Fiscal crises again on the horizon as legislators return to Juneau

State legislators are packed up and heading to the state capital in Juneau for what’s likely to be another meat-grinder legislative session. The outlook is for little action likely on the big issue – the state’s financial problem.

All sides are also maneuvering in their positions with eyes on the August and November elections.

Gov. Bill Walker and Lt. Gov. Byron Mallott are running for reelection as independents, and so far they have no Democratic opponents. However, they do have a gaggle of Republican contenders including the Mat-Su Valley’s state Sen. Mike Dunleavy, former senator and Senate President Charlie Huggins, former House Speaker Mike Chennault of Nikiski, and Anchorage businessman Scott Hawkins.

All state representatives are up for reelection. They must run every two years. State senators serve four-year terms, so half of the 20-member Senate will be before voters next fall.

The fiscal gap remains as the most troubling and politically sensitive problem for the state, and no politician like to raise taxes on constituents, particularly in an election year.

Walker and leaders of the state House, which is controlled by Democrats, are pushing for a comprehensive fiscal plan that includes budget cuts, use of Permanent Fund earnings, a “cap” on the annual Permanent Fund dividend, and a broad-based tax on citizens, which the state has not had since the early 1980s.

The Senate, led by Republicans, agrees with most parts of this plan including keeping the budget stable, using Permanent Fund earnings and capping the PFD, but without the tax.

Last year, a plan for a state income tax was put forth by the state House, which is led by Democrats, only to crash and burn in the Senate, which is led by Republicans. Later in the year, in one of many special sessions, the governor put forth a more moderate idea, an “employment” or wage tax similar to the annual lump-sum “school tax” paid by Alaskans in the years after statehood, which was repealed after North Slope oil flowed in 1977. The Legislature, exhausted after extended special sessions, did not act on Walker’s proposal.

The governor has advanced the idea again for the 2018 session and has also tied a proposal for an $800 million construction program for deferred maintenance in schools, university, and state buildings to an equal amount of new revenues brought in by passage of the employment tax.

House Speaker Bryce Edgmon said the income tax is now dead as far as the House Majority is concerned. “We see little support for it,” he said. The House does support some kind of broad-based tax as part of an overall fiscal plan, Edgmon told the Resource Development Council Jan. 4, in a briefing.

However, the Senate Majority remains cool to the idea of taxes, in any form, Senate President Pete Kelly told the RDC in the same meeting. “We see no reason to take money from the private sector just to support government. The private sector is where wealth is created,” Kelly told the RDC.

The problem is that Alaska has been running multi-billion-dollar annual deficits since oil prices plummeted in 2015. Luckily the state has cash reserves on hand – the Permanent Fund has not been touched – but the ready cash reserves are being drained. Since 2015, the state has drawn $15 billion from cash reserves to cover the budget.

This spring, the Legislature will pass a budget that drains remaining money from the Constitutional Budget Reserve, the state’s main cash reserve. To achieve a balanced budget, which the state Constitution requires, lawmakers will have to appropriate money from the Permanent Fund’s earnings reserve account, which holds about $13 billion.

While the principal of the Permanent Fund cannot be appropriated, the earnings can be, although over the years they have been spent only for the annual Permanent Fund Dividend and “inflation proofing” payments of the earnings back into the principle of the Fund.

However, for upcoming Fiscal Year 2019, the budget year that begins next July 1, legislators will face a difficult choice: either cut the budget further or tap the earnings reserve to keep the budget at its current level.

Talking with RDC members Jan. 4, Edgmon and Kelly spelled out key differences between the House and Senate approaches.

Kelly said the Senate’s position is that the House and Senate are in basic agreement on the fiscal solution, absent a new tax. With oil production and oil prices gradually rising and the economic recession close to bottoming out, now is not the time to hit the economy with a new tax.

If the state follows a plan of using some Fund earnings, capping the dividend and keeping spending at FY 2018 levels, the deficit will be gone by 2023, Kelly told the RDC.

Edgmon said there are still a lot of economic uncertainties and that the Senate’s budget plan leaves no money for increases of the bare-bones state capital budget, flexibility for contingencies on unexpected events, and built-in budget pressures like rising health costs.

Realistically, a larger capital budget is needed, as rising health costs will be difficult to control, and the outlook is for continued deficits, Edgmon told the RDC. It would be prudent to get a new tax on the books now, he said, because it will take at least three years to set up the administrative machinery and get money coming in.

Tim Bradner is editor of Bradners’ Alaska Legislative Digest