Two weeks down: Legislature takes up budget, taxes, fund earnings and AK LNG
JUNEAU — The Legislature finished the second week of its 2016 session Friday, with committees settling down to work on bills and, most important, the budget for upcoming Fiscal Year 2017, which begins July 1.
Lawmakers are still grappling with what to do about the huge state budget deficit, which Sen. Anna MacKinnon, R-Eagle River, co-chair of Senate Finance Committee, said could be near $4 billion.
It’s too early to know whether the Legislature will take a step toward a fundamental restructuring of the state’s finances or whether things will descend again into the kind of political bickering that led to last year’s end-of-session partisan standoff over the budget and a near-shutdown of the state government.
The Legislature is led by Republicans, but the minority Democrats feel the urgency to reach a solution as well.
“The most pressing issue we face is to get to 11 votes in the Senate and 21 votes in the House (a majority in both bodies) on a sustainable fiscal plan,” said Sen. Berta Gardner, D-Anchorage, the Senate Minority Leader, in a Jan. 27 briefing.
The stakes are big this year. Absent a restructuring, the state will burn through its main cash reserve, the Constitutional Budget Reserve, in two years, and if nothing is done, the remaining ready cash, in the Permanent Fund’s earning reserve, will be gone in two more years.
Standard and Poor’s, the national credit rating agency, has already lowered the state’s rating from AAA to AA+ with a negative outlook, which will affect most municipalities too. If the Legislature doesn’t act this year, S&P may lower the ratings again, it has said.
Meanwhile, the outlook for oil priced and oil revenues remains bleak. The state will receive about a third of the amount of money it needs to balance its budget this year, and there’s no sign of an upturn in oil prices anytime soon.
Against that doomsday scenario, there are actually hopeful signs in the Legislature.
Gov. Bill Walker has put forth a plan for new revenues by raising a host of existing taxes and instituting an income tax, as well as spending cuts, that would come near to balancing the budget.
Legislators are interested in the plan, and the Senate Affairs Committee, chaired by Sen. Bill Stoltze, R-Chugiak, held hearings last week on a core part of it: a refashioning of how Permanent Fund earnings are used.
Meanwhile, the Transportation Committee in the state House started work on another part of the governor’s plan, an increase in state fuel taxes.
The House Finance Committee, co-chaired by Rep. Mark Neuman, R-Big Lake, and Rep. Steve Thompson, R-Fairbanks, held a hearing on the concept of Sustainable Wealth Plans as developed in other nations that is the model used by the governor in fashioning the fiscal plan he has put forward.
Walker has proposed a suite of tax increases on businesses, including minerals, fisheries, alcohol and tourism along with a personal income tax. So far legislators are only working on the fuel tax, but consideration of the other tax proposals will be given later this session.
Legislative leaders say the tax parts of Walker’s plan are likely to be kicked over until next year, after the 2016 session, and the income tax faces even more uncertainty.
A part of the governor’s plan also involves restructuring the way the Permanent Fund Dividend is funded, which will also reduce the amount of the dividend, at least for the near term. That is likely to be put off until next year also.
It’s likely that the Legislature will act this session, however, on fashioning some use of Permanent Fund earnings. That would make a big dent in the deficit and reassure bond rating agencies, and the state’s business community, which is nervous, that the state’s leaders are capable of coming together on the fiscal problem.
So far there are no legislators disagreeing with the idea — it was why the Permanent Fund was created, many argue — but how it’s done has yet to worked out.
Essentially, funds would be withdrawn from the Permanent Fund’s earnings reserve, an account that holds income from the Fund and which are legally available for appropriation (the Permanent Fund itself can’t be spent). The earnings reserve now holds about $7.5 billion.
The mechanism for determining how much would be withdrawn needs to be established so that the amount does not excessively draw down the account, because citizen dividends and an inflation-proofing payment into the Permanent Fund itself must also be made.
Many legislators are leaning toward a percent-of-market-value, or POMV, mechanism like most large endowments use because it is a simple, transparent concept. Sen. Lesil McGuire, R-Anchorage, has put forth this idea in her Senate Bill 114, introduced last year.
The governor hasn’t yet spelled out what the mechanism would be in his plan except that it would likely be a set amount, yet to be worked out (it would have an inflation adjustor), because that would lend stability to the revenues available to the budget.
The criticism of that approach is that it isn’t yet clear how the withdrawal mechanism would work; it could become a “black box” that is not transparent to the public, and thus capable of being manipulated, critics say.
But while many legislators are leaning favorably toward using Fund earnings, things could still be derailed if an end-of-session budget deadlock develops again.
One signal that a messy end may well develop is that almost all factions in the Legislature who endorse using Fund earnings put qualifiers to it. Republican leaders of the Senate say they lean toward the idea but that spending cuts, possibly big ones, must come first.
House Republican leaders aren’t saying much but it’s clear they want spending cuts, too. The governor has proposed about $100 million in reductions but that may not be enough for the Legislature. A $1 billion reduction, which some legislators say is needed, is unlikely given the adverse effects on the economy, and most talk in the capitol hallways is that an operating budget cut similar to last year’s, about $380 million, is likely.
The timing is the problem, however. House and Senate Finance Committees won’t finish their work until late March and the wrangling over the budget will likely continue into April as the House Minority flexes its muscle to demand restoration of some reductions in return for the necessary three-quarters vote in the House on a Constitutional Budget Reserve cash withdrawal.
Republican leaders may agree to the Permanent Fund earnings draw but it will happen after the amount of cuts are known, and whether they are deep enough.
This means that it won’t be known whether the first step toward fiscal restructuring will happen until close to the Legislature’s scheduled adjournment in the third week of April.
If another deadlock develops, as happened last year, all that could get pushed out into May, or even June. Therefore, all of this remains uncertain until the end of the session, a sure prescription for an exciting end.
Meanwhile, legislators plan extensive hearings on many parts of the governor’s plan and alternatives they may develop, to draw the public into the debate and to show they’re doing something as the budget process works in the background.
Meanwhile, while most attention is focused on the big fiscal issues there is work being done on routine legislation introduced last year but still in the hopper.
Interestingly, Senate committees are taking up some bills sponsored by Democrats, an unusual bipartisan move, as well as some House bills passed by that body last year.
Usually House bills are taken up later in the session, with Senate bills given priority.
Here’s some examples: The Senate Labor and Commerce Committee held hearings this week on Senate Bill 111, a bill by Sen. Bill Wielechowski, D-Wielechowski, that would ban fire retardent chemicals in childrens’ toys and furniture. The chemicals are toxic and accumulate in dust in childrens’ rooms and pre-school centers, Wiechowski said.
Wiechowski has been working on the issue for eight years, he said. A similar bill passed the Senate in 2012 but died in the House after furious lobbying by the chemical industry.
The industry says the chemicals should be regulated on the federal level, not state-by-state, but Wielechowski says the U.S. Environmental Protection Agency and Congress have not acted on the issue despite growing scientific data on health hazards posed by the chemicals.
The committee also took up HB 12, by Rep. Shelly Hughes, which streamlines licensing requirements in the home mortgage finance industry. Both bills were held, but HB 155, sponsored by Rep. Steve Thompson, R-Fairbanks, did move out of committee.
The bill repeals certain industry tax credit and incentives that are little-used, an “indirect expenditures” repeal effort Thompson has been working on.
While most of gas pipeline-related issues will be taken up in a special session planned later this spring one that is active in the Legislature this session is SB 100, establishing the framework for a Payment-in-Lieu-of-Tax payment by the Alaska LNG Project to municipalities and the state.
The Senate Community and Regional Affairs Committee held an initial hearing on SB 100 on Thursday. The so-called PILT substitutes for the conventional property tax that the project would pay to municipalities and the state, Revenue Commissioner Randy Hoffbeck told the senate committee.
If property taxes, as currently structured, are applied to Alaska LNG during its years of construction and early operation, they would be a serious financial burden, Hoffbeck said.
The PILT restructures the way payments are made and would provide $800 million to municipalities during the years of construction to offset local impacts. After the project starts up about $15.7 billion would be paid over 25 years in lieu of the conventional property tax.
After 25 years the system could revert to conventional taxes or a new PILT could be negotiated, Hoffbeck said.
Also last week the House and Senate Resources Committees held oversight hearings on the Alaska LNG Project, in which the state has a 25 percent interest.
On Monday, project manager Steve Butt of ExxonMobil outlined progress on technical and engineering work, indicating that the project cost still appears to be within the $45 billion to $65 billion range estimated in 2012.
The engineering teams are now engaged in a cost-reduction effort so that a revised cost estimate due out this summer will be in the lower range, nearer $45 billion, than near the upper $65 billion, Butt said.
“We need that if we’re to be competitive,” given the current market outlook, he said.
On Wednesday, commercial managers for the project from BP, ConocoPhillips and ExxonMobil, as well as the state’s Alaska Gasline Development Corp. appeared before the committees to give an update on commercial negotiations now underway.
The negotiating teams are working hard but they’re not done, said DaveVan Tuyl, BP’s manager.
“But just because we don’t have ink on paper doesn’t mean we aren’t making progress,” Van Tuyl said.
He could not say when the agreements will be finalized, however.
Rep. Mike Hawker, R-Anchorage, asked Marty Rutherford, Deputy State Revenue Commissioner, about a recent letter from Gov. Bill Walker to the companies threatening to use “other options” to commercialize North Slope gas if the agreements aren’t done when the Legislature adjourns, which is scheduled for late April.
Hawker asked if the governor’s deadline attempts to impose an artificial schedule on the negotiations making it a “schedule-driven” project, which could create problems.
Rutherford said the technical, engineering and regulatory work is proceeding relatively smoothly but that the governor is disappointed that more progress hasn’t been made on the commercial contracts, some of which have to be approved by the Legislature.
The negotiations include agreements among the companies themselves as well as some that involve the state.
The week ahead
Legislators continue work next week on the budget and the governor’s fiscal plan. State Budget Director Pat Pitney will present projections of state employee reductions Monday to the House Finance Committee.
On Tuesday, House Finance and the Senate State Affairs Committee continue work on the governor’s proposed Permanent Fund restructuring, and the House Fisheries Committee will hold the first hearings on Walker’s proposed increase in fisheries taxes.
Tim Bradner is a correspondent for the Journal. He can be reached at [email protected].