Fitch, Slope leaders weigh in on local revenue proposals

  • Fitch Ratings analysts speculate that Gov. Michael J. Dunleavy's proposed education funding cut, equal to about one-quarter of current General Fund support to districts, could require local governments to make up the shortfall through increased local taxes or by shifting funding away from other programs or projects. (Photo/File/AP)

Gov. Michael J. Dunleavy’s plans to pull back the State of Alaska’s financial support to local governments could hamper the ability of cities and boroughs to finance future projects, according to a Fitch Ratings brief issued Feb. 20.

To resolve the state’s roughly $1.6 billion budget deficit without tax increases or changes to the Permanent Fund dividend program the Dunleavy administration is proposing combination of deep budget cuts and ending several revenue sharing programs with local governments.

One of the largest cuts would be to state education funding. Dunleavy’s budget calls for a $269.4 million cut to the state’s formula funding program to school districts as well as repealing a $30 million one-time, forward-funded appropriation boost to districts passed last year for the 2020 fiscal year.

Fitch analysts speculate that the education cut, equal to about one-quarter of current General Fund support to districts, could require local governments to make up the shortfall through increased local taxes or by shifting funding away from other programs or projects.

The administration is also seeking a statutory repeal of the state’s program to reimburse districts for a large portion of their school construction bond debt obligations. Doing so would save the state roughly $100 million per year, according to the Office of Management and Budget.

In 2015 the state put a five-year moratorium on sharing the burden of school construction bonds with local governments; the latest proposal would cut state aid for bonds sold prior to 2015. The moratorium is set to end in July 2020 when the state would resume funding 40-50 percent of school bond debts depending on the size of a given community.

“The loss of school bond reimbursement would prompt immediate increases in debt service property tax rates that support schools’ unlimited tax general obligation (GO) bonds,” Fitch states. “Higher debt service tax rates could make it more difficult to garner public support for tax increases that would be needed to offset losses in operating revenues and could decrease public appetite for school bonds to meet ongoing capital needs.”

A Feb. 21 Legislative Research Division analysis concludes that the Municipality of Anchorage would have to increase property tax rates by 25 percent to generate enough additional local funding to offset the proposed state education reductions.

Many legislators critical of parts or all of Dunleavy’s budget have characterized it as a cost-shift from the state to cities and boroughs

The rating agency also notes the cumulative cuts could further strain the state’s economy, particularly in rural areas where government is often the largest employer.

Additionally, the administration’s plan in Senate Bill 57 to repeal a law allowing cities and boroughs to assess oil and gas property taxes on exploration and production facilities would pull another roughly $420 million per year from local jurisdictions into state coffers to reduce the deficit, according to fiscal notes accompanying the legislation.

The vast majority of that money, about $372 million in 2018, would come from the North Slope Borough. The City of Valdez — with the end of the Trans-Alaska Pipeline System and Alyeska Pipeline Service Co.’s marine shipping terminal — the Kenai Peninsula and Fairbanks North Star boroughs would absorb most of the remaining reductions.

While the state conducts oil and gas property tax assessments, local governments are able to apply their mill rates on the state’s assessments to collect their portion of oil and gas property taxes. Companies then use the local tax payments as credits against the state’s 20-mill oil and gas property tax rate.

The oil and gas property tax revenue accounted for 86 percent of the North Slope Borough’s total revenue in 2018, according to Fitch, which currently gives the borough an “AA” credit rating with a stable outlook.

“If passed, the change in tax law would likely prompt a significant downgrade in the rating, absent offsetting policy actions to provide alternative revenues to the borough,” Fitch states, while also noting the North Slope Borough had $162.7 million in general obligation debt at the end of the 2018 fiscal year.

A spokesman for Dunleavy did not respond to questions about the property tax plan in time for this story, but OMB officials have said the North Slope specifically could rely on its $708 million endowment fund and prospective federal grants from oil development in the National Petroleum Reserve-Alaska to offset the tax revenue loss.

According to Fitch, it’s unlikely the borough would be able to cut expenses enough for other revenue streams to offset the potential loss.

The North Slope Borough and the usually quiet Arctic Slope Regional Corp. put out a joint statement Feb. 21 rejecting the administration’s oil and gas property tax plan.

ASRC President Rex Rock Sr. said the tax stream has supported “everything from public safety in our communities to even reliable power and heat” over more than 40 years.

“These are services, let’s not forget, that are not provided by the state,” Rock added. “Trying to balance the budget on the backs of the Iñupiat people across the Arctic Slope is a wrong-sided attack on our region.”

NSB Mayor Harry Brower Jr. said borough residents have generally supported responsible resource development because of the economic benefits it brings them.

“As written, Senate Bill 57 makes us question that support. Is this what the governor is intending to do with this legislation — pit the Iñupiaq people of the Slope against industry?” Brower questioned.

According to Fitch, the rating agency will follow the progress of SB 57 and affected local government ratings changes could be made if it appears likely to pass.

Elwood Brehmer can be reached at [email protected].

02/25/2019 - 11:31am