State bond package unlikely

With little appetite from legislators for a general obligation bond package, bare bones capital budgets the next couple years are probably a harsh reality of the state’s fiscal situation.

The administration’s proposal for a $500 million general obligation, or GO, bond package to fund up to $250 million of capital appropriations in each of the 2017 and 2018 fiscal years received, seemed possible, if not likely, to pass the Legislature based on reactions when the idea was first offered by Gov. Bill Walker in December.

Attitudes have changed, however, as the session has worn on.

Revenue Commissioner Randy Hoffbeck said during a March 21 press briefing that there was growing concern in the Legislature about taking on additional debt at a time when the state’s budget is upside down to the tune of a $3.5 billion-plus deficit.

“The consensus seemed to be with legislators that they would like to wait until we get a stabilized fiscal plan in place because bonding will have to dovetail with whatever plan that we come up with,” Hoffbeck said.

An administration plan to bond for future state pension obligation payments also fell on deaf ears and was subsequently scrapped.

When first proposed, the bonding plans were pitched as a way to leverage the state’s low-interest borrowing capacity under the premise that the state can get a better percentage return on its savings over the long-term than the interest on the bonds would cost.

The leaders of the capital budget in both chambers of the Legislature largely echoed Hoffbeck’s conclusions in interviews.

Senate Finance co-chair Sen. Anna MacKinnon, R-Eagle River, said she heard through public testimony to the committee that many Alaskans feel the state operating budget is still too large, and therefore it wouldn’t be prudent to add spending for capital projects.

Walker floated the GO bond proposal as a way to pay for critical and incomplete infrastructure projects across the state, but House Finance co-chair Rep. Steve Thompson, R-Fairbanks, said his primary concern lies in the prospect of “Christmas treeing” on a bond package. That is, a fear that numerous, nonessential projects would end up decorating the bond legislation.

Both MacKinnon and Thompson said the sentiment toward capital spending could change next year if the Legislature works out a fiscal plan that stabilizes state revenue and substantially reduces annual deficits through some use of the Permanent Fund’s investment earnings, taxes and budget cuts.

Thompson added that it will be a new Legislature next year, which could bring with it new priorities.

MacKinnon also cited the State Bond Committee’s January Debt Affordability Analysis report, which concludes Alaska has the capacity to take on about $175 million in additional GO bonds without further impacting its credit rating.

Multiple ratings agencies have slightly lowered the Alaska’s formerly sterling credit ratings this year because of the messy budget situation, and, so far, a lack of a plan to address it.

“The issue is we absolutely could use debt to finance some projects that we think are viable and that would benefit the state long-term, and I believe that may still be a conversation going forward, but the issue is that currently we are structurally imbalanced and if we don’t change the way that we are structurally balanced, I can’t in good conscience go forward and recommend a bond package to anyone,” MacKinnon said.

The hitch in holding off on a bond package is that waiting one year means waiting at least two. GO bond proposals must be approved by the public on a general election ballot — if not this November then not again until November 2018 — that also means approval from the electorate is far from a sure thing.

While GO bonds often pass in better budget times, the prospect of voters signing off on state debt when cuts are being made to other areas of government spending is more uncertain.

Hoffbeck said that when the next window for GO bonds opens up it would be something the state “would need to strongly consider.”

MacKinnon did not rule out the possibility of funding high-priority projects — namely those that address safety issues — through direct appropriations next year.

As for the 2017 budget, she said the capital budget, which will come out of the Senate first, will take center stage in the last couple weeks of the session, with the state’s priority being “to squeeze every dollar of matching money” out of federal capital programs.

Much like last year, the governor’s proposed capital budget uses about $180 million of state general funds to match more than $950 million of federal money mostly for highway and airport improvement programs. All in, Walker’s capital budget totals more than $1.2 billion thanks to the federal support.

As recently as fiscal 2013, when oil prices averaged close to $100 per barrel and translated into full state coffers, Alaska spent more than $2 billion of its own money in a capital budget. The drastic change in capital spending is exemplified simply in the size of the actual budget bills — 194 pages in 2013 versus 20 pages from the administration this year.

Because it takes up to six years for most state appropriations to fully “hit the street” in the form of work for contractors, Alaska’s construction industry is still relying on the larger capital budgets from days gone by for much of its work.

Significant contraction from the oil and gas sector led the Associated General Contractors of Alaska to project a decline in construction spending this year of about 18 percent, which would take the industry roughly back to the activity level seen in 2013.

Cut from the administration’s initial capital budget was $5 million for the Alaska Energy Authority’s popular Renewable Energy Fund grant program that supports projects across the state focused on getting rural communities off of diesel and fuel oil for home heating and electric generation.

Since 2008, the Legislature has committed $271 million to the Renewable Energy Fund. It received $11.5 million in the budget passed last year, one of the few state programs to be funded in the state’s slim 2016 capital spend.

AEA contends completely cutting Renewable Energy funding this year will impact its ability to administer prior-year grants.

MacKinnon said the authority should expect to be “touched” by changes in state spending habits, but also noted she is working on a way for surplus funds from the Power Cost Equalization Program, also administered by AEA, to support renewable energy projects. 

The premise behind the idea is that rather than spending PCE money each year to subsidize electric costs, the money could be used to permanently reduce rural energy prices through generating renewable energy.

Power Cost Equalization is an endowment-style state subsidy that buys down the cost of electricity for rural Alaska residents and small businesses.

“It’s a theory we need to do the math on,” MacKinnon said.

Elwood Brehmer is a reporter for the Alaska Journal of Commerce.