More details on the state budget

A stalemate in organization of the state House is likely to delay the Legislature’s ability to get down to business when it convenes Jan. 9 in Juneau.

Negotiations continue among newly elected Republicans, Democrats and three non-affiliated independents, but it now appears the 40-member state House is split 20-20 among Democrats, Independents who are likely to side with them, and one Republican who announced Wednesday that she would join with them.

The new development is that Rep. Louise Stutes, Republican of Kodiak, said she will again join a coalition of Democrats and independents in the House as she did in 2018, when the House was also almost evenly-split.

In a statement, Stutes said she is a lifelong Republican but that she must put the interests of her constituents in Kodiak and Cordova, who are heavily engaged in commercial fishing, against any party affiliation.

She fears a Republican House majority will tilt toward sports fish groups on issues contrary to the interests of communities she represents.

Stutes’ decision was anticipated and it may encourage other Republicans to cross party lines. A coalition-type organization now seems likely to emerge in the House as it did in 2018.

With the addition of Stutes, the Democrat-led group would have 20 votes against 20 seats controlled by Republicans absent the Kodiak representative.

It seems virtually certain that two of the three independents, Reps. Bryce Edgmon, I-Dillingham, the current Speaker of the House, and Dan Ortiz, I-Ketchikan, will again align with Democrats, as they did in 2018.

Newly elected Josiah Patkotak, independent of Utqiagvik (formerly Barrow) has announced he will align with fellow rural legislators, like Rep. Neal Foster, who are Democrats.

Republicans lost one seat they had counted on when Rep. Lance Pruitt, R-Anchorage, who is now House Minority Leader, was defeated by a razor-thin margin after the counting of absentee ballots. Pruit has filed a lawsuit seeking the overturn the result, arguing there were irregularities in the election process.

However, even if a majority of 21 prevails, a one-vote is not a stable margin for organizing the House because there are already mavericks on the Republican side, like Rep. David Eastman, R-Wasilla, and the Democrats have their own internal divisions including liberal progressives from Anchorage’s urban districts.

Meanwhile, the 20-member state Senate has its own divisions. There are 13 Republicans among returning senators and some newly elected against seven Democrats, but there are four senators who might not align with nine Republicans over differences on state fiscal issues, particularly a proposed larger Permanent Fund Dividend.

If that happens, a coalition could also control the senate.

How all this will play out is uncertain but what is known is that the Legislature can’t do business until these matters are settled.

Unless there is a clear majority of at least 21 in the House and 11 in the Senate, the presiding officers and committees can’t be formed. No official business can get done until those things happened.

This could delay work on essential business, particularly the state budget. The same thing happened in 2018 when an extended delay in organizing the House led legislators to be late getting to work on spending and fiscal issues.

Budget matters will be even more urgent for the legislative session convening in January. Revenues are likely to be down again in Fiscal Year 2022, the budget for which has to be prepared next spring, and spending for many agencies and programs will be up, part of that due to impacts of the COVID-19 virus.

The Department of Revenue will release forecast of state income for FY 2012 any day now, and for certain before Dec. 15. That’s the day Gov. Mike Dunleavy will release his proposed FY 2022 budget.

What’s causing uncertainty is that state savings, except for the Permanent Fund, are essentially depleted. There’s also a wild card in whether there will be a larger Permanent Fund Dividend or any dividend at all.

If there is no dividend paid in 2021 the Legislature may be able to pass a budget that is balanced, but just barely. If a modest PFD is paid similar to one distributed this year, the state will have a $902 million deficit, according to estimates of the bipartisan Legislative Finance Division.

If a larger dividend is paid, such as one calculated according to a formula in state law, the deficit will be $2.42 billion, the finance division has calculated.

The problem legislators will have to wrestle with is how to pay these deficits if a dividend is paid. A complication is that a group of newly elected incoming lawmakers, and some current legislators who are reelected, have signed a pledge for a “full” dividend, or one paid according to the statute.

To pay the deficits lawmakers will have two choices, both of them unpleasant. One will be to cut spending to make enough money available for the PFD. The other would be to take the money from the Permanent Fund’s earnings reserve.

If $2.4 billion in spending cuts are authorized, which is more than half of the state general fund operating budget, the only programs where cuts can be large enough to make a difference would be state funding for schools and state money supporting the University of Alaska.

Cutting funds for schools could gain $1.2 billion for the PFD but it would just pass the buck to local taxpayers because municipalities would have to fund all of their school district costs rather than part of them, thanks to the state support.

Cutting state funds from the university would force the system to shut down. With no higher education available Alaska young people will flock to out-of-state colleges, and most will not return.

Cutting other programs like the state troopers or prisons would endanger public safety, and big cuts in state health and social service spending will be difficult to achieve due to federal rules and the ongoing COVID-19 emergency.

Another option that is easier politically is to just take money needed for the dividend from the Permanent Fund’s earnings reserve account.

Much of the Fund, its principle, is protected by a constitutional ban on spending. But earnings from invested assets in the principal flow into an earnings account that can be appropriated.

The earnings reserve now provides a payment of about $3 billion yearly to help support the state budget, through a Percent-of-Market-Value, or POMV, mechanism like that used by large university endowments.

The POMV is capped at about 5% of the Fund’s total value, which is over $60 billion. If more money is taken to pay PFDs the annual withdrawal would increase to 6% under some calculations.

That would mean more money is taken from the earnings account than its earnings or the income to it paid from the principle of the Fund. If this were done for several years it would deplete the earnings reserve and reduce the annual POMV payment for support of the budget.