Gov. Bill Walker / Commentary

Defending the PFD reduction as painful but prudent

Alaskans will soon receive our annual dividend checks. This year’s $1,022 check for every qualified resident will help Alaska families with things like winter fuel, food and clothes, holiday gifts, and saving for college. These checks will boost local businesses and increase local tax revenues. At the same time, I am keenly aware that many Alaskans are disappointed — and some are angry — about the size of this year’s dividend. While the average dividend since the inception of the program has been $1,150, many were counting on a larger amount this year. Indeed, this year’s checks would have been $2,052 without my vetoes. How did we get here? Why did I veto roughly half the dividend? The answer requires some context.  When I filed for office, state unrestricted general fund revenues were $7.5 billion. This year, they’re $1.2 billion. That’s an 83 percent drop. Please consider that for a moment. Imagine your family’s income fell more than 80 percent. Or that your business lost 80 percent of its revenue. You would probably start spending less. We have done that. Over the past four years, unrestricted general fund spending has dropped 44 percent — nearly in half. That’s according to the Legislature’s nonpartisan budget analyst David Teal. The budget is now down to $4.4 billion. That’s below the spending level called for by the Alaska State Chamber of Commerce and others calling for big spending cuts. And we still have a massive deficit. We could close every school and every prison, and we still wouldn’t have enough money to pay for state services. We simply can’t cut our way down to a $1.2 billion budget. I come from a family of homebuilders. I’ve never built anything without a plan. And we can’t build Alaska back to prosperity without a plan. In December I proposed a plan to balance the budget in a sustainable way. The plan called for a combination of budget cuts — including cuts to oil tax credits — along with modest tax increases and sustainable use of permanent fund earnings. The idea was balance. We can’t do it with cuts alone. We can’t do it with taxes alone. For example, it would take a statewide sales tax of 19 percent to raise enough revenue to balance the budget. That’s a nonstarter. And I am not willing to balance the budget using permanent fund earnings alone. That would jeopardize our dividends and the fund itself. Unfortunately, lawmakers failed to pass my plan or any other, leaving a nearly $4 billion budget gap. In the past four years we’ve drawn down our savings from $16.3 billion to an expected $3.6 billion at the end of this fiscal year. We’re burning through our savings at an alarming rate. I therefore took action to extend the life of our fast-shrinking savings. In June I vetoed $1.3 billion, including $430 million in oil tax credits. My vetoes also included roughly half of the money for this year’s permanent fund dividends. The vetoed dividend money is not being spent. It remains in the permanent fund earnings reserve, prolonging the state’s ability to pay dividends in the future. I labored long and hard over the decision. It was by far the most difficult decision I have made to date as Governor. However, it is clear we can’t continue to use the current dividend formula. In the past few years, revenues have plummeted while Permanent Fund investment earnings have grown. The current dividend formula would have us spending more on dividends than any other state service — including education. It’s not a sustainable path. If we do nothing, the permanent fund earnings reserve will likely be depleted within four years. Then dividends will be zero. I don’t want that to happen. My commitment to Alaska and Alaskans has never wavered. I believe we must find a balance between the wants of today and the needs of tomorrow. If we don’t make changes, we’re on a course to economic disaster. It’s a 100 percent preventable disaster, and I will do everything I can to prevent it.  Gov. Bill Walker, an independent, is the eleventh governor of the State of Alaska.

Budget challenge makes it time to put our wealth to work

By now, most of you know we have a budget challenge: Over the past two years, Alaska’s oil revenue has plummeted by 88 percent, mainly due to a sharp drop in oil prices. We’ve cut the budget from $8 billion in 2012 to $4.8 billion. Despite these reductions, our deficit amounts to more than half our annual budget. If we do nothing, we’re on a course to drain the constitutional budget reserve within two years — and the permanent fund earnings reserve within another two years. Dividends would likely end within four years, and we’ll be left with no source of funding for public services like troopers, teachers, and transportation. Here’s the good news: We don’t have a wealth problem, we have a cash-flow problem. And we have a plan. When oil started flowing through the trans-Alaska pipeline, the late Governor Jay Hammond and others recognized that oil wouldn’t sustain us forever. They created the Alaska Permanent Fund as a means to turn a temporary oil boon into a permanent income generator. Gov. (Jay) Hammond said, “I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity.” And he succeeded. We’ve reached a crossover point where our savings earn more income than our oil. It’s time to put our wealth to work. One of the problems that has plagued Alaska is our dependence on a volatile revenue source. We feast when oil revenue goes up, and it’s famine time when oil goes down. We need to get off the boom-and-bust cycle — we need to put government on an allowance, provide stability for our economy, and give investors confidence in our future. That’s what my proposal aims to do. A key piece of my plan is the Alaska Permanent Fund Protection Act. Instead of putting oil revenue into the general fund, the legislation puts most oil revenue in the Alaska Permanent Fund, which is big enough to absorb the revenue volatility. A set portion of the earnings would be used each year to support government services. That amount would go up (or down) with inflation – rather than with the price of oil. But first, half of all royalty revenue would be set aside for distribution to Alaskans as dividends. The first year, my bill provides a fixed dividend of $1,000. Future dividends are expected to be around $1,000 based on current projections. If and when new resource development comes on line, dividends will increase. The Alaska Permanent Fund Protection Act reduces the need for taxes. It does not touch the principal of the fund. Rather, my bill diverts more income to the fund, and sets up stable and sustainable use of earnings. This plan makes the Permanent Fund permanent. This gets us most of the way toward closing the budget gap. I am proposing other measures to get us the rest of the way there: oil tax credit reform, modest broad-based taxes, and other targeted tax increases. All who benefit from our great state — including nonresident workers — are part of the solution. The other key part of our plan is continuing to bring down state spending. On top of $900 million in cuts last year, we’re proposing more than $100 million in reductions in the coming year. We’ve instituted statewide travel and hiring restrictions. We’re establishing shared services agreements to reduce government overhead. We’re consolidating divisions. We’re doing away with some programs. This is just the beginning of a long-term effort to reduce the size of government without harming Alaskans or our economy. The question we’ve asked over and over as we’ve crafted this plan is, “Is it fair? Is it balanced?” We can and no doubt will debate what’s fair and what’s balanced. I welcome that debate. This plan is written in pencil, not pen. The only truly unacceptable course is to do nothing. Our credit rating was recently downgraded, and credit agencies have warned that we must take action this year to close the gap between our spending and revenues to avoid further downgrades. Lower credit ratings mean higher costs of borrowing for critical projects, and can have a chilling effect on investment. Ultimately, a balanced budget is just a means to an end. Alaskans have dreams and goals. Most of us want to live in a community that feels safe and healthy, where our children can get a good education, where there are jobs and opportunities – where our families can thrive. It’s hard to do that when the budget is so off-kilter and uncertainty looms large. Let’s roll up our sleeves and pull together to solve our budget challenge so we can move on to the goals and visions we carry for ourselves, for our families, and for our state.

Walker thanks Legislature for pulling together to advance a gasline

This was an historic week for Alaska. Thanks to our state legislators, we took a significant step toward controlling our own destiny. The Legislature held about two weeks of hearings to examine my proposal to buy out TransCanada’s interest, then almost unanimously approved my request to exercise our option to take over Alaska’s share of the gas pipeline project. This is not just a financial or contractual arrangement. It’s so much more. For the first time in a long time, Alaska is stepping up and taking out the middleman between us and our future. Under a prior agreement, TransCanada held the State’s ownership interest in two components of the Alaska Liquefied Natural Gas (AK LNG) Project — the gas treatment plant on the North Slope and the gas pipeline itself. While TransCanada has been a valuable partner in the AK LNG project, taking over the company’s interest gives Alaskans greater control over our share of the gasline project. It ensures that we maximize the economic return on the production of our natural gas resources. To successfully build a gas pipeline transport system and market our gas, we must pull together as a team. The next step is to ensure North Slope gas is available for a gasline project. While some of our AK LNG partners are developing multiple LNG projects around the world, we have just this one. The united front shown by the Legislature’s approval of the TransCanada buyout goes a long way toward getting us a pipeline project that secures our economic future and benefits all Alaskans. The benefits of an LNG pipeline system include short-term construction jobs; long-term careers running the pipeline and developing oil and gas reserves; opportunities to help meet the state’s energy needs; and a long-term revenue source for public infrastructure and services. Long before construction begins, this project will jumpstart Alaska’s economy. It will create thousands of jobs. Billions of dollars will be spent and circulated throughout the state. Every project dollar has a multiplier effect—supporting local businesses, retailers and contractors who in turn support other businesses. To ensure those jobs go to Alaskans, we have already begun training local workers in preparation for the type of work that will come with the pipeline. As of 2014, more than 1,600 Alaskans have received training in pipeline construction and maintenance. Once the pipeline is built, we will see hundreds of long-term career opportunities in which Alaskans can run and maintain the pipeline system. And we can expect even more jobs and state revenue from reinvigorated oil and gas exploration on the North Slope. This economic activity boosts local economies and helps provide a base for economic diversification. There will be at least five pipeline off-take points, which means the potential of lower energy costs for Alaskans as natural gas is made available to communities throughout the state. This will enable communities to replace wood and oil with natural gas, which will reduce air pollution and carbon emissions. Approval of the TransCanada buyout is another stepping stone toward making the gas pipeline a reality. Standing united together, we can do this. I thank you, Alaska legislators, for pulling together to provide overwhelming support of this important project advancement.   

It’s time for Alaska to drive its destiny as an owner state

Earlier this week (Sept. 21), Lieutenant Governor Byron Mallott and I enlisted the help of seventh-grader Shania Sommer from Palmer to announce the amount of this year’s permanent fund check. We wanted one of our promising youth to be the face of the dividend to highlight the importance of ensuring a bright future for the next generations of Alaskans. It is with those young Alaskans in mind that I write this. When Alaska became a state, Congress mandated that the new state could not sell its resources in the ground. Whereas other states have the right to transfer land so private citizens can own and develop mineral wealth, Alaska cannot. The intent was for Alaska to retain ownership of resources, like oil and gas, to fund our government. Thus, Alaska became an “owner state.” With the discovery of hydrocarbons first in Cook Inlet, and later at Prudhoe Bay, Alaska developed a state government that is largely funded by oil revenues from state and federal lands. Traditionally, states have taxed oil and gas either under a property tax or a tax on production volume. Since Alaska chose to tax based on production, we exempted the value of the assets in the ground from taxation. Instead, we only levy a property tax on improvements, like wells and pipelines. Our current tax structure assumes leaseholders would diligently develop our resources. That has proven unwise. The problem is compounded by the fact that royalty payments by those companies are also based on production.  The consequence is Alaska does not receive income from undeveloped natural gas on the North Slope, and because the leaseholders do not pay taxes or royalty on gas in the ground, there are no penalties for not developing. When I became governor, I inherited a gasline negotiation process which began in June of 2014 under Senate Bill 138. While the technical work is progressing fine, very little has been accomplished on the necessary commercial agreements. That is because the process assumes all parties are equally motivated to build this gasline. Unfortunately, that is not the case. Each producer has its own internal corporate priorities designed to maximize stockholders’ rate of return against all other global possibilities. Therefore, the negotiations only progress at the pace of the most reluctant partner. I am doubtful this process, as structured, will ever result in a project moving forward on a timeline, and with conditions, acceptable to Alaskans. That is why I am taking a significant step to ensure Alaska finally is able to monetize our vast North Slope natural gas. One piece of the legislation I will submit to the Legislature for the special session this month will reinstitute a reserve tax on gas that is not developed. Gov. Jay Hammond signed a similar piece of legislation in 1975 in order for Alaska to receive much needed oil revenue prior to construction of the Trans-Alaska Pipeline. Those taxes were treated as a prepayment of taxes once oil began to flow. Similarly, with my legislation, the taxes would only be paid if the gas is not shipped. Gov. Wally Hickel famously told those who then held leases on the North Slope, “You drill or I will!” They drilled, and because of that, we have Prudhoe Bay today. We have waited for nearly 40 years to see our gas moved to Alaskans and the world market. There have been many gasline efforts to date, but none have been successful — largely due to reluctance from some producers to allow the gas they control to go to market and because there is no financial repercussion for keeping our gas in the ground. A gasline is estimated to return several billion dollars of revenue to the state every year. As Alaska grapples with a multi-billion dollar deficit, the project has gone from a wish-list item to a must-have. As we watch dozens of competing LNG projects being advanced in other parts of the world — many by the same companies we are working with today on AK LNG — Alaska must take steps now to ensure we finally receive revenue and affordable energy for Alaskans from our natural gas. Some will criticize this bold step. But I say it is long past time for Alaska to stand up, work closely with our partners in AK LNG, but never again have Alaska’s future determined by others. If a producer chooses to advance one of its competing LNG projects rather than Alaska’s, then so be it. However, that producer must not be allowed to prevent the gas the company controls in Alaska from being sold or shipped in our gasline. If the company does, then it will have to pay to keep the gas in the ground. Think of it as Alaska’s insurance policy for the future. If nobody withholds gas from a gasline, then the tax is never used. However, without it, Alaska runs the risk of never monetizing our natural gas resources and worse, never controlling our own destiny.  With the passage of a reserves tax, the probability of an Alaska gasline being constructed will be vastly improved. It is time Alaskans step forth, in the great Alaskan spirit of Govs. Hickel and Hammond, to act like the owner state we are. If we insist our resources be developed, and create fair economic consequences if they are not, we will be successful — but only if we have the political will and courage to do so. Gov. Walker issued a proclamation for special session to begin Oct. 24.

The time has come for Medicaid expansion

Earlier this week (July 14), I sent a letter to the Legislative Budget & Audit (LB&A) Committee, giving members the required 45-day notice of my intention to accept additional federal and Mental Health Trust Fund Authority funds to expand Medicaid. Before signing the letter, I met with the LB&A chair to explain my intentions. Alaska statute provides that the governor give 45 days’ notice to this committee before accepting money that has not been budgeted if the fund source is not state general funds. Procedurally, the governor notifies the LB&A committee of the funding opportunity. After 45 days, the governor may accept the money, regardless of LB&A action. Governors and legislatures in 29 states plus the District of Columbia have already made the common-sense decision to accept Medicaid expansion. Ten Republican governors have approved Medicaid expansion. Republican legislatures in five states have approved Medicaid expansion. Why? Because it helps their residents, their economies, and their budgets.  A recent report by the Robert Wood Johnson Foundation on eight Medicaid expansion states — Arkansas, Colorado, Kentucky, Michigan, New Mexico, Oregon, Washington and West Virginia — concluded those states will save a total of $1.8 billion by the end of 2015 as a result of accepting Medicaid expansion. I want to bring those same benefits to Alaska. If Alaska had accepted Medicaid expansion on Jan. 1, 2014, we would already have received an estimated $220 million in additional federal revenue. If we act now, we can expect to bring in $1 billion in new federal health care dollars over the next six years, and save more than $100 million in state general funds. Medicaid expansion also means up to 4,000 new jobs. In the first year that we expand Medicaid, the state will save $6.6 million. This will provide a much-needed boost to our economy and relief to our budget. We can’t afford not to expand Medicaid. This is an opportunity to help our friends and neighbors who may be forced to choose between life-saving medical treatment and bankruptcy. This is a chance to do something for those who cannot work because they’re sick — and can’t afford to see a doctor because they can’t work. By helping people escape these terrible binds, this is an opportunity to strengthen the fabric of our communities. Some argue that taking federal money is somehow wrong. Alaska businesses and families pay federal taxes to support many federal programs. These are Alaskans’ tax dollars, and I’m determined to bring it back to Alaska for the good of our people and our economy. Alaska hospitals absorb more than $100 million in uncompensated care each year. Those costs get spread to the rest of us — and threaten the viability of our community hospitals. Based on the experience in states that have expanded Medicaid, Alaska hospitals anticipate a reduction of $20 to $30 million in unpaid bills. Unfortunately, inaccurate information has been circulating about Medicaid expansion. Let’s correct the record. Medicaid is working. In the first three months of this year, Medicaid helped 4,065 Alaskans manage their diabetes; 284 Alaskans received life-saving dialysis services; 628 women had mammograms for early detection of breast cancer, and nearly 4,000 Alaskans received health services at home, keeping them out of more expensive institutions. These services improve lives and save money. The payment system is working. When the new service went live under the previous administration, in October 2013, there were widespread problems. Very few claims were paid correctly. However, the system has improved tremendously since December 2014. Today, over 90 percent of the new claims processed are being paid accurately and on time. Reform is under way. Changes to the personal care attendant program, for example, are saving about $20 million annually. Through a care management program, we are reducing the number of Medicaid recipients over-using costly emergency room services. We anticipate $240 million in savings over the next six years as a result of initiatives to improve and streamline the program, and my administration is working with a consultant to identify further opportunities. It’s necessary for Alaskans. Some people have said low-income Alaskans can get health care at community health centers and similar facilities. That’s just not practical. These facilities offer only limited services — because without Medicaid, they lack reliable funding. Moreover, these facilities can’t provide specialized care such as cancer treatment or cardiology services. During the legislative session, we provided testimony in more than 30 hearings. We addressed every concern and answered every question. Alaskans across the state have cheered when I said I would accept the federal funds to expand Medicaid. Many approached me personally to share their struggle to access medical care. Over the past several months, I have received hundreds of emails of support; many with poignant personal stories of a loved one unable to receive care. We have received more than 150 resolutions of support for Medicaid expansion — from Petersburg to Barrow, chambers of commerce, church organizations, local governments, health care providers and the list goes on. A majority of Alaskans understand that Medicaid expansion makes sense for Alaska. I agree. It’s time.

Delaying tax credit payments reflects new fiscal reality

July marks the beginning of fiscal year 2016: a chance for a new beginning and a fresh start for addressing Alaska’s economic future. On June 29, I signed into law the budget bills passed by the Legislature. For fiscal year 2016, we will spend $1 billion less than we spent last year. This is a 19 percent overall reduction with an average 13.5 percent cut to executive branch agencies, and cuts of over 30 percent in the Department of Commerce and the governor’s office. Even with these reductions, we still have to draw $2.7 billion from savings to make up for state revenue losses caused by low oil prices. Writing a budget to meet our changing circumstances required a team effort. The budget I introduced to the Legislature in January reduced spending by approximately 8 percent. It included some painful cuts to education, along with other reductions across state government. As oil prices continued to drop, the Legislature wrestled with how to address falling revenues. In the end, they reduced the budget I submitted by an additional $250 million. We’ll be seeing still more cuts as my administration works to find $30 million to fund the contractually negotiated cost of living allowance increase for state workers. Alaskans are starting to feel the effects of these spending cuts. From Southeast communities that will see reduced ferry service this winter to reduced firefighting and search and rescue capacity in the Interior. You, a family member, or a neighbor may have been laid off recently. Public services are being cut back statewide. We’ve even had to reduce the number of state troopers. This is Alaska’s new reality. I was aware of this new reality when I made the decision to limit a $700 million appropriation to repurchase oil company tax credits to $500 million. Though the $200 million veto only defers our obligations, and does not change the state’s bottom line, it was clear to me that something needed to be done to ensure this issue is part of our discussion about Alaska’s fiscal situation. Under Alaska’s oil and gas production tax system, an oil and gas company may receive a credit for a portion of each dollar they spend exploring for or developing our oil and gas resources. The credit is used to reduce the company’s production tax liability to the state. The idea is that a company will have more of an incentive to invest in the state if their investments will result in a lower tax obligation. For small producers and explorers, the benefit from tax credits is limited because they do not produce enough to have a tax liability against which to apply the credit. To address this problem, the state established a program to repurchase credits issued to companies with little to no oil and gas production. Since 2007, the state has repurchased approximately $3 billion worth of tax credits with the amount of credits increasing rapidly over the past several years. Last year, we paid out $625 million to repurchase credits from new explorers and producers, with around $700 million expected to be applied for this year. The bulk of the repurchased credits are for operating losses with less than 20 percent going toward exploration. Money for the repurchase of credits comes from an oil and gas tax credit fund. A formula establishes how much money is appropriated to the fund each year. This year, that amount would be $91 million, far less than the $700 million estimated to be needed as well as the $500 million still in the budget. I reduced the amount to $500 million because that is sufficient to pay all of the tax credit applications currently in process. As in past years, the Legislature opted to appropriate an open-ended amount that would cover all repurchase requests. This open-ended purchase of oil and gas company tax credits was on a path to becoming the largest expenditure in future state budgets. If the projections hold and companies earn credits in excess of $500 million, the companies with pending credits will be the first ones reimbursed at the beginning of fiscal year 2017. Alternatively, some of those companies may choose to sell their credits to other companies with a tax liability. There are other tax credits under the current oil and gas production tax system that lower taxpayers’ obligations. Combined with the repurchase program, we anticipate credits to total nearly $1.1 billion this year. Unlike most other countries’ oil tax systems, Alaska does not have a pre-approval process or criteria for a company to take advantage of the tax credit incentive programs. With our new fiscal reality, we can no longer afford these extremely generous incentives. Something has to change. In recent discussions with oil and gas exploration company representatives in Alaska prior to making my decision on the reduction, I was pleased to find them respectful of the gravity of Alaska’s fiscal situation and the difficult spending reductions we are experiencing. I am committed to and have been meeting with each company individually to discuss their exploration plans for the coming year and to work together towards a mutually beneficial solution to the significant cost of the repurchase program. It is important to note that the affected oil companies are not alone in experiencing the impacts of our declining revenues. Every Alaskan is affected in one way or another. For a healthy economy, we must continue the conversation we started in Fairbanks last month. While my administration will continue to make budget reductions by looking for efficiencies and opportunities to streamline services, we must also talk about diversifying our revenue. We cannot hope and wait for oil prices to go back up. It is time we all come to the table to discuss our way forward financially in this great state. Please join us in this journey as together we maximize Alaska’s potential. Bill Walker is the governor of Alaska.
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