While the House has made few adjustments to Gov. Bill Walker’s (I-Alaska) suggested funding for day-to-day costs of government, House Finance Co-chair Paul Seaton (R-Homer) moved Tuesday to cut $100 million from less scrutinized statewide items.
Walker proposed cutting unrestricted general fund spending (UGF) by about $30 million in Fiscal Year 2018. He recommended a $57 million cut to the operating budget. Modest growth in the capital budget accounts for the balance.
House subcommittees examined the 19 State agencies and recommended about $13 million in increases, mostly in federal dollars for education, above Walker’s FY 2018 budget. UGF growth and reductions, which determine the State’s budget deficit, would be minimal within the departments.
House Finance finished considering those subcommittee reports Tuesday.
Walker’s proposed cuts to the operating budget come from agency operations. Those $122 million in cuts are partially offset by a $62 million increase in statewide items.
While large departments like Education & Early Development (DEED) and Health & Social Services are scrutinized in subcommittee, statewide items tend to receive less attention, even though they include expensive subjects, like community assistance, oil tax credits, and school bond debt reimbursement.
The moratorium keeps the State from reimbursing any portion of new municipal bond packages for schools until 2020. It was opposed by most school districts.
Despite the legislature’s actions, Walker vetoed $430 million of the oil tax credits and $41 million, or 25 percent, of school construction funding.
He proposed paying the recommended minimum of $74 million for oil tax credits in FY 2018.
The proposals were not considered in subcommittee.
Legislative Finance Director David Teal said the bond debt reimbursement amendment is effectively a 42-percent cut to State support.
According to a document Seaton distributed to House Finance members, Anchorage would have to pay $18 million more under the proposal. Mat-Su would have to pay about $10 million more, while Fairbanks and Juneau would each have to pay an additional $5 million. The difference would likely be assessed as property taxes.
The idea was not a popular one among Seaton’s own House majority caucus, who consider it a cut to education.
“I think it’s pretty clear that our caucus has placed a high priority on keeping funding intact for K-12 public education,” House Speaker Bryce Edgmon (D-Dillingham) said during a press conference Tuesday morning. “We’re very strong supporters of the school system in Alaska.”
House Resources Co-chair Andy Josephson (D-Anchorage) prefaced his comments by calling Seaton one of the “great intellects” in the Capitol.
“If there were 60 of him, we would not have a $3 billion deficit, and we would be done on April 17,” Josephson said.
But, Josephson added, “My preference would not be to have a school bond debt reimbursement cut. I think that there are other ways to achieve balance without doing that.”
“Personally, I don’t want to see any cuts to education,” agreed House Majority Leader Chris Tuck (D-Anchorage). “If we can hold schools harmless, that is my preference.”
Rep. Seaton: Trying to Protect Education Funding
Minority members in the House Finance Committee also reacted negatively to the school bond debt reimbursement cut.
Rep. Steve Thompson (R-Fairbanks), who supported the moratorium last year, said Seaton’s move breaks a contract with municipalities.
“I’m sure that we’re going to get a ton of pushback from around the state because of the cost and the inability of them to raise money or to make up the differences that are going to be happening,” he said at a hearing.
“When the State continues to make these financial commitments and then reneges on them, I think that that’s a bad precedent for the State,” added Rep. Mark Neuman (R-Big Lake), filling in for Rep. Lance Pruitt (R-Anchorage).
“What we’re trying to do is look at a big piece of our budget expense — education — and not damage the education system within the state,” Seaton said. “We are in a situation of $2.7 billion deficit, and we’re trying to figure out how we can have some savings, lower expenses, costs, cutting, and how do we do that with the least impact upon the most vulnerable.”
“There’s no proposal in this budget to cut classroom funding. There’s no proposal in this budget to cut [Base Student Allocation] funding, per-student funding. School funding in this budget remains the same. The proposal here has to do with money that goes to municipalities to pay their debt,” House Finance Vice-chair Les Gara (D-Anchorage) cautiously explained.
Seaton told House Finance members he wants the cut in a committee substitute so that the public can comment on it.
Public testimony begins Thursday with Homer, Kenai, Ketchikan, Kodiak, Mat-Su, Seward, Utqiagvik, Dillingham, and Fairbanks.
Anchorage, Sitka, Petersburg, Delta Junction, Unalaska, Glennallen, Tok, and off-net sites are scheduled for testimony Friday.
Bethel, Cordova, Kotzebue, Nome, Valdez, Wrangell, and Juneau will testify on Saturday.
If the legislature does not cut school bond debt reimbursement, said Seaton, it will have to explore other options, like adjusting the public employee retirement funding formula.
Last year, municipal and education officials panned such a proposal from the Senate Finance Committee as a cost-shift.
“This would give the municipalities lead time” to adjust their budgets, Seaton argued for his proposed cut.
“Well, this is terrible, but perhaps it’s like Winston Churchill’s quote about democracy: It’s terrible, except for everything else,” Rep. David Guttenberg (D-Fairbanks) said.
“This does seem to be the least harmful of the options that have been discussed, the least harmful on schools, in my view,” Gara agreed, “but it doesn’t come without cost to municipalities.”
Neuman noted that the Mat-Su is growing so fast that a new school is built every year, so his district will be disproportionately impacted by a cut to school bond debt reimbursement. He argued that a cut to school formula funding would be better.
The Senate majority has proposed a five percent, or $65 million, reduction to the DEED budget.
“That’s massively damaging to schools, in my view,” said Gara.
In lieu of funding formula cuts, Gara offered his support for Seaton’s proposal Tuesday, but warned he may not be able to support it later in the budget process.
The amendment ultimately passed without objection.
Seaton explained that a separate amendment cutting rural school construction by $17 million was necessary because it is linked to school bond debt reimbursement by a formula. The reduction matches the effective 42-percent cut to school bond debt reimbursement.
The cut will leave about $5 million in the Rural Education Attendance Area (REAA) Fund after work is done on the Shishmaref school. House Finance Co-chair Neal Foster (D-Nome) said the next two schools on the priority list are in the Lower Kuskokwim and need $75 million.
Schools in the unorganized borough are entirely funded by the State because there is no local taxing authority.
Wilson moved to completely eliminate deposits to the REAA Fund, arguing that municipalities have to pay a portion of school bond debt, while the unorganized borough does not.
Teal said such an amendment would violate the settlement in Kasayulie v State, a case that established parity between urban and rural school construction.
“I won’t say that you will be sued if you cut it all, but it certainly could open the lawsuit back up,” Teal cautioned Wilson.
Wilson withdrew her amendment, and the cut to rural school funding passed without objection.
Minority Members Object to Oil Tax Credit Reduction
Seaton said his last big cut, $37 million from oil tax credit payments, matches the 50-percent UGF reduction to school bond debt reimbursement and rural school construction.
The State maintains an oil tax credit fund from which cash credits are paid. There is a statutory formula that recommends how much the legislature should deposit in that fund every year.
Last year, Walker vetoed the credits down to the formula: $30 million. This year, the formula recommendation is $74 million, the amount Walker proposed in his budget.
Seaton’s amendment cuts that in half.
He objected to Wilson’s characterization of the credits as a debt.
“These are not a debt to the State,” Seaton said of the credits. “There is not interest owed on it.”
But Neuman said the State statutorily entered into an agreement to pay the credits.
“This is a debt,” he countered.
Walker’s vetoes and the House’s proposed cut don’t create jobs and don’t attract business from oil companies, said Neuman.
“Why would they invest in this state?” he asked incredulously.
“I see this amendment as a job-killing bill and investment-killing, also,” Thompson agreed.
“By doing this… we’re basically saying we’re going to break the statute as written,” Wilson said. “If you don’t like the statute, then change it.”
Seaton responded that the statutes say the credits may be issued as certificates to be held against future tax liability or may be bought back by the State, subject to appropriation by the legislature.
“We are the legislature,” he reminded Wilson.
The amendment passed 6-5.
Gara said the question over oil tax credits raises a broader question: “Who should get in line, and when is the State going to have the ability to fund the things it needs to fund?”
“At some point, until there’s a fiscal plan in this State, it’s a matter of who gets in line,” he said.
Should oil companies get in line ahead of children or seniors, Gara asked.
“If this State had a fiscal plan, we wouldn’t even be here right now,” he said, adding that if the legislature passes a plan, some of Tuesday’s cuts can be reversed.
House Majority, On Repeat: Fiscal Plan This Year, Including Tax Credits
Gara’s House majority colleagues agree with him.
“Important decisions need to happen this year,” Tuck told reporters Tuesday.
“We all know historically it’s very difficult to get major initiatives that are controversial through [in] an election year,” said Edgmon, “so if we don’t get things done here in 2017, are we in fact kicking the can down to calendar year 2019, which would be Fiscal Year 2020? Can we afford to do that? Can we afford to put a plan together that relies primarily on the price of oil going forward or the performance of the stock market? We don’t think so. We think we need to take those decisive steps this year.”
Edgmon noted that a solution next year would become even more difficult because it is a gubernatorial election year.
“The reason, I think, we’re revisiting this oil and gas tax credit issue is because last year was an election year and the pressure of getting something done led to what passed,” House Resources Co-chair Geran Tarr (D-Anchorage) agreed.
House Resources is working on a bill Tarr called “unfinished work from last year,” raising oil taxes at low prices and eliminating the cashable credits on the North Slope.
“We have a credit outlay that we can’t afford,” Josephson said, adding that if nothing is done, Walker will simply veto them again.
House Resources will take public testimony on the bill Wednesday night.
“I think it’s an easy statement to make for the Senate to just do a Permanent Fund dividend-only plan,” Tuck reacted. “Alaskans are tired of politicians always going the easy route, and that is going after the Permanent Fund dividend. Sure, that fixes a lot of problems, but Alaskans don’t want to see a fix to the Permanent Fund without a fix to the oil taxes.”
“It needs to be a comprehensive plan,” Tarr agreed.
“We have the public on our side,” Tuck insisted. “I think that the Senate’s going to have a hard time convincing Alaskans that their plan is the plan because their plan is a lazy plan.”
“Nobody said the new revenues aspect of a fiscal plan was going to be easy,” Edgmon said. “The difference from last year to this year, in my view, is that the resolve to restructure the Permanent Fund, I think, is sort of universally held, whereas last year it was a very much open question as to whether that was something that a majority of the legislators wanted to do. Restructuring the Permanent Fund is the major piece of a fiscal plan going forward.”
Late Tuesday afternoon, House Finance adopted along caucus lines a complicated budget amendment that draws a percentage of the Permanent Fund for two years, pays a $1,150 Permanent Fund dividend (PFD), and deposits $1.7 billion in the K-12 Public Education Fund, technically closing the deficit. The amendment is a hybrid of Walker’s Permanent Fund Protection Act and the House majority’s own Permanent Fund bill, though it is not statutory.
Edgmon said the House is on pace to finish within the statutory limit of 90 days.
“I’d love to be home on the 91st day, just like everybody else,” he said. But, he added, “Honestly, if it takes going over a little bit in order to do the right thing for the future of Alaska, personally, I’m prepared to do it.”
Tuesday was Day 43 of the 90-day session.