News from Patrick Flynn

It’s been a few years since I last visited Juneau, Alaska’s capital city, and a variety of factors, not least of which that I’ve co-chaired the Assembly’s legislative committee for six years, inspired a return last week.

In walking the capitol halls and visiting with legislators and staff from all over Alaska I was struck by the similarities between current times and years past, particularly in the mid-90’s when I worked there.  (And, in case you’re wondering, I met with folks from across the political spectrum – just like I do at home!)  Indeed, the issues most likely to immediately affect Anchorage have echoes from the past.  To wit:

Municipal assistance:

As discussed on this blog previously, municipal assistance is a mechanism by which the state shares oil wealth with local governments.  Declining state revenues led to the disappearance of this program in the past and, with the revenue rebound in the last decade, a recurrence.  Oil revenues are once again in decline and many legislators expressed the belief that it was simply a matter of when, not if, the phasing out of this support for local government would occur.

Education funding:

Most legislators considered it likely that we’ll see some sort of increase to education funding, probably to the Base Student Allocation (BSA), thereby reducing level of cuts facing school districts this year.  What’s less clear is how, or if, the legislature will address local funding caps, which limit how much revenue municipal governments can contribute to their local school district.  Anchorage is currently funding our school district at the state-imposed cap (though there are a couple items ASD pays for that the MOA could take on to free up money for other things) so an increase in said cap could allow more local tax dollars to flow to schools.

Side note 1: my understanding of the public policy behind caps on local contributions is that it seeks to maintain parity between school districts.  To explain, Alaska has municipal governments with high-value industrial properties and relatively low populations.  In theory, these local governments could tax at higher levels and put more money into their schools so that students would have advantages students elsewhere would not enjoy.

Side note 2: it is also not clear whether an increase to the BSA, or some other education funding mechanism, will require municipal governments to provide a local match.

Unfunded PERS liability, part 1:

This is a little bit complicated but here’s the story in a nutshell.  The Public Employee Retirement System, the pension program for many (but not all) state and local government employees, does not have enough money to cover its anticipated expenses.  Reasons include bad actuarial advice (the state sued, and the actuaries settled to pay for a portion of the problem), the market crash several years back and other factors.  In order to address the matter the state and municipal governments have been paying down that liability.  The current formula has the state, which runs PERS, covering the majority of the cost with local entities (municipalities and school districts) paying 22% of their PERS-related salary costs.

Similar to the legislative discussion of reducing municipal assistance there is talk of increasing local “contributions” toward the unfunded liability, perhaps to as high as 24%.  For Anchorage, that 2% increase would cost $5.6 million this year alone.

Unfunded PERS liability, part 2:

The best way to aggressively address the above problem would be to use some cash reserves to pay down the liability, which would reduce annual costs and shorten the number of years we’d be paying to make PERS whole.  Senator Johnny Ellis first floated the idea a couple years back and Governor Parnell has a similar proposal on the table this year.  Beyond the fact that this could free up state and local revenues in the future, here’s why that matters to Anchorage:

We (the municipality) own enterprises (utilities) that have employees enrolled in PERS.  Of particular note are Anchorage Water & Wastewater Utility (AWWU) and Municipal Light & Power (ML&P).  Rates for their services are heavily driven by their cost of capital as they replace and rehabilitate infrastructure such as generators, transmission lines, treatment facilities, water mains and the like.

New Government Accounting Standards Board (GASB) requirements will force AWWU and ML&P to account for their entire PERS liability, regardless of the state’s existing efforts to assist with the problem.  The effect can, and most likely will, result in a downgrade of the bond ratings for these entities.  This means they will pay more for debt needed to maintain operations and, as a consequence, increase rates to cover those costs.  Long story short, failure to quickly address the PERS liability will result in higher utility bills for Anchorage residents.

What it all means:

The unifying factor of these issues is their effect on Anchorage’s budget; here’s why:

When the Assembly passed the 2014 municipal budget we were somewhat under Anchorage’s tax cap (here’s a reminder of how that works).  That number fluctuates as we incorporate various items and, prior to heading to Juneau, I was of the understanding we were about $4 million under.  I have subsequently learned we’re only about $1 million under the cap.

The potential changes to municipal assistance, education funding and local contributions to PERS under consideration as the legislature approaches its final month of the 2014 session are in flux.  Depending on how state lawmakers address those issues we could see scenarios where Anchorage would have to increase taxes to meet state-imposed mandates and/or cut other services to free up revenue to meet those same demands.

Complicating all this is the fact that we have to set our mill levy in April, just as the legislature is wrapping up its business and before we fully understand the effects of their decisions.  Long story short, I’m glad I made the journey and hope I helped state lawmakers understand the gravity of their deliberations.

Regards,

Patrick