July marks the beginning of fiscal year 2016; a chance for a new beginning and a fresh start for addressing Alaska’s economic future.
On June 29, I signed into law the budget bills passed by the legislature. For fiscal year 2016, we will spend $1 billion less than we spent last year. This is a 19 percent overall reduction with an average 13.5 percent cut to executive branch agencies, and cuts of over 30 percent in the Department of Commerce and the Governor’s Office. Even with these reductions, we still have to draw $2.7 billion from savings to make up for state revenue losses caused by low oil prices.
Writing a budget to meet our changing circumstances required a team effort. The budget I introduced to the Legislature in January reduced spending by approximately eight percent. It included some painful cuts to education, along with other reductions across state government. As oil prices continued to drop, the legislature wrestled with how to address falling revenues. In the end, they reduced the budget I submitted by an additional $250 million. We’ll be seeing still more cuts as my administration works to find $30 million to fund the contractually negotiated cost of living allowance increase for state workers.
Alaskans are starting to feel the effects of these spending cuts. From Southeast communities that will see reduced ferry service this winter to reduced firefighting and search and rescue capacity in the Interior. You, a family member, or a neighbor may have been laid off recently. Public services are being cut back statewide. We’ve even had to reduce the number of state troopers. This is Alaska’s new reality.
I was aware of this new reality when I made the decision to limit a $700 million appropriation to repurchase oil company tax credits to $500 million. Though the $200 million veto only defers our obligations, and does not change the state’s bottom line, it was clear to me that something needed to be done to ensure this issue is part of our discussion about Alaska’s fiscal situation.
Under Alaska’s oil and gas production tax system, an oil and gas company may receive a credit for a portion of each dollar they spend exploring for or developing our oil and gas resources. The credit is used to reduce the company’s production tax liability to the state. The idea is that a company will have more of an incentive to invest in the state if their investments will result in a lower tax obligation.
For small producers and explorers, the benefit from tax credits is limited because they do not produce enough to have a tax liability against which to apply the credit. To address this problem, the state established a program to repurchase credits issued to companies with little to no oil and gas production.
Since 2007, the state has repurchased approximately $3 billion worth of tax credits with the amount of credits increasing rapidly over the past several years. Last year, we paid out $625 million to repurchase credits from new explorers and producers, with around $700 million expected to be applied for this year. The bulk of the repurchased credits are for operating losses with less than 20 percent going toward exploration.
Money for the repurchase of credits comes from an oil and gas tax credit fund. A formula establishes how much money is appropriated to the fund each year. This year, that amount would be $91 million, far less than the $700 million estimated to be needed as well as the $500 million still in the budget. I reduced the amount to $500 million because that is sufficient to pay all of the tax credit applications currently in process.
As in past years, the Legislature opted to appropriate an open-ended amount that would cover all repurchase requests. This open-ended purchase of oil and gas company tax credits was on a path to becoming the largest expenditure in future state budgets.
If the projections hold and companies earn credits in excess of $500 million, the companies with pending credits will be the first ones reimbursed at the beginning of fiscal year 2017. Alternatively, some of those companies may choose to sell their credits to other companies with a tax liability.
There are other tax credits under the current oil and gas production tax system that lower taxpayers’ obligations. Combined with the repurchase program, we anticipate credits to total nearly $1.1 billion this year.
Unlike most other countries’ oil tax systems, Alaska does not have a pre-approval process or criteria for a company to take advantage of the tax credit incentive programs. With our new fiscal reality, we can no longer afford these extremely generous incentives. Something has to change.
In recent discussions with oil and gas exploration company representatives in Alaska prior to making my decision on the reduction, I was pleased to find them respectful of the gravity of Alaska’s fiscal situation and the difficult spending reductions we are experiencing. I am committed to and have been meeting with each company individually to discuss their exploration plans for the coming year and to work together towards a mutually beneficial solution to the significant cost of the repurchase program.
It is important to note that the affected oil companies are not alone in experiencing the impacts of our declining revenues. Every Alaskan is affected in one way or another.
For a healthy economy, we must continue the conversation we started in Fairbanks last month. While my administration will continue to make budget reductions by looking for efficiencies and opportunities to streamline services, we must also talk about diversifying our revenue. We cannot hope and wait for oil prices to go back up.
It is time we all come to the table to discuss our way forward financially in this great state. Please join us in this journey as together we maximize Alaska’s potential.