Budget talks underway, but no fiscal plan

The end of the legislative session is shaping up to be fairly anticlimactic as House and Senate leaders have begun negotiating the finer points of the $4.5 billion operating budget this week. 

The budget conference committee began meeting April 14, and while the 90th day of the session quietly came and went April 16, there is a general feeling the Legislature will wrap up soon. 

It is a significant departure from the political theatrics that dominated much of the last three springs when debates over the size of the budget and how to fund it kept legislators in session well into May and June. 

Republican Senate President Pete Kelly said, particularly last year, “it was a full-on war between the House and the Senate” as battles played out over the age-old issues of taxes and the appropriate amount of government spending. 

This year, whether legislators have truly reached agreement on the budget or simply wish to close out the session so they can begin campaigning and fundraising, the House and Senate budgets both came in with similar overall totals in the range of $4.5 billion in unrestricted general funds. 

Both versions of the budget also include language directing the Alaska Permanent Fund Corp. to pull $2.7 billion from the Earnings Reserve Account of the $65 billion Permanent Fund. Of that, just more than $1 billion would go to pay Permanent Fund dividends of $1,600 per Alaskan with the remaining $1.7 billion going to pay down the nearly $2.5 billion budget deficit. 

The $2.7 billion Earnings Reserve draw is based on a 5.25 percent of market value, or POMV, draw — on the five-year average value of the Fund — included in the budget. It would leave the state with a fiscal year 2019 budget deficit in the $500 million range, with the exact deficit dependent on oil price and production figures and the size of the capital budget, which still has to be passed. 

The agreement over the dividend, Earnings Reserve draw and overall size of the budget would seem to be progress in the three-year debate over long-term funding of state government, but the one-off POMV calculation just continues to leave the issue unresolved after this year. 

Additionally, the Senate’s concession to not push for further substantial budget cuts, combined with the Democrat-led House Majority coalition backing off on its insistence for an income tax perpetuates the structural budget deficit — albeit at a much lower level. 

Legislators are still debating a few items, however. 

The main one is K-12 education funding. Early in the session it was indicated both sides agreed to keep the key base student allocation flat to avoid the perennially contentious topic. 

Despite that, House Bill 339, a proposal by Anchorage Democrat Rep. Les Gara, to increase the BSA by $100 to $6,030 per student, gained momentum in the second half of the session and was passed by the House April 14. A $100 BSA increase would add approximately $25 million to the budget. 

Gov. Bill Walker supported the move in a formal statement from his office. 

House leaders contend several years of a stagnant BSA has amounted to a collective $70 million cut to school districts since 2014 as inflation has eroded the present value of the BSA. 

Senate Republicans have countered with a revised plan to forward-fund education in fiscal year 2020 that would flat-fund the BSA in 2019 but increase it by $117 per pupil, or $30 million in the 2020 budget. 

But the Senate’s BSA increase is tied to passage of Senate Bill 26, which would establish a formal POMV draw on the Permanent Fund. 

Permanent Fund Corp. leaders have stressed they need to have the structure of an Earnings Reserve draw written in law to provide certainty in managing the Fund and give them an idea as to how much of the Fund they need to keep liquid for government appropriation in any given year. 

That position has been championed by the administration and supported by most in the Legislature, but the political realities of the situation have kept it from happening. 

How the state will deal with its $800 million-plus oil and gas tax credit obligation is still unresolved as well. Both the House and Senate budgets include appropriations to the Tax Credit Fund, although the House is at $49 million and the Senate would put $184 million into the Fund. 

The difference is over varying interpretations of the statutory formula used to determine the minimum tax credit appropriation. The House amount is based on a calculation that uses the amount of production taxes the state is actually expected to receive in 2019, while the Senate’s calculation is based on the wholesale production tax amount before deductible credits are applied. 

The administration is backing the Senate, as its calculation is the formula that has been used the past two years. Breaking from that precedent to pay less would further damage the state’s financial reputation that has already been tarnished on multiple levels during the period of big budget deficits. 

Legislators could also avoid the tax credit appropriation by passing the administration’s proposal to sell bonds to pay off the tax credit obligation in one big payment. 

Companies holding credits would have to accept a discount of up to 10 percent on the face value of the certificates — a way to prevent the state from spending more to borrow for the cash — but industry representatives and company leaders favor the plan over waiting years to pay off the obligation with small annual appropriations. 

The bonding plan also has general bipartisan support in the Legislature and unamended mirroring versions of the legislation have passed out of the Resource committees in each body, yet the Finance committees have yet to take up the bills. The tax credit bonds could still be a part of a final budget deal. 

The House Finance and Resource committees are also continue to discuss oil tax increases, with Finance co-chair Rep. Paul Seaton, R-Homer, pushing a major production tax overhaul similar to what the House passed last year. 

The proposal for a base 25 percent production tax with income-tax like brackets as oil prices increase would raise between $600 million and $700 million in additional revenue per year. 

The bill in the Resources Committee, sponsored by committee co-chair Rep. Geran Tarr, D-Anchorage, would leave the existing base production tax structure in place but raise the gross minimum tax floor from 4 percent up to 7 percent in tiers that would gradually raise the minimum tax based on oil prices. 

That legislation, House Bill 288, would raise up to about $220 million per year, but that amount would fade if oil prices drastically rise, which would cut the minimum tax out of production tax calculations. 

House Majority leaders have said they are considering an oil tax increase in-lieu of implementing a broad-based personal tax, which the Senate has wholly rejected, to further pay down on the state’s deficit. They also note that with the companies currently paying the minimum tax, Alaska’s production tax is among the lowest in the country and lower than it has ever been in the state’s history. 

However, neither the administration nor the Senate Majority appear be willing to raise oil taxes at this point. 

Elwood Brehmer can be reached at [email protected]

 

Updated: 
04/18/2018 - 4:51pm

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