The House Finance Committee adopted a new version of the operating budget Thursday, March 28, that forward-funds FY 2021 public education and pays for school construction.

The new committee substitute (CS) for HB 39 includes the recommendations of the budget subcommittees that closed out last week.

Subcommittees elected to maintain spending on key items Gov. Mike Dunleavy sought to cut, like early education, Medicaid, and the Alaska Marine Highway System (AMHS).  The University of Alaska subcommittee recommended a $10 million increase to the University budget.

In addition to those recommendations, the CS forward-funds K-12 public education for FY 2021, something for which educators have been clamoring.

The legislature did the same thing for FY 2020 via HB 287 last year, adding an additional $30 million in one-time money.  Dunleavy’s budget sought to cut $300 million of the funding from that bill because it is not subject to his veto.

“This appropriation forward-funds, in like manner of what it did last year, the FY ’21 K-12 and pupil transportation formula,” Legislative Finance Division Fiscal Analyst Amanda Ryder explained in a hearing.

“Education for this year should be protected, and we want to do the same thing for next year, and that is forward-fund the following year’s education budget,” House Finance Co-chair Neal Foster (D-Nome) reiterated.

During a press conference earlier Thursday, Foster said the committee heard testimony from nearly 1,800 people during formal hearings, as well as a series of eight meetings last weekend from Ketchikan to Bethel.  That testimony was roughly five-to-one against Dunleavy’s cuts.

“People are really concerned about what these cuts are going to do.  It’s not to belie the fact that there’s people out there that want a full PFD [Permanent Fund dividend] and would like to see deep cuts, probably even deeper cuts.  But the vast majority of people we heard did not give us that message,” said House Speaker Bryce Edgmon (I-Dillingham).  “It’s certainly my hope — I think our coalition’s hope — that when we do meet with the governor when he comes back into Juneau next week, that he’ll have heard some of what we heard, as well.

After salary adjustments were added to the subcommittee recommendations, the CS cuts year-over-year agency operations spending by $29 million in unrestricted general funds (UGF).  That is $493 million less than Dunleavy’s cuts.

Dunleavy continues to submit budget amendments, adding some as recently as Wednesday night.  Therefore, the above comparison may not hold, Ryder advised.

“Don’t be alarmed if you see the governor’s numbers change over the next 24 hours,” she said.

House Finance Co-chair Tammie Wilson (R-North Pole) said the budget is part of a multi-year approach to adjust agency spending.

“We can’t just keep cutting,” Wilson said, while also acknowledging, “We can’t keep taking out of our savings.” 

Wilson said she is “comfortable” with another $100 million in reductions to Medicaid not represented in the CS.

That recommendation will likely show up in House Finance amendments, which are due on Monday afternoon and will be debated next week.

Foster noted that if the legislature cuts Medicaid too deep, the administration can submit a supplemental budget when the legislature reconvenes in January.

“There is that comfort level,” he said.

House Removes Medicaid Language Fiscal Analyst Says Wasn’t Transparent

Medicaid was part of 29 language changes the CS made to Dunleavy’s budget.

The CS strips open-ended language that would have allowed the administration to bring in additional, un-budgeted federal receipts.

That language is part of a push by the Office of Management and Budget (OMB) to remove appropriating authority from the legislature.

“By removing this language, you’re able to see a little bit more clearly what is happening in the Health & Social Services budget, and if they need more federal receipts, you’ll understand why they need them when you approve them,” Ryder told committee members.

She noted that if the Department of Health & Social Services (DHSS) needs more funds in the middle of the fiscal year, they can approach the Legislative Budget & Audit Committee or submit a supplemental budget.

Language that would drain the $172 million Statutory Budget Reserve (SBR) savings account in the likely event that the federal government does not approve a variety of Medicaid waivers was also removed.  The language would allow DHSS to spend from the SBR for FY 2019, FY 2020, and FY 2021.

“Do you know why the administration would need a multi-year appropriation?” asked Rep. Andy Josephson (D-Anchorage).

“I would prefer to decline to speak on behalf of the administration,” responded Brodie Anderson, Foster’s aide.

Ryder chimed in that DHSS has sufficient funding for FY 2019 based on their testimony.  The SBR language would simply cloud how DHSS spends money.

“Which year is it spent in?  It’s all ’19 money.  It makes it very difficult to see what is appropriated and spent in a particular year when you budget like this,” she said.  “Leg. Finance believes there are more transparent ways of appropriating money for Health & Social Services for Medicaid and that if you need the money in FY ’20, appropriate the money in FY ’20.  If you need it in ’21, appropriate it in ’21.”

CS Pays Fewer Oil Tax Credits, Keeps School Bond Debt Reimbursement

Anderson told House Finance that a settlement is expected by October in a legal dispute over a plan to issue bonds for oil tax credit payments.  Therefore, the CS includes $700 million in bonding authority to pay down the balance of outstanding credits.

In light of the State’s structural deficit and the extended time the State has been taking to pay off oil tax credits, the legislature passed a bill (HB 331) last year by Gov. Bill Walker that allows the State to pay credits from bonds.  The cost to the State of the bonding process is deducted from the face value of the tax credits.

However, the CS also includes $70 million UGF to pay cash credits to companies that don’t take that reduced amount.  

“It’s just a choice that the certificate holders have to participate in the program and get their cash immediately — and it would be discounted — or to get full face value by waiting two or three or four years,” Legislative Finance Director David Teal explained.

“The only real advantage to the State is that you don’t have to address this issue every year,” he said of the bonding process.

In contrast to the $70 million for cash credits in the CS, Dunleavy had proposed $170 million for FY 2020 and $84 million for FY 2019.  That money would have come from the Alaska Industrial Development and Export Authority (AIDEA), which provides capital to private businesses.

“We’re largely rejecting the concept of taking AIDEA receipts?” Josephson asked.

“At this point, we will not be utilizing any of the recommendations that the governor had for AIDEA receipts,” replied Anderson.

The CS also rejects Dunleavy’s recommendation to replace a variety of designated fund sources, like the Power Cost Equalization (PCE) Endowment Fund, with general funds.

While Dunleavy has proposed repealing the school bond debt reimbursement program that pays a portion of municipalities’ school construction costs, the CS funds the program.  It also pays for school construction in Rural Education Attendance Areas (REAAs) per a statutory formula.

“Because you have added the school debt reimbursement, you now need to add the REAA to be consistent with statute,” Ryder explained.

Expect an amendment from Wilson on this.  On Monday, House Finance is scheduled to hear her HB 106, extending the current moratorium on school bond debt reimbursement until 2025.

Besides the repeal of school bond debt reimbursement, Dunleavy has proposed repealing several State taxes that provide over $400 million to impacted local governments.  Under his plan, that money would accrue to the State.

“A lot of these measures just simply don’t have a lot of support,” Edgmon told reporters.

Wilson noted that local governments have revenue caps that prohibit them from compensating with increased local taxes. 

“We can’t just tax more,” she said.  “Sometimes you just don’t understand the domino effect until you hit something so hard, you find out the communities don’t even have the authority to even make up the difference.” 

The CS restores the fisheries landing and business taxes to municipalities.

“The way that those landing taxes and business taxes have been distributed will continue following past practice?” Rep. Dan Ortiz (I-Ketchkan) asked in House Finance.

“The proposal had been to take all that money from the municipalities… bring that into the State Treasury, and we’re saying we’d like to keep that with the local municipalities,” confirmed Foster.

House Finance Has Yet to Address Size of PFD

Dunleavy sought to avoid a three-quarter vote of both chambers by keeping language out that mentioned the Constitutional Budget Reserve (CBR) savings account.

However, the constitution requires that State accounts with leftover money at the end of the fiscal year be swept into the CBR to repay it.

The CS includes traditional language to reverse that sweep and restore the accounts.

“We are taking funding from the Constitutional Budget Reserve?” Wilson worried.

Ryder explained that the CBR language does not mean the legislature has to spend from the CBR; it merely enables the reverse sweep.

“It’s just a huge accounting nightmare if we don’t do that,” Foster added.

House Finance followed Dunleavy’s lead in not including the PFD in the operating budget bill.  Dunleavy submitted his 2019 PFD proposal separately in HB 46 as part of a plan to pay back the balance of the 2016-2018 PFDs.

Foster said the House will first finish determining the proper size of the budget, then determine funding sources, including the PFD.

Edgmon added the size of the PFD will likely be a part of end-of-session negotiations.

“Our question to a lot of Alaskans was, where do we meet in the middle, and what essential services do you want, and what is your version of a sustainable Permanent Fund dividend?” Edgmon said.  “We heard a lot of support for keeping essential services intact.  A lot of Alaskans- not all, but a lot of Alaskans- are willing to take a reduced Permanent Fund dividend in order to protect schools and public safety and road services and other essential items they find necessary to live their lives.”

House Rules Chair Chuck Kopp (R-Anchorage) told reporters he sees indications that all the parties are coming to general agreement on the budget.

“The budget situation we’re in is encouraging discussions that politically before were not possible,” Kopp said.  “There are points of agreement and points of unity with the governor’s office, with the House and the Senate.  That is that we are all trying to look at how do we pay for schools, roads, public safety, and dividends within available revenues.  That is a common desire of this whole body and the administration.  In the process of achieving that goal, there are different views how to get there, and that’s what we’re wrestling with.”

“Alaskans want to have a certain level of essential services.  We heard from many they’re willing to pay for it, either with a reduced PFD or maybe something else they’re willing to put on the table,” Edgmon added.  “As somebody said on public radio this morning, this is a turning point for Alaska.  We have spent our savings down.  There’s not a desire in the legislature to overdraw the [Permanent Fund] Earnings Reserve.  Where do we go from here?  And that’s the central question that’s not just before us as a legislature, but I think is before the state as a whole.”

Edgmon said the goal is to finish the budget process and the legislative session by the middle of May, within the constitutional limit of 121 days.

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