Alaska governor would balance state budget at locals' expense

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Alaska Gov. Mike Dunleavy’s budget proposal would have negative credit implications for municipalities across the state if enacted, according to Fitch Ratings.

“The budget proposal eliminates the state’s school bond debt reimbursement program for local governments and cuts unrestricted general fund spending for schools by 24%,” according to a Fitch report.

The fiscal 2020 budget proposal would also shift property tax levies on oil and gas infrastructure and fishing taxes from the local level to the state.

The funding shift is so severe at the local level that if the budget passes as proposed, there is no question that some municipalities would default on their bonds, said Tim Navarre, president of the Alaska Municipal League, which represents the state's 165 cities and boroughs.

The boroughs, Alaska’s form of county government, are not only affected if the state takes revenues, such as the fishing, oil and energy taxes that have traditionally gone to them, but also if the state as Dunleavy proposes decides not to pay its traditional reimbursements for school district bond debt service.

Dunleavy, a Republican, won election in November. Most of the members of the legislature are Republicans, but the House, after a 31-day impasse at the beginning of the session, is run by a coalition of Democrats, independents and a few Republicans, who chose as speaker Bryce Edgmon, an independent who was speaker in the previous session as a registered Democrat.

Fitch doesn’t plan immediate rating changes due to the legislation, because the budget could be altered as it wends its way through the House and the Senate.

The ratings agency is monitoring the situation and may take rating action if passage begins to appear more definite.

"In terms of the greater rating concern, both the proposed cuts to school funding and elimination of the school bond reimbursement program are meaningful concerns for local government finances," said Andrew Ward, a Fitch director.

Reductions in state formulaic school funding could pressure borough policymakers to backfill some district revenue losses, creating budget stress for borough governments and potentially crowding out other services, according to Fitch.

“The boroughs levy property taxes on behalf of the schools, and both the borough and school district levies have to fit under a single tax cap,” Ward said. “It is possible that the need to raise property taxes for school district operations could limit the amount of tax cap available to the boroughs.”

The boroughs are responsible for making the bond payments on most of the school districts' bonds. The state used to reimburse the boroughs for 90% of that cost, but that has dropped to 60% on the new school bonds, Navarro said.

“Increasing property taxes to cover the full bond debt service would be a more automatic, pro forma adjustment, but it has knock-on effects on the public’s and policymakers' willingness to adjust property taxes for operations,” Ward said. “Even if the public were willing to bear the additional property taxes required to offset some of the school funding cuts in the context of the rising debt service levy, the operating levy could be constrained by state or local property tax limitations.”

The amount of debt service that Anchorage School District would lose under the proposal is $40 million, it would also lose $110 million of the state’s contribution to its operating budget, said Jim Anderson, the school district’s chief financial officer.

If the school district is forced to cut 21% of its budget as proposed, it could mean laying off 1,100 to 1,500 people, Anderson said. The district enrolls about 46,000 students.

The district had $517 million of general obligation bonds outstanding as of June 30, 2018, according to its financial statements.

Anchorage School District manages its own debt, Anderson said, though the debt is backed by the full faith and credit of the Municipality of Anchorage, which collects the taxes that repay it.

Anchorage and Matanuska-Susitna are probably the school districts most affected by the governor's proposals, because of the size of their bond programs, Anderson said.

Anderson said Anchorage school bonds would be repaid, but taxes would have to go up, which means the public might be less inclined to approve future bond authorizations.

Some regions would be harder hit than others.

For instance, the North Slope Borough, a sparsely populated area that includes the Prudhoe Bay oil fields and the Arctic coast, relies almost entirely on an energy-dominated property tax levy.

The borough collects about 85% of the $440 million in revenue that could be shifted to the state from local governments under the governor’s proposal, according to Fitch. That $372.1 million made up 93% of its 2018 property tax revenues and 86% of its total general fund revenues, with the exact loss dependent on which assets are classified as oil infrastructure, Fitch wrote.

Outside of the energy sector, Fitch said, the North Slope's small, remote communities have very limited tax bases and economies.

The borough's AA rating takes into account the lack of diversity in the tax base, Fitch said, but it does not take into account a sudden change in state tax law.

The loss of oil tax revenues would have less of an impact on large borough’s and cities.

The Fairbanks North Star Borough, which has the second-highest exposure among Fitch rated entities, collected about $11.2 million in oil infrastructure property taxes in fiscal 2018, roughly 10% of its overall general fund revenue, Fitch wrote. For Anchorage, it represents less than 0.5%.

But Navarre said some municipalities are getting hit by every proposed cut. Anchorage, for instance, would lose almost $200 million to the various cuts.

"Those municipalities that could attempt to survive would have to increase taxes," Navarre said. "Some wouldn't, because they couldn't tax themselves out of existence. They would just cease go away, which would impact the state, because they would have to provide the services."

He noted that a lot of communities own their hospitals.

Alaska's budget dilemma is many years old. The state government doesn't tax sales or income and is almost entirely dependent on oil tax revenue. As North Slope oil revenue waned, a series of governors and legislatures have tried without much success to change the system, while relying on reserves built up in the fat years.

The state government, which entered 2016 with triple-A ratings across the board, now carries ratings of Aa3 from Moody's Investors Service and AA from Fitch Ratings and S&P Global Ratings.

Dunleavy's cut-based approach, which would also cut swaths through popular institutions like state universities and its ferry system, represents a stark departure from previous budgets, Navarre said.

“It would take legislative statutory changes to make his budget legal,” Navarre said. “No governor has ever had this many statutory changes to make his budget legal.”

Given the outcry from legislators and mayors, Navarre doesn’t think the budget will make it through the House and Senate in its current form. But he adds that the Alaska governor does have line item veto power.

The state’s lawmakers are faced with eliminating nearly $1.6 billion in order to balance the budget.

The fiscal year 2019 budget signed by Alaska’s previous governor Bill Walker drew from the Permanent Fund — a pool of oil and gas tax revenues invested over the years that pays residents an annual dividend — to balance the budget.

Navarre said petitions are circulating to take that action again in order to save the municipalities, some of which he said could cease to exist under the governor’s proposal, and the schools.

“I think he was looking for cuts and didn’t really think of the impact it would have,” Navarre said. “He was just trying to put the budget in balance, but you can’t do that without thinking of the impacts.”

Matt Shuckerow, the governor’s press secretary, didn't respond to a request for comment.

“It is early in the process though," Anderson said. "By the end of March we will have a better idea what the House is going to do and by the end of April, a better idea of what the Senate will do. Then they go into caucus and work out their differences."

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State budgets State and local finance City of Anchorage, AK State of Alaska Alaska