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Cuts and Taxes and Dividends Oh My!

A look at state and local plans to deal with a lean fiscal future

 

Graph provided by Alaska Department of Revenue Director Ken Alper

The Cost of Doing Nothing: This graph shows what the financial future of the state looks like should the state budget remain at the status quo, assuming the price and production of oil also stays the same.

State Rep. Jonathan Kreiss Tomkins and Alaska Department of Revenue Director Ken Alper gave a state budget crisis presentation for community members two weeks ago.

They used colored blocks of wood representing different revenues and expenditures balanced on a large scale to provide a visual representation of the state's budget deficit and the continued gutting of our state's savings should the legislature not create a more sustainable budget for the state.

On the revenue side of the scale sat a handful of black blocks representing oil revenue. Oil revenues are pumped into the state from various pipelines, the bulk of which comes from royalty payments, net profit taxes and production taxes made from oil companies to the state. That money fluctuates based on production and, more importantly, the price of oil. Last year that revenue amounted to around $1 billion. This year it's around $500 million.

The state brought in around $600,000 from other taxes such as the raw fish tax, business license fees, corporate income tax and property taxes.

In spite of all that, and the $900,000 million in cuts to various state agencies and services, the legislature faced a $3.5 billion budget deficit. To fill the gap, to pay for this year's funding to schools, ferries, court system and police among a vast myriad of other services, the state tapped into its savings, what's called the Constitutional Budget Reserve (CBR).

"That's the money the legislature uses to balance the budget when times are lean, when we have a rainy day," Kriess Tomkins said. "Well we've got an absolute torrential downpour right now."

If oil prices remain low the state has around four more years worth of savings. There is currently around $7.7 billion in the state's CBR.

Alper said the budget was built around the expectation of oil prices of between $80-$100 a barrel.

Essentially, the state budget is built around a variable price of oil. State economists do their best to anticipate those prices but it's ultimately an educated guess at best.

"We've never been exactly right," Alper said. "The expected price for this year was $50 (per barrel) and the next year is $56. We're at $30 right now so we guessed wrong so far."

The problem will not be fixed by cuts alone and even a slew of new taxes Governor Bill Walker and other legislators have introduced won't fill the gap.

Aside from cuts to state spending and oil tax credits to companies, Kriess-Tomkins and Alper also outlined part of the governor's plan to introduce an income tax and other taxes targeting alcohol, tobacco and motor fuel and, what would most tip the scales, the Permanent Fund Protection Act.

Instead of using all the oil revenues for state spending, Walker's proposed act would tie 50 percent of oil royalty revenues towards dividends, which at current estimates would make this October's dividend check around $1000.

The state would deposit the rest of the royalties and 100 percent of production tax revenues into the Permanent Fund-a giant pool of money, around $45 billion, that is currently being invested around the world. The state can't touch the money without a constitutional amendment. But the state can and does spend the earnings from those investments. Those earnings create the pool of money that is used to draw dividend checks and another portion is tossed back into the Permanent Fund to protect it from inflation.

With Walker's proposal, a calculated annual draw from those earnings would instead transfer to the state's general fund, and would, according to the proposed Act, break the budget constraints tied to the variability of oil prices.

Even if oil prices increased to $50 a barrel next year and the legislature approves the entirety of the Governor's tax package, not including the Permanent Fund Protection Act, the state would be short $2.2 billion.

"We're still in a place where we're not sustainable," Alper said. "Do we want to have the conversation about a long term solution that would involve permanent fund earnings or are we not ready to have that conversation yet? That's really what we're going to learn over the next few months in the legislature."

What does this mean for Petersburg?

The legislature will vote on the Governor's package, along with a variety of other proposed taxes and cuts this legislative session. In the meantime, municipalities across the state are preparing for tight times ahead.

Among cuts to state agencies and services, capital project monies from the state to municipalities like the Petersburg Borough are expected to dwindle.

"We've sent this year's capital project list to the state," Petersburg Borough Finance Director Jody Tow said. "Are we expecting anything? No."

Petersburg and other municipalities are still receiving appropriated money from previous budget cycles but that money is quickly drying up.

"The construction industry hasn't quite felt the full impact of this (capital project funding) going away yet because they're still spending capital budget money from two and three and four years ago," Alper said during the presentation. "Once that money works its way through the pipeline that's when we're really going to see the impact out there in the communities."

Petersburg is hugely reliant on state funding for its infrastructure. For the very building where Kriess Tomkins and Alper gave their presentation, the Sons of Norway Hall, the state provided $250,000 for its renovation.

In the last five years the state has provided $39.5 million in grants and other funding for 20 different projects. 17 percent of the borough's FY16 budget included state grants for the borough's general fund. The state has warned municipalities across the state to be prepared for a decrease in that funding.

Petersburg Borough Manager Steve Giesbrecht said as far as capital projects go, there is state funding left for a handful of projects, like the police/municipal remodel and drive down dock, but no new allocations and, like Tow, he isn't expecting any new money to come from the state.

"We may still do capital projects but they're going to be really small," Giesbrecht said. "They're going to be local, very small and come from local funding."

Because the borough relies on general fund money from the state for its operations, the borough has been shrinking its budget for the past several years. Giesbrecht recently asked department heads to cut a total of $88,000 between several borough departments-mostly from the police department and public works-from an already smaller budget.

Last year the Parks and Rec department cut more than $100,000 from its budget by getting rid of two positions. The maintenance of trails and various parks decreased as well. The department lost cleaning staff, along with the library, so librarians and parks and rec employees now do their own janitorial work. The community gym has also reduced its hours.

Data and graph projections from the state's New Sustainable Alaska Plan website

Existing Revenue $850 million Alaska Permanent Fund Protection Act $3.2 billion Earnings on Other Savings $135 million Mining (2% increase on top tax bracket) $12 million Fishing (1% increased raw fish tax) $20 million Tourism (Elimination of municipal cruise head tax exemption) $15 million Motor Fuel (6.8 cent increase on jet fuel, 5.3 cent increase on general aviation; $45 million 5 cent increase on marine; 8 cent increase on highway) Alcohol (10 cent increase per drink) $40 million Tobacco ($1/pack increase, includes E-Cigs) $27 million Oil and Gas (Reduce amount spent on tax credits; harden floor & raise to 5%; $500 million add loan program) Individual Alaskans; Income Tax (1.5% of average income – 6% of fed liability) $200 million *It is important to note that other legislators have different plans and ideas regarding cuts and new revenues for the state. This article focuses on Governor Walker's plan because that's what was presented during the state budget presentation.

The borough is also facing possible reductions in federal dollars, mainly in the form of Timber Receipts, monies meant to offset the inability to tax logging on the Tongass National Forest. $600,000 of that money goes to the Petersburg School District each year and this month is the last time the borough may receive that money should Congress not reauthorize the funding. The borough does have enough of those dollars saved and earmarked so it could give the school district that money for another five or six years.

Giesbrecht said, despite all this, the borough is planning to have a smaller but balanced budget. But he believes new sources of revenue should be discussed.

Officials recently gave voters the opportunity to increase borough revenues after approving several ballot initiatives such as sun setting or getting rid of the senior sales tax exemption, increasing the sales tax cap and instituting a tobacco tax.

All of those measures failed except the tobacco tax and Giesbrecht said the borough is no longer considering revenue solutions, although he thinks it still should.

"As people get older they not only qualify for the property tax exemption but also the sales tax exemption and now suddenly we get lower property taxes and lower sales taxes," Giesbrecht said. "That's going to hurt the community in the long run."

According to data from the Alaska Department of Labor and Workforce Development, the overall population in Petersburg is decreasing while the percentage of those 65 and older, the age that qualifies those for the senior exemption, is increasing. In six years the senior population is expected to reach nearly 24 percent of the population of Petersburg. That means roughly ¼ of the population won't have to pay property taxes or sales taxes, the main source of local income all municipal governments receive.

The Petersburg Borough Assembly will likely begin conducting budget work sessions late February through March where they will review, discuss and ultimately approve next year's budget.

 

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