Tim Bradner

Week 11 in Juneau: Tax credits, pension cost-shifting could derail session

The 2015 legislative session is set to adjourn in about two weeks, on April 17. Now is the time of the session, toward its end, that things spring from the woodwork and tempers can fray.  People are now watching closely for events that can derail an orderly end to the session, and abruptly end bills that have long been worked on. It happens every session, but the situation seems more acute this year with a huge budget deficit and solutions to that being worked on that can at best cover only part of the financial gap. At this point, two issues are emerging that could inflame tempers, or are already. One is an oil tax credit reform bill now in the House that is increasingly controversial and may cause a major blowup when it reaches the Senate. Another is a package of bills introduced by the Senate Finance Committee that increase the required contributions by school districts and municipalities for teachers and public employees. On the pension bills, the effect would be to reduce the state’s contribution, thereby easing the strain on the state budget. Under a long-standing agreement set out in state law, the state currently picks up the major shares of public employee and teacher unfunded pension liability contributions, leaving school districts paying 12.5 percent and local governments 22 percent. These are contributions over and above what the schools and municipalities pay for their current pension obligations. These payments are toward an estimated $10 billion-plus unfunded pension liability that the state is working to pay down over 25 years. The new bills, introduced last Monday, March 28, would ratchet up the local shares over three years to 22 percent for schools and 26.5 percent for municipalities, however. That would be a $17 million a year increase for local governments, and it will likely be more because of compounding, said Kathie Wasserman, the Alaska Municipal League’s executive director. “We have very few ways to raise money. Taxes and fees are it,” Wasserman said. “This is not an acceptable solution to the state’s fiscal situation. It’s just handing the bills to someone else,” meaning local governments, she said. The projected savings to the state budget are not known for certain at this point. A consultant to the state is doing an analysis that will be presented soon to senators on the Finance Committee, said Sen. Anna MacKinnon, R-Eagle River, who is co-chair. Where schools are within municipalities, such as in the state’s larger communities, the local government may be able to provide additional funds to offset the state cut. But where municipalities are unable to do this, which may be the case in small communities, or in rural areas where the regional district is a state-created entity, there is no choice but to take the additional funds from the state’s education funding. Critics of this move say it is an indirect way to take back, or at least cut into, a scheduled $50-per-student increase in the Base Student Allocation for schools that is planned this year. There is another problem for municipalities. The larger share of the pension obligation taken on by local governments requires them, under new financial reporting rules, to carry it as an increased long-term obligation. Wasserman said it will amount to about $1.2 billion over 25 years. This will affect of the cost of municipal borrowing at a time when state capital appropriations are negligent and municipal debt may be needed for local capital improvements. Oil tax credits The oil tax credit bill is in the House Finance Committee. It was changed significantly in the House Resources Committee, which reviewed the bill at length through much of the session. It will likely be changed again in the Finance Committee. Gov. Bill Walker introduced the original version of the oil tax credit bill with the goal of restructuring the tax credits incentives, and eliminate some, to reduce the heavy cost of the program. The governor intended to retain parts of it, however, such as incentives for explorers to get wells drilled. Under the governor’s proposal the cash-outlay cost of the program would be reduced to about $100 million per year. The House Resources Committee made several important changes including phasing out several of the incentives over a few years rather than end them all at once and impacting companies in the middle of developing new projects. However, a gradual phase-out would leave the program still with higher costs of several hundred million dollars a year. One other change made by the Resources Committee in the House, which will probably be retained by the Finance Committee, is the elimination of the governor’s proposal to increase the minimum production tax paid by oil producers from 4 percent to 5 percent. This is not part of the tax credit restructuring since it is a flat tax increase but was part of HB 247, the tax credit bill. In the Senate, Sen. Cathy Giessel, R-Anchorage, chair of the Senate Resources Committee, has been noticeably quiet about her opinions and plans for the incentive restructuring bill when it comes to the Senate and to her committee. Giessel chaired a working group on the tax credits that met several times last summer and is one of the most knowledgeable legislators about the issues. However, the bill goes to Senate Finance Committee after Giessel’s committee, and that committee may also have plans for the bill. The oil tax credit bill is one of the unknowns facing the state’s bottom-line budget number for fiscal year 2017 beginning July 1. The House and Senate have both passed their versions of operating budgets, with the House version, so far, at about $4 billion and the Senate, so far, at about $4.25 billion. What’s not included are the oil tax credit expenditures and a few other items being resolved, but the tax credits are the larger of these. Combined, they could push the operating budget up to about $4.5 billion. In comparison, current year fiscal year 2016 operating budget spending is about $5 billion. Deficit swells past $4B Another new development this week is a higher estimate for the current-year 2016 deficit, which has been pushed up by a higher supplemental spending budget for this year as well as a new oil revenue estimate released recently that is lower than the previous estimate, in December. Pat Pitney, the state budget director, said the new estimates are $4.1 billion if the House version of the supplemental budget passes and $4.3 billion if the Senate version prevails. The higher deficit will take a big bite out of available cash reserves. The Constitutional Budget Reserve, the state’s main cash reserve, held about $10 billion last July 1, according to state Deputy Revenue Commissioner Jerry Burnett, and if the deficit is $4 billion it could leave about $6 billion in the CBR next June 30. That total might be adjusted upward somewhat by balances transferred from other funds. If the FY 2017 deficit is again $4 billion it would deplete the CBR to about $2 billion by June 30, 2017. Meanwhile, legislators in Juneau continue working on long-term structural solutions to the fiscal gap, which could stretch out those savings. The consensus is still that some mechanism for tapping earnings of the $50 billion-plus Alaska Permanent Fund will be adopted this year, with other revenue measures to be considered in 2017, after the 2016 elections. Of three proposals for using Fund earnings on the table, in different bills, some version of Sen. Lesil McGuire’s SB 114 is said to be the favored option. It converts the Permanent Fund to an endowment with a percent-of-market value payout mechanism for making funds available to the state general fund. The latest version of SB 114 would adopt a 4.5 percent annual payout, a rate that is low enough to compensate for inflation and keep the overall Fund sustainable. McGuire’s bill would make about $2 billion a year available for the budget and retain the annual Permanent Fund dividend. Another proposal, by Rep. Mike Hawker, also uses a percent-of-market value payout mechanism, also relying on a 4.5 percent annual payout, and would similarly provide about $2 billion a year for the budget. A major difference is that Hawker’s bill would pay sharply reduced dividends in the near-term years to pay down the state’s deficit, with the possibility of much higher dividends after the deficit is eliminated. However, both Hawker’s and McGuire’s proposals still leave annual budget gaps of $2 billion or more. For now, the gap would have to be covered by draws on reserves. The third proposal, SB 128 by Gov. Bill Walker, comes closer to covering the budget gap. The governor’s plan changes the payout structure of the Permanent Fund in different ways than Hawker and McGuire but also “bulks up” the Fund with a $3 billion deposit of money transferred from the Constitutional Budget Reserve. With this and a larger share of oil royalties paid into the Fund than is now the case, 50 percent rather than 30 percent, Walkers’ plan would have the state make a fixed $3.3 billion annual draw from the Fund’s earnings. This is closer to covering the deficit, and the governor would have the remainder covered by a package of new taxes, which were also introduced this year. If the taxes are not enacted this year, and the governor’s bill was adopted, cash reserves would also be drawn from the cover the remaining budget gap. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

Week 10 in Juneau: Backburner bills and budget items

JUNEAU — It’s a different year for state legislators now in session in the state capital. People are very occupied with budget issues and the state’s financial crisis but it is also proving to be a productive time to work on other issues, things that can save money. A lot of these are small things. In a previous Legislature, when there was lots of money, these bills would fall through the cracks because people were busy with other legislation or chasing capital budget appropriations. But they are worthy things. Case in point is Senate Bill 101, a governor’s bill that, as originally introduced, would allow the state Division of Parks and Recreation to sell items like T-shirts and other merchandise with the park name and logo. Most states that have state park systems do this, Ben Ellis, the state park director, told the Senate Finance Committee recently. It has proven to be a good moneymaker to help those parks defray expenses. Georgia, for example, clears a $3 million annual profit on its sales of park memorabilia, Ellis said. Ed Fogels, Deputy Commissioner of Natural Resources, said the park division is now about 40 percent self-funded through campsite fees, and if the Legislature OKs sales of merchandise the parks should be 100 percent self-funded. That’s really good news in these tight budget times, and it might help ensure more frequent servicing at those porta-potties in the roadside campgrounds. The Parks Division budget is about $3 million, in terms of unrestricted state funds. But while the concept behind the bill is widely supported it’s a back-burner issue for many legislators, and the parks merchandise part of SB 101 could easily fall through the cracks. The bill was introduced in January 2015, but members of the Senate Resources Committee, which worked on the bill last April, a year ago, worried that the parks’ merchandise sales would complete with the private sector and took the section allowing those sales out of the bill. Left in the bill is language that addresses other issues. The department said those concerns have now been addressed, however, and the provision may be added back in the Finance committee. A version of the bill in the state House, House Bill 184, was also introduced in January 2015 and has been in the House Resources Committee, its first committee of referral, since last April. On the Finance committee Sen. Peter Micciche, R-Soldotna, said he hopes the division could employ Alaskan designers and manufacturers in creating the merchandise rather than have it designed out of the state and made overseas like other Alaska-themed merchandise seen in tourist shops. Another bill of a similar vein is Sen. Cathy Giessel’s SB 170, which would allow the Geologic Materials Center operated by the Division of Geology and Geophysical Services to charge private companies using the facility to do research on oil well cores and other geologic samples stored there. Most states with geologic materials centers charge companies an admission fee and the income from those helps defray expenses. There’s no reason why Alaska should be different, Giessel told the Senate Finance Committee in a hearing on the bill.  For oil and gas companies looking to explore in Alaska the DGGS Materials Center is the first stop for geologists beginning their research, Giessel said. Repsol, a Spain-based major oil company, for example, made good use of the center when it was first investigating prospects in Alaska. $30M proposed for substance abuse treatment On the budget front, there are small and not-so-small initiatives that are happening that don’t get noticed with all the noise about the big budget cuts. An example is a proposal by Rep. Mark Neuman, R-Big Lake, who as cochair of the House Finance Committee must supervise the budget whacking, for an actual increase in funding for alcohol treatment. Neuman proposed $30 million over four years to help fill in gaps in alcohol treatment facilities statewide. This will actually save money for the state, Neuman argues, because without it there will be more spending in the justice system, from troopers and courts to prisons, which are already heavily burdened by alcohol-related crimes. “Ninety percent of the cases in the court in Palmer are related to alcohol and drugs. People just don’t feel safe anymore,” Neuman said in an interview. “The important thing is to get people into treatment as soon as they are arrested, even while they’re still in jail. The prison system has authority to do this but there’s no money for the treatment. “Troopers tell me that in most cases offenders feel real remorse over what they’ve done (while intoxicated) but there’s nothing that can be done,” to help break the cycle. “Judges are sympathetic in ordering treatment in lieu of jail-time, but there are no beds available in treatment centers,” Neuman said. After release, the offender is often on the streets, sometimes homeless, and the process is repeated, at huge cost to the state. “It costs $55,000 a year to keep someone in prison. Treatment costs $3,500 to $5,000,” Neuman said, so without treating the reasons why people are recycling through the justice system the state is just squandering money. Neuman has long been concerned, on the Finance committee, with the problem of recidivism in the prison system, most of it related to recurring crimes related to alcohol and drug use. Jeff Jesse, executive director of the Alaska Mental Health Trust Authority, which is active in promoting behavioral health treatment, praised Neuman’s initiative. “Even in tight budget times, some legislators are really able to connect the dots and see the connection between spending a little now and saving a lot later,” he said. Neuman said another reason for improved treatment is to take the pressure off the state troopers who are on the front line in dealing with people who alcohol and other substances, and who commit crimes. “We have to reduce the work load for these people. We’re cutting their budgets but we’re not reducing their work,” he said. Keeping up morale and retaining good people is important. “It’s of the highest importance that these people (troopers) can go home safe,” after work, Neuman said.   The appropriation isn’t a done deal, of course. It is in the House version of the state operating budget but not in the Senate’s. The two budgets are reconciled in a House-Senate conference committee, which will convene in April. Neuman will almost certainly be a member of the conference committee but he will have to argue the merits of the appropriate to convince the Senate’s conferees. Tax credits, Medicaid, Fund earnings On other matters, House and Senate committee pressed full-bore on major bills last week. After weeks of hearings the House Resources Committee reported out a rewritten version of the governor’s House Bill 247, revamping the state’s oil gas tax credit bill. The committee took out a controversial section that raised North Slope oil producers’ minimum tax on gross revenues from 4 percent to 5 percent and restructured other parts of the bill. Industry tax credit revisions for Cook Inlet, a prime goal for the governor, were retained but eased compared with what Walker wanted. Some incentives that the governor wanted ended are instead phased out over several years. The bill is now in the House Finance Committee, which was due to start work on it in the latter part of the week. The House Finance Committee also spent several days of hearings on Senate Bill 74, the Medicaid reform bill passed by the Senate the previous week. One hearing last week was devoted to Medicaid anti-fraud provisions in the bill, another to curbing overuse of hospital emergency rooms, and a third hearing focused on managed care provisions in the senate bill. Meanwhile, the Senate Finance Committee held several hearings on proposals to restructure use of Permanent Fund earnings to help ease the state budget crisis. Before the committee were SB 114, by Sen. Leisel McGuire, R-Anchorage, and SB 128, a governor’s bill. The committee also held two sessions of public hearings on the proposals. In another development, Senate Resources Committee moved out HB 100, House Speaker Mike Chenault’s “Agrium” bill.  The legislative provides for Agrium to apply certain expenses against the state corporate income tax if the company restarts its closed fertilizer plant near Kenai. Unlike other industry tax credit programs provided by the state, this would be effective only if Agrium actually restarts the plant. Chenault argues that the company’s purchases of natural gas would result in additional state royalties and taxes from gas production more than offsetting the tax credit Agrium would receive. The bill is now in Senate Finance. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]  

Week 9 from Juneau: Budget progress but work aplenty remains

Both the state House and Senate have passed their separate versions of the state operating budget, the House on March 11 and the Senate on March 14. With that done – or mostly done as sections of the operating budget still need work – legislators’ attention in the final weeks of the 2016 session is to focus on revenue measures. At least that was the plan laid out earlier by House and Senate leaders. The 2016 session hit its 60th day Friday, March 18, the two-thirds mark. Adjournment of the 90-day session is scheduled for Sunday, April 17. In one development, the Senate State Affairs committee moved two major fiscal restructuring bills, one by Gov. Bill Walker and one by Sen. Lesil McGuire, out of committee. Both reorganize the way Permanent Fund earnings are managed and would make some of the earnings available for the state budget. They are now in the Senate Finance committee. It was the first major action by a legislative committee on any of three proposals to restructure the way Permanent Fund earnings are used. Significantly, the Senate Finance Committee will take up McGuire’s bill, SB 114, on Tuesday, March 22. The State Affairs Committee, chaired by Sen. Bill Stoltze, had held weeks of hearings on the proposals. The committee tweaked McGuire’s SB 114 but made no changes to Walker’s proposal. In another development Senate leaders said last week they would not support any new taxes this year, which would appear to doom prospects for a separate fiscal reform proposal by the governor, for tax increases. The state House has similarly shown little appetite for taxes. As part of an overall fiscal package Walker introduced tax increases on fisheries, mining, oil and gas, tourism and fuel along with alcohol and tobacco. Walker also introduced a personal income tax. The fuel tax increases have moved from transportation committees in both House and Senate to the Finance committees in both bodies, but with a provision that restores the current tax if crude oil prices increase. There has been no movement among any of the other tax bills. A revenue measure that appears likely this year, however, is in some way of tapping Permanent Fund earnings to support the budget. The Fund earns several billion dollars a year and its income has been increasing, in contrast with state oil revenue, which has seen sharp decreases. Senate leaders have always said some way of using Fund earnings will be needed this year, and last week Senate Finance co-chair Sen. Pete Kelly, R-Fairbanks, reaffirmed his support for that. House leader have been noncommittal. But the way the Fund’s earnings would be used is all-important, particularly to the credit rating agencies like Standard and Poor’s and Moody’s. If the Legislature simply appropriates funds from the Permanent Fund’s Earnings Reserve Account, which it can legally do, the action will be seen as a simple, ad-hoc cash grab on Wall Street and would tend to further diminish the state’s reputation and creditworthiness. However, if the earnings are appropriated through a structured approach, such as proposed in any or three separate fiscal plans now before the Legislature, the ratings agencies have said it could have the opposite effect, of boosting Wall Street’s confidence that Alaskans are capable of devising a fiscal plan. Two of the fiscal plans, Sen. Lesil McGuire’s SB 114 (a House version is HB 303, by Rep. Charisse Millet) and Rep. Mike Hawker’s HB 224, would adopt a percentage-of-market-value, or POMV, payout rule for the Permanent Fund, a procedure commonly used by large endowments. In both bills a 4.5 percent payout is used. The payout from McGuire’s POMV proposal was lowered from 5 percent to 4.5 percent in the committee. Hawker’s bill would generate between $2 billion and $2.5 billion yearly over the next five years, assuming it was adopted this year. McGuire’s bill would generate a similar amount of money after the payout change. Gov. Bill Walker’s proposal, in HB 245 and SB 128, is different. It would have the Legislature appropriate a fixed sum for the budget – about $3.3 billion annually in the legislation. This amount would be at a level that would leave enough earnings to sustain the Fund. The fixed draw is a defining characteristic, said Attorney General Craig Richards, because it would make a specific amount of money available for the budget each year, creating stability in the state’s budgeting. The weakness of the alternative POMV approach, Richards argued, is that it is still volatile, shifting unexpectedly with market changes and injecting uncertainty in budgeting. Richards’ remarks came in a presentation to the Senate State Affairs Committee last Tuesday, March 15. One important difference with the governor’s plan, however, is that it requires the Permanent Fund, and the Fund’s Earnings Reserve Account, to be “bulked up” by injecting more money. For the reserve account the money would be transferred from the Constitutional Budget Reserve, another state savings fund. The transfer of funds from the Constitutional Budget Reserve to the earnings reserve would require a three-quarters vote of the Legislature. One feature of all the proposals is that the Permanent Fund dividend would decline, at least in the near term, and vanish in the case of Hawker’s bill, although it would be restored possibly in future years if the state’s overall revenue situation improves. In Hawker’s bill money from Permanent Fund earnings would go first to pay the state’s budget and to pay down the budget deficit. After that money would be made available for a dividend. McGuire’s bill would retain a dividend as would Walker’s proposal, although in both the source of funds would change from earnings of the Fund to a share of state oil and gas royalties. Since royalties will most likely decline over the years as production drops the effect would be a gradual reduction in the dividend payment. The lower dividend, over time, would make more money available for the budget. On other issues pending, on Monday the House Finance Committee is due to take up the Medicaid reform bill passed by the Senate last week. It is SB 74, sponsored by Sen. Pete Kelly, R-Fairbanks, and 12 co-sponsors. A House Medicaid reform bill, HB 227, sponsored by Rep. Paul Seaton, R-Homer, is also in the House Finance Committee after having passed earlier out of the House Health and Social Services committee, which Seaton chairs. The bill makes key changes in how the state will administer Medicaid, which is a health care program for low-income people paid for roughly equally by the state and federal governments. The program has grown in costs in recent years and even the state 50 percent share has become a major expense in the state budget. The Senate bill seeks to lower costs by, among other changes, requiring coordinated primary care for Medicaid recipients who frequent costly hospital emergency rooms; instituting a demonstration project of a larger coordinated care project among Medicaid recipients, and a study of merging all state-paid health care plans for public employees including teachers. One other issue being worked hard in the state House is an overhaul of the state’s complex oil and gas tax credit incentive program, which has also become very costly. For weeks the House Resources committee has been at work in a detailed review of the tax credits through HB 457, a bill proposed by the governor to reshape the program. Another bill by the governor, HB 246, is also before the committee. It would expand the ability of the state economic finance corporation, Alaska Industrial Development and Export Authority, with funding of infrastructure related to small or medium-sized oil and gas fields. HB 246 had its first hearing in the House committee last week. A controversial feature of HB 247, oil and gas tax credit reform, is a proposal by the governor to increase the state’s minimum production tax on oil from 4 percent to 5 percent. It’s not clear what the Resources committee will do with these  bills. A proposed committee substitute is being developed and one or both bills may move out of the committee next week. There is still a long path ahead, though. The House Finance committee will put its mark on the legislation, and if the bills get to the Senate, senators likely have their own ideas.   Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

Week 8 in Juneau: House moves budget, Senate passes Medicaid reform

Legislators in the state House signaled what they hope to achieve — a state spending reduction of several hundred million dollars — in their first formal budget actions Thursday and Friday on the fiscal year 2017 state budget. But just how much would be cut in the House budget is still a moving target, said David Teal, director of the Legislative Finance Division, a support agency to the Legislature. According to figures compiled by the division and posted on its website the operating budget passed by the state House in the early morning hours of Friday trimmed state agency budgets by almost $300 million in unrestricted general fund spending. That number grows, to as much as $639 million or much higher by some estimates, when the totals of other general fund spending is included such as debt service on state bonds, pension payments and refunds paid out under the state oil and gas exploration and development tax credit incentive program. “The fact is that no one really knows what the reduction is,” Teal said, mainly because of a flurry of activity in the House Finance Committee that included switching of funding source for several programs. It will take time to get the numbers sorted out. The House passed its budget by a 24-14 vote at about 3 a.m. Friday morning. The tax credit payments are the biggest unknown, Teal said, because a bill restructuring the program is still in a House committee. Gov. Bill Walker wants to limit cash payouts to explorers to $100 million per year, but if the bill, House Bill 247, doesn’t pass, the state could accumulate new liabilities of $500 million or so. Walker may veto some of that like he did last year. Meanwhile, an operating budget is also being developed in the Senate, but it is not yet passed. It’s typical for the budgets approved by the House and Senate to be changed before legislators leave Juneau. In a briefing Thursday, Senate Finance co-chair Sen. Pete Kelly, R-Fairbanks, said the Senate’s target, at the end of the day, is a $500 million net reduction in unrestricted general fund spending from the current year. The Senate’s action to pass its budget is expected this week, and modifications to the House version are likely, Kelly said. As soon as the Senate passes its budget, a House-Senate conference committee will be appointed to iron out differences between the two plans but leaders in both bodies said the plan is to leave the budgets in conference for the next month while lawmakers turn their attention to revenue measures. At this point some method of using Permanent Fund earnings is the favored choice to offset depleted state oil and gas income, but decisions on which of several plans put forth for using the earnings have not been made. It’s thought that passage of any of several tax measures proposed by Gov. Bill Walker is unlikely this year, although an increase in the 8-cents per gallon gasoline tax could be enacted. If the Legislature achieves a $500 million reduction in spending this session it would still leave a gaping $2.5 billion to $3 billion-plus deficit for fiscal year 2017, and a need to draw down savings by that amount. The budget figures so far reflect deep cuts in many state agencies and the University of Alaska, but the numbers are far from final. One area of contention last year appears to be absent this year so far. That is education spending to support “K-12” elementary and high schools. So far there is no significant talk of reducing the Base Student Allocation, or BSA, a formula that sets out how state financial support for school districts is allocated. There is even an increase in the BSA for fiscal 2017 that was authorized in a bill passed by lawmakers two years ago, and there hasn’t yet been talk of halting that. This could be part of a plan by House and Senate Republican leaders to defuse school funding as the kind of line-in-the-sand issue that led to an impasse last spring with House Democrats, causing them to withhold votes for a withdrawal of funds from state savings and effectively extending the 2015 session. But if K-12 education is exempted from cuts this year, other education, such as the University of Alaska, is not. In its budget the House proposed a deep cut of $50 million, but the Senate is talking of a $25 million cut. All state support for pre-kindergarten programs has also been eliminated from both the House and Senate operating budgets. With this having happened in both budgets it’s very unlikely money will be added back in before the Legislature adjourns. One spending program the Legislature appears to be loathe to touch, however, is the Permanent Fund Dividend. In his budget Gov. Bill Walker had reduced money for the PFD this year to $700 million, or enough for a $1,000 dividend check. However, the House Finance Committee added $700 million to this to bring the total to $1.4 billion, enough for an approximate $2,000 PFD payment. Walker had reduced the appropriation under an assumption that his package of fiscal reform bills, which included a new mechanism for paying the dividend, would pass. That’s considered highly unlikely now, so the House Finance Committee changed the appropriation amount back to $1.4 billion. However, if the $700 million had been left in the budget and not increased it still would have resulted in a lower payout of $1,000 in a PFD check regardless of whether the fiscal package were enacted. The irony of the state spending money on dividends while cutting funds for basic services and balking at structural reform in the state budget is not lost on Wall Street credit rating agencies, said Rep. Mike Hawker, R-Anchorage, who was in Anchorage on Friday for medical treatment. Several major rating agencies have reduced the state’s credit worthiness in recent months. “It won’t be enough to just appropriate money from reserves, another money grab. They want to see systemic change,” Hawker said in comments to a Commonwealth North group in Anchorage.   Medicaid reform Aside from the budget issue one of the more important issues being considered this year is major revamp of the state’s Medicaid program along with other changes that could have wide-ranging effects in the state’s health care industry. The vehicle for this is Senate Bill 74, whose prime sponsor is Kelly, and which has been reported out of the Senate Finance Committee and was passed by the Senate unanimously on Friday. There is a lot of Senate horsepower lined up behind the bill. Cosponsors include five other senators including the other Finance co-chair, Sen. Anna MacKinnon, R-Eagle River; three other Finance members, Sen. Peter Micciche, R-Kenai; Sen. Click Bishop, R-Fairbanks; and Sen. Lyman Hoffman, D-Bethel, as well as Sen. Cathy Giessel, R-Anchorage, who is a health care professional. The bill makes wide-ranging changes in Medicaid, the health care program for lower-income Alaskans that is administered by the state and about half paid for by the federal government. A major objective is to toughen state laws and penalties for Medicaid fraud, handing new tools to anti-fraud investigators in the Department of Health and Social Services and the Attorney General’s office. One of the new tools would be a state “false claims” act that would empower state officials to pursue health providers who make false claims for Medicaid payments. Surprisingly, Alaska has no such law now, which requires the state to seek repayment or to assess penalties by other, more cumbersome, means. Among other things it tackles overuse of hospital Emergency Rooms by Medicaid patients with a required use of primary care case management for individuals identified as ER “over-users.” The bill also sets up a partnership between the state and hospitals for an electronic information system between hospital emergency rooms so physicians will be able to track patients’ history in other ER rooms. In a move to combat the epidemic of abuse of pain-killing drugs, which has led to heroin addition, physicians will be required to consult a database of painkiller drug prescriptions to individuals before prescribing drugs. Hospital emergency rooms and physicians within hospitals are exempt from this. In what could be a major change that will affect the entire Alaska health care industry, the bill would allow telemedicine for the first time so that Alaskans can consult out-of-state physicians and medical providers via the Internet or videoconference, and out-of-state physicians would be able to prescribe medicines. Out-of-state physicians consulting with Alaskans will still have to be licensed to practice in Alaska, however, and health care firms providing telemedicine services will have to register with the state under the bill. In other measures, SB 74 also authorizes a study of a possible merger of many separate health care and insurance plans that are paid for directly, and even indirectly, by the state, along with studies of how the state’s bulk purchasing power for services and drugs could be leveraged to lower costs or improve efficiencies. This idea, also from Kelly, has been proposed before in different forms and it has been opposed. Two years ago Sen. Mike Dunleavy, R-Wasilla, proposed merging of school district and state health plans to enlarge the pool of insured individuals, gaining efficiencies. The bill was strongly opposed by most school districts and teachers’ unions who argued there would be less flexibility for the insured under a large, combined health plan. This time around the influential public employee unions, who operate health plans for their members, are likely to resist a consolidation. A similar bill on Medicaid reform, House Bill 227, is pending in the House Health and Social Services Committee, sponsored by Rep. Paul Seaton, R-Homer, who is also chairman of that committee. It deals with many of the same issues as does SB 74, particularly Medicaid fraud. Seaton’s bill was reported out of the House committee March 9 and is now in the House Finance Committee.   Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

Week 7 in Juneau: budget discussions quicken pace

JUNEAU—The Legislature passed its halfway mark this week, Day 45 on Thursday, and the pace of work is quickening. Budget subcommittees in the state House finished their work on agency budgets last week. The House Finance Committee folded those into a draft operating budget bill. Final amendments to that will be made in the committee. A final budget is set to go to the floor of the House by Wednesday, and then to the Senate by Friday. Meanwhile the Senate’s own budget subcommittees are at work. The target date to have the House-passed and Senate-passed budgets in a conference committee is March 15, legislative leaders say. It will then sit there, pending final action, as lawmakers turn their attention to proposed revenues to ease a huge budget deficit. It’s still unclear how much the Legislature will cut the state budget. After the House budget subcommittees concluded their work the total Undesignated General Fund expenditure was $4.093 billion for FY 2017, almost half a billion dollars down from $4.511 billion in the governor’s amended budget for the upcoming year, and almost a billion dollars down from the $5.07 billion UGF expenditure in the current year, FY 2016. However, there may have to be some funds added back in by the full House Finance Committee. Money for the state’s share of expenditures on the Alaska LNG Project was taken out by a budget subcommittee, for example, but will be added back by the full committee. Also, the Senate will have its own ideas on the operating budget. Some of the House reductions may be restored or, in some cases, the Senate may cut more deeply. The final outcome won’t be known until the budgets are passed by both bodies and the budget conference committee finishes its work, which will likely be near the session adjournment date. The 90th day, April 17 this year, is when state law says the Legislature must complete its work but there are provisions that allow for extensions if more time is needed, as happened last year. The final weeks of the session will be consumed with deliberation over revenue options, the most likely some use of Permanent Fund earnings to help pay for the budget, the first time that will have been done. There are essentially two approaches to using earnings from the Fund before lawmakers. One, proposed by the governor, would be a fixed annual draw of $3.3 billion for the state general fund, an amount that would allow the fund to still be sustained, and even grow over the long run. The second is an endowment model proposed by Sen. Lesil McGuire, R-Anchorage and Rep. Mike Hawker, R-Anchorage, that would have a percent of the Fund’s total market value appropriated to the state general fund. In all cases the appropriation would actually come from the Permanent Fund’s earnings reserve account, where income from the Fund is deposited. The earnings of the Fund can be legally appropriated by the Legislature, but funds from the principle of the Fund cannot be spent. Walker is also offering up a slate of tax increases on business as well as a motor fuel tax increase and reestablishment of a state personal income tax, but none of those measures are expected to pass this year with the possible exception of the fuel tax increase. Versions of Walker’s fuel tax increase have moved out of both the House Transportation Committee and Senate Transportation Committee and are now in the Finance committees of both bodies. Both committees tempered the governor’s proposal, which is to increase the state’s current 8 cents per gallon tax on motor fuel to 16 cents per gallon, by voiding the increase if crude oil prices return to $85 per barrel. The present 8 cents per gallon tax is the lowest in the nation and has been unchanged since 1960. Many business groups, such as the Associated General Contractors’ Alaska Chapter, are supporting the increase because it would help make money available for road maintenance and because it would strengthen the state’s arguments in defending generous provisions for Alaska in federal transportation safety programs. While most of the Legislature’s attention is focused on fiscal matters there is a lot of work being done on proposed changes to the state’s Medicaid program, a state-federal health service program for low income Alaskans, in criminal justice reform and in revamping the state’s oil and gas exploration and development incentive program. Sens. Pete Kelly, R-Fairbanks, and Anna MacKinnon, R-Eagle River, are leading the Medicaid reform, while the criminal justice reform effort is being led by Sen. John Coghill, R-Fairbanks. Both initiatives have fiscal implications because they would save the state a lot of money over time. The Medicaid reform bill, Senate Bill 74, was introduced by Kelly last year and further developed in extensive work sessions in a subcommittee, and is now in the full Senate Finance Committee. Kelly and MacKinnon are co chairs of the Senate Finance Committee. In the House, the Health and Social Services Committee, chaired by Rep. Paul Seaton, R-Homer, has been working on its own version of Medicaid reform, with a bill, HB 227, sponsored by Seaton. Medicaid is a big-ticket cost for the state, estimated at $603 million for the state share in FY 2017. Medicaid is a joint federal and state program. The two governments split costs about 50-50. Action on reforming the oil and gas incentives is in the House, for now. Extensive hearings, chaired by Rep. Ben Nageak, D-Barrow, have been underway in the House Resources Committee. More of those are planned this week, Nageak said Thursday in a briefing by House leaders. Nageak is co chair of the Resources committee and is in charge of oil and gas bills. Unless the oil tax credit program is changed, it will impose a $500 million burden on the state’s general fund in FY 2017, according to projections by the House Finance Committee. The bill in committee is HB 247, sponsored by the governor, and is intended to restructure a complex system of tax credits that has grown more intricate over time, and which has become very expensive for the state. A “companion” bill, also by the governor, is in the Senate, but Senate Resources chair Sen. Cathy Giessel, R-Anch., is letting the House take the lead. Giessel likely has her own ideas about reforming the incentives – she chaired a working group that met several times over the summer – but is keeping her thoughts to herself, for now, and will wait for the House to send over the bill, if it does. What has the oil and gas industry stirred up, as well as the industry’s support contractors and service companies, is that HB 247 does a lot more than restructure the tax code. It also imposes a tax hike on producing companies by raising the minimum production tax from four percent of gross revenues to five percent. “That may not sound like much, a one percent increase, but for companies now paying the minimum tax it’s a 25 percent tax increase,” said Kara Moriarty, executive director of the Alaska Oil and Gas Association, the industry trade group. It’s made worse by the fact that producing companies on the North Slope are operating deeply in the red with oil prices at about $30 per barrel. Moriarty told the House committee last week that the average per-barrel cost of producing oil on the slope and moving it to market is about $54 per barrel, which means that the companies are losing about $25 for every barrel they produce. The cost figures are from the Department of Revenue’s fall 2015 revenue forecast, which contains production and cost data. In separate projections, the Department of Revenue has estimated that if oil prices remain in the $30 per barrel range for an extended period the slope producers’ loss could reach $1.8 billion this year. Industry tax experts also told the House committee last week that there are obscure provisions in HB 247 that amount to hidden tax increases. One example, cited by ExxonMobil tax manager Dan Seckers, is a section that changes the tax calculation from an annual to a monthly basis. This has the effect of exaggerating the impacts of short-term volatility and swings in crude oil prices in ways that drive up the tax obligation (the tax is paid as a percent of oil value, which is determined by the price) as compared to an annual reporting which tends to smooth out the swings in prices. There are other problems in the complex bill, according to companies presenting remarks to the committee. A provision softening strict confidentiality rules around taxpayer reporting so the public can obtain at least some information about tax breaks specific companies are getting, may be drafted too broadly. Unless the language is tightened the provision could have the effect of making other kinds of confidential taxpayer data public, it was argued. Despite those issues, and the increase in the minimum tax is the biggest for industry, the overall intent of the bill is to tighten up and simplify a state tax incentive bill that has become so complex that it is easily “gamed” by companies, revenue officials have said. There are several types of tax credit incentives in the current law and in certain circumstances companies can “stack” them, one atop another, so that as much as 75 percent of the cost of an exploration project is paid for by the state. In many cases this is actually represents a cash expenditure because companies can turn in tax credit certificates and be refunded by the state. One effect of HB 247 would be to reduce this, for example putting an annual limit on the amount of cash refund that can go to a company. One of the biggest changes in the bill would be to complete a reform in the tax credit program that was started in Senate Bill 21 for the North Slope, but not done for Cook Inlet. This was a 25 percent capital investment tax credit that allowed firms to credit one fourth of all capital investments against state production tax liability.  Since all types of capital investments, for example roads, bridges, airfields, were included in this along with investments targeted at finding more oil, such as new drilling, the cost to the state was becoming prohibitive. Had SB 21 not been enacted the state would have paid out a billion dollars in refunds or foregone revenues in Fiscal 2014. As it happened, however, the capital investment tax credit was repealed for the North Slope in SB 21 but not in Cook Inlet. One of the goals of HB 247 is to complete that process by repealing it in Cook Inlet as well. This change alone would have a major impact in reducing state obligations under the incentive program.

Week 6 in Juneau: House makes budget recommendations

JUNEAU—Friday was day 39, and wrapped up week six of the 2016 legislative session. Next week, day 45 will the halfway point of the 90-day session. Things are busy in the capitol building. Budget subcommittees of the House Finance Committee closed out their work, handing in recommendations to the full Finance panel, which will hold public hearings this week. Meanwhile, Senate budget subcommittees continue working, to be ready when the House formally transmits its version of the operating budget, which is expected in early to mid-March. Some subcommittees recommended substantial reductions for agencies, others did not. One of the largest cuts so far is to the University of Alaska, which would see a 30 percent reduction of its state general funds, a budget subcommittee headed by Rep. Tammie Wilson, R-North Pole, has recommended. Wilson’s subcommittee recommended a large cut last year of over $50 million to the university’s budget but that was modified to about $25 million by the full House Finance Committee. Gov. Bill Walker proposed cutting the university appropriation by $15.5 million in his 2017 fiscal year budget. On the university budget, the Legislature does not reduce specific programs but rather makes an overall cut and allows the Board of Regents and university administrators to allocate the reductions. Legislators were easier on the Department of Labor and Workforce Development, partly because it is a smaller agency with much of its work funded by the federal government. “For the Department of Labor we recommended a 12 percent to 13 percent reduction (of state general funds), but that follows a 20 percent reduction last year,” said Rep. Charisse Millett, R-Anchorage, who is a member of the labor department subcommittee. Every legislator sits on a budget subcommittee. The Department of Transportation and Public Facilities also got off relatively lightly in its House subcommittee, with a $2 million reduction in the highways maintenance budget, which will be absorbed by extending the service life of the state equipment fleet, and a $2 million cut to the state ferry system, which will be softened this year with funds taken from the system’s revenue account. Additional revenues will have to be generated to refill that account for next year, however. The light touch on DOT was done partly because the agency took a 12.5 percent cut of state funds last year, totaling about $34 million. Most important, the state ferry system will be able to operate this summer with its published schedule. Last year, budget cuts threatened to change ferry schedules and disrupt travel plans before reallocation of money from a special fuel account was used to fill the gap. Reductions to the Department of Commerce, Community and Economic Development budget were generally in agreement with cuts Walker proposed in amendments to the administration’s FY 2017 budget released recently. Those included cutting all money, for next year at least, in the Alaska Energy Authority’s Renewable Energy Fund grants, a program that helps finance small renewable energy projects mostly in rural communities. Walker had proposed $5 million for the program in his original FY 2017 budget released in December but cut the funds in his budget amendments. In more flush times lawmakers have funded $20 million to $25 million annually for REF grants, which require contributions from the local community that typically match or exceed the state money. The department’s budget also reduced money for the Alaska Energy Authority to train rural power system operators and its “circuit rider” program where the agency provides technicians to assist rural plant operators with maintenance or respond to emergencies. Funding was also cut for state tourism marketing and for the Alaska Seafood Marketing Institute, a state agency that works with the seafood industry in marketing. ASMI does generic Alaska marketing and is widely credited for having established an Alaska brand identity for wild-caught fish, helping Alaska harvesters compete with farm-raised salmon. In the case of ASMI and tourism marketing, the state will pass more of the promotion work to private partners in both industries, mainly seafood processors in the case of ASMI and for tourism the Alaska Tourism Industry Association, a trade group of mostly smaller Alaska tour operators. But for the Alaska Energy Authority’s rural power plant assistance, “we’ll just have to do the best we can,” the authority’s director, Sara Fisher-Goad, told the agency’s House budget subcommittee. Legislative “intent” language in the proposed budgets for both the AEA and ASMI expressed the Legislature’s desire that both agencies be able to operate without state general funds in two years. A recommendation was also made that AEA link itself with a sister-agency, the Alaska Industrial Development and Export Authority, to save money. It isn’t immediately clear what savings are possible because AEA and AIDEA already share many administrative support functions, including shared building space, but also have different functions. With ASMI, some ongoing state money would be required as a match to federal funds for overseas seafood marketing. Alaska is the only seafood-producing state with substantial international sales. As for the Legislature itself, Millett said in a House Majority press briefing that a 12.4 percent cut is recommended for lawmakers’ budget, which will require putting some legislative staff on furlough. Also, Millet said there is no money in the budget to pay rent for the new Legislative Information Office building in Downtown Anchorage, which has become controversial. The owners of the building have made an offer to sell it to the Legislature, and plan is also being considered to break the lease and move legislative offices to the state-owned Atwood Building, also downtown. Once the House and Senate Finance committees complete work on the operating budget a House-Senate conference committee will convene to iron out differences. Permanent Fund earnings On the overarching issues of the 2016 session, work continues on the major question of the session, a decision to use Permanent Fund earnings and enact new taxes to reduce a massive $3.5 billion-plus budget deficit. There are now three distinct plans before lawmakers, one proposed by the Walker administration, a second by Sen. Lesil McGuire, R-Anchorage, and a third by Rep. Mike Hawker, also an Anchorage Republican. McGuire’s bill is in the Senate but Millett has introduced a version of McGuire’s bill in the House. Walker’s proposal involves a series of changes in the way earnings of the Permanent Fund are managed, how revenues flow into the Fund, and how the annual citizen dividends are funded. The governor would set a fixed annual draw from Fund earnings for the budget – $3.3 billion, adjusted for inflation – an amount that would not impair the Fund’s long-term sustainability. Dividends would be $1,000 for 2016, a reduction from just over $2,000 last year, and would then be determined by the amount of state resource royalty income in future years. Most projections are that the dividend would gradually decline unless major new oil discoveries are made. McGuire’s approach is similar in concept to Walker’s, including funding dividends with oil royalties, but would make Permanent Fund earnings available under a percent-of-market-value, or POMV, approach, similar to the way large endowments are managed. Hawker would also adopt a POMV approach for making money available for the state budget but would make a major change in the dividend financing in that any surplus Permanent Fund earnings would first go to reduce the state budget deficit. If there is any money left over it would be used to fund dividends. The Senate State Affairs Committee and the House Finance Committee have been holding extensive hearings on the bills (Hawker’s bill is only in the House) along with public hearings. There’s no real sense of direction yet as to what the Legislature may do. Most lawmakers want to finish work on the fiscal 2017 budget and show budget reductions to constituents before they turn to the new revenue options. In a briefing early last week Sen. Pete Kelly, co-chair of the Senate Finance Committee, said there is a general consensus, at least in the Senate, that some way of using Permanent Fund earnings should be adopted, but that budget cuts should be demonstrated. Senators seem more aligned behind a version of McGuire’s Permanent Fund earnings bill than the governor’s proposal, which is seen as overly complicated. Hawker’s bill is seen as the simplest of all the proposals, but there is a concern that it does away with the PFD, for at least the near-term, until budget deficits are erased. All three proposals would substantially reduce the dividend compared to last year, however. Tax bills Another issue before legislators is proposals for new state taxes. As a part of his overall fiscal plan the governor has proposed a series of tax increases on almost every major Alaska industry, including the oil industry, along with a state personal income tax and an increase of state fuel taxes. Last week the Senate Labor and Commerce Committee began hearings on the income tax, and the Senate Transportation Committee adopted a version of Walker’s fuel tax increase and sent it on to the Finance Committee. The new version raises the state’s motor fuel tax from 8 cents per gallon to 16 cents per gallon, similar to what Walker proposes, but only as long as crude oil prices are below $85 per barrel — now about $30 per barrel. If crude oil prices rise above the $85 threshold the tax would revert to 8 cents a gallon. A similar version of the fuel tax bill, with its link to crude oil, is pending in the House Transportation Committee. As for other proposed tax increases, such as those proposed for mining and fisheries, nothing has moved. Rep. Louise Stutes, R-Kodiak, who chairs the House special Fisheries Committee, plans no near-term action on the bill. In a House Majority briefing late in the week she pointed out that while the proposed one percent hike in the state fish tax sounds relatively light, it represents an increase from three percent to four percent, or about a one-third increase. Being from Kodiak, Stutes represents a major fisheries center. On a related matter, University of Alaska economist Gunnar Knapp presented results of modeling of the economic impacts of different options being considered, budget cuts, reduced PFDs and new taxes. The report, still in draft and to be finished in March, was prepared for the Department of Revenue by the University of Alaska Anchorage Institute of Social and Economic Research, or ISER. It illustrates the possible short-term effects of a $100 million reduction in state workers, or the elimination of those jobs; a $100 million reduction in state employees’ pay; a $100 million reduction in the Permanent Fund dividend, and a $100 million increase in revenues from a broad-based tax such as a personal income tax or state sales tax. The economic effects of a state income tax or sales tax are roughly similar, Knapp said. Of the scenarios modeled, ISER found a direct reduction of state workers that equates to saving $100 million in the state budget, would have the greatest negative impact. The total loss to the economy would be 1,677 jobs. An across-the-board $100 million cut in spending, which would include some state workers as well as other kinds of state spending, would cost the economy 1,260 jobs. A $100 million reduction in dividends paid out to citizens would have less of a negative impact, a loss of 917 jobs in the economy. A cut in state worker pay would have the least impact, a loss of 897 jobs. Using these calculations, if spending were cut $3.5 billion at one time, to eliminate a $3.5 billion deficit, it would cost the state’s economy 44,100 jobs. For reference, in December there were about 325,000 people working in Alaska in jobs of all types. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

Week 5 in Juneau: A somber mood after passing of Gruenberg

JUNEAU—The mood in the capitol building was somber this week. Legislators were saddened by the unexpected death last Sunday of Rep. Max Gruenberg, a long-serving and well-liked lawmaker. On Wednesday, Gov. Bill Walker, flanked by top industry executives, announced the Alaska LNG Project was going on the slow-track. Walker did everything he could to avoid saying delay, but that was the effect of what the governor did say. Finally, oil prices and state revenues are still in the pits, with no relief in sight. On Gruenberg, legislative leaders had words of praise as they remembered a thoughtful, precise lawmaker who brought insights from years of practicing law and legislative service to committee meetings. The House Judiciary Committee, which Gruenberg once chaired when in the Majority, was his turf, and his advice was listened to. On Friday, the House unanimously passed a resolution naming the Judiciary Committee room after Gruenber. “Max, in many ways, was an institution, with a depth and breadth of knowledge that will never be replaced. We’re honoring him as one of the greats. Naming the room after him ensures his spirit lives on,” said Speaker Mike Chenault, R-Nikiski, who introduced House Resolution 6, naming the room. In the Senate, Minority Leader Sen. Berta Gardner, D-Anchorage, had equal praise: “He (Gruenberg) was a Talmudic scholar for our time, with an eye for detail, and a love of the fine point. He had the kindest and most gentle of hearts, and took great joy in many explorations — in books, in people, in history, and in the world of possibilities. His absence will be such a loss for all of us.” Gruenberg joins other legislative icons with rooms named after them, like former Speaker Ramona Barnes (Capitol Room 124,) and former Sens. Betty Fahrenkamp (Room 203,) John Butrovich (Room 205,) and Senate President William Beltz (Thomas Stewart Building Room 105.) LNG stalls On LNG, Walker’s press conference Wednesday with officials from BP, ConocoPhillips and ExxonMobil was held in Anchorage and telecast to legislators in Juneau. It brought a puzzled response in the capitol. There was no announcement being made other than an acknowledgement that the extended period of low oil prices was taking its toll, and had clouded prospects for the project moving along on its current schedule. “Change is coming, details to follow? I wish there was something more concrete coming from today’s event,” Chenault said following the press conference. Walker said the companies had raised the market issue with him, and the governor had decided to go public with it, and to assure people there was still forward momentum, that work on preliminary engineering would continue. Prices in Asia for liquefied natural gas, or LNG, are at very low levels along with crude oil prices, and although it will take a decade for the Alaska LNG Project to be in operation, a time when energy prices may be far different, low oil prices cuts into the financial capability of even large companies to advance the project. Meanwhile, complex negotiations on commercial agreements needed for the project have not progressed, Deputy Natural Resources Commissioner Marty Rutherford told the Senate Finance Committee in budget briefing Thursday. “We are seriously behind schedule on the commercial negotiations,” Rutherford said. Rutherford will become the interim DNR commissioner March 1 after current Commissioner Mark Myers announced his retirement on Tuesday. In the press conference Walker said the state and the companies will now discuss a reconfiguration of the project to lower costs, with a goal of having a new plan in March. Rutherford, in the budget briefing, said discussions on a new plan started Thursday. Presumably any changes would involve the commercial structure of the project since changing the design parameters at this point would be expensive given the advanced stage of engineering and regulatory work. Rep. Mike Hawker, R-Anchorage, said he wasn’t surprised at the development. “The stage-gate at the end of Pre-FEED (preliminary engineering) was always intended as a pause for all four parties to carefully evaluate the feasibility of this project before committing to the multi-billion dollar FEED (final engineering) phase,” he said. At the press conference, Steve Butt, an ExxonMobil manager leading the Alaska LNG technical and regulatory work, said work on preliminary engineering is continuing with a goal of completing it by the end of the year. A revised cost estimate is being developed as a part of that, he said. Budget work continues Legislators, meanwhile, were focused mainly on their budget work during the week. The House has suspended all committee work on bills not dealing with the budget or fiscal issues and many committees canceled meetings so their members could attend agency budget subcommittee meetings. Chenault said the move in the House to stop work on bills not connected to the budget and fiscal issue was having its desired effect. “We are seeing a lot more participation in the Finance subcommittees because members aren’t being distracted by other bills,” he said. “We need all the input we can get into the budget discussions.” The Senate has continued work on non-budget bills but at a slower pace, with its members similarly focused on spending and possible new revenues. Each state agency is working with a House and Senate Finance subcommittee on its budget and every legislator sits on a subcommittee, with those chaired by members of the House or Senate Finance Committees. When the subcommittees produce their recommendations, which are expected starting this week, the chair of the subcommittee will present the work to the full Finance Committees. The recommendations may or may not be accepted. Traditionally the House develops the operating budget, usually in early March, and sends it to the Senate in late March. The Senate Finance Committee, meanwhile, works with its own subcommittees on recommended spending levels for agencies so as to be ready when the Senate formally receives the operating budget from the House. It works the other way on the state’s capital budget, which is mostly for construction. The Senate usually develops this first and sends it to the House, typically in early April. Differences in the budgets between House and Senate are worked out in budget conference committees toward the end of the session in the third week of April. There is apprehension, however, that the train wreck at the end of the 2015 session may be repeated this year. A withdrawal of funds from the Constitutional Budget Reserve, or CBR, a state savings fund, will be needed again this year to cover a large budget deficit, and a three-quarters vote of the House and Senate is required. The Republican majority in the Senate can deliver 16 votes, or three-quarters of that 20-member body, but in the House the Majority cannot command the 30 votes needed in that 40-member body. Votes of the House Minority are needed. Last year House minority members withheld their votes to get changes in the budget and an impasse developed that dragged on into June, through two 30-day special sessions. In an interview, House Minority Leader Chris Tuck, D-Anchorage, said he hopes to avoid a repeat of last year’s breakdown by working out an agreement early on budget issues. The House Minority and Majority have engaged earlier this year to discuss priorities, Tuck said. Negotiations started late last year, which led to the breakdown. “CBR withdrawal votes have been held several times in the past but it had been years since we’d done it, and we were all a little rusty at it,” Tuck said. On the governor’s fiscal policy and revenue proposals, legislative committees continue hearings on the main plans put forth for using a part of Permanent Fund earnings. These include the governor’s plan, which involves a kind of replumbing of the Permanent Fund income management and the Permanent Fund Dividend; a proposal by Sen. Lesil McGuire, R-Anchorage, which also “replumbs” the Fund’s income use and dividend, but is simpler. Hawker also has a bill in that pursues the same goals but along different paths, and is also relatively simple. The most active committees on these are the Senate State Affairs Committee and the House Finance Committee. There are no signals yet on what these committees will do with the proposals, however. Public hearings have been held by the Senate State Affairs Committee with much of the comments by the public opposed to using Permanent Fund earnings or reducing the citizen dividends. The future of the governor’s tax proposals is up in the air too, although committees have been having hearings on several including proposed tax increases to minerals (HB 253, SB 137), fisheries (HB 251, SB 135), tourism (HB 252, SB 136), alcohol (HB 248, SB 131), and Tobacco and E-cigarettes  (HB 304, SB 133). Not surprisingly, there is opposition being voiced in the public hearings on the bills. Walker’s personal income tax bill (HB 250, SB 134) was up for its first hearing Thursday in the Senate Labor and Commerce Committee, but the hearing was cancelled and rescheduled for Feb. 23. Meanwhile, an interesting aspect of the tourism tax measure is that it could upset a legal settlement between cruise companies and the state that was brought after a state cruise passenger tax was first enacted. Ketchikan and Juneau also enacted municipal cruise taxes. There was serious concern over the lawsuit because the imposition by the state of a tax on interstate commerce, on cruise passengers, could be seen as a violation of the U.S. Constitution’s commerce clause. The settlement was reached after the state agreed to reduce the tax and make other changes, and also to restrict the use of funds raised by the tax to improvements that directly benefit cruise ships and passengers. Using the money from taxes imposed on interstate travel in ways that benefit those travelling would likely pass muster in the courts, it was reasoned at the time. Using the money to support the state’s or municipalities’ general fund would likely fall, attorneys felt. The governor’s bills now would raise the tax indirectly, by disallowing a credit of local taxes paid against the tax owed the state. This in itself might not upset the settlement but the state would have to use any new revenues gained only on benefits to cruise tourists or ships. The increased revenues should not be used to support the state general fund budget, in other words. An interesting aspect to the governor’s proposed FY 2017 budget, however, is that it assumes that the Legislature will pass Walker’s fiscal reform package including the tax increases and restructuring of the Permanent Fund income management. Revenues from the proposals are assumed and built into the budget. If legislators do not pass the governor’s package, those revenues will be backed out of the budget, increasing the state deficit by those amounts. Included in this, however, is that only $700 million is in the governor’s amended FY 2017 budget for Permanent Fund dividends to be paid later this year. That amount is sufficient for a $1,000 dividend. In his original budget, submitted in December, Walker had put in $1.4 billion for dividends, which would be enough to pay the dividend under the existing formulas for paying it, a little more than $2,000. If the Permanent Fund income and dividend restructuring proposals don’t pass, there would still only be enough money for a $1,000 dividend. Legislators could add to the appropriation but they would have to take the added $700 million from state programs or cause the deficit to grow by that amount. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

Week 4 in Juneau: Gov’s oil tax credit overhaul under scrutiny

Independent companies developing new oil and gas projects are anxiously watching a major revamp of the state’s petroleum tax credit incentive program, but bills making those changes seem on a slow track in the state Legislature. Hearings have been underway in the House Resources committee on House Bill 247, the tax credit bill introduced by Gov. Bill Walker, but it’s uncertain when the committee will act on it. The bill must still go to the House Finance Committee and then to the Senate, and the 2016 legislative session is about one-third over. One company ready to drill as soon as there’s clarity over the changes is BlueCrest Energy, of Fort Worth, Texas. BlueCrest must commit soon to the use of a jack-up rig for Cook Inlet drilling planned this summer, its president, Benji Johnson, said in an interview. Senators are letting the House take the lead on the bill. One House Resources Committee hearing scheduled for Friday, Feb. 5, was canceled when its members decided to wait for a study under preparation by the university’s Institute of Social and Economic Research. It turned out that the study, intended to assess economic impacts of Walker’s fiscal reform package, did not deal with the changes proposed in the tax incentives. The committee resumed work on the bill on Wednesday, Feb. 10, but a public hearing set for Friday, Feb. 12, was postponed until Saturday, Feb. 13, and then canceled. Much of the hearings held so far have consisted of Rep. Mike Hawker, R-Anchorage, putting state Revenue Commissioner Randy Hoffbeck and Tax Division Director Ken Alper through the wringer with questions about the governor’s intentions with the tax credit rewrite. The legislation is complex, however. The title of the bill is 273 words long, Alper said. The governor decided in mid-2015 to reorganize the program, when the state was being hit with sharply declining revenues. Walker called it a luxury the state can no longer afford, at least as the incentives are structured now. The state faces a $3.5 billion budget deficit this year and the incentives amount to $500 million of that. Originally, $700 million had been appropriated for the current budget year but Walker vetoed $200 million of that to bring the actual cash outlay to $500 million. He has promised to eventually pay the remainder, however. Of the $500 million still authorized $472 million has actually been paid so far, Alper said. The program was started years ago and was intended to spur exploration and new oil development. It has resulted in new drilling and discoveries, but it has also grown complicated over several years and through many changes. There have been unintended, and costly, effects, Alper told the Resources Committee. "Some producers have been able to reduce their state production tax liability to zero and yet still receive cash payments under the incentives," he said.  Independents, many of them small, are able to get up as much as 75 cash percent reimbursement of expenses related to exploration and development of new projects. The credits are taken in two ways, as credit against a company’s production tax liability if there is production, or in a cash payment from the state if a company is exploring and has no production. Industry has warned he state must move carefully in restructuring the program. If the incentives are abruptly terminated (some by July 1, 2016, others retroactively to Jan. 1, 2016), some small- to medium-sized projects now in development will not proceed, several companies have said. Sen. Cathy Giessel, R-Anchorage, who chairs the Resources Committee, said this could mean some future production the state is counting on may not materialize. Giessel credits the incentives with stimulating exploration and new production mainly by independents. "Using an analogy, this is like running a school system and wiping out your kindergarten class," she said. "There could be production in a few years and we won't have it." Independents like Denver-based Armstrong Oil and Gas have led Alaska exploration in recent years and discoveries have been made, including by Armstrong and its partner, Repsol. This is at a time when two of the largest Slope producers — BP and ExxonMobil — have shown no interest in Alaska exploration. The other large Slope producer, ConocoPhillips, remains active in exploration. In the bill before the House committee, the governor would set a limit of $100 million for tax credits to explorers. That would be a big contraction from the several hundred million dollars a year spent in recent years. Setting limits can make the program less effective, the Alaska Oil and Gas Association argued in a white paper. Limits placed on the state incentives adds uncertainty to a company’s planning and causes the incentives to be generally disregarded in assessing a new project. In an earlier experience with this, when limits were placed on incentives in 2002 and 2003, “companies did not find value in the credits, so they were not utilized and many of them were eliminated or changed as the state’s tax policy evolved,” AOGA said in its paper. A separate part of the restructured program would apply to projects in development. The governor has proposed a separate bill, HB 246, that would have the state development finance corporation, the Alaska Industrial Development and Export Authority, or AIDEA, offer loan guarantees to help small companies finance development costs. This might work, said Johnson of BlueCrest Energy. Johnson said the loan guarantee approach could help his company finance development of gas reserves at Cosmopolitan, an oil and gas discovery the company has made in Cook Inlet. Previously, BlueCrest and other small companies have used the state tax credits as collateral to backstop development financing by commercial banks. Loan guarantees from AIDEA would serve the same purpose, he said. One problem is that HB 246, allowing the loan guarantee, appears to be on the Legislature’s slow-track, too. It is even further back in the queue of bills than the tax credit measure. It has been referred to the House Resources committee but is not yet scheduled for hearings and committee work. Meanwhile, the state has spent a lot of money in the incentive program. "Between 2007 and through 2015, there has been $7.4 billion in credits issued,” Alper said. About $6.4 billion of this has been for the North Slope, and another $1 billion spent in Cook Inlet. Of the $6.4 billion spent on the Slope, $4.3 billion was used mostly by major producers against production tax liability, or in tax payments not made to the state, with $2.1 billion in tax credits that were refunded in cash by the state mainly to independents. Of the $1 billion in credits issued in Cook Inlet in the same period, $900 million was refunded in cash and $100 million taken by producing companies against tax liability. The Legislature had already moved to reel in some of the more expensive tax credits. Much of the North Slope producers' $4.3 billion offset against taxes came from a 20 percent capital investment tax credit put in place in 2006 under the Petroleum Profits Tax, or PPT, under Gov. Frank Murkowski and continued in Alaska’s Clear and Equitable Share, or ACES, passed under Gov. Sarah Palin. That 20 percent credit was repealed for the North Slope in 2013 in Senate Bill 21 under Gov. Sean Parnell, which involved a major rewrite of the state’s oil tax law. The investment tax credit was left intact in Cook Inlet, however, and it is one major reason why explorers can “stack” credits to get as much as 75 percent of expenses in cash refunds. Walker’s current HB 247 would repeal the 20 percent investment tax credit in Cook Inlet. The capital investment tax credit has become misdirected, state officials have said, since it was tied to capital spending by companies for all purposes and not directly related to spending for new production.  Several exploration-only tax credits were also put on the road for repeal in the 2013 tax overhaul, and those repeals take effect this year. However, some exploration incentives were retained, including some to help firms exploring in the large unexplored basins of Interior Alaska. Legislators dubbed these "Middle Earth" tax credits. Two Alaska Native corporations drilling in the Nenana Basin and the Copper River basin are eligible to be refunded up to 65 percent of eligible expenses. Minimum tax not a minimum Other problems in the state’s petroleum tax laws have also come to light, particularly in the light of the plunge in crude oil prices. The state has discovered, for example, that it has a "hole" in a minimum-tax provision of the production tax, intended as a protection for the state budget if oil prices fell. The minimum tax would have producers pay 4 percent of gross revenues in lieu of the net-profits production tax when oil prices drop below a certain point, which they have. The tax credits, if applied against tax liability, can allow producers to pay less the minimum. The state is now worried that several producing fields on the Slope may be running at a loss, which could result in zero production tax being paid. Citing confidentiality requirements, Alper could not say this has actually happened, but it could, though. “We see one or more major producers showing a net operating loss for 2015,” he told the House committee. The pending HB 247 would disallow the use of credits against the minimum tax, in effect sealing the hole. The bill would also raise the minimum tax from 4 percent to 5 percent, which would add about $100 million to the producers' tax bill. Alper said untangling the web of tax credits for Cook Inlet, closing minimum tax loopholes and hiking the minimum tax are major objectives of the current legislation. The state’s oil and gas industry is not happy about the hike in the minimum tax. “While a 1 percentage point increase might not sound significant, it would represent a 25 percent increase for those companies already paying the 4 percent minimum tax,” the Alaska Oil and Gas Association said in its white paper. Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

Week 3 in Juneau: ‘We need to man up and do our jobs’

JUNEAU — The Legislature ground through its 18th day in Juneau as of Feb. 5 with 72 days to go until its scheduled adjournment. Whether that actually happens depends on a lot of things, mainly whether an agreement can be reached with the House Minority, mostly Democrats, on a draw from the Constitutional Budget Reserve, or CBR, a state savings account. House minority votes are needed to get a three-fourths majority to make a CBR draw, and the worry is that extended wrangling over budget cuts may throw the Legislature into an extended overtime, as happened last year. In a briefing by House leaders, Rep. Craig Johnson, R-Anchorage, the House Rules chairman, said discussions are already underway with the minority caucus on the issue, with House Speaker Mike Chenault, R-Nikiski, and of the Finance Committee co-chairs Reps. Mark Neuman, R-Big Lake, and Steve Thompson, R-Fairbanks, taking the lead. Johnson said he hopes to avoid what happened last year when the minority demanded, and eventually got, restoration of cuts to education and a scheduled increase in state employee’s pay. “What happened last year will cost us millions over the next five to six years. We can’t afford to let it happen again,” Johnson said. In a separate briefing last week, state budget director Pat Pitney said there is no way to avoid the CBR draw this year, and that the administration is also is in “discussions” with legislators, presumably the House Minority on the three-quarters vote. “There has to be a balance. We’re all in this together,” Pitney said. Her comments came in a Senate Finance Committee briefing Feb. 2. Johnson said he hopes the governor will get involved early to prevent an impasse. Meanwhile, legislative committees are buckled down in review of agency budgets and Gov. Bill Walker’s plan to revamp the state fiscal system with new revenues in addition to spending cuts. With oil prices in the $30-per-barrel range the budget deficit will be more than $3.5 billion this year. The Senate State Affairs Committee, chaired by Sen. Bill Stoltze, R-Chugiak, continued with its hearings on the governor’s plan to revamp the Permanent Fund into an endowment to help support the state budget. Public hearings were held the evening of Feb. 4, with many people phoning in expressing opposition to using Permanent Fund earnings, or at least until there were more spending cuts. In comments earlier Stoltze mentioned a possible public vote on a new state fiscal plan that involved the Permanent Fund, perhaps fashioned as a constitutional amendment. House leaders are cool to this idea, however. In the House leadership briefing, Johnson said, “I don’t think the citizens of Alaska sent us down here to make them vote on something. We’re a representative government. We (legislators) need to man up and do our job.” House leaders are mindful, and don’t want a repeat, of the overwhelming public rejection a few years ago in an advisory vote on adopting a “Percent of Market Value” payout plan for Permanent Fund earnings, an approach used by most endowments. “It was a different time,” Johnson said, a reflection of the state’s current budget crisis that didn’t exist then. From a practical viewpoint, Johnson said, if the fiscal plan were to be put into a constitutional amendment that would have to be approved by voters in November, it would be difficult for the Finance committees to write a fiscal year 2017 budget for the period beginning July 1. Tax time Meanwhile, the House is well along in its consideration of various business tax bills introduced by the governor. The bills have been referred to various committees to deal with policy issues, for example the state fuel tax increase to the Transportation Committee, an increase in minerals taxes to the Resources Committee, and a fish tax hike to the House Special Fisheries Committee. Public hearings have already been held on the fuel and minerals tax hikes. After the policy committees finish their reviews and public hearings the bills will go to the Finance Committee, which will also be finalizing the budget. At the House leadership briefing Rep. Shelly Hughes, co-chair of the House Transportation Committee, said her committee has been holding hearings on the fuel tax increase and said she is concerned that the governor’s proposals take too much money out of the pockets of ordinary citizens just to help sustain government. The plan to hike motor, aviation and marine fuel taxes is estimated to bring in $49 million a year, but that’s money that will go to the state general fund and would not be targeted to help maintain “roads and runways,” Hughes said. It’s also money out of Alaskans’ pockets, she said. “We estimate that if all of the governor’s tax and revenue proposals were to pass it would cost an average Alaskan family of four $7,000 a year,” Hughes said. “The public needs to engage on this. It could have a huge impact,” on families and the economy, she said. Public hearings on the taxes, the fuel tax in particular, have drawn a very light response so far, which is why Hughes is concerned. The gravity of the state’s financial situation is sinking in with legislators, however. If nothing is done the heavy draws on state cash reserves will continue, said Sen. Peter Micciche, R-Kenai, in a Feb. 2 Senate Finance Committee briefing by administration officials. If things stay on course, “In 2018 the CBR (Constitutional Budget Reserve) is gone, and the Earnings Reserve (account) of the Permanent Fund will be gone two years later. After that the Permanent Fund dividend goes away. Alaskans need to understand this,” Micciche said. “If we say we’re going to go ‘medieval’ on the budget, and cut down to where our revenues are (one third of the budget) it’s just not realistic. We have to be creative in our response to this,” he said. He’s not sure the governor’s fiscal plan goes far enough, however, mainly in spending reductions of $100 million. “My constituents are telling me they are willing to support a draw on Permanent Fund earnings and new revenues (in addition), but I’d better be willing to look ‘em in the eye,” in terms of ‘right-sizing’ government,” Micciche said. “I’m not sure this plan (by the governor) does that.” Medicaid reform In other developments, a Senate Finance subcommittee working on reform of the state Medicaid system held a Feb. 4 hearing to review results of an initial study by The Menges Group, a health care consulting firm retained by the Legislature to recommend changes in the state-administered Medicaid, which is administered by the state and paid for partly by the federal government. Health and social services spending consumes 28 percent of Alaska’s General Fund operating budget, and Medicaid is the big driver in that, said Joel Menges, president of the consulting firm. Menges said his study did not assess any impacts of the state’s expansion of Medicaid ordered last year by Walker, but did make a preliminary assessment of possible cost-saving measures. He said there will be costs to the state budget in fiscal year 2017 for the expansion because the current fiscal year, which ends June 30, is the last year in which the federal government pays 100 percent of the expansion costs. Alaska’s costs for next year are estimated at $5.7 million and increasing to about $24 million a year in 2020, when the federal share of the payment drops to 90 percent. However, the state will benefit from some reduced costs due to the expansion, such as certain behavioral health costs now paid by the state and that are now paid by Medicaid, and federal payment for certain medical costs of prison inmates that are now paid by the state. Menges estimated the combined state cost savings at about $9 million a year. The expansion will also bring new federal money into the state’s economy, which might be welcome in the current economic environment, Menges said. He estimated this at between $170 million and $200 million a year. In the hearing Sen. Pete Kelly, R-Fairbanks, who co-chairs Senate Finance along with Sen. Anna MacKinnon, R-Eagle River, gently took Menges to task for characterizing more government money in Alaska as a “good” thing. The dominant role of government is the economy tends to crowd the private sector, Kelly said, for example in making it difficult for many businesses to compete for good employees against the public sector employers who pay well and offer generous benefits. Toward the end of his presentation Menges outlined a few preliminary recommendations for cost-saving measures, ideas which he described as “low hanging fruit,” and that will be developed further in reports yet to come. One is to manage prescription drugs provided through Medicaid in a more organized way, to steer people toward both name-brand and generic drugs that are effective but less expensive. A second is to provide focused care management services to people who are experiencing multiple hospitalizations over given time periods. “We see people, and they are easy to find, who are hospitalized five or more times over 24 months, an this isn’t the fault of hospitals,” he said. Obviously something goes amiss when people are discharged. In many cases the illness is related to behavioral health problems, “and people often go back to the same lousy environment that produced the problem,” Menges said. “This is a situation where fee-for-service medicine really adds costs, and it’s an ideal place to start with managed care,” he said. A third area where the state could develop substantial cost savings is to encourage the Tribal health system, where the Indian Health Service pays 100 percent of Medicaid costs, to develop long-term care facilities for Alaska Native patients. These are now lacking in the Tribal health system, so elderly Natives wind up staying in non-Tribal facilities where the federal government only pays 50 percent, leaving the state to pay the rest. The week ahead The Senate Finance Medicaid subcommittee plans further meetings on Monday, Feb. 8, at 9 a.m. and at 1:30 p.m.; on Wednesday, Feb. 10 and Friday, Feb. 12. Meanwhile the House Health and Social Services Committee will have its own session on Medicaid reform on Tuesday, Feb. 9. The governor’s proposed fisheries tax increase will be up before two committees next week, in Senate Resources Committee on Monday, Feb. 8, and the House Special Committee on Fisheries on Wednesday, Feb. 10. Also on Wednesday, the Alaska Criminal Justice Review Commission will review recommendations that are to be included in a bipartisan criminal justice reform bill of which Sen. John Coghill, R-North Pole, the Senate Majority Leader, is prime sponsor. On Friday, a bill to prohibit Walker from appointing the state Attorney General to state commissions and the boards of independent state corporations, will have its first hearing in House Judiciary Committee. The measure is sponsored by the House leadership including Speaker Chenault and Rules Johnson as well as Labor and Commerce Committee chair Rep. Kurt Olson, R-Soldotna, and Rep. Charrisse Millet, R-Anchorage, the House Majority Leader. The bill is particularly aimed at Walker’s appointment of Craig Richards, the attorney general and a close confidante and law partner of the governor, to the Alaska Permanent Fund Corp. board.   Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]  

Two weeks down: Legislature takes up budget, taxes, fund earnings and AK LNG

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

Buckling down in face of budget deficit

State legislators are back in Juneau for the 2016 legislative session, and they’re back facing a huge budget deficit. Some legislative leaders say they’re ready to step up to the plate to deal with it. Three Republican senators — Senate President Kevin Meyer, Finance Co-chair Anna MacKinnon and Resources Chair Cathy Giessel — say some combination of budget cuts and new revenues such as use of Permanent Fund earnings for this year are needed to solve the problem. Cuts must come first, all three say. But cuts alone won’t do the job. House leaders have been quiet about the problem so far. “We can’t cut our way out of this. Even if we were to cut $1 billion, we’d still have a multi-billion-dollar deficit, so cuts aren’t the total answer,” said Sen. Cathy Giessel, R-Anchorage, who chairs the Senate Resources Committee. Giessel’s comments came during a briefing of the Alaska Support Industry Alliance, a contractor group, on Jan. 14. MacKinnon voiced similar views in a talk to constituents at the Eagle River-Chugiak Chamber of Commerce Jan. 13. The Permanent Fund should be managed like an endowment, she said, to make more funds available. “This could bring us $900 million instantly,” she said, and make a big dent in the deficit. Giessel said the Senate Majority will target $1 billion in cuts this year, a goal similar to last year that was mostly achieved (the budget was reduced by about $750 million). But cuts should also be matched with some use of Permanent Fund earnings this year. “We have to do this a piece at a time, in a predictable manner that will preserve stability. To make radical changes too suddenly would not be good,” Giessel told the Alliance. Only after government is “right-sized” should taxes be considered, she said. Worries about reelection later this may be causing many lawmakers to be timid in facing the issue, but a new poll by the Rasmuson Foundation released Jan. 20 indicates legislators may face voters’ wrath if they fail to act on the deficit. Of those surveyed, 83 percent said they are “less likely to support” incumbent lawmakers who fail to take action on the budget shortfall; 75 percent say they are more likely to support legislators who act, or at least that the action would have no effect on support for reelection. As to how to solve the problem, 65 percent feel a combination of budget cuts and new revenue are needed, compared with 30 percent who favor budget cuts only. As to how much should be cut, 55 percent said they would support a reduction of 10 percent of the state operating budget, or about $500 million. The state’s operating budget is now about $4.8 billion. The poll sampled opinions of 812 voters between Jan. 3 and Jan. 10. Meanwhile, oil prices keep dropping. Two years ago the state received $5 billion in unrestricted general fund revenues, 90 percent from oil. But at $30 per barrel oil prices, or lower, $1.5 million in unrestricted state revenues may be lucky, Giessel told the Alliance in her briefing. On Jan. 20, oil dropped further to less than $27 per barrel. Gov. Bill Walker has put forth a plan that mixes modest cuts and new revenues, and that balances the budget by 2019. Some legislators, again mostly senators, say they are interested in Walker’s plan, or at least parts of it. Sen. Lesil McGuire, R-Anchorage, introduced Senate Bill 114 last year, a bill enacting fiscal reforms with concepts similar to Walker’s ideas. Scott Goldsmith, a University of Alaska economist, has put forth another variation in a “sustainable budget” plan. All proposals involve a mixture of budget reductions and new revenues. Sen. Pete Kelly, R-Fairbanks, who co-chairs the Senate Finance Committee with MacKinnon, said the public still believes the state budget is too large despite $350 million cut out of the operating budget last year. “Last year we reduced spending for the first time and by about $800 million, $350 million from operating and the rest from capital spending. We made government smaller for the first time,” Kelly said at the Senate Majority briefing. “We didn’t see a tremendous impact from this, however, no significant response,” in the curtailment of services. “That tells me it’s probably still too fat. “I think we have to do one more round of cuts before we start talking about the Permanent Fund dividend or new taxes. I hear people talking about a plan for ‘sustaining’ the government but it’s usually from people who support the government as it is now.” This 2016 session faces complications in reducing the budget, however. The House Minority has served notice that it has no intention of giving up its leverage with votes needed for a three-quarters approval in the House on a cash withdrawal from the Constitutional Budget Reserve, or CBR, to cover the deficit. That departs from one key part of the governor’s plan, which is to transfer funds remaining in the CBR to the Permanent Fund’s earnings reserve account, from which appropriations can be made, as a way of helping “bulk up” the Permanent Fund to generate revenue for the state. House Minority Leader Chris Tuck said Jan. 19 this isn’t a good idea. “We shouldn’t make these funds too easy to reach,” he said. The Earnings Reserve can be tapped by a simple majority vote by lawmakers while a CBR draw requires a three-quarters vote. The Constitutional requirement for a super-majority to tap the CBR is a useful mechanism that requires that there be consensus in the Legislature, Tuck said.   It can also hand leverage to a small group of lawmakers, however. Last year the House Minority used its muscle to get additional school funding and state employee pay raises from the Legislature’s Republican Majority. The dispute put the 2015 session into overtime that ran through two special sessions and a near-shutdown of the state government. It’s unclear what budget priorities the House Minority may settle on this year but education funding is likely to be among them again. The first shot across the bow in a possible 2016 school-funding fight was fired by MacKinnon in her talk at the Eagle River chamber. A scheduled increase in the Base Student Allocation, a formula that guides state funding for local schools, is set for this year, MacKinnon said, and the senator has a problem with that given the current fiscal situation. Giessel identified another hot-button school issue in the 10-student minimum size for state support to rural schools. The Republican Majority may push a plan to raise the minimum to 25 students. She said she has visited small community one-room schools in her previous senate district, and understands how a school is at the heart of a small community. “I know this is hard, but can we really afford to support schools with 10 students?” she said. MacKinnon said education funding has grown fast in recent years to the point that it is now the single biggest driver in the state budget, outpacing health and social services. Medicaid reform is on the agenda this year, MacKinnon said, meaning a systematic look at the program to reduce its costs. She doesn’t expect a drive to repeal the governor’s expansion of Medicaid, however. “I’m very aware of the benefits the expansion has brought for many people, but the system needs reform,” she said at the Eagle River-Chugiak Chamber. MacKinnon has worked over the summer with Rep. Liz Vasquez, R-Anchorage, and officials from the Department of Health and Social Services, on ways of solving problems in Medcaid. “It will be one of our top priorities,” MacKinnon said at a Senate Majority briefing Jan. 19. There are a lot of basic policy decisions made in past years by the Legislature that have now resulted in the growth of spending in “formula” programs like Medicaid, and these need to be reviewed to reduce costs, MacKinnon told the chamber. On other topics, Giessel said in her briefing to the Alliance that the governor’s plan to replace state contributions to pension liability with bonds will be scrutinized. “There are some of us who believe this is just kicking the can down the road,” on the liability, she told the Alliance. “We’ll be having a robust discussion on this,” in the Senate, she said. On a topic Giessel is closely involved with — oil and gas incentive tax credits — the senator said a flat repeal of the tax credits is unwise, because it would impair future oil production. “Totally eliminating these is like decimating your kindergarten class,” in education, she said. The governor proposes to replace much of the tax credit program with loans from the Alaska Industrial Development and Export Authority, the state’s development financing corporation, but Giessel isn’t sure about this, she said. “This may be the wrong way to do this, because it doesn’t bring in fresh money from out of state,” which banks and other lending institutions can provide, she said. With the tax credits in effect companies could borrow from commercial banks against the credit, as a form of interim financing. Having AIDEA make loans just uses up state lending resources rather than bringing in new money, Giessel said. Some in industry have suggested that loan guarantees made by AIDEA to backstop commercial loans could accomplish part of what the governor intends, but changes in state law may be necessary. Giessel also said changes may be needed that are not to the liking of the petroleum industry. “Cook Inlet oil pays zero production tax,” a legacy policy from prior Legislatures,” she said. “This (exemption) is due to expire in 2022. We are discussing allowing it to expire in 2018 instead.” She also said the minimum tax in the state production tax law applying to North Slope production needs to be “hardened,” a proposal also put forth by the governor. The current tax law has a minimum tax paid when oil prices slide below a certain point, which they have. However, there are circumstances involving net operating loss tax credits that now allow producers to pay less than he minimum. Walker proposes to end this. Bradner is a correspondent for the Journal. He can be reached at [email protected]  

Real estate market forecast sees softening in Anchorage

Anchorage’s commercial and residential real estate market looks to be relatively stable this year, although some softening is expected. Local realtors and brokers gave their best estimates for different segments of the Anchorage bowl real estate market at the annual Building Owners and Manager’s Association forecast luncheon Dec. 8. The overall office vacancy rate for Class A office space is projected to rise, on average, from 6.8 percent in 2015 to about 7.6 percent in 2016, but Anchorage is still doing well compared with the national average office vacancy a rate of 13.4 percent average, Per Bjorn-Roli, with Reliant LLC, told those at the BOMA luncheon. Lease rates are expected to remain stable 2016, at an average of $2.95 per square foot for all types of properties, Bjorn-Roli said. “The market will be a little softer, however, and tenants will be well positioned to ask for concessions like free rent periods and property improvements,” he said. “This happened in 2011, too,” when the local market was coming out of a mild downturn. About 157,000 square feet of new office space was added in 2015 in the Anchorage area with much of that in the Cook Inlet Region Inc. and Kuukpik Corp. new buildings in Anchorage’s Midtown. However, 30,000 square feet of the 157,000 square feet of space added in 2015 was absorbed by market growth, he said. Class A office space Downtown is actually tighter now than a year ago, he said, with 2.7 percent of space vacant now compared with 2.9 percent a year ago. In Anchorage’s Midtown, however, the vacancy rate for Class A space is up to 10.3 percent from 6.3 percent a year ago, with this mainly due to the CIRI and Kuukpik building additions, Bjorn-Roli said. Meanwhile, no major new commercial office projects are planned for 2016 and that should basically keep the market steady, with normal growth gradually absorbing the vacant space available. However, if the Legislature really follows through with its threat to cancel the lease on the new Legislative Information Office building on 4th Avenue it would open up a large block of Downtown space. Legislators are interested in moving the Anchorage  legislative offices to the state-owned Atwood Building on 7th Avenue, but this issue is far from settled. Many features of the new LIO building were custom-ordered by legislators, and that could impose conversion costs if there are new tenants. Bjorn-Roli said the financial shortfalls affecting state government won’t have any immediate effects on the commercial office space market because the state has the cash reserves to buffer shortfalls, at least for the next two years. “We see a two-year window for cuts and adjustments,” he said. “However, there is a dramatic increase in the ‘concern’ index.” But there is time for the adjustments and any impacts will be spread out. “State spending is a major driving force in the office market,” Bjorn-Roli said, so the magnitude of budget cuts will be watched closely. What may also cause effects would be reductions in oil and gas industry activity, but it’s hard to forecast this. BP has announced a workforce reduction, for example, but BP owns its office building in Midtown, so the reduction wouldn’t immediately affect the office market, he said. “We see few effects in 2016 but in 2017 it may become an issue,” he said. “Our conclusion overall is that the Anchorage area office market it healthy and stable, with some softening expected,” Bjorn-Roli said. It’s a similar story for markets for retail space market, Brandon Spoerhase, with BSI Commercial Real Estate, told those at the BOMA luncheon. Retail space markets are holding steady with lease rates overall averaging $1.55 per square foot in older buildings and a $2.65 per square foot average rate for newly-built space, said Spoerhase. The fourth quarter 2015 vacancy rate estimated at 5.5 percent compares very favorably with the national average of 11.3 percent, he said. Retail profit margins continue to be healthy, as demonstrated by national clothing retailer H&M’s 2015 opening in Dimond Center, which was the second most successful in the company’s history, Spoerhase said. Two major retailers still looking at Anchorage include Whole Foods, the upscale grocery chain, and Victoria’s Secret, the womens’ apparel chain. New arrivals include three national food chains, Smash Burger; Sonic Drive-In, Dave & Busters. One open space being eyed by national retailers is 40,000 square feet available at the former Carrs’ grocery store space in the Mall at Sears in Anchorage’s Midtown, Spoerhase said. Meanwhile, major malls like the downtown 5th Avenue mall, Glenn Square and Tikahutnu Commons in northeast Anchorage, have little or no remaining space, Spoerhase said.  “Glenn Square still has a couple of ‘pads’ still available, but the hunt is on for a food retailer that won’t compete with the existing food retail tenants,” Spoerhase said. The Fifth Avenue Mall is essentially full, and new retail growth has spilled out into adjacent space along 5th and 6th Avenues, he said. Meanwhile, Pfeffer Development’s U-Med retail development on Alaska Pacific University lands in the Midtown university and medical district is still set for a 2016 or 2017 groundbreaking, Spoerhase said. This is a build-to-suit development project, he said. Overall, BSI sees no significant change in the retail market in the next 12 months, Spoerhase said. In commercial construction, a number of small to medium-sized private and institutional new buildings and school projects are planned for 2016, Jonathan Hornak, of Cornerstone General Contractors, told those at the BOMA luncheon. Hornak ticked off a number of medium-sized projects expected to be underway this year, such as a $17 million Anchorage Museum addition. No major new projects are pending, he said. Four projects in the “rumor” category, which Hornak left unidentified, at least at the BOMA luncheon, include a reported 9,000-square-foot building in Wasilla and three buildings in Anchorage, one 6,000-square-foot facility, a second at 50,000 square feet and a third reported at 60,000 square feet.  Residential real estate meanwhile remains tight, as it has for some time. Speaking to both rentals and homeowner properties, Tyler Robinson, of Cook Inlet Housing Authority, said the apartment vacancy rate in Anchorage remains below 5 percent, but things are looser in the more expensive categories. “We haven’t seen many effects yet overall,” from low oil prices and tightening state budgets, “but we are starting to see impacts at the higher end of the market,” Robinson told those at the BOMA luncheon. Rents have been increasing for several years, with the average in 2012 for a two-bedroom apartment at $1,300 a month, up from $800 a month in 2000, he said. As for single-family homes, the average sales prices today is about $370,000, up from $188,000 in 2000. The tight supply is mainly a factor of inadequate building of housing. “Studies have indicated we need to be building 900 housing units a year, in all segments of the market, to keep up with demand. We’re actually building about 300 a year, so there’s a shortfall,” that translates to a very tight market, Robinson said. The Municipality of Anchorage hasn’t been a real help in this because developers get wrapped up in red tape and delays. One major apartment developer has struggled to get permits for a 36-unit project. In contrast, in other states, developers and working with local governments and nonprofits on a wide variety of projects that are often linked to green space and urban amenities and retail. Robinson mentioned an Oklahoma City riverwalk project that matched urban recreation and greenspace with mixed urban and retail development in an attractive project. Accomplishing that took partnerships, he said. In Anchorage, many private developers, “don’t feel welcome,” Robinson said.

After flooding, work continues to re-bury TAPS

Flooding of the Dalton Highway last spring caught a lot of attention, mainly because the vital road link to the North Slope oil fields was cut off for days. Hundreds of trucks delivering supplies and equipment were backed up and delayed. What got very little, if any, attention was that washed-out areas nearby exposed buried parts of the Trans-Alaska Pipeline System to the open air and moving water. There was never any danger to the integrity of the pipeline, Alyeska spokeswoman Michelle Egan said. However, it was something Alyeska had to respond to right away. In places, the gravel overburden and pipe insulation were washed away along with a gravel workpad that runs nearby. “The waters started to recede in June, and our baseline (contractor) folks started work immediately on moving ice, repairing access roads and cleaning up debris,” said Shaune O’Neil, Alyeska’s manager on the project. “Before work could start in August, we had to have survey crews locate and identify and map the damaged areas, and do some engineering work to facilitate the more complex repairs.” After the initial steps, work was started on the long-term fix but that has turned out to be a big challenge for Alyeska and its contractors, and it still isn’t finished. Flood repair operations had to be shut down in early December because a continuing flow of water proved difficult to manage. Work is scheduled to resume in February when the winter freeze sets in, which should diminish the water flow, O’Neil said.   The problem area, which also affected the Dalton Highway, was in the areas south of Deadhorse, the industry-service center for Prudhoe Bay and other oilfields, and there were two separate flooding events. An earlier flooding, in March, pushed large ice sheets, six to twelve feet thick, out of the Sagavanirktok River onto the road and blocked traffic. The ice created dams for the water, which compounded the early spring flooding. The ice was cleared away but the normal spring “breakup” a few weeks later brought more flooding, closing the road again and covering about 600 square miles of tundra lands mainly south of Deadhorse, O’Neill said. In the second flooding, in May, five feet of ground cover over the pipeline was washed out, exposing the pipe in six locations, with the longest stretches exposing 23 feet and 40 feet of pipe. Alyeska had to respond quickly but also in a measured way, O’Neil said. “We can’t just throw gravel on top of the pipeline. We must do a careful assessment, checking to make sure the pipe coating and the pipe weren’t damaged, along with the pipeline’s cathodic protection,” she said. That meant excavating around sections of pipe to a level below the pipeline, with the longest section being 80 feet. “We had to go two feet below the pipeline and to build side slopes, and since the pipeline was buried at five feet below the surface at these points it meant we had to excavate a trench to the 11-foot level,” before the pipe inspections could be done, O’Neil said. Most of the work was scheduled to be done in the fall through September, October and November, but the continued rush of groundwater complicated and slowed the project even with the 24-hour operation of two 10-inch pumps that were dewatering the trench. “The conditions were very challenging,” O’Neil said. “We had to do the excavation, check the tape wrap (around the pipe) and if the pipe was exposed we had to sand-blast down to bare pipe, do an ultra-sound inspection to ensure the pipe integrity, and then recoat the pipe.” It wasn’t just the main pipeline, either. Work had to be done on the small fuel gas line that runs parallel to the oil pipeline from Prudhoe Bay to Galbraith Lake, in the southern foothills of the Slope. The origin of the water was only partly the river. There was also unexpectedly high groundwater seeping in. “There are a lot of small tundra lakes in this area and we believe that damage and surface erosion from the flooding changed the hydrology,” O’Neil said. If the excavations and inspections were challenging, cleaning up all the broken pieces of insulation left scattered across the tundra by the flood was a labor-intensive nuisance, but it had to be done. Gravel also had to be back-filled around three vertical support members, or VSMs, that hold nearby above-ground sections of pipeline, but there was no damage, O’Neil said. Alyeska mustered four contractors to deal with the problem, with Athna Construction, subsidiary of Ahtna Inc., an Alaska regional Native corporation, handling some of the most difficult work, O’Neil said. Other firms mobilized were Houston Contracting, which is owned by Arctic Slope Regional Corp.; Price Gregory and Hamilton Oilfield Services, she said. Ahtna Construction, Houston Contracting and Price Gregory are under long-term service contracts with Alyeska, and Hamilton was added to the mix. They also needed a lot of material (gravel and rock) so Brice Construction, which was also working for the state on the Dalton Highway repair, was able to open a new gravel pit for both gravel and sand, and also to bring larger rock from a source near Atigun Pass, in the mountains south of the Slope. Hamilton’s part of the project was in mining and moving gravel and rock. O’Neill said the project required extraordinary coordination and cooperation among contractors who are also competitors for work on TAPS. The companies do specialize, however. Ahtna has been doing main-line inspections and repairs for TAPS for several years and has a lot of experience in that area, O’Neill said, and Houston and Price Gregory also do pipeline integrity work but Price Gregory also had to take on civil work, which it ordinary does not do, O’Neil said. There easily could have been resentment within these companies because they may not have gotten as much of the work as desired, but there was none on this job, she said. “People really stepped up to the plate,” she said. Through early December Alyeska and its contractors expended 48,000 man-hours of work, moved about 50,000 cubic yards of gravel; 10,000 cubic yards of large rock and 350 cubic yards of sand. Ahtna mobilized Aug. 29 and demobilized Dec. 9. Price Gregory mobilized Aug. 26 and demobilized Oct. 30. Houston is under a continuing maintenance agreement for the pipeline, so its crews were already mobilized. However, it isn’t yet complete. Tim Bradner can be reached at [email protected]

Support for using investment earnings, taxes after cuts

The idea of using a potion of Permanent Fund earnings to narrow the huge state budget gap is gaining traction in the Legislature. Two Senate leaders, Senate President Kevin Meyer, R-Anchorage, and Resources Committee Chair Sen. Cathy Giessel, R-Anchorage, say some way of using investment earnings has to be part of the equation, although both say additional spending cuts should come first. The Standard & Poor’s downgrade of Alaska’s credit rating issued Jan. 5, which also affects ratings of Alaska municipalities, will add momentum in getting consensus on at least the first step in solving the fiscal issue, which is use of investment earnings. Earnings of the Permanent Fund have been increasing in recent years in sharp contrast to oil income, which has declining sharply with the drop in crude oil prices. The principal of the Permanent Fund, now about $53 billion, cannot be spent, but the earnings, typically about $3 billion a year, have always been available for appropriation. Meyer was earlier reported to be asking for a state sales tax bill to be drafted but he said he has no intention of introducing the idea. “I’m not thinking of introducing anything (like a sales tax), but it may get to a point, after budget reductions, that we have to consider new revenues,” Meyer said. “I don’t like any form of tax but if it comes to it we have to have all options on the table, because we’ve got to do something.” Giessel said, “Overall, I’m on board with using Permanent Fund earnings. That’s why we created the Fund. Using investment earnings won’t cover the entire $3 billion to $4 billion budget gap but it will provide a start.” Giessel said the revenue and budget situation has become “much more dramatic,” in recent months. “Something has to be done. I agree that cuts have to be made, and we need to do that first, but at the same time we can’t make decisions that will decimate the private sector,” she said. She cited the debate over petroleum industry development incentive tax credits as an example of where unwise cuts could have very adverse consequences. “If we eliminate these completely we’ll be paying the price in five or seven years when the oil that would have been produced by new projects won’t be there,” Giessel said. As Senate Resources chair Giessel is chairing a working group of legislators probing the tax credit issue. Meyer said, “I think we will still have to rely on savings to cover parts of the deficit this year but we should also go toward some use of Permanent Fund earnings, either the governor’s strategy (laid out in a plan issued recently) or Sen. (Lesil) McGuire’s plan,” introduced last session. “This would be a way of bringing in some substantial revenues, after spending cuts, and we should look at this (revenue option) first before we go to a tax.” Meyer described an email sent to other senators on the sales tax, and reported in the press, as “internal,” and more aimed at starting the discussion than an endorsement of the idea, although it quickly leaked. Meyer said the idea of tapping Permanent Fund earnings was seriously considered by the Senate Majority last year when the Legislature was stalled over budget negotiations with the House minority Independent Democrat caucus, who had balked at providing votes needed to tap the Constitutional Budget Reserve, the state’s main savings account. Meyer said members of the House Majority supported the idea, “but Speaker (Mike) Chenault wasn’t sure he had all the votes needed.” A dissident group of House Republicans had signaled they would oppose it, complicating things for Chenault. “They called themselves the ‘Musk Ox group,’ over those animals’ trait of gathering in a tight, protective circle when a threat loomed,” Meyer said. Gov. Bill Walker has put forth a package of measures that would largely close the fiscal gap if they were all adopted. It includes a modest $100 million reduction of state general fund spending, a “replumbing” of the way oil royalty income flows, diverting it to the Permanent Fund and the annual dividend, a package of tax increases on businesses including the oil industry, and a personal income tax. One indirect effect of Walker’s proposal on the dividend would be to reduce it by half, approximately, compared to what it would otherwise be in 2017. Rep. Andy Josephson, D-Anchorage, a member of the House minority, said there is some concern in his caucus because the governor’s income tax in that it is not progressive enough and would be if it meshed more closely to the federal income tax. Also, any reduction of the dividend would be felt disproportionately by low income Alaskans, he said. If broad-based taxes are considered, the revenue impacts of different options vary. A personal income tax like that introduced by Rep. Paul Seaton, R-Homer, last year, in House Bill 182, would generate about $655 million to the state treasury and the tax would be deductable from federal personal income taxes. Also, 20 percent of the tax receipts would come from nonresident Alaskans who are working in the state, according to a revenue options white paper put together by the Department of Revenue in mid-2015. The tax would have little impact on low-income Alaskans, the Revenue Department said. A 3 percent statewide sales tax would bring in about $418 million. If food is excluded from the tax, which is a typical exemption, revenues to the treasury would be reduced by about 15 percent, the analysis said. Part of the tax would be paid by nonresidents, such as tourists, but a sales tax would also disproportionately affect lower-income Alaskans. Other effects of a sales tax are that if it is imposed on top of a municipal sales tax, and many Alaska cities and boroughs already have sales taxes, it would result in a high combined tax that could encourage more purchases made out of state. On the other hand, two of Alaska’s largest cities, Anchorage and Fairbanks, do not currently have sales taxes. Two business groups, the Anchorage Chamber of Commerce and Fairbanks Economic Development Corp., have endorsed a sales tax over a personal income tax, and also favor some use of Permanent Fund earnings, the groups said in separate announcements. Tim Bradner can be reached at [email protected]

For Sullivan, focus on foreign policy, fulfilling promises

It has been a busy first year in Congress for Alaska Sen. Dan Sullivan. Elected in November 2014, the former state Natural Resources Commissioner and Attorney General took office in January in the new Republican-controlled Congress. Sullivan has an increasing role in foreign policy with his military background — he still serves in the U.S. Marine Corps Reserve — and his U.S. State Department experience, where he was Assistant Secretary of State for Economic, Energy, and Business from 2006-09. As a freshman, Sullivan is 100th in Senate seniority, but he did well last spring in his initial committee assignments and landed all four of his priorities: Commerce, an important committee for fisheries (Sullivan is one or two freshmen on the committee); Environment and Public Works, Armed Services, and Veterans’ Affairs. On Armed Services, Sullivan has already formed a close relationship with chairman Sen. John McCain, R-Ariz., and has been tasked with coordinating the committee’s oversight of Pacific region defense issues, to which Sullivan has added an emphasis on the Arctic. In an extended interview with the Journal Dec. 22, Sullivan ticked off accomplishments of the Senate in 2015 under its new Republican leadership. He feels good about his own performance there, too. “My focus is on the themes I campaigned on. This is important because there is a lot of cynicism out there (about government) and people notice,” when an elected official doesn’t follow through on commitments, Sullivan said. “It breeds more cynicism.” “With every vote I make I can point to something I campaigned on.” Return (mostly) to regular order What’s most important, Sullivan said, is that under new leadership the Senate is now functioning as it should, with bills and appropriation measures moving through committees where hearings are held and bill “markups” are done. Legislation then moves on to the Senate floor where amendments can be offered, and sometimes adopted. Sullivan contrasted this to a non-functional Senate under Democratic leadership and its former Majority Leader, Nevada Sen. Harry Reid, where few amendments were allowed on the floor and budget bills did not move through the normal process. “In 2014, under Harry Reid, there were a total of 14 roll call votes on the Senate floor. That’s about one a month. In contrast, in 2015 there have been over 200 roll-call votes,” Sullivan said. “We’re now operating in regular order.” Highlighting two issues, Sullivan said the enactment by Congress of a bipartisan five-year surface transportation bill was a significant accomplishment after years of stalemate and one-year extensions of the former program. He gave credit to Alaska’s senior Sen. Lisa Murkowski, for leadership on the House-Senate conference committee on the transportation bill along with an education bill that took control of school curriculums away from the federal government and send it back to states and local school boards. Among other bills, an amendment by Sullivan to a federal Human Trafficking measure gives states the ability to go after sex offenders if the U.S. Justice Department chooses not to. The senator’s interest in this came from his experience as Alaska’s attorney general where the Justice Department blocked the state in pursuing a high-profile case. “This is about protecting people who are most vulnerable. It was my first accomplishment in the Senate, and it went on to pass the House,” Sullivan said. There is actually more bipartisan action in the Senate than is commonly believed, he said. An example is the Senate’s vote approving the Keystone oil pipeline, a highly-charged energy issue, where one quarter of Democrats in the Senate voted with Republicans to approve the project before President Barack Obama vetoed it. The vote to override the veto failed 62-37, a few votes short of the two-thirds needed to override a veto. However, the old ways are not completely gone from the Senate. Sullivan said he voted against the federal spending bill, passed in late December, because of the less-than-transparent way it was handled, which was in a manner reminiscent of the Harry Reid era. “Harry Reid, (House Minority Leader) Nancy Pelosi, (Senate Majority Leader) Mitch McConnell and the White House made the final agreements behind closed doors on this 2,200-page, $1.8 trillion-dollar Omnibus Appropriations Act. We got this bill on Tuesday and were told we had to vote it on Friday,” Sullivan said. Sullivan voted “no” on the bill, in protest. “I dug my heels in,” he said. “There is a possibility that there are bad things for Alaska tucked into this bill, and we don’t know what there are.” He cited an example of a last-minute, little-scrutinized 2014 bill that contained language making changes to the U.S. Small Business Administration’s minority contracting bill that were very adverse for Alaska Native corporations in that business. Sullivan’s vote split the Alaska delegation on the spending bill. Murkowski and Rep. Don Young voted yes. Before the end-of-year omnibus spending bill he voted against, Sullivan said the Senate’s performance in passing budget appropriation bills in an orderly process showed the process working as it should. “We had 12 budget appropriation bills brought to the Senate floor and those were on a bipartisan basis,” Sullivan said. However, the Senate Democrats filibustered every appropriations bill when brought to the floor, including three times against the National Defense Authorization Act, or NDAA, a bill that Obama eventually vetoed Oct. 22. “I don’t know what they were really after,” in the filibuster, Sullivan said, “other than to force a jam-up of bills at the end of the year.” Congress rebuffed Obama’s veto by passing a virtually identical NDAA in November by veto-proof margins of 91-3 in the Senate and 370-58 in the House. On the spending bill, Sullivan noted that many of his fellow freshman Republican senators voted against it, having campaigned against passing budgets in such a fashion, as well as several committee chairmen who were upset that their appropriations bills had been killed. There were also more partisan bills that passed the Republican-led Senate, such as the repeal of Obamacare and bills dealing with intrusive new federal rules like Environmental Protection Agency’s Waters of the U.S and the new EPA rule on carbon emissions. “The president will likely veto those, but we (the Senate Republicans) felt it was really important to make the case,” he said. Frequent flier It is in foreign and military affairs that Sullivan feels he can contribute the most, taking advantage of his background in the U.S. State Department in the George W. Bush administration and his own military status as an officer in the U.S. Marine Corps Reserve. Being in the reserves allows the senator to interact with troops when on periodic active duty, and this gives him a direct perspective on current issues uniformed military personnel deal with that would be difficult for any other senator. The Senate leadership recognizes this value, leading to the request by McCain and Majority Leader McConnell that Sullivan help oversee the military realignment toward the Pacific. It is highly unusual for responsibilities like this to be given to a freshman senator. It puts Sullivan in key meetings in the Pacific, however, including a one-on-one in Tokyo earlier in 2015 with Japan’s Prime Minister Shinzo Abe. Sullivan used the occasion to pitch the Alaska LNG Project to Abe, and he found the prime minister surprisingly well-briefed on the effort. He also brought up AK LNG at a press conference in Singapore May 28 at the Asia Security Summit as part of a delegation led by McCain and Sen. Jack Reed, D-R.I., noting when he had a chance to speak that he mentioned the project had just that day received a key export permit from the Department of Energy. Sullivan has also been active in jawboning U.S. Army officials to slow, or halt, the transfer of 2,600 troops from the 4th Brigade Combat Team (Airborne) at Joint Base Elmendorf-Richardson, or JBER, downsizing the unit to battalion-size. He succeeded in getting an amendment on the defense spending bill requiring the Defense Department to develop an Arctic Operations Plan and got verbal assurances from the Army that troops would not be withdrawn until the plan was finished. Army brass wasn’t happy about the amendment because operations plans are very detailed, requiring a threat assessment, and they take time, Sullivan said in the interview. Sullivan’s argument for the plan, citing Russia’s Arctic military buildup, got a lot of attention from other senators, however, that rose above common parochial concerns whenever military troops are reduced from an area. “They (Russia) have positioned four brigade-size combat teams and built 11 new airfields in the Arctic, as well as installing a sophisticated new air defense system and commissioning 40 new icebreakers, some of them nuclear. What are we doing? Squat, and at the same time we’re talking about withdrawing the only airborne combat brigade in the Pacific, one of six in the Army, and the only U.S. troops who are Arctic-trained,” Sullivan said. “The good news is that many other members of the Armed Services Committee now recognize this.” The issue is not yet settled. A critical test will come in February when the Army plans to take elements of the 4th BCT from JBER to Louisiana to participate in tests on its ability to operate as a smaller, battalion-sized unit, or essentially what would remain at JBER if the 2,600 troops were to leave. Sullivan plans to attend and observe the tests. The senator agrees the Army needs to cut costs but trimming combat troops is not the way to do it, pointing to the military’s “tooth to tail” ratio. The U.S. military has the longest “tail,” or ratio of support to front-line personnel, of any of the world’s armed forces, and if reductions are made the “tail” should be looked at first, he said. Meanwhile, another foreign policy issue Sullivan is watching closely, although it may now be beyond Congress’ ability to do anything, is the lifting of economic sanctions against Iran that is part of the recently-agreed nuclear accord. Some senators have discussed possible legislation that would prevent at least the U.S. sanctions from lifting until the administration certifies that Iran is no longer a state sponsor of terrorism, in effect taking Iran off the list of nations that sponsor terrorism. Whether the idea will get traction isn’t known, however. Sullivan is not a fan of the nuclear agreement, however, because it has already been shown that Iran has violated it with its tests of long-range missiles. President Obama was too quick to sign off on the deal without ways of ensuring compliance, the senator said. An example he cited is that Iran basically self-inspects its nuclear facilities under the deal. There is no real independent inspection and verification. What rankles Sullivan particularly is that Iran is being freed of sanctions while four U.S. citizens are still being held prisoner, and that Congress has been cut out of the loop on such an important foreign policy decision. “There are a lot of Democrats who opposed this deal. It’s a bad precedent,” Sullivan said. “Through all of our nation’s history, all major foreign policy initiatives have been bipartisan and involving Congress,” through actions like ratification of treaties or formal declarations of war, Sullivan said. The senator feels he has a stake in the matter because as a top State Department official in the Bush administration Sullivan was instrumental in knitting together an international coalition of nations on the economic sanctions that ultimately brought Iran to the bargaining table. Much of what that accomplished is being lost by an agreement that is weak and difficult to enforce, Sullivan said.

Alyeska pouring efforts into cold-weather ops

It has been a warm winter so far, and operators of the Trans-Alaska Pipeline System operators are thankful. But winter has just begun, and the worry of cold temperatures in Interior Alaska and a midwinter “event” that halts pipeline operations, like what happened in 2011, is never far from mind. Since that suspenseful event when Alyeska Pipeline Service Co. engineers were concerned they couldn’t restart the pipeline, they have been aggressive about putting countermeasures in place. It costs money, but heating the oil flowing through the pipeline has now become standard procedure. Without the heating, oil could cool to 31 degrees Fahrenheit or lower by the time it reaches Valdez, at the pipeline’s southern terminus, a temperature at which ice formation and wax buildup would cause operational problems, Alyeska officials say. The company operates TAPS on behalf of its owners, the large North Slope oil producers. The problem is mainly is caused by the low volumes of oil as North Slope production has continued to decline. TAPS, completed in 1977, now operates at about 25 percent of its 2 million barrels-per-day design capacity, Admiral Thomas Barrett, Alyeska’s CEO, told an Alaska business group in a briefing.  “Our operations in winter are increasingly complex,” Barrett said. At Prudhoe Bay, oil that once entered TAPS at its Pump Station 1 at 140 degrees Fahrenheit now comes in at 108 degrees. When the pipeline operated at full capacity of 2 million barrels per day it took four days for oil to reach Valdez, and with the pipeline full the friction of fluids moving against the pipe walls kept the oil warm. Now it takes 15 days for oil to travel the 800 miles and because half the pipeline is built above ground there’s ample exposure to winter temperature that can reach minus-50 degrees. There isn’t enough oil flowing for the pipe wall-friction mechanism to do what it previously did. “The real danger for us is if there is an unexpected winter shutdown. There could be significant problems,” if the oil were to congeal and ice were to form as water dropped out, Barrett said. Exactly this happened in 2011 when a small oil leak at Pump Station 1 caused TAPS to shut down for several days during cold weather. At several points along the pipeline in Interior Alaska, the crude temperature dropped below freezing. When regulators finally gave the OK, Alyeska was able to restart the pipeline, but with difficulty.  Pipeline operators are now adding heat at four locations by circulating the crude through loops of piping so that the friction adds heat. At Pump Stations 3, 4, 7 and 9, heat is added by running oil through recycle loop, at a rate of up to 25,000 barrels per hour at Pump Station 3. Last January, oil left Pump Station One at a 106 degrees and an ambient sir temperature of minus-17 degrees. When the oil reached Pump Station 3, 100 miles south, its temperature had dropped 51 degrees. Recirculating at Pump Station 3 added 15 degrees back. The same process is repeated at Pump Stations 4 and 9, although at Pump Station 7, which has been shut down, a mainline pump has been kept active to do the recirculation. In 2015, Alyeska added a new heat source, a diesel-fuel heating skid placed 17 miles north of Pump Station 7, at Remote Gate Valve 65, a point along the pipeline where cold winter temperatures are common and the pipeline could be vulnerable to ice formation. Oil is extracted and circulated through a loop with about 2 degrees added by the heat skid. Alyeska is considering the addition of similar heat skids at various points. TAPS also gets a bump in heat by the return of residual oil from a small refinery near Fairbanks owned by Petro Star Inc., an Alaskan refiner. Petro Star takes crude from TAPS and makes jet fuel and diesel, returning unused portions of the crude, at a high temperature, to the pipeline. Michelle Egan, Alyeska’s spokeswoman, said the main strategy is to protect Pump Station 9, near Delta, southeast of Fairbanks, where the oil must be warmed enough to get the rest of the way to Valdez and over Thompson Pass in the Chugach Mountains. “The higher winter production from the North Slope is a big help. On a lot of days now we’re moving 550,000 barrels per day, so the volume helps,” she said. But throughput continues to decline at rates that have averages 5 percent a year and pipeline operators are concerned with wax buildup if rates reach 400,000 or 350,000 barrels per day, she said. Meanwhile, one experiment tried by Alyeska has turned out to be unsuccessful. In a special test facility built at the University of Tulsa, the company experimented with a strategy of removing water from North Slope crude, from its ambient content of 0.2 percent water to 0.02 percent, to see of the crude could be run at temperatures below freezing without ice being formed. Unfortunately, ice still formed even at the lower water content, Barrett said in his briefing. “We learned we can’t flow it colder, so adding heat is now our main strategy,” Egan said. Interestingly, the idea of circulating the crude oil through loops of pipe at pump stations to add heat was born in the crisis atmosphere of the 2011 early winter shutdown, when engineers were seriously worried that after several days the oil had cooled and gelled to the point that the system might not restart. It wasn’t an immediate solution to the problem at hand but in a brainstorming session Alyeska’s engineers suggested it as a preventative measure for the future, and management adopted the plan. The 2011 shutdown also brought some drama between state and federal regulators, and Alyeska’s management, over the restart. The Pump Station 1 leak was still being repaired but Alyeska asked for government permission to temporarily restart the pipeline flow to warm up the oil. The U.S. Environmental Protection Agency, which had taken over control the federal agency management of the problem, refused, according to Dan Sullivan, now a U.S. Senator but who was state Commissioner of Natural Resources at the time. The state and Alyeska forcefully pressed the issue, warning EPA that the system could be down for weeks or even months with serious consequences to U.S. west coast oil supply and state of Alaska finances. Sullivan said he was working back channel to the White House at the time, and EPA eventually backed down, allowing the temporary restart. As Slope production continues its decline the point at which TAPS can no longer operate, as currently configured, is still unknown. Below 300,000 barrels per day, some form of “batch operation” could be implemented where the pipeline is operated periodically, drawing down oil stored at Prudhoe Bay. Meanwhile, the steps Alyeska has to take is adding significant operating costs, a factor in the increasing tariffs for moving North Slope oil to Valdez.  “The real solution for us is finding more oil on the North Slope and adding new production and throughput,” Barrett said. Although it would have been a decade away, new production from the Chukchi Sea from Shell’s exploration was being looked on by many Alaskans as a long-term savior for TAPS. Shell pulled out last fall, however, saying citing regulatory delays and costs amd disappointing results from the one exploration well completed this past summer. Tim Bradner can be reached at [email protected]

Anchorage chamber, FEDC issue support for broad-based revenue

Two influential Alaska business organizations are endorsing use of a portion of Permanent Fund earnings to help support the state budget along with broad-based taxes. Both also said they support continued reductions in state spending. On the tax question, one group, the Anchorage Chamber of Commerce, said it supports a state sales tax, while a second organization, the Fairbanks Economic Development Corp., or FEDC, did not specify a tax but endorsed the concept of a broad-based tax. Both groups put out press releases, FEDC on Dec. 18 and the Anchorage Chamber on Dec. 22. Gov. Bill Walker has proposed a broad restructuring of state finances, including the Permanent Fund and the annual citizen dividend payment, as well as new taxes on businesses and a state personal income tax. The Legislature will consider the governor’s proposals as it deals with a massive state revenue shortfall caused by sinking oil prices and revenues. In its press release, the Anchorage chamber said it did a survey of its 900 members. “The main message from our membership is that the highest priority needs to be placed on solutions to the state’s financial situation,” said Bruce Bustamante, president of the Anchorage chamber. “We are aware that there will be many issues in front of the Alaska Legislature, however the financial situation warrants the highest level of action first.” The chamber did not go into detail on a mechanism for tapping Permanent Fund earnings but mentioned “percentage of market,” in the press release, which means the “percentage of market value” concept commonly used by major U.S. endowments where the annual payment to a recipient organization, such as a university, is a percentage of the total market value of the endowment at a point in time. A state lottery was also mentioned by some Anchorage chamber members, but not the array of specific industry or business taxes now being proposed by Walker. There were some mentions in the survey responses to other taxes, but “our members did not point to any specific business or industry taxes, or changes in tax credits, as the solution to the financial problem in the survey,” Bustamante said. In Fairbanks, the FEDC urged the state’s political leaders to work together to solve the fiscal challenge. “Achieving long-term fiscal stability, affordability and sustainability for the state will require a mix of continued cuts to government spending and increased revenues including use of state investment earnings,” the FEDC said in its statement. On new revenue sources, the organization’s board said, “Providing the state revenues sufficient for it to operate and invest effectively in and for the public interest is critical to Alaska’s future fiscal health. The board (of FEDC) believes that in addition to increases in user fees, implementing some form of broad-based statewide taxation and the use of some portion of Permanent Fund earnings to fund state government must be considered.” Reducing the level and scope of spending must also be addressed, FEDC’s board said: “Achieving a smaller, more efficient and more sustainably affordable state government is critical to Alaska’s fiscal health.” Anchorage chamber members also endorsed continued reductions in spending. “The Anchorage Chamber of Commerce members highly support reducing the state budget significantly in order to work toward sustainability,” the chamber said in its press release. In an interview, Bustamante said his members at the Anchorage chamber felt strongly that new revenue sources should be considered only after spending reductions.

Fights over taxes, spending, revenue

There seems little doubt that the 2016 state legislative session will be pretty ugly. The money situation is getting worse and there’s no reason to believe that the House minority of the Independent Democrat caucus won’t again use its leverage to extract budget concessions from the Republican-controlled House and Senate Majority. A replay of last year’s extended session and back-to-back special sessions, which lasted into June, may occur in 2016. Without the House minority, the Majority doesn’t have the necessary three-quarters vote of both the House and Senate to withdraw money from the Constitutional Budget Reserve. Last year the House Democrats played their cards to protect education funding and state employee pay raises.  Other issues will be mixed into the pot for 2016. One is possible legislation needed on a long-standing effort to get coordinated, and more efficient, dispatching of electric power through the Southcentral/Interior Alaska “Railbelt” electric grid. The electrical transmission system needs an upgrading and new investment. State dollars are scarce, but private investors are now interested. However, changes in the regulatory structure, which may need legislation, are needed to attract the private investment. Prior year efforts at restructuring the power grid have run aground on the competing interests of the independent electric utilities in the Railbelt. Also, health insurance companies are expected to raise a proposal for “resinsurance” to share the costs of supporting individual and family health insurance, the costs of which have become unaffordable for many across all health insurance sold. Premiums for Premera and Moda, the only two companies offering policies in the state, will increase by nearly 40 percent next year. A similar plan has worked successfully for several years in sharing costs of a high-risk pool, to provide insurance for Alaskans with serious health problems. The new idea is to extend this to individual and family plans. Complicating the 2016 session, however, will be the strains between Gov. Bill Walker and legislative leaders. At the end of a special session in November, Walker pledged to do better in his relations with the Legislature, but House and Senate leaders are taking a wait-and-see attitude on this. What may improve things in the 2016 regular session is that the focus will be mostly on budget issues, and state budget director Pat Pitney is well regarded on the second floor (the Legislature) of the Capitol building. Natural gas issues, which were the source of most of the friction in 2015, will come later, in a likely special session following the regular session. House Speaker Mike Chenault and Senate President Kevin Meyer scrapped with Walker for much of last year’s sessions over the governor’s new direction for the Alaska LNG Project, the planning for which is now underway. Meanwhile, the revenue situation is getting worse, which puts more pressure on legislators and the administration. In a briefing to Commonwealth North, a business and public policy group, budget director Pitney said the current fiscal year 2016 budget deficit has ballooned from a $2.7 billion shortfall estimated last spring to an estimated $3.5 billion, based on the annual state revenue forecast issued in early December. The deficit has increased because oil prices have continued to drop. The spring revenue update, issued last April, assumed an average price for North Slope crude oil of $64 per barrel. The December forecast lowered that to $49 per barrel. Prices for North Slope oil are continuing to fall, however, reaching $35 per barrel last week. For the first six months of the fiscal year from July through December, the average is already less than the $49 per barrel assumed in the December forecast, according to Department of Revenue data. What this means is that the state’s cash reserves will be drained more quickly than thought, Pitney told Commonwealth North. The main cash reserve, the Constitutional Budget Reserve, will be depleted by 2018, she said. There are other cash accounts, such as the Permanent Fund’s Earnings Reserve, but Walker is counting on that fund staying intact to help capitalize a new state endowment that could stabilize the state budget. Legislators will spend a lot of time in the 2016 session debating what to do about this. The governor has put forward a fiscal plan that involves a restructuring of the way income is managed from the state’s Permanent Fund, and to make some of the earnings available to help support the state budget. Walker has also proposed an array of new taxes, including a personal income tax, and the restructuring of the state’s oil and gas tax credit program. At this point Republican legislative leaders say more spending cuts are needed, and deeper ones than the governor proposed, before any new revenue source can be considered. Business leaders, like GCI President and CEO Ron Duncan, say the Legislature must make some step toward new revenues in 2016 even if not the whole package Walker proposes, or else business leaders will lose confidence and slow new investment in the state. The credit ratings agency Standard and Poor’s has also written that the state faces a rapid downgrade from its top-notch AAA level if it does not adopt a fiscal plan in this session that puts the state on a sustainable path going forward.

A critical year lies ahead for Alaska LNG Project agreements

The coming year is a critical one for the Alaska LNG Project. Continued progress on Alaska LNG is vital to Alaska’s long-term economy, and the state budget. If targets are missed, the state’s future, already cloudy because of short-term state revenue issues, will be challenged. If the project does proceed, the sales of natural gas from the North Slope, as liquefied natural gas, or LNG, will bring new petroleum revenues to the state to replace declining oil income. Also, the construction of a $45 billion to $65 billion project will also be huge stimulus to the state’s economy, reminiscent of the building of the Trans-Alaska Pipeline System in the 1970s. Steve Butt of ExxonMobil, the project manager, will provide an update of a pending labor-needs study for the what’s known as a “giga” project at the Alaska Support Industry Alliance’s annual “Meet Alaska” conference Jan. 8. Alaska LNG involves an 800-mile gas pipeline to be built from the North Slope south through the Interior to Southcentral Alaska. The project involves a large gas treatment plant at Prudhoe Bay mainly to remove carbon dioxide from the gas, the pipeline itself with a thick-wall pipe diameter at 42 inches or 48 inches (both cases are still being studied) and a large natural gas liquefaction plant at Nikiski, the planned terminus of the pipeline on the Kenai Peninsula. Each of the three components are mega-projects in themselves, which led AK LNG to be dubbed a “giga” project by some. Key decisions have to be made in 2016, however. At the forefront are agreements on a set of commercial contracts among the parties involved in the project, which includes the state and the three major North Slope producers: BP, ConocoPhillips and ExxonMobil. Each partner would own about one-fourth of the project, a share that is in line with the parties’ share of North Slope gas reserves, including the state. The concept is that each owner will ship its share of gas through its owned capacity in the project, so that profits are made not only on gas production and sales but also the transportation and processing services. The most important agreements needed include a gas “balancing” contract among the producers that will govern how gas supplies are to be made available if there is a technical problem with production in one of the two fields supplying gas, Prudhoe Bay and Point Thomson. At least one of the partners — ConocoPhillips — says the gas balancing agreement is critical to its participation. This is a complicated issue because the producing companies own differing percentages in the two fields, and arrangements for compensation for emergency gas supply must be worked out in advance. The second most important agreement — and this one is a “must have” for all three of the producers — is a contract on state fiscal terms on gas production, which would assure the companies, and LNG customers, that state taxes on gas won’t change for a period of several years, mostly likely the 20-year or 25-year term of LNG sales contracts. This is a needed because the economic margins in gas production are very thin and the state has a record of frequent changes in taxes on oil production. Without it, buyers are unlikely to sign long-term LNG purchase contracts. A new twist is that an amendment to the state Constitution is needed to allow this, because the constitution now prohibits any Legislature from locking in taxes that a future Legislature can’t change. Alaska voters will have to approve the amendment in the November 2016 general election. That approval is vital if the project is to continue to the next step in mid-2017 of doing final engineering, or front end engineering and design. A critical deadline on this is June 24. That’s when a proposed constitutional amendment, approved by the Legislature, must be transmitted to the Division of Elections for placement on the November general election ballot. If the deadline is missed, the next general election is in November 2018. This would effectively delay Alaska LNG for two years. And, if voters turn down the amendment the companies and the state have no “plan B”, or alternative method of assuring LNG buyers there would be no changes to state tax terms. If the fiscal terms agreement is reached — there’s no guarantee of that — and if the Legislature approves the deal and the constitutional amendment — no guarantee of that, either — the proponents of the amendment will have to convince the public that a “yes” vote is a vote on the Alaska LNG Project itself. Meanwhile, there were some important changes in the project in the latter part of 2015, three of them done at the request of Gov. Bill Walker. One was the governor’s decision for the state to take over TransCanada’s share of the pipeline and gas treatment plant so that the state would own a uniform 25 percent of all three parts of the project: the gas plant on the Slope, the pipeline and the LNG plant. Previously TransCanada owned 25 percent of the gas plant and pipeline with the state owning only 25 percent of the LNG plant. There is potential for misaligned interests when the state ships its one-quarter share of gas through parts of the project it doesn’t own. The new arrangement solves that problem, but it also means the state must finance a full one-quarter share of the project cost, which will be in the range of $13 billion or more. Previously TransCanada would have arranged financing for its share of project costs. The Legislature agreed to fund the TransCanada buyout in a November special session. Another change, or at least potential change, came in early autumn when the governor asked the industry partners to pursue a more detailed assessment of a 48-inch pipe diameter to be considered alongside 42-inch diameter pipe that appears to be optimum, for now at least. The governor argued that building in extra capacity now would allow for more efficient shipping of gas if new gas discoveries are made, which state geologists believe will be the case. Alaska Gasline Development Corp., which owns the state share of the project, will also have to find a new president after Walker obtained former CEO Dan Fauske’s resignation on Nov. 20. The board of directors for AGDC has hired a consulting firm to conduct a worldwide search for a new president.  

North Slope companies to keep up spending

What lies ahead for Alaska’s oil and gas industry in 2016? The overwhelming unknown is the price of crude oil, and whether it will continue to go down, stabilize or creep upward as has been predicted. What is causing the slump is well known. There’s too much oil supply on the market and on the demand side, the economic slowdown in China has taken the wind out the world commodities boom, affecting not just oil but also metal prices. Saudi Arabia continues to produce to keep its market share, ditto for Russia and other producing countries. In the U.S., shale oil drillers have upset expectations that they will cut back by finding cheaper ways to produce. Alaska’s good fortune is that the large companies that produce most of the North Slope’s oil have seen slumps like this before and are capable of riding this one out. How many Alaskans remember $8 per barrel oil prices in 1998? Surprisingly, the large companies’ capital investment estimates for Alaska, for 2016 and 2017, have not yet taken a beating. Forecasts given the state Department of Revenue by the industry, a requirement of the state’s production tax law, estimate that $3.32 billion in capital spending will occur in fiscal year 2017, the state budget year beginning next July 1, and $3.24 billion in 2018. That’s down from $3.61 billion estimated for the current budget year, but considering that crude oil prices are nearly a third of what they were not too long ago, the numbers are a signal of confidence. Identity of companies giving the forecasts to the state cannot be revealed but one company, ConocoPhillips, has released a 2016 Alaska capital budget of $1.3 billion, down 5 percent from 2015 spending but in line with the overall industry estimates given to the Revenue Department. Much of the capital investment will go to major maintenance of facilities in the existing oil and gas fields, which are aging, and for the three major slope producers, ConocoPhillips, BP and ExxonMobil, part of the planned investment will be in expenditures supporting the Alaska LNG Project. There are, however, new projects underway, which is surprising in such an environment. ConocoPhillips is pressing ahead with its planned GMT-1 oil project in the National Petroleum Reserve-Alaska, a project the company had planned to follow the startup of production at CD-5, a few miles east of GMT-1 and on the border of the petroleum reserve and state lands. Caelus Energy is also continuing work on its Nuna oil project also on the Slope and near the company’s Oooguruk oil field, and also plans new exploration drilling on a nearshore Beaufort Sea prospect that the company believes has great potential. Doyon Drilling’s “Arctic Fox” rig was moved to an onshore staging area near the site of the test well last fall, and will be moved into position for drilling as soon as winter weather conditions allow for construction of an offshore ice pad and an ice road. In the big, largely-unexplored Interior basins Ahtna Inc., the Alaska Native regional corporation for the Copper River area, plans to drill in the spring for natural gas in a prospect near Glennallen, in partnership with Texas-based independent Rutter and Wilbank. In the Nenana Basin, west of Fairbanks, Doyon Ltd. is well along on its plan for a third exploration well, to be drilled next summer, near Nenana. In the Cook Inlet basin in Southcentral Alaska, Hilcorp Energy plans new exploration drilling near producing gas fields on the Kenai Peninsula, and BlueCrest Energy plans to begin oil production at the offshore Cosmopolitan oil and gas deposit near Anchor Point. BlueCrest also hopes to begin drilling gas production wells next summer at Cosmopolitan. Some of the 2016 work by smaller companies could be affected by anticipated changes to the state’s oil and gas tax credit development incentives. Gov. Bill Walker has proposed reorganizing the system as a loan program because it has become too expensive for the state in its current form. State officials who are working on the reorganization are sensitive to the needs of companies with projects that are now underway, where investments have already been made. A refashioning of the program will be presented to the Legislature in 2016 but elements of the existing program will be retained, state officials have said. Tim Bradner can be reached at [email protected]


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