A surprise decision by Alaska utility regulators to block Anchorage from collecting millions of dollars from its electric utility has created the prospect of an $11 million city budget shortfall for Anchorage in 2016, officials said this week.
While the shortfall isn't a sure thing yet, city budget director Lance Wilber sent an email this week asking department heads to start making preparations. He said departments have been asked to cut some costs by the end of this year and propose larger-scale reductions for next year.
"It's an initial conservative approach to make sure that we have some options to work with," Wilber said in a Thursday interview. "We are in a tough fiscal situation, we will be in a tough fiscal situation, so we need to be smart about our choices."
An anticipated $4 million reduction in state revenue sharing for Anchorage in 2016 is being compounded by a decision in July by the Regulatory Commission of Alaska that the city is no longer entitled to collect millions of dollars from its wholly owned utility, Municipal Light & Power. This year, the dividend payment to the city was $7 million. The loss of that money and the projected decline in revenue sharing brings the expected shortfall to $11 million.
The Legislature could decide to increase or decrease revenue sharing payments during the 2016 session in Juneau, but Wilber said officials want to plan for the reduction.
Wilber said he's instructed departments to cut budgets by a half-percent by the end of 2015 and propose 2 percent cuts for the 2016 budget. In his email, Wilber wrote that the larger reduction proposal is "for consideration only -- no decisions regarding reduction have been made or will be made without a thorough evaluation of the impacts."
Wilber said he's not giving specific direction to department heads on how to meet the targets. In his letter, he told department heads to talk to city executives if the more immediate reductions are expected to "significantly" affect service.
Dividend going away
On July 16, the Regulatory Commission of Alaska ordered ML&P to stop paying the municipality a yearly dividend. As owner and investor in the utility, the municipality was receiving a share of the profits from the ML&P's operations each year. The dividend was based on the city's investments.
This year's payment was $7 million, the highest dividend in the utility's history.
But the commission wants the utility to cease dividend payments in part because it believes the utility is facing increased debt associated with its share of the Southcentral Power Project -- a 183-megawatt plant owned by ML&P and Chugach Electric Association that went online in 2013.
In its order to ML&P, the regulatory commission said, "it is simply not fair for the utility to continue dividends given the magnitude of its capital spending and decreasing equity position."
Since 2005 -- when the RCA reinstated the dividend after it was suspended in 1987 by the regulator's predecessor, the Alaska Public Utilities Commission -- ML&P has paid the municipality of Anchorage more than $60 million in dividends.
"Our dividend is being paid to the city to reward them for making the investment in the utility in the first place," said Mark Johnston, ML&P's acting general manager and chief financial officer.
The order to halt dividend payments came after a flurry of appeals that began over a 2013 rate increase request by ML&P to cover growing costs associated with its share of the power plant it shares with Chugach Electric Association.
That rate increase request of 31.5 percent was appealed by several of ML&P's major customers, including Providence Health & Services, which operates Providence Medical Center, and the Federal Executive Agencies, which handles the business of military bases. The Alaska Attorney General's Office also participated in the appeal.
The RCA approved an interim rate increase of 24.32 percent -- one that could be refunded if the rate calculations didn't pan out. It was during hearings and investigations over that rate increase that the RCA considered ML&P's dividend payment to the city.
Providence Health Systems has argued that ML&P shouldn't continue paying the city dividends from profits while at the same time asking for higher rates from customers to pay for its own costs. On July 16, when the RCA made its interim rate increase final, it ruled that the utility must suspend dividend payments to the city until its debt-to-equity-ratio improves.
ML&P is appealing the regulatory commission's decision.
Budget planning starts
In warning city departments about the potential for an $11 million shortfall, Wilber, who was just recently promoted from his job as city transit director, said he's letting individual departments decide how to meet the target reductions. He also said the administration is encouraging departments to come up with ideas for generating revenue.
He said those ideas are meant to "help us start the conversations about … where would those direct changes in service be affected."
City departments have until Aug. 14 to devise plans for making cuts. At that point, Mayor Ethan Berkowitz and his executive team will review the ideas and decide a plan, Wilber said. The administration's final budget is to be submitted to the Assembly the first week of October.
Last summer, the administration of Mayor Dan Sullivan, predicting a roughly $7 million shortfall, told departments to look for savings in ways that didn't include layoffs. The Sullivan administration ultimately reported a $7 million surplus from 2014.
Wilber said there's not panic about the current fiscal climate, but the Berkowitz administration is "trying to get our heads around it."
"It's not insurmountable, (but) that doesn't mean it's not insignificant," Wilber said.
Correction: An earlier version of this story incorrectly stated the year in which the $7 million ML&P dividend was paid to the city. The correct year is 2015, not last year.