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Legislators continue finance discussions Administration shooting for early budget delivery; ISER beginning study of impacts of different cuts, tax, permanent fund changes KRISTEN NELSON Petroleum News
Alaska legislators, having struggled through two special sessions to reach accord with the administration of Gov. Bill Walker on a state operating budget in face of a steep drop in oil prices and steadily declining North Slope crude oil production, are already preparing to deal with the next budget cycle.
The House Finance Committee met Aug. 24, hearing from Commissioner Randy Hoffbeck of the Alaska Department of Revenue and Director of the Office of Management and Budget Pat Pitney.
Pitney noted that it was unusual to have a budget discussion in August but said that the state’s financial situation made it important to talk early and often.
Hoffbeck told legislators the two would run through the presentation they’d been doing around the state, starting in June. He said it’s become clear that people don’t think the state has a problem, and said the administration will continue to speak on budget issues around the state.
Unrestricted general funds The problem lies in the unrestricted general funds which the state can use to meet any needs it has. Those funds come primarily from crude oil production taxes, and with the drop in oil prices, those revenues are down by more than half.
In the best case oil price, some $65 per barrel, that amount would be down by $2.7 billion, Pitney said, forcing the state to prioritize. At oil prices in the $40-45 per barrel range, the decline could be $3.3 billion, she said.
Agency budgets were reduced, Pitney said, and based on December 2014 numbers, there were 500 fewer full-time state employees in July. That number did not include unfilled positions, she said. The layoffs totaled fewer than 60 because people chose to retire or were able to find different jobs and resigned, Pitney said.
Hoffbeck said they’ve spent as much time talking about cuts as about possible new revenue, but cuts can’t be the only discussion because the state can’t cut enough to balance the budget.
Early indication Pitney said the administration plans to have an indication of what the budget will be in early October rather than waiting for December, with the focus on constraint. Last year 19 percent was cut in unrestricted general funds, she said, a 13.5 percent reduction in the executive branch, with 20-30 percent reductions in some areas.
What will be out in early October will be a budget framework, Pitney said, with targets and revenue expectations.
Oil and gas revenue have bailed the state out before, Hoffbeck said, but at present production levels it would require an oil price of $109 a barrel, with the more optimistic price outlook at $60-80 per barrel and the less optimistic outlook at $40-60 per barrel. He said there is nothing on the horizon that indicates the crude oil price could go back to $109 per barrel in time for this budget.
And at current prices, he said, it would take 1.6 million barrels per day to balance the budget (in July production averaged less than 500,000 bpd).
Increasing revenue Hoffbeck said some of the options for increasing revenue include modifying oil and gas taxes, modifying oil and gas credits, modifying non-oil and gas taxes; repurposing financial assets; adding new taxes; and lottery/gaming. He said Sen. Cathy Giessel is putting together a panel on modifying taxes and said they’d already done a lot of meetings on that over the summer. It will be an active discussion this year, he said.
Pitney said the list of possible ways to increase revenue doesn’t indicate administration endorsement - these are ideas that have surfaced.
Pitney said the administration will indicate in October what tax-change legislation it will be proposing.
ISER study Gunnar Knapp, director of the Institute of Social and Economic Research and professor of economics at the University of Alaska Anchorage, described a study ISER is starting on the economic impacts of Alaska’s fiscal options. The $60,000 study is funded by the Department of Revenue and the Office of Management and Budget, with a preliminary report in mid-September and a final report in early January.
Knapp said with the state’s options of more spending cuts, new revenues or using Permanent Fund earnings, an issue in making a choice will be how the options would affect the state’s economy.
He said the goal of the study is to be helpful to Alaskans and particularly to legislators who will have to make the hard choices, and asked for advice on what fiscal options and what economic impacts legislators want to know about.
The study will look at impacts on jobs and incomes by sector, government and private; by industry; by region; and by income group. It will look at short-run and long-run impacts and on who pays for fiscal options.
Review of past studies
ISER will review its past studies and update them using current data, Knapp said. It will also review other studies and use modeling to estimate impacts.
Previous ISER studies have provided a lot of information on the economic impacts of different fiscal options, Knapp said, citing a 1987 study comparing the economic effects of reimposing personal income taxes, reducing Permanent Fund dividends or reducing state spending.
Knapp said previous studies have found that there are no painless options; that all fiscal options would affect the state’s economy; and that different options have different economic impacts, including different impacts on industries, income groups and regions, and different effects on investment, development and future revenues.
One conclusion of the 1987 study was that “either reimposing income taxes or reducing dividends would reduce purchasing power of Alaskans and, therefore, cost the economy jobs and income.”
A modest personal income tax “would cost the state somewhat fewer jobs and less income than would a similar dollar reduction in Permanent fund dividends,” the 1987 study found, based on higher-income people tending to spend less money in the Alaska economy than average-income Alaskans who would be giving up dividends, a conclusion which might hold true today, depending on how income distribution and spending patterns have changed.
The 1987 study also found that, depending on the type of state spending, cutting state spending could have an even greater effect on jobs than imposing income taxes or cutting dividends.
Jobs created by state spending In 1999 ISER estimated that for every $1 million in state spending, 15 government jobs and 12 other jobs were created, a total of 27 jobs, compared to local operating grants which created 10 government jobs and 12 other jobs, a total of 22 jobs.
The Permanent Fund dividend, by comparison, created only 11 other jobs - no government jobs - a lower impact because jobs are only created when people spend their dividend income.
Preliminary ISER estimates, from February of this year, found that for every $100 million cut from agency operations 318 direct jobs were lost and 548 other jobs, a total of 866; compared to a capital spending cut of $100 million which cost 506 direct jobs and 425 other jobs, a total of 931.
Cutting the state workforce to reduce total pay by $100 million (1,466 jobs) would produce a direct loss of 1,466 jobs and an indirect loss of 499, for a total of 1,965 jobs lost. Across the board cuts for state workers totaling $100 million would result in zero direct loss of state jobs, and 449 indirect jobs lost.
The total loss in income from $100 million in cuts would be $61 million for the cut in agency operations; $64 million for the cut in capital spending; $122 million for the cut in state jobs; and $122 million for the cut in state workers’ pay.
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