Alaska budget, bonding bills go down to the wire
Time runs out Sunday on Alaska’s legislative session, with the budget, a proposed new bonding program, and changes to pension obligation bond authority still hanging in the balance.
April 15 marks the 90th day of the session, when state law allows lawmakers to gavel out for the year. Hoping to avoid adding 31 days to the session, as allowed by the Alaska constitution, the legislators are hustling to resolve differences over what Gov. Bill Walker and some rating analysts have said are key questions for protecting the state’s fiscal health and credit quality.
Largest among the issues is a budget, on which it appears that the state’s Democrat-controlled House of Representatives and Republican-controlled Senate are closer to agreement than they have been for years. Both have indicated agreement on a 5.25% draw on the state’s Permanent Fund and a $1,600 annual dividend payment to Alaska citizens.
Walker, an independent, supports using draws on the Permanent Fund to help eliminate the multi-billion dollar structural deficits that have plagued Alaska’s last several budgets. The fund, a roughly $60 billion pool of oil and gas tax revenues invested through the years, helped Alaska earn a move to stable from negative by Moody’s Investors Service because the fund’s investments had performed well. The House has already passed these measures in its budget, and the Senate is hoping to pass its bill very soon. Walker praised the two wings of the legislature for coming together on figures Walker himself is able to support.
“All sides agree it is necessary to tap the earnings reserve of the Permanent Fund to help pay for government moving forward,” the governor said in a statement. “It is essential that the first draw from the Permanent Fund in history is structured, sustainable, and protects the future of the dividend program.”
Analysts have said that Alaska may face downgrades if it doesn’t stop burning through its reserves to pay for its government. Rated triple-A by the three largest rating agencies as recently as 2015, the state was downgraded by all three as oil prices fell and revenues coming into the treasury from the state’s energy industry dwindled and failed to keep pace with expenses. Now Alaska is rated AA by both Fitch Ratings and S&P Global Ratings and Aa3 by Moody’s Investors Service. The risk of falling further remains real, even though energy prices have rebounded from the rock-bottom levels of a couple of years ago.
Lawmakers remain divided over how to enshrine use of the Permanent Fund in law over multiple years, an issue which may be worked out in separate legislation. Because there are differences in the spending levels established in the House and forthcoming Senate budgets, a conference committee is expected.
While time is getting tight for the work to get done by the 90-day limit established by law, the state constitution allows for the legislature to work to the 121-day mark, which would land it in mid-May. And on top of that, Walker has the ability to call special sessions and has done so with regularity in the past, including four last year that stretched from mid-May until Nov. 21 of 2017.
While legislative leaders have said they plan to finish as close to the 90-day mark as possible, there are other items of interest to the muni market that could get some attention.
Among them is a bill that would establish an Oil and Gas Tax Credit Certificates bond financing program. Under this program, the state would sell bonds to buy back accrued oil and gas company tax credits at a “modest” discount.
The Walker administration said the debt financing cost over the lifetime of the debt will be offset by the discount taken by oil companies who are eager to receive their cash now, rather than on the schedule set by statutory formula. The bill, SB 176 in the Senate and HB 331 in the House, would create a new state bond corporation empowered to sell up to $1 billion in bonds to repurchase outstanding oil and gas tax credits. About $800 million of the credits were outstanding at the end of 2017 as well as some $200 million expected to be awarded in coming years. The tax credit program was ended by law last year, and some oil companies have been hesitant to embrace taking a discount on the credits they earned.
Another bill would authorize some $800 million of infrastructure and deferred maintenance projects over three years, funded by a temporary payroll tax. Still another would slice the state’s pension obligation bond authority in half, to $2.5 billion from $5 billion. That bill already made its way through the Senate and is pending before the House Rules Committee.
POBs are controversial because there is a risk that the proceeds invested into the pension fund they support might not justify their interest costs. The situation came to a head in Alaska in late 2016 when Walker decided on a last-minute cancellation of a planned $3.3 billion POB issuance after S&P Global Ratings said issuing the bonds would probably result in a downgrade for the state.
Walker’s office didn't immediately respond to a request for a comment on whether he is confident in the successful conclusion of the budget process or whether he would consider calling for another special session.