In a series of hearings last week in the Alaska Capitol, advocates from across the state presented hours of impassioned and often emotional testimony in favor of a bill to sharply increase state funding for public schools.
The state funding formula has increased just 2% over the past decade, but a pair of cold-blooded financial hearings by legislative committees showed that the education request may have to compete with the Permanent Fund dividend and aid for aging state buildings in the next budget.
In December, Gov. Mike Dunleavy offered a state budget for the fiscal year that starts July 1, proposing that the state spend $1.5 billion from savings, which would be required to cover his $3,800 Permanent Fund dividend. It was a similar spending plan to what he proposed in each of the past two years.
In each of those years, however, the Legislature took the governor’s plan and slashed his proposed dividend in order to avoid spending from savings.
The Legislature’s preferred dividend formula is called the 75-25, for the way it takes the annual transfer of Alaska Permanent Fund investment earnings to the state treasury, then divides it 75% for public services and 25% for dividends.
“The last two years, the Legislature has put forward the 75-25 dividend and been able to have a balanced budget. This year, that is probably not enough,” Alexei Painter, director of the Legislative Finance Division, the Legislature’s budget analysis wing, told the Senate Finance Committee last week.
The problem is twofold: Lawmakers are preparing to spend more, and oil isn’t giving the state as much revenue as it used to.
When it comes to oil, the problem is one caused by success. State tax law allows oil companies to lower the amount they pay in production taxes through a deduction based on their operating expenses and investments in new production.
ConocoPhillips is spending billions of dollars to develop the North Slope Willow project, and it can deduct its expenses from state taxes it would otherwise pay. That makes it a money-loser for the state treasury in the next few years. Willow is expected to go into production by 2030.
The nearby Pikka project is being developed by another company which doesn’t currently produce oil in Alaska. That company, Australia-based Santos, will be able to apply its deductions to future oil production, so even though the North Slope will be producing more oil, the state won’t be earning more money.
In addition, oil prices are lower than much of last year, cutting further into state revenues.
In the state Capitol, House Bill 69, an education-funding increase proposed by members of the House majority, is expected to cost at least $300 million above what the governor has proposed spending on education.
Add the cost of that legislation to other budget increases, and there’s not enough money to go around, Painter told the Senate Finance Committee, then repeated his comments to the House Finance Committee.
“Simply switching the dividend to 75-25 is not going to be enough to balance the budget this year. You’re going to have to either find other budget reductions, reduce the dividend further or explore other revenue options. You can’t just do that one thing and it’s solved, which has worked the last two years,” he said.
To date, no legislators have introduced any legislation proposing to significantly change state taxes. During the first six years of his administration, Dunleavy has vetoed every tax bill to reach his desk — even a tax on e-cigarettes — and legislators have never overridden any of his vetoes.
Painter also warned both committees that the governor’s proposed budget doesn’t include enough to keep up with maintenance at state facilities.
Alaska has a maintenance backlog of more than $2 billion, and many state buildings were built during the oil boom of the 1970s and 1980s. That leaves many of them overdue for replacement or repair.
The problem may be worse than official reports indicate, Painter said, offering the Fairbanks Pioneer Home as an example.
That building has a deferred maintenance list of a few million dollars, but it also needs a new roof and doesn’t meet federal standards for accessibility by handicapped people.
Replacing the building would cost $115 million, he said.
In the House Finance Committee on Jan. 30, Fairbanks Rep. Will Stapp asked Painter what would happen if oil prices averaged $10 per barrel below what the state is expecting in the coming years.
That would widen the expected deficit by $350 million to $400 million, Painter replied.
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