Spending in focus as revenue dips

If Sen. Hollis French has his way, the convening of the Legislature Jan. 21 will be day one of the campaign to repeal the oil tax reform bill that passed last year.

French, an Anchorage Democrat, will also be the Senate’s new Minority Leader after Sen. Johnny Ellis, D-Anchorage, who held that position last year, has stepped aside. French will use his position in the limelight to hammer away at Republicans and the state administration about Senate Bill 21, which Democrats call a “giveaway” to industry.

Democrats also will hone in on an unexpected $2 billion drop in revenues this year, causing a drawdown on cash reserves. The state administration should have seen that coming and warned the Legislature before December, French said.

“The number one topic of the session will be the budget deficit. It will dominate the Finance committees and every other committee. On every bill, the question will be, can we afford it?” French said.

On the House side — and the other side of the partisan aisle — Rep. Mike Hawker, R-Anchorage, is more sanguine. He agrees the revenue decline is sobering but he sees a positive aspect — it will force a serious discussion among lawmakers about the state’s long-term financial situation.

“The big issue will be the level of the capital budget, which has been, frankly, out of control in recent years,” he said.

The state has enjoyed multi-billion dollar capital budgets in recent years but the drop in oil revenue — which actually started during the fiscal year 2013 that ended last June 30 — forced the Legislature to adopt a leaner capital budget last session for the current state fiscal year.

The most recent, more drastic, revenue decline estimate released in December has caused Gov. Sean Parnell to propose only a bare-bones capital budget for the fiscal year 2015 that begins July 1.

Hawker said in an interview that tackling the operating budget that pays the ongoing cost of state programs will be much more difficult.

“Every program has a constituency and it affects the lives of real Alaskans. This is much more difficult to turn around,” Hawker said.

The operating budget constitutes the bulk of state spending and it has been growing steadily, in increments of 6 percent to 10 percent yearly, despite efforts to hold it down.

“Formula” programs, such as Medicaid and state school funding, where spending is tied by law to population numbers and, in the case of Medicaid, linked to federal funds, constitute the bulk of the operating budget.

Despite some talk by the House Republicans of cutting education funds, Hawker sees this as a non-starter.

“I don’t see us reducing funds for schools ever, but I do think we have to look more at fiscal planning. We haven’t been able to get much traction on this in recent years because there was so much money on the table,” Hawker said.

There are plenty of other issues pending, but the revenue question will color all of them, French said. Education will have a priority, he said, but “a lot of popular programs, like weatherization, LNG trucking to Fairbanks, a (state-sponsored) gas pipeline, things it looked like we could afford a year ago,” that will now be examined very carefully.

“We have to change our mindset. It will affect every dollar we spend,” French said.

On the capital budget, “the governor gets to go first,” in setting his priorities for the fiscal year 2015 budget proposal. However, regions of the state that are infrastructure short, like rural Alaska, depend on the state capital budget and will have to fight hard this year for any capital budget money.

It just isn’t rural Alaska, either. There are half-built engineering buildings at the University of Alaska campuses in Fairbanks and Anchorage with the university depending on the FY 2015 capital budget to finish the buildings, which need about $80 million between them. The governor is proposing some money for the buildings in his capital budget, but not enough.

“We made a commitment to finish the buildings. We’ve got to dig down and find the money,” French said.

Another concern is finding money to replace the University of Alaska Fairbanks’ aged power plant, he said. 

The governor proposed no money for this project, estimated to cost at least $200 million.

“It’s hard to imagine neglecting a facility that supplies heat, as well as power, to the Fairbanks campus,” French said.

Hawker said the Legislature will be spending a lot of time with the governor’s proposal to inject $3 billion into the state’s pension plans, which are underfunded relative to long-term obligations to public employees.

But taking money out of savings may not be the best way to do this, he said.

“There are a couple of bills pending that address this in other ways,” Hawker said, such as pension-obligation bonds, which are a way the underfunding could be financed without impairing state cash reserves.

Hawker proposed some of these ideas himself four years ago when the underfunding of pensions became more widely known.

“We could have financed this at 2 percent interest rates then. That opportunity is behind us now,” he said.

Interest rates are still low, and the opportunity will again be investigated. However, the pension problem is overblown, he said.

“The underfunding is not a crisis. People don’t understand that. It’s a long-term obligation and we have money in the bank. Unlike a private company with a pension obligation, the state can’t go bankrupt — not with more than $50 billion in assets,” Hawker said.

The state also has a constitutional obligation to public employee pensions.

“I can easily imagine the Supreme Court handing over the Permanent Fund to retirees,” Hawker said. “This is a management problem, a technical problem, and it’s been hyped to the point that it is scaring people.”

In fact, the Legislature has dealt with the problem already, in House Bill 125 passed a few years ago. In that Legislature, the state guaranteed that it would cover municipal and local school district pension obligations (the state now manages pension funds for all public entities) and developed a formula that is now being followed and which will correct the underfunding in 25 years.

However, the payments under the formula are increasing every year, which has been long known. They totaled about $600 million this year and the cost will reach and then exceed $1 billion annually in a few years.

Parnell’s $3 billion cash injection would reduce that obligation to about $500 million per year, which would be easier for the state to deal with in an era of reduced oil revenues. That might be accomplished using other means than using cash, Hawker said.

On another hot-button issue, the proposed Knik Arm crossing, French said he believes the governor’s decision to consider conventional state financing of the big project rather than a plan involving private investors is good news for opponents of the bridge.

“This is an enormous change of direction. With state money involved, a big project like this is typically pulled along by getting the cooperation of other regions of the state, and usually that’s done with money,” French said.

If the money isn’t there, it would be difficult to marshal a consensus in the Legislature around the project, which is seen as mainly benefitting the state’s core “railbelt” Anchorage-Fairbanks area.

The cash won’t be available for straight capital appropriations to build the project, which is expected to ultimately cost more than $1 billion, but the Legislature’s signoff is needed even if the project were funded by state revenue bonds.

On the House side, Hawker said he believes the state-financing approach, most likely through revenue bonds, is the right way to go rather than a private-sector financing method.

However, Hawker has doubts, he said, as to whether the Legislature will want to invest a lot of cash in the project this year. Parnell has proposed $55 million for the project in his capital budget, but the Legislature doesn’t have to actually appropriate this money.

Tim Bradner is a reporter for the Alaska Journal of Commerce in Anchorage. He can be reached at tim.bradner@alaskajournal.com.