The statue of William Henry Seward in front of the Alaska State Capitol is seen covered in snow on Monday, Jan. 21, 2024. (Photo by James Brooks/Alaska Beacon)
In a series of hearings this week within the Alaska State Capitol, public-school advocates from across the state presented hours of impassioned and often emotional testimony in favor of a bill that will sharply increase Alaska’s funding for public schools.
But a pair of cold-blooded financial hearings also showed that the request may have to compete with the Permanent Fund dividend and aid for aging state buildings.
In December, Gov. Mike Dunleavy proposed a $7.7 billion state budget for the fiscal year that starts June 1.
That spending would require the state to spend $1.5 billion from savings, and it isn’t too dissimilar from what the governor has proposed in each of the past two years.
In each of those years, the Legislature took the governor’s plan and slashed his proposed Permanent Fund 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 from the Alaska Permanent Fund to the state treasury, then divides it, 75% for 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 this 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.
ConocoPhillips is spending hundreds of millions of dollars to develop the Willow project on federal land, and it can deduct its expenses from taxes it would otherwise pay this year. That makes it a money-loser for the state treasury in the next few years.
The nearby Pikka project is being developed by another company, which doesn’t currently produce oil. 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 the state Capitol, House Bill 69, an education-funding increase proposed by members of the state House, is expected to cost at least $300 million above what the governor has proposed spending on education. An official estimate isn’t yet available.
Add the cost of that legislation to already-expected cost increases, and there’s not enough money to go around, Painter told the Senate Finance Committee, then reiterated his comments to the House Finance Committee on Thursday.
“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, 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 Thursday, Rep. Will Stapp, R-Fairbanks, asked Painter what would happen if average oil prices finished $10 below what the state is expecting in the coming years.
That would widen the expected deficit by $350 million to $400 million, Painter replied.
“Have you done any modeling on the 99-1 yet?” Stapp asked, jokingly referring to a dividend formula that would leave just 1% of the annual Permanent Fund transfer for dividends.
“I don’t even think that would cover the costs of running the PFD program,” Painter said.
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