Dunleavy’s budget is picking winners and losers, but it doesn’t have to

Listening to Mike Barnhill wax poetic on the intent of the framers of the Alaska Constitution earlier this week was music to my ears. The Alaska Constitution is special. It is unique among constitutions and contains provisions unlike most other states like privacy protections, a natural resources section and a prohibition on dedicated funds clause.

The dedicated funds clause is quite interesting. Article IX, section seven of the Alaska Constitution states:

“The proceeds of any state tax or license shall not be dedicated to any special purpose, except as provided in Section 15 of this article or when required by the federal government for state participation in federal programs. This provision shall not prohibit the continuance of any dedication for special purposes existing upon the date of ratification of this section by the people of Alaska.”

Functionally, many in the legislature have taken it to mean that one legislature cannot bind the hands of another legislature and it’s mostly followed. Sometimes, though, there is enough political will to ignore the vaguely nebulous language of the provision (what really is dedicated anyway?). In those cases, the Legislature inserts language saying “nothing in this bill creates a dedicated fund” or engages some other creative method.

That is, until Mike Barnhill got the call that we’re strictly adhering to the constitution now. He delivered that message to the Senate Finance Committee Tuesday morning declaring of the Dunleavy proposal to eliminate funds like Power Cost Equalization Fund, which funds the difference between rural and urban Alaska’s power cost difference, that “This really is consistent, quite frankly, with the original constitutional intent that all stakeholders for funds would compete on a level playing field. That we wouldn’t create mini permanent funds all over the state’s accounting system that would give certain stakeholders preference over funds over other stakeholders.”

Indeed.

Quite interesting then is the administrations silence about the most recent creative end run around the ever less powerful dedicated funds clause when dealing with oil tax credits.

The State of Alaska racked up quite a bit of a bill when it started handing out cash credits for exploration and production of oil and gas. Those cash credit obligations came from both tax systems ACES and SB21. As of calendar year 2018, the state “owed” about a billion dollars in unpaid cash credits ($836.9m as of 1/31/2019).

I say owed here because, you’ll remember, one legislature cannot bind the hand of another meaning funds to the Oil and Gas Tax Credit Fund are subject to appropriation. Every year, the Legislature must decide to appropriate funds there instead of to other services just like almost every other appropriation like education, Medicaid spending, etc.

Mike Barnhill argues against a decades-old fund, the PCE Fund on the grounds that the fund might be dedicated. There is no legal challenge threatening the constitutional standing of the fund, there is no deficiency in how the fund works, it’s indisputable that the fund delivers incredible benefits, and the legislature appropriates the funds annually. Why fix what isn’t broken?

If we were to believe the sudden pearl clutching about dedicated funds, then all funds and expenditures should be considered equally including the nearly $1 billion that was teed up to go out in state bonding authority.

HB331, the “bonds for tax credits” bill is a perfect microcosm for how the legislature and the administration routinely, and knowingly, work to undermine the dedicated funds clause when one priority takes precedence over another in their view. HB331 was meant to more immediately fund the aforementioned billion dollar-ish oil and gas tax credit liability by going out to the bond market and borrowing money. The state would use that borrowed money to pay off banks (to those who thought this money was going to companies….no). Industry and certain legislative members made it clear that the current payment schedule in use was not pumping out cash fast enough.

HB331 would not only get cash to banks quicker and free up credit for industry, but critically, it ensured that an appropriation of a certain amount would be made every year, killing the “subject to appropriation” clause applicable to the current oil and gas tax credit fund appropriations. Once the state signs on the dotted line for bonds, they will pay investors back fully one way or another.

HB331 created a shell corporation, the Alaska Tax Credit Certificate Bond Corporation backed with no assets, to hold the bonds and skirt the constitutional prohibition on dedicated funds. A legislative legal opinion found largely the same thing.

But, based on an old Supreme Court case, Superior Court Judge Pate found that “HB 331 has provisions that allow credit holders to sue the Tax Credit Certificate Corp., but not the State of Alaska, if the bonds aren’t paid through appropriations by the Legislature.” It would be the state, of course, who would pay if the Corporation were sued.

There are currently two appropriations to the Oil and Gas Tax Credit Fund, totaling about $254 million, satisfying the statutory minimum for FY19 and FY20 to be paid out in receipts from the Alaska Industrial Development Export Authority. This is all while the bond sale is presumably ongoing.

With a possible Supreme Court appeal pending on the constitutionality of HB331, Gov. Mike Dunleavy’s administration is ensuring cash continues to flow for industry by appropriating AIDEA funds to industry, while at the same time cutting hundreds of millions of dollars from state government.

With the revelation that companies whose tax certificates total more than $100million have decided not to participate in the system, and the sudden worry over dedicated funds, the Legislature ought to consider paying an affordable statutory minimum payment, attempt to establish an affordable schedule going forward, and cancel the bond sale.

Just as the legislature can choose whatever amount it pleases to fund the formula driven education budget (see: annual underfunding fight), so too can they choose any number to fund the Oil and Gas Tax Credit Fund. Industry can wait just a few more years, much needed revenue will be freed up for literally anything else and the state will avoid a Supreme Court fight. Everyone wins.

This is called a compromise. With Dunleavy’s sudden and strict adherence to the dedicated funds clause, you’d think he’d be the first to argue the point that the Legislature can appropriate whatever it wants and shouldn’t be tied to a predefined number, most certainly not to the bond market. It won’t happen because we all know the Dunleavy administration isn’t going to advocate for slower payment of oil and gas tax credits.

But, at a time when every single sector in the state is hurting except industry, it should be no small request that they wait just a few more years for their cash credits while we attend to not burning schools down. Nothing prevents the legislature paying off the credits sooner when times begin to look up.

Further, if there really is $250 million in spare change at AIDEA that can be dispensed for oil tax credits today, then there shouldn’t be any problem with paying a smaller amount now, and taking the other $150m to cover some of the enormous craters that have now opened up in the state budget.

The public and some in the legislature will rightly argue this is a misprioritization of funds. While not a solution, $150 million would go a very long way to covering the UGF cut to the University, education or Medicaid. Tossed aside in this debate is good accounting and policy considerations which actually support the idea that these payments should be made from UGF, not AIDEA receipts anyway.

If we are to believe the rhetoric that PCE and others must be sacrificed at the altar of the dedicated funds clause, then the logic carries that all similarly offending programs like HB331, should be as well.

The answer, of course, is that none really have to be. HB331, if implemented correctly, had an “affordable” payment schedule and PCE hardly needs a temporary budget director tinkering with its inner workings.

Barnhill is right. The administration shouldn’t be in the game of creating mini permanent funds that give preference to certain stakeholders over others. But actions speak louder than words and this administration’s continuation of the dedicated funds policy for some, while moralizing about its non-effect on others, is currently showing where its priorities lie and which stakeholders they see as more deserving of state funds than others.

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