Tim Bradner

BOEM director hears support for OCS drilling in Alaska

U.S. Bureau of Ocean Energy Management Director Abby Hopper got an earful in Alaska last week. Hopper met with Gov. Bill Walker, the state’s congressional delegation and representatives of Arctic communities — all urging that Arctic offshore lease sales be included in the next five-year Outer Continental Shelf leasing schedule. Hopper’s schedule of meetings included no opponents to offshore drilling. She would not tip her hand on whether her recommendations to her boss, Interior Secretary Sally Jewell, will include lease sales in the Chukchi and Beaufort Seas. Whether Jewell will take Hopper’s advice is also unknown. The U.S. Interior Department will release a proposed new five-year schedule for OCS lease sales from 2017-22 some time this fall, Hopper said Aug. 12 in an interview in Anchorage. Hopper did say, however, that OCS Sale 244 in Lower Cook Inlet is still on track for 2017. That sale is part of Interior’s current five-year lease sale program and the BOEM has completed a draft environmental impact statement, or DEIS, for OCS Sale 244. Two Arctic lease sales in the current five-year program were cancelled last year due to lack of industry interest, Hopper said in the interview. The cancellations came after Shell’s decsion to pull out of the Arctic following unsuccessful drilling in the Chukchi Sea last summer, but Hopper said that even before Shell’s announcement there was no industry support for a Chukchi Sea sale, even from Shell, and only one company nominating acreage in the Beaufort Sea. Following Shell’s announcement of its drilling results several companies, including Shell, relinquished leases in the Chukchi and Beaufort Seas and Jewell also decided against allowing Shell an extension of Chukchi leases set to expire. The company has retained rights to one key lease, where the “Burger J” exploration well was drilled, although that lease expires in 2020. Hopper said BOEM has received no indications that Shell plans to return to do more work at the lease. BOEM officials who sat in on the interview with Hopper said the agency will eventually receive data from Shell’s drilling, and has already received some, which can be used in its ongoing evaluation of oil and gas resources in the region. Shell actually drilled on the Burger prospect in the Chukchi Sea in the early 1990s and made a significant gas discovery, although it was not economic at the time. BOEM officials would not comment on just what Shell found at Burger in its earlier drilling but said the information is included in the agency’s published estimates for petroleum resources in the region. In her meetings last week Hopper said she was struck by strong support for offshore sales from Arctic Inupiat Offshore, a consortium of Alaska Native corporations in Arctic coastal communities. “They told me that responsible oil and gas development is important in maintaining their traditional way of life,” she said, which requires, these days, economic activity and cash-paying jobs. “Oil and gas development has brought many benefits to their communities including water and sewer, roads and other infrastructure,” Hopper said she was told, although the reference was to onshore, not offshore, industry activity. Hopper also met separately with Arctic Slope Regional Corp., the Native regional corporation for the North Slope. In her meetings with the state’s two U.S. Sens. Lisa Murkowski and Dan Sullivan, Hopper got a similar message. Hopper also visited two North Slope oilfields, Hilcorp Energy’s Northstar project and the Nikaitchuq field operated by Eni Oil and Gas. Both are offshore fields in shallow water just north of the onshore Prudhoe Bay field, and part of the Northstar field extends into federal OCS leases for which Hopper is responsible. In a visit to Alaska last spring, Hopper visited North Slope coastal communities including Kaktovik, Nuiqsut, Barrow, Point Lay, Point Hope and Kotzebue and encountered several opponents to offshore drilling in some of the villages. Hopper said in the interview that the federal OCS Lands Act spells out criteria for decisions on whether to hold a sale including the position taken by the state’s governor, resource potential and environmental concerns and the alternative uses of the OCS. “There is no particular priorities as to how the criteria are applied,” she said. Even if lease sales are included in the schedule there can be no guarantee they will actually be held. Industry must first express interest in them, and a federal EIS is required. In contrast with the Arctic sales there were expressions of interest by industry in the lower Cook Inlet sale. BOEM’s Alaska spokesman, John Callahan, said the number of nominations received from companies is confidential. However, agency officials also said the nominations were received before the collapse of crude oil prices in late 2015. Hearings were held on the draft EIS Aug. 15, in Anchorage, with hearings also planned for Kenai and Homer. If the sale is held it is possible that there will be a no-show by industry, which happened once before with a Lower Cook Inlet sale, an embarrassment for BOEM’s predecessor agency, the Minerals Management Service, after the expense of the EIS and lease sale preparations were incurred. MMS also cancelled two subsequent Lower Cook Inlet lease sales when there were no nominations of acreage by companies. If Lease Sale 244 is held BOEM would offer 1.09 million acres on 224 OCS tracts for in sale 244. The lease sale area is just south of state-owned submerged lands in upper Cook Inlet, where there are several producing oil and gas fields. Previous Lower Cook Inlet OCS sales have included offshore acreage to the south, which is in deeper water and distant from infrastructure. The smaller, more compact acreage now being offered is closer to infrastructure and known oil and gas-producing fields. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]  

Don’t tell Delta farmers that 1980s project was a bust

It’s part of Alaska lore that the state’s Delta Barley Project in the 1980s was a huge flop and that all the farmers went bust. Tell that to farmers in Delta, who are doing quite nicely. In fact Delta farmers are succeeding, although in ways not originally intended by state planners. “I don’t see failure when I go to Delta. I see people working and tractors in the field,” says Arthur Keyes, the state’s new Agriculture director. Bryce Wrigley, a local barley farmer, says people around Delta get pretty steamed when they hear they are all failures. “The only time we hear this is when we leave Delta. We never hear it around here,” he said. Not all the original farms in the 1980s project failed, Wrigley said. There are several still farming and one where children have taken over. Wrigley himself purchased his spread in the early 1980s and has been farming since. At least 12 farmers in the area make their sole living from farming, although many have jobs to supplement the family income. Wrigley is proud that his son raised on the farm, Milo, is now back from college with a degree in international agricultural business and working in the family business, which includes the manufacturing of a value-added product, barley flour. Milo Wrigley’s goal is to begin export of that flour, which has a high nutritional content, Wrigley said. It would be the state’s first export of barley, ironically the goal of the 1980s project, and a value-added export at that. It is true, however, that the Delta project flopped as it was originally planned. The state paid for the clearing of land, held a lottery to attract farmers and helped provide financing. The idea, championed by Bob Palmer, then-Gov. Jay Hammond’s chief of staff and a long-time friend of the governor, was to grow large quantities of barley to stimulate local dairy farming and other agriculture, and to export the surplus. The Alaska Railroad bought grain cars in anticipation of shipping barley and the state purchased components of a grain terminal for Seward, which was never built. Tens of millions of dollars were invested in land clearing and subsidized loans, but North Slope oil production had started and the state was by awash in oil money. Valdez, wanting to get the edge on Seward as a barley-shipping port, went ahead and built a grain silo, which still stands (it is now a telecommunications tower). Interestingly, there was competition at the time for the location of the state barley project. Many argued that Nenana, west of Fairbanks, had better soil for growing than Delta and was at a lower altitude, which meant the growing season was longer. Politics played into the decision, however. Jack Coghill, a Republican and opponent of Hammond, was mayor of Nenana at the time and a champion for Nenana as a location, but being politically crosswise with Hammond and Palmer didn’t help Coghill’s cause. In contrast, former state Rep. Pappy Moss, a charismatic legislator who was a Democrat and represented Delta, won over Hammond and Palmer for Delta. Bad luck played into the plan, however. Once lands were cleared and farmers were established, several years of unusually bad weather hit just as people were learning the ropes. Most important, world grain prices collapsed, which undermined the whole scheme. Wrigley said land around Delta was still being cleared when he arrived in 1983, and that at the time the original concept seemed viable. Export markets were strong and Japan was importing grain from the U.S. west coast. Alaska was two days’ closer in sailing time and ship costs then were $50,000 day. “No one anticipated the collapse of the market,” Wrigley said. Newly-elected Gov. Bill Sheffield stopped the Seward grain terminal project when he came into office in 1982, and also ordered the railroad to sell the grain cars. Wrigley says the stigma of the original project persists, hyped partly by the media. It also plays into the hands of politicians who cite it as an example of why the state can’t do anything right. After the export scheme collapsed and state funding evaporated Delta’s farmers adapted to survive, focusing on local markets and niches, said Scott Mugrage, who farms and raises cattle near Delta with his son, Justin. “Everyone has a niche,” he said. In Mugrage’s case that niche is raising grain and feeding and selling cattle. Other farmers developed different strategies. Some switched from barley to hay to meet the demands from Alaska’s large and active horse community, while one farmer developed barley pellets for animal feed. Other farmers grow various grasses to sell seed. Some of the farms are very large. One is about 10,000 acres although the land is not all planted. Wrigley developed his barley into new, value-added products. He started the Alaska Flour Co. and is developing a good business milling and selling barley flour and other products in retail stores in the state. Mugrage owns about 550 acres and leases another 2,000, all in grain and hay for cattle. He raises barley and oats as well as some peas, which are mixed with the barley to add nutrition for cattle. “We’re successful. We’re satisfied with where we are,” Mugrage said. He is actually a relatively recent arrival in Delta, having purchased his farm a few years ago. But Mugrage is a veteran in the cattle business in the Lower 48 and still owns cattle feed lots in Nebraska. He has mostly Black Angus as well as some Scottish Highland cows, which are well suited to northern climates. He sells about 200 cows a year. With proper know-how the cattle business and other agriculture in the area are viable and could be expanded, Mugrage said. It’s important for Alaska to become more self-sustaining in food, which it once was. “Few people realize what a short supply chain we have with our food. We depend essentially on one ship,” Mugrage said. (Actually there are two operated by Totem Ocean Trailer Express). The federal soils conservation program, which is available to farmers nationwide, has been a big help for the Delta farmers. They rotate their crops, allowing some land to periodically remain fallow to rejuvenate the soil. The federal program helps pay for the maintenance of fallow land. Wrigley estimates that in the Delta area, in any given year, about 5,000 acres are planted in grain, 11,000 acres are kept in grass, or hay, and about 15,000 acres are maintained as pasture. That’s far short of the state’s lofty goals when the barley project was launched but it is still a sustainable small industry that helps support dozens of families in the Delta area. Like Mugrage, Wrigley believes there’s a lot of room for agriculture to expand to meet local needs. “We spend $2.5 billion a year on food and import 95 percent of what we consume. If we could increase that to 20 percent we could create a thriving local agriculture industry,” he said. That’s quite doable if the demand is there. As much as 50,000 acres in the Delta area could be put into production relatively quickly, much of the land having been cleared in the original barley project. What could jump-start the local industry in Delta is if the U.S. Army were to convert one of three boilers in the power plant at Fort Greely, which is nearby, from oil to biomass, with barley as the fuel, Wrigley said. Farmers have made a proposal to the Army and it is being studied as a way for the plant to reduce greenhouse gas emissions. Two of the boilers would remain oil-fired, under the plan. Wood chips are now used as biomass fuel in schools in Delta and Tok, but barley is superior as a fuel because it has less moisture than wood, which makes it more efficient in handling and in combustion in cold temperatures, according to the proposal made to the Army. Storage for barley is also more compact than wood chips, which means the “footprint” for storage is smaller. Also, the barley can be burned without processing unlike wood chips, where chips must be made from scrap wood and salvage timber. Fort Greely’s fuel needs could be met with 15,000 tons of barley per year. The fuel need for one boiler translates to about a truckload of barley per day, according to the proposal. If the Army were to adopt the plan it would allow Delta farmers to essentially double barley production, and with the land available that could be done quickly, Wrigley said. The additional sales would bring $2.8 million in new income to the region, which would translate to about $20 million in total benefit when a multiplier is added, according to the proposal. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]  

Employers begin programs to develop industry ‘cross-skills’

Alaska employer and training groups are taking another step in a long-sought goal: identifying “cross-industry” skills that will allow workforce training to focus on entry-level capabilities useful across several related industries such as petroleum, mining and maritime. It has not turned out to be a simple task, said Dave Rees, a retired BP workforce manager who chairs the Business Education Compact, a forum for employers and the job training community. Identifying cross-industry skills is a project taken up by the Business Education Compact as state and federal funding for training has become scarce. It’s now important to stretch dollars farther, and employers are being asked to contribute more of their own funds. Employers typically do focused, occupation-related training once a new employee is hired, but they need workers coming in the door with certain abilities and, ideally, preparation in some skills needed for the occupation. These are things traditionally left to public education and, at a very basic level, to parents. For starters, “We need people able to get to work on time, be unimpaired and have no criminal record. It’s really important that kids in high school know these things,” said Kris Norosz, government affairs director for Icicle Seafoods, a major Alaska seafood employer. Icicle, with its roots in Petersburg, hires many seasonal process-line workers needing only basic skills, but Norosz said the company also hires a wide variety of skilled professionals. Because many jobs are year-round the company prefers to recruit locally, where the company has plants. There are often difficulties in getting skilled workers at the places and times they are needed, she said. “Every industry has it choke points,” and for seafood companies it’s often in fields like refrigeration engineers, can line mechanics, electricians and port engineers, she said. These are jobs that pay well and are often year-around. In all technology-related occupations, which also tend to pay well, new recruits need math, science and computer skills along with soft skills like interpersonal communication and teamwork, which are seen as increasingly important by employers. All of these are common to most career paths, and all are typically taught in at the high school level. But things get more difficult at the next step in teaching entry-level skills in fields like instrumentation and maintenance. “There are a lot of career pathways that are now identified in specific occupation fields, but not across fields,” Rees said.  Even within one industry, such as oil and gas, separate skill preparation is still done for many kinds of technicians and operators. There is not enough that overlaps. Training for some occupations have obvious overlaps. Heavy equipment operators, for example, are employed in surface mining and in civil construction, Rees said, but even the equipment operator field can get specialized and computer skills are increasingly important with vehicles more reliant on “smart” information systems. Job fields like equipment maintenance are becoming more complex, too. Traditionally most heavy equipment was diesel-powered, but now electric-powered heavy equipment, as well as passenger vehicles and trucks, are becoming more common. In the future maintenance people will be diesel mechanics as well as electrical technicians. This illustrates the cross-skills gap, the need for trainers to teach both fields in one program. McDowell Group, a Juneau-based consulting firm, has been retained to help identify common skill-sets but an initial McDowell report published this spring wasn’t able to go far enough, said Kari-Ann Carty, executive director of the Alaska Process Industries Careers Consortium, or APICC, a group that helps coordinate technical training. A second report by McDowell is being commissioned that will zero in on some of the central questions. It will be published next spring, Carty said. Much of McDowell Group’s initial research was focused on federal job codes that describe occupations, but the second report will include results from interviews that should be more helpful, Carty said. The intent is to have McDowell Group publish updates of the report annually, she said. The federal job codes, which are often relied upon in government-funded training, are more related to specific craft skills. The real world of the workforce is one of employers wanting flexible multi-skill training.  Carty said one model for integrated training attracting attention is a “holistic” approach developed by Vigor Industries and the Alaska Construction Academy in Ketchikan and being done with local Southeast Alaska high schools. “This is well-rounded and flexible, involving multiple technical skills like welding and electrical. It is built around ship-building,” which is Vigor’s business, but students are finding jobs in a wide variety of Alaska maritime-support companies, many in other parts of the state, Carty said. Doug Ward, Vigor’s business development director, said his company targets Alaska recruits for its shipyards in Ketchikan and Seward because hiring locally, which also requires training, results in reduced turnover. The company has found that many skilled workers it recruits for Ketchikan from the Lower 48, where Vigor has other shipyards, find the adjustment to Southeast Alaska’s rainy climate difficult. The local-recruitment is having results for Vigor. “As of this week, we have 185 workers (in total) between ‘new build’ (the new Alaska-class ferries being built in Ketchikan) and repair, and 167 of those are local. We have 70 local workers dedicated to the new ACF ferries,” Ward said. Vigor is helping school districts in the southern Southeast region with pre-apprenticeship programs and the company also offers internships, he said. “In Ketchikan high school students take courses designed around the NCCER  (a national skills certification program) Core Construction Skills, like in welding, and participate in Maritime Career Day. In Wrangell, students are designing speed boats in AutoCAD and then building them,” Ward said. Internally, Vigor works with entry-level employees to upgrade to middle-skill and journeyman levels. Vigor and other marine-related companies are also working on industry-wide skills-training initiatives and in 2014, working with the University of Alaska, published a Maritime Workforce Development Plan, a requirement for industry-specific training to be recognized in many federal programs. The effort was also aimed at getting maritime recognized as a distinct industry in Alaska because many workers in marine-related fields are identified in other industries such as transportation or seafood, and this reduces the awareness of the industry’s importance in the eyes of the public and government officials. To date maritime employers have organized themselves into a loose alliance that includes companies like Crowley and Icicle along with Vigor, but the group is also aligning and may become a formal part of APICC, Carty said. To date APICC has been primarily focused on process control skills in the petroleum, mining and wastewater industries (seafood plants also rely on process controls) but the integration of maritime skill requirements, like vessel maintenance, will broaden the organization. This is important because APICC is an employer organization that is mostly privately-funded, and its purpose is to ensure that the training community, which includes the university and, more broadly, the schools, knows what employers need. This is new because until now employers have not been broadly or deeply engaged in any organized way. Too often, training policies and priorities have been influenced by federal and state labor agency officials and others, and while well-intentioned this doesn’t result in focused efforts. “We need to ensure that workforce plans are employer-driven so that employers know they can get the skill sets they need with new employees,” said Norosz. Tim Bradner can be reached at [email protected]

Budget cuts take bite from job training programs

Budget cuts to state and university training programs have become a major concern for industry leaders who worry about the “graying” the workforce in Alaska’s key industries, and having enough future skilled workers. The concern is across-the-board, from oil and gas to mining, maritime, seafood — you name it. The skilled-worker gap is actually a problem now, even with the state facing economic uncertainties. “In many Alaska industries, from oil to mining, construction and health care, jobs remain difficult to fill due in part to a lack of qualified Alaska workers. All of these industries have challenges hiring in Alaska and must therefore recruit employees from outside the state,” Juneau-based McDowell Group, a consulting firm, wrote in a workforce report published this spring. Meanwhile, the state Department of Labor and Workforce Development, which coordinates much of the state and federal money for training, has seen its budget cut sharply, from $33.4 million in state funds two years ago to $22.4 million in the current year, state Labor Commissioner Heidi Drygas said.  State funds to three rural regional training centers, in Kotzebue, Nome and King Salmon have been cut sharply, as has money for the Alaska construction academies, which are in larger communities, Drygas said. The rural training center cuts are particularly unfortunate, she said. “These are areas with high chronic unemployment, and the training is focused mainly on jobs available in those region, like health care, construction and transportation, where workers now come mainly from other parts of the state,” Drygas said. There are other funds available to these centers, which are operated by nonprofits, but the state funds provide a base for operations. “They helped keep the doors open,” Drygas said. For major employers, however, a worry is that the rollercoaster ride down of commodity prices in resources like oil and gas and minerals may discourage young people from pursuing training they’ll need for jobs that will sprout again when the commodity cycle turns up. For example, there have been layoffs in petroleum and young people may see this as a sign that there’s no future in the industry, says Dave Rees, a retired BP workforce development manager who now chairs the Business/Education Compact, a forum for employers and people engaged in workforce development. “Young people may be discouraged, thinking that there will be no jobs. That’s not true, because there will always be people needed to operate the oil fields,” he said. “It is estimated now that a substantial part of the North Slope operations workers will retire in the next 10 years,” he said. The skilled technicians needed to replace those workers should now be in craft or university programs or taking classes in high school to get prepared, Rees said. In its report, McDowell Group said 6,566 resident workers in the oil and gas industry are expected to reach retirement age in the next five to 10 years.  The trend is similar in mining, where 47 percent of mechanics, 51 percent of mining materials engineers and 65 percent of mining machine operators are 45 or older, McDowell Group said. But even if young people are interested in careers in petroleum or mining they may see fewer opportunities for training due to reduced funding. The process feeds on itself because fewer applications made to training providers, whether private, union or university, will force training administrators to shrink or even cancel programs. Translated, this means that when an upturn comes trained Alaska workers won’t be available. Rees believes that employers will have to step into this void themselves, funding more entry-level preparation and basic workforce training. “We won’t be seeing a lot of state or even federal funding in this new era of tighter budgets,” he said. Entry-level career preparation and vocational schooling were functions traditionally provided in public education in high school or the university and previously, employers concerned themselves mainly with focused training once a new hire is on the job with a basic set of skills. Basic preparation was left to schools of various kinds. This model is changing, however. Workplace technology is more complex, requiring proficiency in computers, math and communication, both verbal and written, as well as skills generally related to an occupational field. With budgets under stress, schools and the university may be less able to provide these. The problem is nationwide. “Across many industries and across the nation a lot of employers face shortages of skilled workers even with rising unemployment. Workers that are available don’t have the skills,” McDowell Group said in its report. Alaska employers began waking up on this about 10 years ago, becoming more active in promoting career awareness in middle schools and vocational programs in high schools, and funding for advanced training in universities. Employers in key technology industries, such as oil and mining, realized also that they had to cooperate and find ways to share information, which can be sensitive because companies’ views of future business and workforce needs are highly proprietary. Training providers needed estimates of future needs because without these they couldn’t gear up to meet employers’ needs. At the same time students had to gain confidence there would be jobs in the end, or at least good chances, at the end of several years of training. Ways were found to do this. One initiative, led by the oil and industry, was the Alaska Process Industry Careers Consortium, or APICC, an alliance of industries that operate plants using process controls, were formed to work together and with training providers. APICC was formed to provide a mechanism for companies using process control technologies to work together, share information and work with training providers, and it has become a model for other industries. One outcome of the effort was creation by the University of Alaska of a two-year associate degree in process technology, which has been highly successful. About 200 have been enrolled in the process technology program in recent years at three of the university’s campuses, with about 70 to 80 graduates per year. Most of the graduates were snapped up by various companies, many looking to replace retiring skilled operations staff. APICC’s success spawned similar efforts in other industries such as in mining, where the human resources committee of the Alaska Miners Association is active. A maritime industry working group has been formed. Both are becoming involved in APICC, so that this organization could wind up serving several industries. Organizations that can facilitate collaboration are good because companies, and even industries, have not been good at translating the demographics of their workforce into projections for future needs, Rees said. “How many welders are we going to need? How many people in their 20s and 30s are now in training to replace retirees?” Rees asks.  Getting data has been difficult. One industry, health care, is considered better at projecting and recruiting for its needs for higher-level professionals like physicians and skilled nurses, Ress said, but even health providers face challenges in recruiting lower-skill workers including certain types of medical technicians and administrative workers. One health care initiative was the successful nursing program at the University of Alaska Anchorage. Individual companies have their own initiatives, meanwhile. Continental Motors, in Anchorage, has an active apprenticeship program in automotive maintenance. Another firm, Vigor Industries, operator of the Ketchikan Shipyard in Southeast Alaska, has its own training program in place and works with the local high school on a pre-apprentice vocational programs. Calista Corp., the regional Alaska Native corporation for the Yukon-Kuskokwim Delta, is meanwhile developing a maritime-related apprenticeship program with transportation companies like Crowley and Lynden Transport, which supply fuel and other services in the region. In another initiative employers in the technical industries, working through APICC, are identifying skills that are commonly needed across several industries. Once these are identified the available training funds can be focused, which could be  very efficient. Training, meanwhile, does pay off and sometimes fairly quickly. “A pipeline training program organized several years ago in Fairbanks by contractors provided training to 1,646 individuals and three years later 80 percent of these people were still working,” McDowell Group said in its report. Wage income for these workers increased 30 percent, or a total of $13 million in new income after the training. the report said. All employers also agree in encouraging career interest and readiness programs in schools, and volunteers from many companies spend time in classrooms talking about their industries. “All employers encouraging schools to develop programs on work readiness,” like being timely, dressing appropriately and learning communication skills, said Cary-Ann Carty, APICC’s executive director. The traditional vocational classes in many high schools have fallen victim to budget cuts but many school districts offer programs in centralized facilities, like King Career Center in Anchorage. APICC has further extended the idea by helping high schools and the university organized dual-credit classes in high schools where students can take certain classes and earn university credits toward an associate degree in process technology. Alaska Resource Education, a nonprofit widely supported by industry, works in elementary and middle schools to promote children’s interest in science and technology, and plans to expand into the high school levels. Rees said such career-awareness programs in schools pays dividends for employers because they help young people know if they are even interested in a field before starting training or apprenticeships. “It’s very inefficient for everyone if a young person gets into training or an apprenticeship and then decides the field is not a good fit. It’s better to find this out before hand through career programs in schools,” he said. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]  

OMB director: State personnel reduced by 1,700 in last two years

State budget cuts are beginning to hit home, in terms of jobs and economic impact. Office of Management and Budget Director Pat Pitney said state employee numbers have dropped by 1,700 in the last two years and the total will grow by another 400 in the next 12 months. So far Anchorage and Juneau are feeling the brunt of the reductions, with both communities down about 500 state workers each, Pitney said at a Commonwealth North meeting July 22. Commonwealth North is an Anchorage-based public policy group. With the state Legislature’s business finished for at least the year so far, after a regular session and two special sessions, Pitney is starting a round of presentations to community groups to explain the state’s financial situation. Her talk at Commonwealth North was the first of these, she said. Two years ago there were 26,500 workers on the state’s payroll, Pitney said. “This is now down to 24,800. By this time next year the number will be 24,400. These are actual people, not positions,” she said. Employees are notified several months in advance that their positions are being eliminated in an upcoming budget, and typically most that are affected have lined up other jobs by the start of the budget year, and some retire if they can, she said. Within the public employee unions workers have “bumping rights,” which means they can, in certain cases, take a job filled by another employee with less seniority. Largely because of all that the state had to issue only 70 “pink slips,” or actual terminations, this year. The state administration also initiated a hiring freeze in January, Pitney reminded Commonwealth North. Fewer employees is only part of the overall picture on a budget that is being rapidly ratcheted down because of a sharp drop in oil revenues. Overall state undesignated general fund spending is at about $4.3 billion for fiscal year 2017. That compares with $5.3 billion in fiscal year 2016. State fiscal years run from July 1 to June 30. Pitney said the administration had a “target” for current fiscal year spending of about $4.7 billion, but that also assumed the Legislature would enact fiscal reforms and new revenue proposals made by Gov. Bill Walker. Legislators did none of those, and opted instead to reduce spending $400 million below the administration’s target number, which itself was $600 million below the previous year outlay. The comparisons are made of undesignated general funds, or UGF spending, which is the most common, but not the only way, of looking at state spending. Undesignated funds are those where the Legislature has total discretion in appropriation. Another category, “designated” general funds, are expenditures for programs where the outlay is required by state statute, usually a formula of some kind, and where the Legislature has no discretion short of changing the statute that governs the formula Cheryl Frasca, a former state budget director and co-chair of Commonwealth North’s fiscal task force, pointed out that getting a total picture of state spending requires looking at two other categories of state spending, one being “designated” general funds and also “other state funds”. In fiscal year 2016 the Designated General Fund spending totaled $941 million, and in 2017 it totals $1.09 billion. The other category — “other state funds” — typically reflects expenditures that are supported by designated revenues, such as University of Alaska student tuition. In fiscal year 2016 this category totaled $641 million and increased to $735 million in 2017. The point Frasca makes is that legislators will often change program funding sources around so that they fall under one of these other categories, and which then makes the UGF spending total smaller. Because the UGF spend is what the public usually looks at it’s a kind of sleight-of-hand, Frasca has said. That said, the overall reductions are still significant. Pitney told the Commonwealth North group that the expected 2017 deficit, combined with deficits from 2016 and 2015, will reduce the state’s main cash reserve, the Constitutional Budget Reserve, to $3.3 billion by the end of the current fiscal year next June 30. Had the governor not wielded a big knife in making budget vetoes on June 29 — vetoing $1.3 billion in spending including $666 million from the Permanent Fund Dividend appropriation — the drawdown on the reserve fund would have been greater, with $2.5 billion left in the CBR by next June 30. As it is, the funds left in the CBR are barely enough to pay for one more year of a large deficit, assuming no increase in spending or improvements in revenues, she said. That amount is too thin, she said. “Prudence dictates that we keep about $2 billion on hand as a cash reserve, or about six months’ operating money,” she told Commonwealth North members. However, the administration is not considering the funds in the Permanent Fund’s Earnings Reserve account as “reserves” in the same sense. This account holds the accumulated income from the Permanent Fund, mainly income not spent for the Permanent Fund Dividend or the traditional inflation-proofing payment to the principal of the Fund. It holds about $7 billion now. It isn’t counted as reserves mainly because funds in the account would be a key part of the governor’s proposed fiscal restructuring of the Permanent Fund to an endowment, where some earnings are used annually to support the state budget. Eric Wolforth, a former state Revenue commissioner and a Permanent Fund trustee, said the Earnings Reserve should be considered as “reserves” against future budget needs because there is no assurance the Legislature will approve the governor’s restructuring. In that light, Wohlforth also said the Earnings Reserve should be placed in short-term assets rather than invested long-term like funds in the principal of the Permanent Fund. “This (the Earnings Reserve) is our last-ditch protection,” against a budget collapse if the Legislature can’t agree on the governor’s restructuring, Wohlforth said. “We don’t want these funds frozen (in long-term assets) when we may need them.” Pitney detailed the spending reductions among several state agencies and also mentioned several other initiatives aimed at saving money including “privatizing” the state’s Pioneer Homes for retirees, with options of just “out-sourcing” management to outright sale of the facilities, and a state “Health Trust Authority” that would combine all state-funded health care programs under one organization. Washington and Oregon have statewide health care authorities and are reporting successes in saving money, but whether this approach would work in Alaska, in a much smaller market, remains to be seen, she said. The state administration also has initiatives underway to centralize state IT services and to institute “shared services” plans in facility management, procurement and collections. A study of possible savings of combining some of the independent state corporations, such as Alaska Housing Finance Corp., the Alaska Industrial Development and Export Authority and the Alaska Energy Authority is also underway. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]  

Seasonal advantage gives state peony market room to grow

Alaska’s oil industry may be in a slump but there’s one new industry rising: the growing and export of fresh flowers, in particular peonies. For certain raising peonies, the large blossoms beloved for weddings and other special events around the world, won’t replace oil as a source of high-paid jobs or state revenues, at least anytime soon. Still, the creation of this mini-industry, which didn’t exist just a few years ago, is a testament to Alaskans’ ingenuity combined with the advent of efficient air cargo service through Alaska’s airports that makes just-in-time delivery of perishable products possible. Alaskan peony farmers also have a seasonal market advantage in that Alaska flowers become available in mid-summer, which is past the growing season for Lower 48 farms, according to Mike Williams, who co-manages Alaska Peony Distributors, a Wasilla-based wholesaler and distributors Just as the Lower 48 peony supply is depleted the shipments from Alaska begin, he said. Production in the state is growing fast, also. Alaska Peony Distributors expects to ship 35,000 to 40,000 cuts stems this year through a new processing and packing facility at Lake Hood, said Meghan Williams, who helps manage the company. That’s up from 20,000 stems last year.  Williams said production next year is conservatively estimated at 60,000 stems. “A number of new farms will be beginning production this year, and many farms currently producing will be doubling their production,” she said. Eaglesong Family Peony Farm, owned by Mike and Paula Williams, is one of the state’s biggest, with 12,000 roots now producing flowers. It takes time to develop peony production, however. “Eventually, a mature peony bush will produce between five and 10 harvestable peony stems each year, although it varies by variety,” Meghan Williams said. “It takes seven to eight years before a peony bush is mature enough to produce at full capacity,” she said. Once a farm has 50,000 roots, a capacity some will achieve in the near future, annual production of 250,000 to 500,000 stems could be sustained, she said. “This is not an unusual level of production for peony farms in the Lower 48 or in Holland but we haven’t accomplished this yet with our young farms in Alaska,” Williams said. Mike Williams of Alaska Peony Distributors said the company serves farms from the Kenai Peninsula to northern parts of the Matanuska-Susitna Borough with small planes chartered to fly flowers in to the pack house at Lake Hood. Single-engine planes typically carry a few hundred stems but larger, twin-engine aircraft can transport up to 6,000, Williams said. It takes about an hour to get the cut stems from the farm to the Lake Hood facility, where they are sorted for quality, chilled and packaged for shipment to the Lower 48 via Federal Express or cargo services of scheduled air carriers like Alaska Airlines and Delta Airlines, Mike Williams said. Alaska Peony Distributors buys the cut stems from the farmers and ships out to Lower 48 and some international buyers, selling to wholesalers as well as hotels and direct to retail outlets like grocery chains and florists. Although the logistics network is complex and expensive, covering about 7,800 square miles, Meghan Williams said the area covers about a dozen micro-climates, which creates a variation in harvesting schedules (higher altitudes makes for a later harvest) and stretches out the shipping season from Alaska. An example of this is at Homer, Mike Williams said. “Some farms there are in a maritime climate but at an 800-foot to 1,500-foot elevation, which means they harvest later than the rest of us,” he said. Williams’ own EagleSong farm is nearing the last stage of its 2016 harvest, typical for most farms, but Homer peony farmers will be able to add supply for several weeks longer, he said. There are also peony farms in Interior Alaska that handle their own distribution. Meghan Williams said there are no firm estimates of how many commercial peony farms are now operating in the state but she believes there are about 65. Many are small “boutique” farms with just a few hundred roots and specializing in rare and unusual peony varieties, she said. However, a handful are larger, like EagleSong, with 12,000 roots now producing. Mike Williams said the market growth has great potential because of Alaska’s seasonal advantage in selling. The European market is huge, with flower distributors in Amsterdam moving 20 million peony stems in a matter of weeks in June. The market potential in Asia is unknown, but it is equally large, he said. Agriculture will always be a small, niche industry. Historically, Alaskans had to produce much of their own food and dairy products before the advent of fast container ships, an improved Alaska Highway and efficient air cargo service. Farming in Alaska continues, and sometimes even thrives, in small niche markets, said Arthur Keyes, the state agriculture director. The thriving weekend farmer’s markets in Anchorage and Fairbanks, where local growers sell fresh produce, testify to that. Keyes said resilient barley farmers near Delta, east of Fairbanks, who inherited problems of the state’s failed 1980s-era experiment in large state-sponsored barley farming, are developing new products, like a barley flour, and finding markets in the growing health food sector, though it is mainly within the state. Peony farming, a new industry, represents another niche, and perhaps ultimately a big one, he said.

DNR transition at top takes place amid budget challenges

When outgoing Natural Resources Commissioner Marty Rutherford gives the keys to incoming commissioner Andy Mack, she will be handing over a major state agency that is, considering the state budget, in pretty good shape. Rutherford is a 27-year veteran Department of Natural Resources administrator who retired June 30 after having served for years as deputy commissioner with several stints as acting commissioner, the most recent since March with the departure of former commissioner Mark Myers. She first became the deputy boss at DNR in 1991, leaving in 2005 after a falling out with then-Gov. Frank Murkowski. She returned to her old job in December 2014 when Gov. Bill Walker took office. The Legislature treated DNR relatively easy this year when it wielded its big budget axe and that’s partly because of legislators’ respect for Rutherford and partly because the agency was hammered hard in the preceding two years. Some good news is that some of DNR’s revenue-generated core divisions, like the Division of Oil and Gas, are going into next year with its funding and staff relatively intact, although there were come cuts. Incoming commissioner-designee Mack, who takes the helm July 1, is known for having good political skill, which will be sorely needed over the next few years because the state’s financial situation won’t be getting better any time soon. Unlike many state agencies the DNR has the ability to generate some of its own funding, through fees. “We’re basically in the economic development business,” Rutherford said, and that includes raising revenues where it’s possible, including selling t-shirts and hats with state logos to support state parks. “No idea is off the table,” deputy commissioner Ed Fogels said, including ideas like renting out unused parking space at the state’s new geological materials center in Anchorage, a former Sam’s Club. Here’s the budget picture for DNR: State undesignated general funds approved for the agency by the Legislature for fiscal year 2017, the budget year starting July 1, totals $62.47 million. That’s down from $70.3 million in fiscal year 2016 ending June 30, $77.92 million in 2015 and $83 million in 2014. “We’re losing 17 positions next year and that’s on top of 76 positions lost last year. It’s a reduction of 10 percent of our workforce over two years,” deputy commissioner Ed Fogels said in an interview. Some good news is that the agency has been able to preserve its core divisions, particularly those that bring in money. The Division of Oil and Gas, for example, took a $139,000 hit this year and lost three positions. The bite was deeper last year for the oil and gas division, however. Other divisions took deeper cuts, however. The Division of Forestry is down $752,000 and two positions. The commissioner’s office was cut $335,000 and two positions. “This is going to affect our ability to deliver services,” Rutherford said. “In the divisions of forestry, mining, land and water management, there are cuts to support staff. This is going to slow down our work.” In the Division of Land and Water Management, which is cut $363,000 and two positions, there will be an effect on the processing of state land and water-use permits. This is an area where the DNR, and the Legislature, applied extra resources in 2011 to catch up on a backlog of land-use permit applications. The agency may be able avoid some piling up of applications by unified permitting procedures and electronic permitting, Fogels said. In other divisions, DNR is moving to find new fund sources so that agencies can become more self-funding. “If people use it, they should help pay for it,” Rutherford said. One example is in the state Parks Division, a small part of DNR but one that is popular with the public, which is already partly self-funded through campsite and visitor fees. The parks division will still take a $99,000 reduction this year. However, a planned increase in park and camping fees will allow the division to pay about half of its costs, Fogels said. The remainder could eventually be covered through new revenues from sales of state park t-shirts, caps and other paraphernalia with the state park logos and other designs, he said. Most state park systems in the U.S. help support themselves through sales of memorabilia, and now Alaska’s will do so, too. State park managers are now working on designs and ordering materials. Fogels said the objective is not to compete with the private sector. The state will be a wholesaler, selling the goods through retailers. Continued development of the state parks and campgrounds, however, could become very profitable for the state. The new K’esugi-Ken campground in Denali State Park, on the Parks Highway, will be open by Memorial Day 2017 with 32 campsites and, weather permitting, stunning views of Denali. “This is one of the best views of Denali along the Parks Highway, and it’s going to really pull people. We expect it to be very profitable,” Fogels said. More public-use cabins, for which fees are charged, are planned in high demand areas, too. “My goal is to get the Parks Division completely off state general funds,” Fogels said. Similarly, the state Division of Geological and Geophysical Services, another part of DNR, wlll be charging for access by companies to use its geologic materials center, which is an expensive facility to maintain. This is common in other states, but has not been done in Alaska. The division is taking a $53,000 cut this year. Rutherford is concerned about the state Forestry Division, which is taking a larger reduction. Cuts this year will eliminate a forester position in the small Haines State Forest in Southeast, and that, plus other reductions, could impair the state’s timber sales program in the region. The Southeast timber sales are profitable for the state, Rutherford said, and are also important for the few sawmills that remain in the area. State-owned forest lands are now the most important source of wood for these mills because harvests in the Tongass National Forest are sharply down. A bill passed by the Legislature this spring to allow the state to do negotiated long-term timber sales will help these mills secure a steady supply of wood. Previously the mills had to bid competitively in shorter-term sales, which meant that purchasers selling state timber as logs into export markets could usually outbid the local mills, which make products. In Interior Alaska the state supplies wood for small mills and biomass for heating from the Tanana State Forest. Rutherford is worried about the Forestry Division’s cuts in firefighter training. Last year saw a hugely destructive forest fire season and it’s too early to predict this year. “If we’re unable to have our own trained firefighters we have to import firefighters from other states,” she said. That not only drains money out of the economy — seasonal firefighting is a big source of jobs for rural Alaska — but it can slow response time. The federal government pays firefighting costs on its own lands, mainly in the Interior and northern parts of the state, but Alaska is responsible for state lands, which are also mostly near communities. Last year the state spent more than $75 million on firefighting. One division in DNR, the Division of Agriculture, has been a kind of step-child in previous years, but the division, and the industry it serves, is actually doing well, though Alaska farming is small-scale, Rutherford said.  The Matanuska-Susitna Borough has long been a source of fresh vegetables for Southcentral Alaska communities and the advent of weekend farmers’ markets had added a new profit center for local growers, though it is small. The new director of the Division of Agriculture, Arthur Keyes, is a local farmer himself and an entrepreneur who also developed the vibrant weekend farmers’ markets in Anchorage. The success for Alaska growers will be in niche markets, Rutherford said, like growing and shipping peonies for seasonal out-of-state markets. Even in Delta, east of Fairbanks, where the state unsuccessfully attempted to develop a large barley farming project in the 1980s, farmers still grow the grain for local markets and are making and selling new products. Bryce Wrigley, one local farmer, is making a barley flour that he sells in Fairbanks and Anchorage stores. His company is Alaska Flour Co. Rutherford said one of the Agriculture Division’s most important functions is the plant materials center that provides seeds for local grasses and plants that are important for land rehabilitation and restoration. Providing disease-free seed potatoes for Alaska growers is another function. This unit was under the budget axe this spring in Juneau. The state House cut $335,000 from the Agriculture Division, essentially eliminating the unit, but the Senate restored the money for one year. “In the next year we’ve got to figure out a way to raise funds for the plant materials center,” Fogels said. Rutherford said the ability to grow grass and other plant seeds in the state is important for keeping invasive plant species out. “Growing our own eliminates the need to import seeds for Alaska growers,” she said. It’s when seeds are imported that invasive species are introduced, mixed in with the out-of-state seeds. The state-owned and prisoner-operated Mt. McKinley Meat & Sausage plant in the Mat-Su, which provides the Southcentral region’s only approved U.S. Department of Agriculture inspection service for meat sales, was also given a reprieve by the Legislature. It was to have closed in July but lawmakers are allowing it to stay open while negotiations are underway with a local nonprofit that could take over ownership and operations. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

Giessel, MacKinnon skeptical of new direction on AK LNG

A briefing planned for next Wednesday on the Alaska LNG Project promises to be interesting, and possibly heated. The state House and Senate Resources committees are due to meet June 29 for a scheduled update from industry and state officials on the big pipeline and liquefied natural gas project. Alaska is a partner in Alaska LNG with the three major North Slope producers, BP, ConocoPhillips and ExxonMobil. The hot topic will be Gov. Bill Walker’s desire for the state to move into the lead role on the giant project, which became public this week in remarks to the press by Keith Meyer, newly-appointed president of the Alaska Gasline Development Corp., the state gas corporation that is the entity representing Alaska’s interest. “We’ve heard the governor imply that he wants to go it alone but this was the first time that we had seen it said explicitly,” by someone in the administration, state Sen. Cathy Giessel, R-Anchorage, said at a Commonwealth North task force meeting Friday, June 24. “We were not informed about this,” she added. As chair of the Senate Resources Committee Giessel will co-chair the June 29 meeting along with Rep. Ben Nageak, D-Barrow, co-chair of the House Resources Committee. Sen. Anna MacKinnon, R-Eagle River, was also at the Commonwealth North meeting, and said, “We’ve been asking about this for quite a while,” and have not been getting answers. As co-chair of the Senate Finance Committee, MacKinnon’s focus is on the budget. “We’ve been asking why we need to be spending $1 million a month on attorneys, including some brought in from London, and we were told that all of this was on work that was ‘inside the lanes,’ to support the present partnership structure,” and not on a new go-it-alone strategy, MacKinnon told Commonwealth North. Giessel said she has been told that Meyer will be speaking for the administration at the meeting. Typically, senior managers from the producing companies also attend and participate in joint presentations. Separately, ExxonMobil, operator of the technical work now underway on Alaska LNG, makes a separate presentation on the status of engineering and regulatory work. The project is now in the preliminary engineering phase, which is due to be complete late this year. The legislators’ focus will be on Meyer and the intentions of the administration, however. Recently announced changes in the administration have further confused things. Walker announced June 23 that state Attorney General Craig Richards has resigned, for personal reasons, and that Andy Mack, former government affairs manager for the North Slope Borough, has been appointed as Commissioner of Natural Resources, replacing Marty Rutherford, who is acting commissioner. The unexpected transitions aren’t sitting well with Giessel. “Marty Rutherford is someone the Legislature trusts. She is extremely knowledgeable about the natural gas project and has taken a very pragmatic approach in managing the state’s involvement,” Giessel said. In a recent interview, Rutherford said the state is still negotiating on fiscal terms with the three industry partners and that the talks could involve a “larger role” for the state in the project, but she did not mention that it might be a lead role or the state taking on building of the project by itself. MacKinnon said Meyer may have “gotten out ahead of the administration” on Walker’s new direction in his press comments. “I’m certain that Mr. Meyer exceeded what was supposed to be out in the public right now on this,” she said. The issue is also likely to further complicate the Legislature’s consideration of a new fiscal structure for the state, MacKinnon said. The Legislature will go into a new special session July 11 to consider once again the governor’s proposal for use of Permanent Fund earnings to reduce the state’s budget deficit, a plan that also involves reducing the annual Permanent Fund Dividend paid to citizens. “People are going to ask why the state is cutting the dividend when the governor is also asking to take on a hugely expensive gas pipeline and LNG project,” MacKinnon said. The gas project is now forecast to cost between $45 billion and $65 billion, but a revised cost estimate is being doing as part of preliminary engineering work now underway. Under the current structure of AK LNG the state would be responsible for about one fourth of the project costs with the industry partners shouldering the other three-fourths. If the state builds the project it will be responsible for all costs. Walker has always wanted the state in a lead role or even as sole developer of the giant gas project. Last year he pushed a plan for the state gas corporation, AGDC, to expand a smaller back-up pipeline plan, developed as a backstop to get gas to Alaska communities, into a larger project that could feed an LNG export plant and be in competition with the Alaska LNG Project. The Legislature stopped that by diverting funds from the AGDC budget, but the political heat generated by the controversy dominated the 2015 legislative session and diverted attention from other issues. With the demise of Walker’s plan to up-size the smaller AGDC gas project, the governor switched to support the industry-state joint-venture project proposed earlier, and approved by the Legislature. However, the sharp drop in crude oil prices and LNG prices on world markets has created problems for industry members of the current consortium. The governor held a press conference with BP, ConocoPhillips and ExxonMobil officials in February to announce a possible new “commercial structure” for the project, and said a new agreement could be in place by late March. That didn’t happen. In the recent interview Rutherford said she has been negotiating individually with BP, ConocoPhillips and ExxonMobil on a new commercial structure and that the talks have included terms under which the companies might be willing to sell gas reserves to the state, under a go-it-alone strategy, or to possible new partners. Walker has talked of bringing in potential purchasers of LNG, such as large Japanese companies, as investors and partners. The sensitivity over current cost, for the industry partners, is mainly on a decision planned in 2017 to begin front-end engineering and design, or FEED, for the giant project. The FEED is expected to cost between $1.5 billion and $2 billion and would be the first major investment in the project by the partners. Under the current structure the state would pay about a quarter of that, or between $400 million and $600 million. About $600 million is being spent in the preliminary engineering work that is now under way. A decision on the FEED in 2017 would allow the project to stay on its current schedule, which requires a final investment decision, or FID, in 2019, construction beginning in 2020 and operations starting in 2024 or 2025. In the recent interview Rutherford said there are ways the project can remain on schedule for completion in 2024 or 2015, however, even with delays in the FEED and FID. Just what the governor intends in a new plan is unclear. In the near-term it would likely involve the state funding all of, or most of, the $1.5 billion to $2 billion FEED cost. With that done, the state could solicit new partners. There are problems of where the money would come from for the state’s larger investment, however. The state’s financial resources are already stressed by large multi-billion-dollar deficits and the new plan to use Permanent Fund earnings would only cover part of the expected deficits. There are ways the state can finance the gas project costs, and state officials have been researching these to fund the state’s one-fourth costs. One idea is for the state to attempt to fund the cost solely with debt, an approach that Walker advocated before he was governor, and was head of the Alaska Gasline Port Authority, a municipal group attempting to develop a North Slope-to-Valdez project. However, approval by the Legislature will be needed on any of this and if reactions Friday by Giessel and MacKinnon are any indication, that will be a tough sell. “We are the ones with the appropriation powers,” MacKinnon said at the Commonwealth North meeting. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

Legislature takes weekend pause after movement on credits, Fund earnings

The Legislature is still trying to finish its business after there was a flurry of activity this week with the passage of House Bill 247, the embattled oil tax credit bill, and the Senate’s passage of a Permanent Fund earnings restructuring, in Senate Bill 128. Several tax bills proposed by Gov. Bill Walker were moved out of the House Finance Committee, but not debated on the floor. The previous week the state operating and capital budgets were passed. Things seem to be rolling and there were hopes lawmakers could finish things up and adjourn the special session. That didn’t happen. It now appears that SB 128, the Permanent Fund bill, is bogged down in the House and action on the various tax bills – on motor fuels, mining and fisheries – has also stalled. Action on these must come in the House and the usual fractures have developed in the House majority, where a dissident Republican “musk ox caucus” has split off to join with the House Minority on several issues. The votes are very unclear on SB 128. A hearing is set for the bill in House Finance Committee next Tuesday, June 14. What has complicated things in the House are the hard feelings remaining from the narrow 21-19 approval of HB 247, the oil tax credit bill. The compromise version of the tax credit bill agreed to in the House-Senate conference committee picked up substantial parts of the Senate-passed version, more favored by the oil and gas industry, instead of the version passed by the House. That displeased the group of rebel “musk ox” Republicans who teamed up with Democrats on the House version. The House bill was rewritten on the floor of the House in a lengthy amendment offered by Rep. Paul Seaton, R-Homer. The vote on that, which occurred May 13, passed by 21 to 16, with enough of the musk ox group joining the House Minority to pass the amended version, sending it to the Senate. When the conference committee compromise bill, which in effect gutted the Seaton amendment, came up for a House floor vote June 6, the vote was 21-19, approving the conference committee bill. What changed outcome on the House floor was that Rep. Mike Hawker, R-Anchorage, who is part of the House leadership faction, was able to be in Juneau after being gone most of the session undergoing cancer treatment in Anchorage. Hawker had missed the May 13 vote. Also, Republican Reps. Jim Colver of Palmer, Tammie Wilson of Fairbanks and Cathy Munoz of Juneau switched their positions. On May 13 they had voted with the Seaton group. On June 6 they voted with the House leadership. The key parts of the Senate bill which displease the Democrats and musk ox Republicans so much is the provision allowing North Slope producers a 35 percent Net Operating Loss deduction and to be able to carry this forward to apply against production tax liability in future years. The “NOL” credits are limited to 15 percent for other parts of the state for fiscal year 2017 and end in 2018, but continue at 35 percent on the North Slope. The enacted version of HB 247 also allows North Slope producers to use the NOLs to bring their state production taxes below the minimum 4 percent gross revenues tax, even to zero. That is another source of irritation for the House Democrats and musk ox Republicans. Other than those two items, which are important to many House members, many parts of the House and Senate versions of HB 247 are similar. Both versions phase out many of the non-North Slope tax credits over three years, although the House bill was more aggressive and phased out many of the credits more quickly. It’s uncertain whether Walker will approve the tax credit bill. The administration is unhappy with parts of it, including the North Slope producer NOL provisions. If Walker were to veto it legislators would have to remain in special session for an extended period to make changes, or come back in a second special session. What has also complicated the picture for SB 128, the Permanent Fund bill, is that passage of the bill by the Senate appears to have energized “don’t touch my dividend” groups among the public. Lawmakers are getting angry emails from constituents over the provision in SB 128 that lowers the dividend to $1,000. Under status quo, the Permanent Fund Dividend, or PFD, will be over $2,000 this year. Faced with fresh protests from constituents, several fence-sitting Republicans in the House may oppose SB 128. Almost all versions of the Permanent Fund earnings bills considered this year would lower the dividend to make more money available to support the budget. The fiscal effect is that a $2,000-plus PFD draws down the Earnings Reserve by $1.4 billion. Passage of SB 128 or any variation of the Permanent Fund earnings bills lowers this to $700 million. If SB 128 were to pass it would allow an approximate $1.7 billion draw (the estimated 5.25 percent-of-market-value of the Permanent Fund) to be taken from the Fund’s Earnings Reserve account to support the budget. This would reduce the estimated $3.8 billion deficit and CBR draw by $2.2 billion. The concept in SB 128 is that current-year earnings of the Fund would more than replace this withdrawal in the earnings account, so that the ER account would be sustained at its current balance  of approximately $7 billion. However, this doesn’t totally solve the state’s budget dilemma. If spending remains at about $4.5 billion a year, in state unrestricted general funds, and revenues remain in the $1.2 billion to $1.5 billion range (although oil prices are now gradually increasing) a $300 million to $600 million deficit will remain. The governor’s proposal is that new taxes would cover that, either from a new personal income tax or higher motor fuels taxes or new taxes on other industries like mining and fisheries. Those are more likely to be taken up next year rather than this year, however.  

Budget deal overshadowed by inaction on oil tax credits, Fund earnings

State legislators managed to pass a budget last week funded by cash reserves, but at week’s end an impasse continued over a long-term plan to restructure state finances and changes to a complex oil tax credit bill. The House Minority agreed to the votes needed to fund the budget after Republican leaders in the House and Senate agreed to add about $74 million in funds that had been cut, mainly in education, back into the budget. Lawmakers are still in a special session that was called by Gov. Bill Walker after the Legislature failed to agree on the budget and other matters in the regular session ending May 18. Friday, June 3, was the 10th day of the special session, which can last 30 days. The approved spending plan for fiscal year 2017, which begins July 1, is now about $4.264 billion in state unrestricted general funds, or UGF, the most widely watched category of spending, according to data compiled by the Legislative Finance Division. This is down from $5.078 billion in UGF spending in the current year ending June 30 and the $5.42 billion in fiscal year 2015. Some of the reductions are in one-time savings, however. Also, Walker has challenged the Legislature’s tally of the numbers, arguing that some of its cuts are not real because of shifts in the fund sources and mixing appropriations from the current year’s budget to pay for items in the upcoming year budget. However, for the longer-term trend, the important numbers to watch, Legislative Finance Director David Teal says, are the reductions in state agency operating budgets. Those are down to $3.87 billion in the budget approved for FY 2017, down from $3.99 billion in FY 2016 $4.5 billion in FY 2015. The reduction in agencies is between the current fiscal year and next year is $216.7 million, or 5.3 percent, according to the Legislative Finance documents. The House Minority had leverage to get money added back because of the requirement for a three-quarters vote in both the Senate and House to approve a withdrawal of funds from the Constitutional Budget Reserve, the main cash reserve for the state. The Senate leadership has the needed three-fourths majority with 16 members of its caucus, but the House needs the votes of its 13 minority members to get its approval for the withdrawal. The estimated withdrawal estimated by legislative leaders is about $3.17 billion, which is the difference between a total state budget of $4.42 billion of all UGF funds (including the capital budget) and revenues now estimated at $1.25 billion. The governor said the draw on the CBR would really be much higher, however. That’s because about $642 million in FY 2017 programs will be funded from the FY 2016 budget, which is still in place. That pushes total spending in FY 2017, including the funds from FY 2016, to $5.059 billion. Given that, the actual draw on the CBR will be about $3.8 billion. The effect of this is that it will deplete the CBR to the point that a similar-size draw cannot be made next year from that fund if the Legislature fails to pass new revenue measures, either the Permanent Fund earnings restructuring or new taxes. After the CBR is drained only the Permanent Fund’s Rarnings Reserve account is left. That fund, which now holds about $7 billion, could be tapped to pay for the deficits but it would make continued payment of PFDs problematic, since these also come from the Earnings Reserve. The Legislature can now appropriate from the Earnings Reserve with a majority vote, but the proposal in HB 245 and SB 128 is to establish an orderly mechanism to do this so Fund earnings will not be spent in an ad hoc manner. The bills are currently in the House and Senate Finance committees and are identical. They would basically shift the Permanent Fund to operate more like an endowment, with a percentage of the Fund’s total value set as an annual payment for the state general funds. The percentage for withdrawal is currently at 5.25 percent in both bills. That amount to be made available is now estimated at between $2.2 billion to $2.5 billion a year. That is still well short of eliminating an approximate $4 billion deficit, so ultimately other revenues will be needed, most likely from new taxes. Meanwhile, no progress was reported on the restructuring of the state’s oil and gas exploration and development tax credit program. The tax credit bill, House Bill 247, is seen as informally linked to the Permanent Fund restructuring bills. Versions of HB 247 have now passed both the House and Senate but they are substantially different, and a House-Senate conference committee has been appointed to negotiate the differences. As of late Friday, June 3, the conference committee hadn’t met. That doesn’t mean nothing is happening, however. Reports are that talks are still underway behind closed doors at possible compromises. Once the agreement is made, the conference committee will meet in public to ratify the compromise. Actually, the House-passed and Senate-passed bills agree on many points, mainly a phase-out of the most parts of the tax credit program by 2019. There are sharp disagreements on the points that remain, however, including the ability of larger North Slope producing companies to use tax credits to reduce their state production taxes to zero, and to “bank” the tax credits against future year tax payments. For their part, the producers argue that fears of a “tidal wave” of unused tax credits wiping out future state tax payments are overblown. That’s mainly because those claims are based on estimates of continued high spending and capital investment by industry, which isn’t happening under current low oil prices. If the spending is lower the loss is reduced, and therefore the tax credit liability for the state. Also, to the extent oil prices do edge up, up from a low of about $26 per barrel in January to about $48, the loss is reduced, and likewise the tax credit liability. Legislators are extremely sensitive to the oil tax credit issue because they fear constituents’ reaction to the state paying hundreds of millions of dollars in tax credits to oil and gas companies while also cutting the state budget and passing legislation that reduces the annual citizen Permanent Fund Dividend, one of the effects of HB 245 and SB 128, the Fund restructuring measures. Those bills (one or the other would be enacted) would cut the dividend to about $1,000 for the next three years. Otherwise it would be over $2,000 per PFD this year and at similar amounts over the next few years. At $1.4 billion estimated to FY 2017 the PFD payout would be the largest single program expenditure of state government, eclipsing state support for schools and the state’s share of Medicaid, the health-care program for lower-income Alaskans. If the dividend is reduced through passage of the Permanent Fund earnings bill it would reduce the cost of the PFDs to about $700 million, resulting in an additional $700 million made available to the state general fund. Meanwhile, other bills are also pending in the special session, such as the proposed increases in mining, fish, fuel and other taxes and a proposed reenactment of a state personal income tax. Alaska’s prior personal income tax was repealed in 1981, after large oil revenues began flowing into the state treasury. As the special session started the tax bills were combined into a single bill but Walker subsequently broke that apart so that the tax bills are now separate. The mining tax increase is in HB 4005; fisheries tax increases are in HB 4006, and the fuel tax increase is in HB 4003. The same bills are in the Senate in separate measures and bill numbers. A big complication for the extended session is a large celebration in Juneau planned by Sealaska Corp., the regional Alaska Native corporation for Southeast Alaska. Hotel rooms have been booked months in advance for June 8 through 11 for the event. The result will be a lot of legislators being kicked out of hotel rooms and a possible move to Anchorage to continue the session.

June 1 looms as some legislative work continues over holiday

Legislators remained in special session in Juneau through the Memorial Day weekend and some committees actually scheduled meetings to work on bills, although many lawmakers were heading home Friday for the long holiday weekend. The special session convened May 23, with legislators called back by Gov. Bill Walker after they failed to pass key bills, including the budget, by the legal end of the regular 2016 session on May 18. The state fiscal year ends June 30, and layoff notices will be sent to state employees June 1. A House-Senate conference committee on the operating budget and mental health program operating budget, which are done separately in House Bill 256 and 257, was to meet Friday afternoon and Sunday afternoon. The conference committee’s work is almost done as there are few differences remaining in the operating budget that need resolution, although supporters of the University of Alaska are still hoping to get some money added back to the university’s budget, which was cut sharply. Current fiscal year 2016 spending by the university is set at $350 million in state funds, and the Legislature proposes to cut it to $300 million. However, there is an additional $25 million in cost increases the university must absorb, such as scheduled pay raises agreed on in collective bargaining contracts, that raise the total impact of the reduction to $75 million. Meanwhile, the big budget question — how the expected $4 billion-plus deficit will be funded — remains unanswered by legislators. A bill that would set a framework for some earnings of the Permanent Fund to be used is before legislators but it has received little attention in recent weeks. What may be causing legislators to hesitate is that the bill would also result in a lower Permanent Fund Dividend to be paid out to citizens this year. If the status quo remains, PFD checks of about $2,000 are expected to be mailed out this fall, at a cost of $1.4 billion from the Fund Earnings Reserve. Under the proposed bills that revamp management of the Fund’s earnings, the checks would be reduced to about $1,000, lowering the cost to about $700 million. Committees did meet on several other bills this past week, however. Hearings by the Senate Labor and Commerce committee were held Wednesday and by House Finance committee on Friday on an “omnibus” tax bill that rolled together several bills that were considered in separate legislation during the regular session. A proposed personal income tax and tax increases on motor fuel, mining, fishing and other existing state taxes are now in one bill. Hearings were also held Friday and scheduled for the weekend by the House Finance committee on HB 374, a health care insurance bill. This bill would expand an existing state “re-insurance” mechanism to provide financial support for people with high-cost medical problems in the individual health insurance policies that are sold in the state. It is modeled on an existing program to support insurance for Alaskans with costly health problems operated by the Alaska Comprehensive Health Insurance Association, or ACHIA. The most high-profile issue of the session, except for the Permanent Fund earnings question, is the proposed reform of the state’s oil and gas tax credit incentives, which has turned into a quagmire that has bogged down the Legislature. Many versions of a reform bill have been proposed by different committees in the House and Senate, all with different effects on various groups within the industry, from large producers to small producers and companies just exploring but without production. At this point there is a version of a bill that has passed the House and a different version that has passed the Senate, with a House-Senate conference committee appointed to reconcile differences between the two. On many points the bills are in general agreement, such as winding down the tax credit program over two to three years. On other issues there are substantial differences, and disagreements, such as an allowance for net operating loss tax credits for major North Slope oil producers and certain terms affecting a minimum state production tax those producers pay. Despite the late hour of the extended session the conference committee on the tax credit bill, HB 247, has yet to meet and there are no meetings scheduled over the long weekend or for next week so far. The talk in the capitol hallways is that there really won’t be a meeting of the conference committee until a basic agreement on the bill is worked out. The basic problem is the difficulty in getting 21 votes in the House on a version that will be acceptable to the Senate. Even if the House and Senate conferees agree on a compromise version it must still go back to both bodies to be approved, or disapproved. On a practical basis the conference committee won’t produce a product until the necessary votes are there on both sides, particularly in the House. However, the clock is ticking and June 1 is a threshold date, in two ways. First, if there is no resolution to the budget the state administration is required to send out notices of termination to all state employees effective July 1. That is the date by which the Legislature must have an approved budget for FY 2017 or the government has no legal authority to spend money. Last year, when disagreements also bogged down the session adjournment, June 1 came and notices went out, creating an upsetting experience for state workers receiving the letters. Lawmakers hope to avoid that this year by having acted on a budget by June 1. A second reason the date is important is that it is the filing deadline for candidates for legislative offices. After June 1 the incumbent legislators will see who has filed to run against them. This is important because if an incumbent faces a strong challenge for reelection the sitting legislator may be reluctant to take a controversial position on a bill, such as the Permanent Fund earnings bill with its effect of reducing the PFD. However, if the incumbent faces no opposition or a weak opponent, he or she may be more willing to make a controversial vote. House members serve two-year terms so all 40 are up for reelection, but many are in relatively safe districts and are unlikely to face strong challenges. The Senate is in an even more comfortable position because senators serve four-year terms, so only 10 senators, or half the 20-member body, is up for reelection this year. Even of those standing for election, many are in seats considered safe.

Lawmakers face crunch of time, hotel space as special session begins

Legislators were back in Juneau Monday morning, May 23, meeting in special session to resume work on a tangle of critical bills they failed to complete May 18 when the regular 2016 session had to end. It was the legal 120-day limit of the regular session. One new worry for legislators, however, is whether they might be kicked out of hotel rooms and apartments if the special session extends into June when Juneau’s annual tourism hotel room crunch hits. “I’m told there are no hotel rooms available in the middle of June,” House Speaker Mike Chenault said. “We may all be sleeping in tents.”  House Majority Leader Charisse Millet said lawmakers could roll out sleeping bags in temporary offices (the capitol building is under renovation) as a former legislator, Vic Kohring, used do, except there are no window shades or blinds in the temporary digs. Meanwhile, on Monday Gov. Bill Walker presented the first of 10 bills he wants lawmakers to work on, with other set to follow. On his notice for the special session the governor included the state operating budget, a Permanent Fund earnings bill, various tax measures, an insurance bill, a bill on adoptions and foster care and another on pension benefits for peace officers’ and firefighters’ spouses, if they are killed in the line of duty. All of the bills were at various stages in the Legislature, some quite advanced, when the House and Senate gaveled out at midnight Wednesday. In a Thursday press conference Walker said he wasn’t sure the bills would be re-introduced in the form they were last in or the original versions introduced, or some new “hybrid” version. The operating and capital budget bills are well advanced and could be completed quickly once final agreements are made. A House-Senate conference committee has been at work for some time resolving differing versions of the operating budget. Important Permanent Fund earnings bills, which could reduce the deficit and draw on state cash reserves, were in the House and Senate Finance committees as identical bills, a signals that agreements had been reached on at least the form of these, although whether there are enough votes to actually pass the bill is unknown. There is talk in the capitol building hallways that some funds cut from the operating budget may be restored, reversing reductions made to K-12 education and the University of Alaska in the latest version of the budget bill. These are believed to be on the list of demands by the 13-member House Minority whose votes are needed to withdraw funds from the Constitutional Budget Reserve to balance the budget. The state capital budget has been passed by the Senate and was on the House floor when the regular session was adjourned. Among other items it contains about $19 million to fund the state’s continued negotiations on commercial terms for the Alaska LNG Project. The state administration had planned to spend more during 2016 and 2017 on gas pipeline work, but money was cut for a marketing initiative for state-owned LNG since it is increasingly likely the big project may be delayed. However, several agreements are still needed soon among the project partners, which include the state, before final engineering can begin. The most contentious issue in the special session will be the revamp of the state’s oil and gas tax credit incentive program, which was the issue that bogged down much of the regular session. In the days before the regular session adjourned the House passed a version of this, which was considered in the Senate and sent back, with major changes. The House rejected those changes and the issue was set to go to a House-Senate conference committee when the gavel came down late Wednesday. This is a complex bill with parts that affect oil and gas companies in different ways and much of the churn on the bill all spring has been on how various versions affected different parts of the industry­ — explorers, small producers and large producers. Walker’s intent in sponsoring the original bill, House Bill 247, was to lower the heavy cost of the tax credits to the budget, which amount to several hundred million dollars a year in the form of cash rebates to the companies, who are mostly small independents. The big push-back against cutting the program sharply came from legislators who felt rapid cuts to the credits was unfair to companies who had made financing decisions on projects based on the program. Some of these projects could be producing 25,000 barrels per day to 30,000 barrels per day by 2018, paying state royalties and taxes, so there is a direct loss to the treasury to a short-term decision to cut off the credits quickly. Some legislators, in defense of the current program, argue that it has actually accomplished its goals of getting new companies exploring in Alaska, new exploration wells drilled and oil and gas discoveries made. For example, new gas resources discovered in Cook Inlet since 2010, aided by the tax credits, eased concerns over a regional gas shortage and ended, for now, plans to import LNG. On the North Slope there have new oil discoveries by Pioneer Natural Resources, Caelus Energy, Brooks Range Petroleum, Repsol and Armstrong Oil and Gas that were arguably aided by the program. However, critics of the tax credits say it’s hard to defend them with state budget deficits of over $4 billion. Lawmakers would have to explain to constituents, as the August and November elections draw near, why cash payments for tax credits to oil and gas companies should have a priority over school or university budgets. Some of the earlier versions of HB 247, as alternatives to the governor’s original bill, had a more gradual wind-down of the credits, but the most recent substitute bills, from the Senate, would wind down the credits more rapidly. As for the regular session, in an after-midnight briefing for reporters last Thursday morning, tired and exhausted House leaders, including Chenault, Rules Chairman Craig Johnson and Majority Leader Charisse Millet, said a last-ditch effort on a budget compromise would have put many things the Minority wanted back in the budget including schools and the university. Chenault said the Senate had also signed off on these. The deal fell apart when the Minority brought up new issues at the last minute, he said. In the Minority’s briefing Thursday morning Rep. Chris Tuck, the House Minority Leader, said one sticking point was over terms in the Senate-passed oil tax incentive bill, HB 247. A particular concern was the confidentiality language in the bill, Tuck said. The Minority wanted more transparency, on who was getting the oil tax credits. The bill that came from the Senate had only the amounts and types of credit payments, but not companies receiving them. Tuck said the House Minority supports the concept of the incentive tax credits, but for the “companies who need them,” meaning independents, and not the large companies. The tax bill from the Senate included provisions that were of more benefit to larger companies, he said. Tuck also said the Minority voted against a 10-day extension because if that failed and a 30-day special session followed it would push a final budget approval too close to July 1, he said. That is the start of the fiscal year and when the government must shut down if there is no budget. He said the Minority was willing to go for a one-day extension or something a little longer but Chenault said the Majority rejected this because there was no assurance a short extension would make a big difference.

Limiting ER ‘over-users’ an attempt at cost control

Trouble comes knocking at Dr. Anne Zink’s emergency room door at the Mat-Su Regional Hospital near Palmer. The patient is a middle-aged housewife, upper middle class, educated, addicted and shopping for painkillers. Zink doesn’t know that. This is a problem. Alaska has a state prescription drug database, but it takes time to log in and use. Zink doesn’t have time. Things move too fast in emergency rooms. “I need this information now, in real-time. Without it, I’m practicing blind,” she said. What Zink wouldn’t know is that the patient has been to an emergency room 34 times in the last 12 months. There are a lot of reasons why people go to hospital emergency rooms. An accident with life-threatening injury is one; a mental health issue and no access to behavioral health help is another. Inability to pay — hospital ERs have to take all comers — is one more. Sometimes people are just lonely and confused. Some come to Mat-Su’s ER more than 50 times in a year.  One patient with complex social and medical needs showed up 166 times last year, Zink said. Unfortunately, shopping for painkillers and narcotics is another reason people come to ERs. This is an epidemic in Alaska and across the nation, and it is an urgent problem. There’s some good news coming, however. Zink and other emergency room physicians in Alaska hospitals will soon be able to get real-time electronic medical information on ER walk-ins through a new project being done jointly by the state hospital association, the Alaska chapter of the American College of Emergency Physicians. (Zink is chapter president) and the state Department of Health and Social Services. The project was authorized in Senate Bill 74, a wide-ranging health care reform bill passed by the Legislature this spring, and it will do more than help spot ER “super-users,” said Becky Hultberg, president of the Alaska State Hospital and Nursing Home Association, or ASHNA. Hospitals will help people find more appropriate care for non-urgent needs than going to an ER, and even making appointments for patients with primary care physicians and behavioral health providers. SB 74 requires this to be done within 96 hours of an emergency room visit. Also, hospitals and the state health and social service department will develop uniform statewide guidelines for the prescribing of narcotics in emergency rooms. Surprisingly, this doesn’t exist now as a statewide guideline.  The joint project is modeling on a series of highly successful emergency room best practices worked out between the state of Washington and hospitals there. Overuse of emergency rooms had become a huge problem particularly among Medicaid patients, and in an attempt to control costs the state put a hard limit on hospital ER reimbursements for Medicaid patients. This put hospitals in a bind because under federal law no patient can be turned away at an emergency room, Medicaid or otherwise. “It became a kind of unfunded mandate,” which was very costly, not just for hospitals but for the entire health care system when Medicaid and Medicare pay, Zink said. The best practices are aimed at spotting ER super-users and steering them to alternative, often better, primary or behavioral care. They were proposed by Washington hospitals and accepted by the state after a court battle over the state decision to cut off Medicaid payments. The first-year savings target of $30 million was exceeded — it was actually $33.6 million, Zink said. Other results included an overall 9.9 percent decline in ER visits, a 10.7 percent decline in “super-users” (those defined as visiting emergency rooms 5 or more times in a year), and a 14.2 percent decline in low-urgency ER visits, she said. These are people with colds and similar ailments who are steered to local primary care providers. The cost-savings potential for educating patients and implementing coordinated care is huge and will include better health outcomes, Zink. The electronic information link between hospital ERs is a first step because people sometimes “shop,” going from hospital to hospital. “Frankly, we’re siloed (cut off). It’s like there’s no highway between Palmer and Anchorage,” in providing access to patient information between hospitals, she said. The project goes beyond prescription drugs too because it will show if a patient already has worked out a health care plan with another hospital. Frequency of radiology and CT scans will also show up on a real-time as part of a one-page health summary. An ER physician might order a CT scan not knowing the patient has already had two or three scans at other hospitals. Too many of these create health problems. “There are 26 institutions doing coordinated care planning between the Mat-Su and Anchorage and not having these in an accessible database leads to a lot of uncoordinated care, duplication and waste,” Zink said. The current state database covers only prescription drugs and has had intermittent funding from the Legislature, where there have been concerns over privacy. It takes two or three minutes to log into the system Zink said. With more than 80 people a day coming through Mat-Su’s ER, and 30,000 last year, taking two to three minutes per log-in for patients needing a prescription drug can easily translate to two to three hours a day being consumed. Changing this will result in better care at lower cost. “An opportunity to do that doesn’t come along very often,” Zink said. SB 74 was passed by the Legislature April 17 and is awaiting Gov. Bill Walker’s signature, but the hospitals and emergency room physicians aren’t waiting. The first planning meeting to implement the project has been held, and Hultberg thinks parts of it can be up and running in 2016 and the rest in 2017. Hospitals will wind up funding parts of the project themselves but there may have to be funds raised for the information technology parts, she said.  

Overtime Week 4: Legislature still bogged down as latest oil tax revision struggles to get traction

There appears to be some movement, finally, in the quagmire that has become the 2016 state legislative session. The House Rules Committee held hearings during the week on a new version of House Bill 247, the controversial state oil tax credit bill, and moved the bill out of committee Thursday afternoon. On Friday the House took the bill up for floor action and debated amendments. It was unclear, however, whether there are enough votes to move the bill out of the House. Approval by 21 of the 40 House members is needed, and none of the versions of HB 247 have gotten the 21 votes needed. If the bill does get out of the House it faces an uncertain future in the Senate. In a related development the Senate Finance met on the state capital budget, another critical bill, and sent SB 138 out of committee Thursday. The committee added $12.5 million for the purchase of a building in Anchorage for the Legislative Information Office but declined an amendment made to restore $7.2 million in additional funding to complete a new school for Kivalina, a coastal village in northwest Alaska. The committee also attached a statement of legislative intent that appropriations made to date for the Kivalina school, which total about $43 million, are enough to satisfy requirements of a settlement of litigation brought by rural parents over inadequate school construction funding. Several rural schools were built under the settlement and Kivalina was to be the last, but the settlement requires a full $50 million appropriation. So far the school budget is $7 million short. If the money is not ultimately appropriated the court may void the settlement. The oil tax and capital budget bills are two of four key pieces of legislation that are hung up in the impasse over adjournment of the 2016 session. Besides oil taxes and the capital budget there is the state operating budget and a measure that would allow Permanent Fund earnings to be used to help fund the state budget. The operating budget is in a House-Senate Conference committee and the Permanent Fund bills, now in identical form in both the House and Senate versions, are in the Finance committees in both bodies. Meanwhile, the Legislature reaches its 120-day legal limit May 18, next Wednesday. Under the state constitution lawmakers must adjourn then, although they can vote to extend 10 days with a two-thirds approval of both House and Senate members. The 20-member Senate could muster that with its 16-member, Republican-dominated majority, but in the 40-member House the votes of all 27 members of the majority will be needed. If extending the session by 10 days does not receive 27 votes, the session ends and all bills will die. The governor would then call legislators into special session and specify certain bills for action. Legislators can add bills to the list. The budget is on the front burner as an issue, however. For state government to operate it must have an approved budget by July 1, the start of fiscal year 2017. If there is no action by June 1, however, the governor must begin issuing pink slip notices to state employees, a contingency in case June 30 comes with no budget. The notices were sent last year when the session extended into June, when lawmakers played a similar game of brinksmanship. HB 247, the oil tax bill, still appears to be the chief obstacle blocking an adjournment agreement, and there are strong disagreements over it between the various factions in the state House. Democrats in the House Minority want the credits scaled down sharply in view of the state budget situation — they call it a “giveaway” to the industry — as does Gov. Bill Walker, who cites the heavy effects on the state budget of cash rebates paid under the program. At the other end of the spectrum is a group of conservative Republicans in the House Majority who feel the tax credit program should be left more or less intact, or scaled back as little as possible, arguing that the program will result in new oil production in the future, with those benefits far outweighing the short-term cost of the tax credits. In the middle, between the groups at either end, is the majority of House Republicans who want the program moderated but not to the point desired by the governor or the House Minority. Complicating this further is the question how the bill affects different companies in the industry, which range from small explorers to small and medium-sized independents developing new oil they have discovered, to the medium-sized and large companies who are producing oil on the North Slope and Cook Inlet. Each version of HB 247 has moved the levers in several of the tax credits ways that affect these companies differently. A lot of the tension around the bill comes from the companies jockeying to protect their own programs at the expense of others, and the large companies who have always been ambivalent about the tax credits. The small explorers includes two Alaska Native corporations drilling in largely untested Interior Alaska basins and small independents testing the possibility of producing shale oil on the North Slope, which could become significant. Of companies developing new finds, three new oil projects that could be affected by the outcome of the HB 247 debate include Caelus Energy’s Nuna project and Brooks Range Petroleum’s new Mustang field on the North Slope and BlueCrest Energy’s new Cosmopolitan oil project in Cook Inlet. These could be producing 20,000 barrels a day to 30,000 barrels a day of new oil in three or four years bringing new oil royalties and other tax revenue to the state if they proceed. BlueCrest President Benji Johnson has shown legislators, in presentations, that its field will repay all of the state’s tax credits in three years if the Cosmopolitan project continues on schedule. HB 247 was on the House floor in April and caused a rupture of the House majority. Without enough votes to pass on the floor, the bill went back to the Rules Committee. Several versions of attempted compromise bills have been floated since then, none getting legs.   This time around the House leadership, in frustration, may just let the latest version out on the floor to see It voted down, killing the bill. That would leave either the Senate sending over its version, SB 130 (which may see the same fate) followed by the governor listing the bill on a special session agenda. If no bill is passed, and the program stays intact as is, the governor might veto a large portion of the $700 million-plus appropriation to pay the credits, as he did last year.

Overtime Week 3: Criminal justice reform passes House, credit issue still unresolved

The state House passed a major criminal justice reform bill late Thursday after days of wrangling over amendments on the floor and lengthy committee hearings. The vote was 28-11 in favor of passage. The bill now goes back to the Senate, which passed the bill 16-2 on April 9. Following the House passage, senators will now review changes made in the House. It is expected that the changes will be accepted, however, which avoids the need for a conference committee on the bill. Passage of the crime bill along with a Medicaid reform bill earlier in the session are seen as major accomplishments even as lawmakers remain at impasse over a controversial bill making changes in the state’s oil and gas tax credit program, and a bill establishing a structure for using Permanent Fund earnings to fill the state budget deficit of more than $4 billion. Senate Bill 91, the criminal justice bill, streamlines sentencing provisions in criminal law and sets out alternatives to prison for low-level offenders. It also facilitates inmate-release community support and counseling to reduce recidivism, or a return to crime and prison. A major goal is saving money — prison costs have become a big burden to the state budget — but the bill is also about developing a more rational structure for incarceration. About half the inmates now in Alaska’s jails are there for non-violent, low-level crimes or awaiting trial. As the bill passed the Senate it didn’t seem controversial but as the legislation progressed through the House opposition developed, including people supporting a hard-line “tough on crime” policy to crime victims advocacy groups, who also opposed coddling criminals. Small businesses also weighed in, worried about provisions in SB 91 that reduced the number of property crimes listed as felonies, making them misdemenors instead. In the final days of the House deliberations there was also talk of adding language from another bill, a “widows and orphans” provision that was being considered that would grant pension rights to families of slain police officers. This had been in a separate bill that was bogged down, so, as often happens, a proposal was made to strip the language and add it to a bill that was moving, in this case the crime bill, SB 91. As that was being proposed others jumped in with suggestions that pensions for widows of firefighters killed in the line of duty should also be added. These measures would have added to the cost of the bill, which already has new funding for community support groups and counseling for released prisoners. In a year when the state is facing a huge budget deficit such added costs are likely to have prompted rejection by the Senate. Credit impasse Meanwhile, the impasse in the Legislature over HB 247, the oil tax credit incentive changes, continues in Juneau. The bill is basically the holdup for adjournment, and until it is resolved nothing else will move, including the state operating and capital budgets and the important Permanent Fund earnings bills. The latest on this is an attempt at a compromise bill being worked out between Reps. Paul Seaton, R-Homer, and Tammie Wilson, R-North Pole. It is an unusual pair to break the impasse; Wilson is very conservative and Seaton is best described as a moderate Republican, though some call him liberal. The two represent distinct factions, with Seaton aligned with a rebel group of Republicans challenging House leaders led by Speaker Mike Chenault, R-Nikiski. The two have not released details of their proposal but are showing it to other House members seeking support. Other “trial balloons” on the oil tax bill have been floated recently including one by Rules Committee Chair Rep. Craig Johnson, R-Anchorage, who is part of the House leadership and has introduced the fifth and sixth versions of the bill since a different version of the bill was yanked from the floor April 13 lacking votes to pass. So far none of these ideas have mustered 21 votes needed for passage in the 40-member House. Passage by the House does not end the issue, however, because HB 247 then goes to the Senate, where Senate Resources chair Sen. Cathy Giessel, R-Anchorage, and Senate Finance co-chair Sen. Anna MacKinnon, R-Eagle River, are said to have different ideas about the oil tax incentives. Meanwhile, with the days kicking by toward the constitutional limit of 120 days for the session and a likely special session following that, legislators are being advised by their leaders to secure hotel rooms through to the end of May. Other bills Meanwhile, as long as the regular session continues all other bills remain alive and some are likely to pass in the rush for adjournment that will happen once final deals are cut. One important bill pending is a “reinsurance” bill that would solve a problem that has emerged in the individual and family health insurance market. Insurance companies selling in this market have suffered heavy losss and one firm, Moda Health has pulled out. This leaves Premera Blue Cross as the only company selling health insurance in the market. The problem is unique to Alaska because of the very small size of the individual health insurance market. In other states, such as Washington and Oregon, the numbers of people are large enough to absorb losses without making the business unprofitable for insurance companies. Losses climbed sharply after a number of people with high-cost medical issues left the state’s existing high-risk pool, operated by the Alaska Comprehensive Health Insurance Assoc., or ACHIA, and joined the new Alaska insurance plans offered under the federal Affordable Care Act. Under the ACA people cannot be denied coverage because of pre-existing conditions, so individuals brought their costs into the new plans but without sufficient numbers to add substantial revenues. Previously they were covered under ACHIA, which collects fees from Alaska group health insurance plans to subsidize the high costs. Meanwhile, those covered under ACHIA paid high premiums, although most of the costs were subsidized. When the ACA plans became available the premium costs were lower, and people with high-cost health problems under ACHIA jumped to the new plans. The legislative proposal would simply expand the existing ACHIA coverage, much as it was before, to essentially the same people with their plans now in the ACA individual insurance market. Since the numbers of high-cost people are about the same, it’s like that fees paid by other health insured will be similar. However, the bills did hit some headwinds a few weeks ago when labor groups became concerned about whether the bill would affect their members’ health insurance plans. It is uncertain how this was resolved. Meanwhile, two other bills that have now passed the Legislature, both related to rural communities, include Senate Bill 196, which allocates surplus earnings from the rural Power Cost Equalization fund, and SB 210, which converts the current state community revenue-sharing program to a community “assistance.” The bottom line of SB 210 is that the amount of money being spent is cut from about $60 million a year to $30 million. The money goes to all municipalities, large and small, to help support services but with a formula that allocates more, on a per capita basis, to small rural villages. SB 196 is related to community assistance in that part of the surplus from the PCE fund, after the annual power cost support costs are paid, is used to fund the community assistance payments. If there are surplus earnings remaining they would be used to help fund the state renewable energy grant program, which mainly helps small rural communities.  

In a first, no bids offered at Cook Inlet lease sale

No bidders showed up for a Cook Inlet oil and gas lease sale planned for May 5, and a top industry official blames a toxic political environment that has developed in Juneau over oil and gas tax legislation. “It is no wonder there were no bids,” said Alaska Oil and Gas Association President and CEO Kara Moriarty. “What company would even consider new projects in Cook Inlet at a time when the Alaska Legislature is considering changes that will make it more expensive to operate in the basin?” A top state official said other factors were in play, however. “We attribute the lack of participation in this lease sale to a protracted period of low prices as well as a limited amount of available acreage around producing areas and infrastructure in Cook Inlet,” Division of Oil and Gas Director Corri Feige said in a statement. “The number of state oil and gas leases currently leased in Cook Inlet is above the historical average. Currently, there are 335 tracts leased in Cook Inlet, totaling over 911,000 acres of state land,” Feige said. The sale is held annually in the spring and offers all unleased state-owned uplands and submerged lands in the Cook Inlet basin in Southcentral Alaska. Moriarty said the message people should take from the no show of bidders, is that, “Alaska is an unpredictable, unstable, and uncertain place in which to do business. “If the governor and sympathetic members of the Legislature make it even harder for companies to invest in Alaska, this lease sale result is likely just the beginning in a series of similar announcements. Either way, Alaska loses.” State lawmakers are in an extended legislative session in the state capitol wrestling with a series of proposed changes to petroleum exploration and development tax credits. The changes would either end or phase out a set of incentives in Cook Inlet the state has offered that include cash rebates to companies. Gov. Bill Walker said the program has become too costly for the state, which is being battered by sharply lower oil revenues. Moriarty said some changes proposed would cut tax credits just as companies are beginning development of new projects, jeopardizing their financing. Cook Inlet has seen a burst of new exploration and development in recent years mostly by independent companies purchasing assets and exploring. The state's incentive program was a particular encouragement for small independents that could use the state tax credits to get financing for drilling. Several gas discoveries have resulted from the exploration by independents and one company, BlueCrest Energy of Fort Worth, Texas, is now developing an oil discovery. Industry bidding was trailing off even last year as oil prices fell. In the state’s 2015 Cook Inlet areawide lease sale, held last May 7, the state Division of Oil and Gas auctioned seven oil and gas leases May 7 to three companies, Hilcorp Energy LLC and AIX Energy LLC, two producers in the region, and Woodstone Resources LLC, a small independent company based in Texas. The state collected $749,819 in bonus bids on the seven tracts. However, having no bids at all is a first for a state oil and gas lease sale in one of the state’s main producing areas. There have been previous cases where no bids were received for state leases in remote areas such as the Brooks Range foothills in the southern North Slope and the Alaska Peninsula in southwest Alaska. A federal Outer Continental Lease sale in lower Cook Inlet was once cancelled for lack of bids but the region is in deeper water and farther offshore than is the case in upper Cook Inlet where the state owns submerged lands and industry is active, with producing offshore platforms. There are also other complications in the Cook Inlet situation than low oil prices and the pending winding down of state incentives, however. The regional geology is gas-prone and while new gas discoveries have been made, and while regional gas prices, at $7 to $8 per thousand cubic feet, are among the highest in the nation, there is also a limited local market. Most of the market is with regional utilities that now have contract needs met until 2022 and 2024. Major gas users are also now purchasing their own reserves so they are less dependent on producers. Chugach Electric Association, the state’s largest electric utility, recently joined with Anchorage’s Municipal Light & Power to purchase one third of the Beluga gas field, on the west side of Cook Inlet, where ML&P already owns a third. ConocoPhillips previously provided an alternative export market for gas through the company’s liquefied natural gas plant near Kenai, but with low LNG prices in Asia it is considered unlikely that the plant will make gas purchases for export shipments this year.

Overtime Week 2: Jackhammers only thing that seem to be working

The Legislature is now two weeks into overtime — the 90th day adjournment seems an age ago — and not much is happening. Committee meeting notices are posted and then cancelled. A trial balloon of a compromise on the contentious oil tax bill is floated, but then sinks. The budget conference committee has gone through much of its work, and the all-important Permanent Fund earnings bills are still in the House and Finance committees. Contractors are busy on the major capitol building renovation, but that seems like the only work being done. Instead of the customary bells being rung summoning legislators to floor sessions, only the jackhammers are heard as workmen tear into the building foundation. On Sunday, a big crane will show up, blocking access. By then legislators will have dispersed to temporary offices. In a briefing last week Gov. Bill Walker complimented lawmakers for staying in Juneau to finish their work rather than decamping to Anchorage to do it. Walker said the availability of Gavel-to-Gavel in Juneau, the Legislature’s public access video service done by KTOO-TV of Juneau, was an important public service that is technically more difficult if done outside of Juneau. Now that temporary quarters are set up it’s likely that any special session will be held in Juneau, too. Another factor in the decision, however, may be the Legislature’s embarrassment over having to use, most likely, the controversial Legislative Information Office in downtown Anchorage if the group did come to Anchorage. It’s unfair to say not much is happening, of course. Behind closed doors there are intensive discussion and negotiations as legislators try to work their way through to a package for adjournment they can agree on. It’s very complicated, though. The bill that rewrites the state’s oil tax credit law is the big hangup. This is House Bill 247 and Senate Bill 130, the original bills sponsored by Gov. Bill Walker. HB 247 is in the House Rules committee, having been sent there after the House Republican Majority split on the issue before mustering a majority of 21 votes (of 40 in the House) to pass the bill to the Senate. The Senate is hanging onto its version, SB 130, to see what the House does. The bill is in the Senate Finance committee.  Meanwhile, the session has not adjourned and all bills are still pending. Two big issues include criminal justice reform, in SB 91, and marijuana regulation, in HB 47. The marijuana regulation bill is in a House-Senate conference where it may remain because of unresolved issues but an important part of it, criminal background checks on marijuana business operators, was taken out and passed in another bill. This is a common late-section practice. If a bill gets bogged down parts of it are often stripped and attached to other bills that are moving through. This sometimes backfires, though. For example, language from a bill granting pension rights to widows of slain peace officers was stripped from one bill and added to the crime bill. The effect was to slow the crime bill as legislators had to take a look at what the pension additions did, particularly when other amendments appeared granting pension rights to other worthy persons. This is a called the “christmas tree” process where ornaments (amendments) are hung on the tree (the original bill). Sometimes there are so many ornaments that the tree dies. The crime bill, SB 91, is still in House Finance committee as this is written but may be on the House floor this week, finally. The bill has broad, bipartisan support and will likely pass eventually. It would develop alternatives to prison for low-level offenders, too many of whom now crowd our prisons. Normally this kind of bill is sponsored by liberal Democrats, but SB 91’s prime sponsored is Sen. John Coghill, R-Fairbanks, a conservative Republican.   Permanent Fund earnings The other major bills hung up in the logjam are the Permanent Fund earnings bills. Identical version are now pending in both the House and Senate Finance committees that are hybrids of different approaches to this in bills originally introduced by the governor and Sen. Lesil McGuire, R-Anchorage. The fact that the House and Senate leaderships seem to have coalesced around a version of this indicates some agreement on the form of a bill, but what isn’t known is whether there are enough rank-and-file members of the House and Senate needed to pass the measure. Twenty-one votes are needed in the 40-member House and 11 in the Senate. If the bill passes it would allow about $2 billion to $2.2 billion of Permanent Fund earnings to be used to support the state budget, but that still leaves $2 billion in a remaining deficit. For this year that could be covered by a withdrawal from state cash reserves but additional sources of revenue, most likely taxes, will be needed next year. The state operating and capital budgets are also in limbo along with everything else. Legislators finished work on the agency part of the operating budget in late March, as planned, but several big-ticket spending items, mainly money for oil tax credit refunds, remain to be added when agreements are reached on those. There are differences between the operating budgets passed by the House and Senate but much of that has been resolved by the conference committee. When the agreement is finally made on oil tax credits the amount needed to fund those will be added to the budget. Oil tax credits It’s a politically awkward issue because legislators may be asked to fund several hundred million dollars of tax credits at a time when $50 million in cuts are being made to the university budget, for example. Some in Juneau have observed that it’s a coincidence that the top-end number for the oil tax credit payments of about $700 million a year is about the same amount that dividend payments to citizens will be cut this year by the various Permanent Fund restructuring bills pending. The bills would set the dividend at $1,000 this year, down from about $2,000 if status quo remained, a reduction from about $1.4 billion paid out with a $2,000 PFD to about $700 million. While there’s no direct connection between the oil tax credit bill and the Permanent Fund restructuring there is a potent political connection in that voters may believe their dividends are being cut to fund cash payments to oil companies. Democrats are already taking advantage of this in op-ed articles being written. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

Overtime in Juneau: ‘Musk ox’ caucus causing headaches for House leadership

The bad news is that the Legislature is still in Juneau. The good news is that the jackhammers have showed up. Major reconstruction work has restarted on the capitol building — this is phase two of a two-year project — and now an added pressure on legislators to get done is just the noise. Streets are also blocked around the capitol too, making access difficult. The betting now is that in a few days there will be a recess for lawmakers take a break and shift to Anchorage to reconvene, possibly in the controversial Legislative Information Office building on Fourth Avenue. Being in the building for the extended session or a special session will be a political embarrassment for the Legislature in an election year but there seem to be few other alternatives as the capitol building itself will be uninhabitable for the summer. If the session is just recessed and reconvened all the bills still pending remain active, and can be voted on. Once legislators actually adjourn, possibly to be called back in special session, all pending bills die. Whoever calls a special session, typically the governor but sometimes the Legislature itself, sets out the agenda with specific bills listed. At this point the key to final adjournment is agreement on the oil tax credit reform bill, House Bill 247 and Senate Bill 130. The House bill is tucked away in the House Rules Committee after having been sent there following a melee of floor amendments when the House leadership lost control of the Majority. A dissident Republican faction — the “musk ox” caucus — joined with the House Minority of 12 Democrats and one independent, to muster majority votes of 21 and at times 22 votes in the 40-member House to tack on amendments making changes in HB 247. Finally, by unanimous agreement, the bill was sent back to the Rules Committee to be reworked.  The Rules Committee scheduled but then cancelled meetings on the bill three days last week, a signal that the issue is still unresolved. There are reports that a compromise is being put together but that there aren’t yet enough votes to support it on the House floor. Meanwhile the Senate is working on its version, SB 130, but seems in no hurry given the disarray in the House. Even if the Senate voted and sent its version to the House an uncertain fate would await it. The splitting and stability of the House Majority is raising concerns for remaining legislation.  The fracturing was evident also in voting patterns for confirmation of former Fairbanks borough mayor Luke Hopkins for a seat on the board of the Alaska Gasline Development Corp. Hopkins was ultimately confirmed but the voting indicated that House rank-and-file Republicans were not following the lead of House Republican leaders after that body voted 22-17 to approve Hopkins. Oil tax credit fight The fight over the oil tax credit bill is how to modify the program, which has become very expensive, and yet still provide some help to explorers and independent companies in the middle of developing new projects. If the program were just continued as is the cost would be about $700 million next year, in fiscal year 2017 starting July 1. Gov. Bill Walker proposed slashing the tax credits affective this year but preserving a small program for explorers, for a cost of about $100 million next year. Since then the battle has raged over ways of changing the credits with the House Resources Committee adopting a more gradual phase-out and the House Finance Committee reversing that back toward the governor’s proposal, at least partly. The Senate appears to lean toward a more gradual phase-out, at least for now. Whatever the price tag when the dust finally settles will have to be added to the state operating budget, which is still pending. Those numbers are $4 billion for the House version, almost a $1 billion cut from this year, and $4.25 billion for the Senate version, a $750 million cut. A House-Senate budget conference committee is working to reconcile the differing budget bills. Wherever the tax credit fight settles, that cost will be added to whichever version the budget conference committee decides to go with. The draw from cash reserves to cover the deficit will be pushed up that much more. Controversy is raging over the oil tax credits because many legislators feel vulnerable — in an election year and with the state facing a $4 billion deficit — handing over several hundred million dollars in cash, as tax credit rebates, to oil and gas companies working on new projects. On the other hand, if the Legislature just takes an axe to the credits and cuts off independent companies working on several new oil projects, about 30,000 barrels per day of new oil production that could be in the pipeline between 2017 or 2018 could be lost. Permanent Fund earnings While the tax credit bill is still in limbo things seem further along on the other big issue of the session, a mechanism to tap Permanent Fund earnings, in an orderly way, to help fund the budget. Identical versions of a bill are now before the House and Senate Finance committees, HB 245 in the House and SB 128 in the Senate, combining ideas from proposals by the governor and Sen. Lesil McGuire. The governor and at least some of the Legislature’s leadership have signed off on the new approach. What isn’t yet clear is whether there are enough votes from rank-and-file members of the House and Senate to pass the bill, however. The uncertainty over control of the House Majority casts a cloud on this, too. If it were passed, the bill would create an endowment-type mechanism to draw annual sums from the Permanent Fund’s earnings reserve account that would total about $2 billion for FY 2017. The Permanent Fund dividend would remain but pared to $1,000, or half the amount it would be under the status quo. However, this would at least preserve the dividend. If nothing is done the state’s cash reserves will be gone in three to four years. There will be no dividend then because there will be no money for it. Crime bill still active Most legislators are sitting around in Juneau waiting for their leaders to get adjournment negotiations done but hearings were also being held in House Finance Committee late in the week on one other important bill, Senate Bill 91, on criminal justice reform. This is bipartisan legislation largely led by Sen. John Coghill, R-Fairbanks, the Senate Majority Leader. Most inmates in Alaska’s prisons are there for low level, nonviolent crimes, and many are simply waiting for trial. SB 91 would allow for alternatives to prison for low-level offenses and would also beef up counseling and inmate “re-entry” programs to reduce recidivism. There are big potential savings to the state budget if prison population growth is slowed or reduced. If trends continue a new state prison will be needed in 2027, a major expense. SB 91 aims to reduce the need for it to be built. No real obstacles appear to be facing the bill and it is unclear why it hasn’t passed yet. It may be that House members want to show they are doing their due diligence on this important measure as Senate committees did earlier. It will very likely be approved in the end. Rural Power Cost Assistance Another bill still pending in the extended session, but likely to be passed in the end, is Senate Bill 196, a proposal by Sen. Lyman Hoffman, D-Bethel, to allocate surplus earnings of the Power Cost Equalization Fund. A House-Senate conference committee was conducting hearings late in the week, seeking to reconcile differences in versions passed by both bodies. The PCE Fund totals almost $1 billion and is like an endowment to support subsidies for residential electricity in small communities around Alaska. The subsidy pays the differences between an average of electrical rates paid in the state’s Railbelt large communities and the actual cost of producing power in the community, which can be high if it is in a remote location. About $40 million a year is needed for the PCE support and typically the investment fund earns more, so there is a surplus. Hoffman’s bill would allocate any surplus to, first, a new “community assistance” program that replaces current community revenue-sharing, and secondly to fund the state’s Renewable Energy Fund, which provides grants for renewable energy projects in small communities. Any money left after those goes back into the PCE fund itself. Hoffman’s purpose with SB 196 is to provide protection for the PCE fund by providing a framework to fund several programs. Absent that the $1 billion fund would be vulnerable to a raid by legislators seeking money for other programs, Hoffman said. State employee merit, step increases A House bill that was introduced just last week, HB 379, has raised a lot of eyebrows. It would void merit and step increases in pay due this year to state employees, and for every future year until oil reaches $90 per barrel for a full fiscal year. Sponsored by the House Rules committee, the bill had one hearing, in House Finance, late in the week. The Alaska Chamber is lobbying for passage of HB 379. Step and merit increases are provided for in state law and can be changed. They are not part of state employee contracts negotiated by public employee unions that normally contain agreed-on changes to health plans and for cost-of-living adjustments, or COLAs. There are no increases in COLAs being proposed in contracts this year, however. The bill is obviously aimed at a big constituency for the Legislature’s minority Democrats and is seen as a bargaining ploy to secure the House Minority’s needed votes to withdraw funds from state reserves to balance the FY 2017 budget. The bill faces an uncertain future, however. Even if it were to pass the House it faces a dubious reception in the Senate. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

Week 13 in Juneau: House bogs down over oil tax credits

The Legislature is scheduled to adjourn Sunday, April 17, but hardly anyone in the state capitol building now thinks that will happen. Too many balls are still in the air. Two big issues include the adoption of a procedure to draw funds from Permanent Fund earnings to help fund the state budget, and a scaling down of the state’s oil and gas exploration and development tax credit program, both which are highly controversial. The move toward adjournment was upset on the floor of the state House last Tuesday, April 12, when a key priority, the oil tax credit reform bill, House Bill 247, came up for final approval. A revolt by a dissident faction in the Republican majority led to seven and sometimes eight Republicans voting with Democrats on amendments to the bill. The bill was held over until Wednesday but after another amendment the House sent the bill back to the Rules Committee to allow time to sort things out. Meanwhile, the Senate Finance committee is working on its version of the bill, Senate Bill 130, but the future of even that is uncertain until the House majority gets itself sorted out. Permanent Fund earnings and oil tax credits are the most volatile issues right now but trailing close behind those is a third ball in the air, a set of tax increases on fuel, minerals and fisheries, which have now been rolling into one bill in the House Finance committee, House Bill 249. Gov. Bill Walker says he want all three of these, Permanent Fund earnings, oil tax credit changes and new taxes, before legislators gavel out. Tax changes in HB 249 on fuel, minerals and fish, are less than what the governor had asked for, however. Other new taxes proposed by Walker, on alcohol, tobacco and cruise ship passengers, have been no movement, along with Walker’s centerpiece tax plan: reinstituting a state personal income tax. Oil tax credit reform has meanwhile become the “get-out-of-town” question for the Legislature. The House Minority, which includes 12 Democrats and one independent, is demanding a bill that reduces cash outlays for credits. The House Minority has clout because the 13 votes are needed for the House to reach a three-quarters vote for a withdrawal of funds from the state Constitutional Budget Reserve to balance the budget. The Republican majority has 27 members but not the 30 needed for three quarters. This is not a problem in the 20-member state Senate, where the majority has more than the 15 votes needed. The “super-majority” votes are needed to withdraw the CBR money because with oil prices still sharply down the state will earn less than a third of the oil revenue needed to fund the budget. The deficit, estimated at over $4 billion this year, must be covered by withdrawals from state savings, mostly in the CBR account. It’s still unclear just what the House Minority wants in the oil tax credit bill. Reducing the cost of the credits is a goal of all legislators but the House Minority may want what the governor is seeking, a $500 million per year reduction (the program now costs about $600 million a year). The credit reform bills that have advanced to the Finance committees on both sides leave parts of the tax credits intact because many legislators want to keep explorers at work finding new oil at a time when oil prices are very low. Those versions do achieve savings, but not as much as in the governor’s bill. Meanwhile, until there’s resolution on the tax credits the other big issue, Permanent Fund earnings restructuring, is unlikely to move, and the stalemate could result that could keep the Legislature in session for an extended time. Ironically, legislators may be close to an agreement on a mechanism to use the Permanent Fund’s income to help the state budget, but even an agreed-on plan will not move until the other issues, mainly the oil tax credits, are resolved. In both the House and Senate Finance committees there are proposals to merge Permanent Fund earnings bills introduced by the governor, with one approach and by legislators with another approach. The governor’s plan involves a reorganization of revenues moving into the Permanent Fund with a set amount for annual withdrawal, which could be adjusted from time to time. The legislators’ approach, mainly in a bill sponsored by Sen. Lesil McGuire, uses a percentage-of-market-value formula that would establish annual payouts from the Fund. The so-called POMV is a procedure commonly used by large endowments. A key argument for the governor’s approach is that with a set amount, established at $3.3 billion yearly, the Legislature and state agencies would be able to do budget planning and not be tempted to increase spending if oil revenues increased. A weakness of POMV is that if oil revenues increase and the Permanent Fund and its revenues grow, the money flowing to the earnings reserve account and then to the state general fund would increase. Legislators, pressured by constituents, would be hard-press not to increase spending. The new compromise preserves the POMV payout but builds in guidelines on withdrawals. Last week Attorney General Craig Richards and Revenue Commissioner Randy Hoffbeck told the House Finance committee that this is in the spirit of what the governor wants and that he would support the new, combined bill. A major factor in legislators’ minds is how the different approaches would affect the Permanent Fund dividend payment. Under the governor’s approach the dividend would be funded by oil royalties instead of from cash earnings of the Fund, the present procedure. Walker likes the idea of giving citizens a direct stake in the state’s natural resource income. McGuire’s bill originally proposed that too, but there was pushback from legislators who wanted to preserve the dividend’s connection with financial performance of the Fund, so that citizens would remain watchdogs on the Fund management. The Senate State Affairs committee changed SB 114 so that both objectives are accomplished, so that the dividend would be funded both by royalties and Fund earnings according to a formula. Walker and McGuire both proposed a dividend of $1,000 for the first year (the PFD was $2,072 last year) but the idea for funding with royalties would have resulted in gradual decreases of the PFD, at least in the near term, as oil production continues to decline. The new funding mechanism will result in a more stable dividend over time in the $1,000 range although there is always chance it could go higher, or drop, depending on oil production and financial performance of the Fund, according to an analysis by the Department of Revenue’s Economics Research Group. Were it to pass, the hybrid bill would make about $2.74 billion available to the general fund in Fiscal Year 2017, the budget year starting July 1, according to the analysis by the Revenue Department. That would increase in nominal dollars (with no inflation adjustment) to $3.74 billion in 2040. Adjusted for inflation that would be $2.19 billion that year, the analysis said.  The Fund’s principal, meanwhile, would grow to $80.9 billion in nominal dollars by 2040, or $47.45 billion when adjusted for inflation, according to the analysis. Although the framework for a compromise Permanent Fund earnings bill is in place there are still some pieces missing, according to legislative staff who have worked on the bills.  For example, there seems agreement for some form of trigger that decreases a POMV draw if state oil revenues climb the language is not yet in the bill. The State Affairs committee version of SB 114 had a provision that reduced the annual draw to $1.5 billion if state oil revenues climb to $2 billion annually (they are about $1.2 billion this year) and to zero if oil revenues climb to $3.5 billion. That has yet to be adopted for the new versions of SB 148, which now contains the language of SB 114, or HB 245, which is now exactly the same as the new SB 148. On another issue, some form of “reopener” or “look-back” provision is also being discussed for the new bill but not yet adopted in either the House or Senate. The governor’s original bill has an automatic review every four years while McGuire’s SB 114 has an annual review. There is also no requirement for “inflation-proofing” in either bill. Under current law the Legislature appropriates an amount each year from the earnings reserve to be injected into the Fund principle to offset inflation. This procedure has been in place since the Fund was created but to a certain extent it has outlived its need. It was needed in the early years when the Fund was mostly invested in bonds and other interest-bearing assets, Angela Rodell, the Fund’s executive director, told the House Finance committee. Now the Fund’s assets are broadly diversified and many investments, such as equities, tend to inflation-proof themselves, she said.  Rodell urged legislators to continue with some form of inflation proofing, however, just so the Fund principle will continue to grow once the earnings are tapped.

Week 12 in Juneau: Huge issues at play with week to go

JUNEAU — Friday, April 8, was Day 81 of the 2016 legislative session with nine more days to the scheduled adjournment, April 17. Things are normal for this point in the session: Murky. The hallways are surprisingly quiet. Legislators seem mostly huddled in their offices. The Finance committees, which is where the action is now, come to life at 5 p.m. when the big bills are brought up. Meetings typically go into the evenings. This session has huge policy issues at stake: Criminal justice reform, health care and Medicaid, a revamp of oil tax credit incentives, and the elephant in the room, a pending reorganization of state finances. This list doesn’t include the budget, which is less than one-third funded with revenues and has a huge $4 billion-plus deficit. With about a week left session none of these things are resolved. That’s normal, because legislators always hold their cards close and wait until the very end to maximize their negotiating strength. This year that seems to be a dangerous path particularly with the fiscal policy legislation and the budget, because the stakes are so large. Solutions are at hand, meanwhile. They involve using the ample earnings of the state’s $50 billion-plus Permanent Fund and spending cuts and some new taxes that will likely come next year. The spending cuts are being made. Both the House and Senate have trimmed several hundred million dollars from the operating budget, although the final total has yet to be determined. Lawmakers now have to make decisions on using Permanent Fund earnings but being politicians they worry about constituents’ reactions and getting reelected later this year. The bills are the governor’s Senate Bill 128 in the Senate and House Bill 245 in the House, and Sen. Lesil McGuire’s SB 114 in the Senate and a similar House bill, HB 303 by Rep. Charisse Millett. Rep. Mike Hawker’s bill is HB 224. Doing nothing about fiscal reform has big consequences, too, because the big deficit will cause state cash reserves will shrink further, and business confidence will sink. If that happens the state’s economy, already battered by low oil prices and layoffs, would worsen. Work on the fiscal policy reforms have been frustratingly slow and the outcome is still a black box. But on oil tax credits, House Bill 247, at least a framework for a solution is in place. In a normal year any one of these policy issues would be big undertakings but to have a several happening in one session is unusual, and stressful, for legislators. But if things are still murky on fiscal policy and oil tax credits, the brighter note is that there is good progress the two other big issues, Medicaid and criminal justice reform. Things are fairly far along on Medicaid and health care legislation, in Senate Bill 74, as well as criminal justice reform in Senate Bill 91, both which promise future savings for the state budget. Medicaid reform SB 74, on Medicaid, passed the Senate unanimously and is now about to emerge from the House Finance committee, ready for action by the full House. Reforming this program is critical for the state budget. Medicaid is the state-federal health care program for lower-income Alaskans and its cost to the state has soared in recent years to several hundred million dollars annually. It is now the single-largest state expenditure behind education, and it is still growing. Without reform, the size of the Medicaid budget will seriously undermine state finances in a few years. The Senate bill was originated by Sen. Pete Kelly, R-Fairbanks, the co-chair of the Senate Finance committee, and it and now with a broad backing of co-sponsors. Among other things it would reorganize the program’s administration, introduce Medicaid recipients to coordinated care led by primary care physicians and eliminate over-reliance on hospital emergency rooms, now a huge expense. There will be improved medical outcomes too, sponsors of the legislation say, because patients will get the right care at the right time, which many now do not get. SB 74 has ramifications for all Alaska health care, too. It authorizes wider use of telemedicine, for one thing, which will induce new competition in health care and will likely bring costs down.   Telemedicine has long been practiced successfully in Alaska’s big Tribal health care organizations serving rural Alaska and it is widely used for in other states’ health care systems, but not so far in Alaska. The telemedicine sections come from legislation sponsored separately by Sen. Peter Micciche, R-Kenai, who built on ideas from previous efforts at telemedicine by former Sen. Fred Dyson and Rep. Lynn Gattis, R-Palmer, a current House member. As prime sponsor, Kelly early on championed managed care and was a key driver for those parts of SB 74 and other parts of the bill reflect proposals for Medicaid reform put forth by the Department of Health and Social Services. There are also sections strengthening the state’s ability to protect Medicaid from fraud. Criminal justice reform The reforms in criminal justice, in Senate Bill 91, have been in the works for years and are led this year by Senate Majority Leader John Coghill, R-Fairbanks, and House Majority Leader Charisse Millet, R-Anchorage. Greg Razo, a member of the Alaska Criminal Justice Reform Commission, the architect of SB 91, told legislators in a briefing last week that it costs $55,000 a year to keep a person in prison, and that about half the Alaskans now incarcerated are there for low-level, nonviolent crimes, most simply awaiting trial. The bill is estimated to achieve savings of $424 million over 10 years, Razo said.  That will come mainly by reducing the number of Alaskans convicted of low-level crimes going to prison, as well as by avoiding the cost of building a new prison expected to be needed in 2017. The bill also sets out initiatives like treatment and social services to ease re-entry after prison to reduce recidivism, or the return to jail by inmates released, but who, lacking support, return to crime. The legislation is expected to reduce the prison population by 21 percent over 10 years, Razo said. SB 91 has been worked on all session in the Judiciary Committee and more recently in the Senate Finance committee, which reported the bill out on Thursday, April 7. The bill is now ready for floor action in the Senate. Meanwhile the House Judiciary Committee has been working on a similar House bill, sponsored by Millet. Tax credits On the oil tax credit bill, a revised version of House Bill 247, sponsored in its original form by Gov. Bill Walker, is in the House Finance committee, which worked on the bill into the weekend, April 9 and 10. Earlier the House Resources committee made substantial changes to the bill introduced by the governor after working for several weeks on the measure. Meanwhile the Senate Resources committee is also working on a Senate version of the bill, on a parallel course with the House committees. Walker’s intent in introducing HB 247 was to sharply scale back the incentive program to reduce its cost, which reached $700 million last year until the governor vetoed $200 million, but promising to eventually pay the credits. Without changes the program will cost similar amounts this year and next, which with $4 billion-plus budget deficits the state cannot afford, the governor has argued. The original HB 247 would almost immediately have slashed many of the tax credits and would have also raised taxes on the industry by first raising the minimum production tax paid on the North Slope form 4 to 5 percent and, secondly, by changing the minimum production tax so that companies cannot bring their tax below it by applying certain of the tax credits, a move to “harden” the minimum tax. The House Resources Committee changed a lot of this, first eliminating the tax increase and the move to harden the minimum tax and secondly by phasing over three years the elimination of several tax credits the governor would cut in one year. That was done to help companies who are in the midst of developing new projects who would be harmed by a sudden change in the tax rules. However, while the Resource committee intent was to soften the effects of HB 247 on an industry hard hit by oil price declines, the effect was also to raise the cost of the credits to the treasury back toward the current level. After leaving the Resources Committee the bill went to the House Finance committee, which is interested in the effects of the bill on the state budget. The new version of HB 247, now being worked in House Finance, strikes a middle ground between the governor’s bill and the changes by the Resources committee. The new bill also dings the big North Slope producers, which the Resources bill mostly did not. It brings back the “hardened” minimum tax but puts it at 2 percent. The minimum tax is still 4 percent but circumstances remain where tax credits can lower the tax but not below 2 percent in the current version. The pending Finance version goes further by terminating after five years tax reductions in current law for producers for new oil developed on the slope. The pending House committee bill also makes changes in the several tax credits for Cook Inlet, but also terminates a production tax holiday for oil produced in the Inlet in 2017 instead of 2022, which is the current law. Permanent Fund earnings It’s still unclear what legislators will do on the overarching question of the 2016 session, which is what to do about tapping Permanent Fund income to cover part of the huge budget deficit. Hearings were scheduled in the Senate Finance committee on the two Permanent Fund and fiscal policy bills, SB 114 and 128, but were canceled, a signal that the committee is still working on its plan for the bills. Although the Fund’s earnings, which are typically several billion dollars a year, can be appropriated by the Legislature under current law, the governor is urging that this be done in a structured way, with a set amount taken. That’s needed to ensure the draw won’t endanger the long-term solvency of the Permanent Fund, and will be transparent enough to instill confidence by the public and financial institutions. Financial rating agencies that are now watching Alaska have warned that a simple “grab” of cash by the Legislature of funds in the Permanent Fund’s Earnings Reserve won’t be sufficient to forestall another downgrade of Alaska’s credit. In presentations to legislative committees last week Revenue Commissioner Randy Hoffbeck and Attorney General Craig Richards urged lawmakers to adopt a mechanism, such as one proposed by the governor, so that clear rules are set out as to how the Fund’s earnings are drawn. Walker’s proposal involves transferring other state reserve funds, in particular $3 billion in the Constitutional Budget Reserve, into the Permanent Fund’s earnings reserve to “bulk up” that account to about $10 billion. At that level the reserve account can sustain annual fixed draws of $3.3 billion with the withdrawal covered each year by new earnings of the $50 billion-plus Fund. The governor’s plan makes other changes too including diverting more oil royalties into the principle of Permanent Fund. The alternative idea being discussed is changing the Permanent Fund to function more like an endowment, with a set percent of the market value of the entire Fund drawn each year. This idea, in McGuire’s Senate Bill 114, has the percentage set at 4.5 percent and the annual draw estimated at about $2 billion per year. Hawker has a similar endowment-type plan in his HB 224, also with a draw of 4.5 percent. However, the plans also change the way the annual Permanent Fund dividend is calculated and would reduce the dividends, in effect making more money available to the state treasury. This is causing great concern among lawmakers who worry about how constituents will react to reductions of the dividend, which was more than $2,000 per citizen last year. “You are achieving stability in the budget but you are doing it by reducing the people’s dividend,” Rep. Tammie Wilson, R-North Pole, told revenue commissioner Hoffbeck and Attorney General Richards last week in a committee hearing. However, under the current fiscal situation there won’t be a dividend at all in four years given the rapid drawdown of state reserves. The uneasiness over the pending elections has prompted some moves to avoid adopting a structure, which could affect the dividend, and just appropriate money from the Permanent Fund’s reserves. Members of the Senate Majority were reported last week to be hunting for enough votes — 11 are needed — to do that that withdrawal. As of April 8 they have been unsuccessful. There are similar sentiments among some House Republicans, and while House leaders like Speaker Mike Chenault, R-Nikiski, and Rules chair Rep. Craig Johnson, R-Anchorage, are playing their cards close, both have made statements expressing caution about simply raiding the earnings reserve. “Doing nothing is not an option. There has to be some kind of new revenue stream,” Chenault said Thursday, April 7, in the House Majority’s weekly press briefing. Johnson said, “Grabbing the Permanent Fund money (in the earnings account) seems like the easiest thing but it may not be the best thing to do.” Rep. Kurt Olson, R-Soldotna, who chairs the House Labor and Commerce Committee and is part of the House leadership, has gone further, having his committee introduce a bill levying a tax of 35 percent on a Permanent Fund dividend, which would be a form of income tax.  That bill is HB 376. Although it can’t be interpreted as any kind of signal, the House Finance committee also held hearings HB 365 on a bill to reimpose a personal income tax sponsored by Rep. Paul Seaton, R-Homer.   Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]


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