two billion revenue decline, we knew the budget would be tight this year. It would be worse if we didn’t have the savings we’ve accumulated, and as long as we are no longer getting a fair share for our oil, it’ll be harder to get out of this hole in the future. It doesn’t have to be this way.”

Kerttula was referring to the Legislature’s passage of Senate Bill 21 last April, which revamped the state’s oil production tax. Democrats blamed the reduction in revenues on the oil tax change, but Parnell said SB 21 will have no effect on revenues next year.

Rep. Les Gara, D-Anch., a member of the House Finance Committee, was more specific in his criticism.

“A sustainable budget is necessary, but Alaskans should know that more proposed education layoffs, the failure to implement the state’s own child abuse prevention study, and the cuts to the renewable energy fund which will hamper our ability to lower the cost of energy, were all avoidable,” Gara said.

Parnell’s 10-year budget plan calls for general fund spending to be capped at $5.6 billion per year through fiscal 2024, with projected budget shortfalls ranging between $464 million and nearly $1.6 billion.

Under the governor’s plan to shore up its obligation to retired workers, a $3 billion lump-sum transfer from the state’s Constitutional Budget Reserve, which currently has about $12 billion, to the state retirement systems would stabilize growing pension costs in future operating budgets, he said.

The state is paying $629 million this fiscal year for employee retirement costs and is projected to pay $703 million next year, according to the Office of Management and Budget. With the proposed $3 billion payment in fiscal year 2015, future payments would hold steady at $500 million for the next 20 years, Parnell said. He likened the current retirement payment system to an adjustable rate mortgage with a continuously increasing rate.

Parnell said the Legislature took a step towards managing its unfunded pension liabilities in 2006 when it closed defined benefit plans and switched to defined contribution plans to new employees, but he said further action needs to be taken.

“We still owe about $12 billion for these earlier pension systems,” he said. “It’s a debt we lawfully owe for past contracts and it’s currently unfunded.”

OMB projects the state would need to pay more than $1 billion per year towards its pension liabilities by 2025 to keep the Public Employees’ Retirement and Teachers’ Retirement systems funded. By paying $3 billion down now on pensions, the state would save more than $4 billion by 2030 at its current contribution rate, according to OMB figures.

The state’s retirement accounts would be fully funded by 2037 under his plan, Parnell said.

Including the $3 billion pension payment, Parnell’s overall operating budget grew 24 percent from the final fiscal year 2014 budget, to $11.4 billion.

However, the unrestricted general fund portion of the proposed operating budget shrunk 13 percent year-over-year, from $5.9 billion to $5.1 billion. Already designated general funds and federal contributions make up the rest of the $12.4 billion proposal.

The governor’s capital budget saw a bigger cut — 66 percent to its unrestricted general fund appropriations and nearly 32 percent overall. Parnell proposed $429.6 million in general fund appropriations for fiscal year 2015, down $846 million from the current capital budget. His total capital proposal is for $1.6 billion, with nearly $1.1 billion in federal funds that go primarily towards highway and airport maintenance.

As is common practice for governors, Parnell said his budget is a guideline for legislators and leaves room for them to add some appropriations where they see fit.

He said overall education spending stayed flat in his budget and he looks to put $5 million towards the Alaska Digital Teaching Initiative to help students in rural villages participate in classes held in other areas of the state through interactive software.

“We’re going to continue focusing on education as a priority,” Parnell said in his budget speech.

Parnell appropriated $10 million to the Alaska Energy Authority’s study work on the Susitna-Watana Hydro project and $20 million for AEA’s Renewable Energy Fund. He put $19.5 million towards his ongoing Roads to Resources initiative and $10 million towards chinook salmon research — part of a five year, $30 million commitment to fisheries study.

The 32-mile Port MacKenzie rail extension project from Houston to the port got $5 million from the governor. Matanuska-Susitna Borough officials have said the $270 million-plus project will need approximately $100 million to finish on schedule in 2016.

The under-construction engineering buildings at the state universities in Fairbanks and Anchorage received $10 million each. In November, the board of regents requested a total of  $78.9 million to complete both projects.

Absent from Parnell’s budget were appropriations for a proposed $245 million combined heat and power plant upgrade at the University of Alaska Fairbanks and funding for Port of Anchorage construction.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Reader Comments:
Dec 28, 2013 08:43 pm
 Posted by  Ray Metcalfe

Most of Alaska's major news outlets won't tell you how profitable Alaska's oil has been for Alaska's three major oil producers for fear of losing advertising revenue from BP and ConocoPhillips.
1. FACT: BP makes less than $2 net profit for producing an Iraqi barrel of oil. Bloomberg Business & Financial News, April 28, 2009. FACT: Under ACES, BP was making a net profit of more than $28 per barrel from Alaska's oil. Petroleum News 3/14/2010 (Alaska profits divided by Alaska production.) ConocoPhillips' annual reports demonstrated $28 to $30 per barrel net profit from Alaskan oil under ACES; many times their international average earnings per barrel.

2. FACT: Gaffney and Cline, Alaska's primary oil consulting company, told Alaska's legislators BP’s return on North Slope investment approximated 123% under ACES. BP's Chief FACT: Executive Officer Tony Hayward, on July 28, 2009, told Bloomberg Financial News, its $2 per barrel return on Iraqi investments was "compatible with returns we earn across the rest of our portfolio." According to Bloomberg Financial News, BP worldwide portfolio earns an 18% annual average return on capital.

3. FACT: BP brags Parnell's two billion dollar tax cut will create 200 new Slope jobs. Newsminer 10/3/13. FACT: Two billion dollars is enough for the state to put 20,000 Alaskan residents to work at $100,000 per year.

4. FACT: Frank Murkowski brags Parnell's tax cuts are nearly identical to those he pushed through the Legislature in 2006. Anchorage Daily News 4/11/2013. FACT: Six legislators were caught and most went to jail for taking bribes in exchange for their yes vote on Murkowski's 2006 tax giveaway plan.

5. Fact: Prudhoe and Kuparuk are experiencing the same irreversible declines that all aging oilfields experience. When legislators pressed for answers, not one Prudhoe or Kuparuk producer was willing to support Parnell's claim that production would increase if taxes were cut.

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