ON POLITICS: Lawmakers have few choices but to tap the Permanent Fund to make budget

The latest information from the state Office of Management and Budget confirms what many who watch the Legislature know already, that lawmakers will have few choices but to tap the Permanent Fund’s earnings reserve account next spring to finance the Fiscal Year 2019 budget.

For several years the state has been draining its main savings account, the Constitutional Budget Reserve, but withdrawals to cover the current year deficit, now estimated at $2.49 billion, will deplete the reserve by next July 1, the start of FY 2019.

What’s left is the Permanent Fund’s earning reserve account, which now has about $13 billion. But touching that is the “third rail” of politics, because many Alaskans are hyper-sensitive, believing it a raid on the Permanent Fund.

It’s not really, but it’s easy to think that.

Although it is managed by the Permanent Fund Corp. the earnings reserve is an account that holds earnings from the Fund that have accumulated over the years. The Legislature appropriates funds for the annual Permanent Fund Dividend from the reserve as well as any appropriation of funds back into the principal, to account for inflation.

Permanent Fund earnings, which can amount to $3 billion annually or more, have never been used to help support the state budget, although many argue that the Fund was created back in 1976 as a way to help fund public services when oil revenues run down.

There is, of course, a lot of argument about these days about that.

Meanwhile, the state’s annual deficits appear to be lower, but the final accounting isn’t finished. This year’s $2.49 billion deficit, for Fiscal Year 2018, the current budget year, compares with the deficit of $2.87 billion in FY 2017, which ended in June, according to information provided by Brian Fechter, an analyst at the state OMB.

The state was running $3.5 billion annual deficits but reduced spending has brought these down. The CBR totaled about $2.158 billion on June 30, according to Fechter. That’s down from $4.39 billion from the same time a year earlier, at the end of FY 2017.

David Teal, director of the Legislative Finance Division, an arm of the Legislature, said the smaller deficit may be an illusion, however. “The current year budget has about $300 million in expenditures funded by one-time revenue sources, so if the same level of services are maintained next year those funds will have to come from general fund revenues, which will push up the deficit,” Teal said.

However, assuming the state budget remains at approximately its current level of about $4.1 billion in unrestricted general funds, and oil revenues total $1.6 billion as is currently expected, a $2.5 billion gap is left. If the CBR contains only $2.16 billion, the Legislature will have to find $460 million somewhere.

Teal said the state could borrow to balance the budget by issuing Revenue Anticipation Notes, a kind of short-term bond that is repaid by future revenues.

But this assumes there will be revenues to pay the bonds. “Current law allows for revenue anticipation notes but they must be repaid within a year,” Teal said. There are also borrowing costs – the interest paid.

Fechter said the Legislature could also draw money from other funds. “The state has endowments such as the Power Cost Equalization Fund (which lowers electricity costs in rural communities) and the Higher Education Fund (used to support school aid) and these can be used to cover the budget gap, Fechter said in an e-mail.

“But this is only a one-year band-aid. The programs supported by these funds will either have to be replaced by state general revenues or ended,” he said.

Teal said another problem in draining the CBR is potentially more serious. The state now uses the reserve fund as a cash management tool, to make payroll and pay expenses, covering inevitable, temporary gaps between revenues being received and expenses. “It would be wise to leave at least $2 billion in the CBR as a cash cushion,” Teal said.

Fechter agreed with this. “We do need a cash-management fund. The size of that is somewhat up to interpretation but most experts agree that having enough money for one year of budget is a good benchmark,” he said.

“Many large cash expenditures, such as retirement payments, which amount to $209 million, are made early in the fiscal year while general fund revenues are collected at a more consistent rate throughout the year.”

The state’s annual revenue does not all appear on the first day of the fiscal year, he said. “We need to borrow (even in surplus years) in anticipation of receiving revenue to make ends meet and borrowing from the CBR is a lot less expensive than short-term or commercial (bank) borrowing, which will require an interest payment. It’s not uncommon to borrow $1 billion in the first quarter of the fiscal year.

The earnings reserve of the Permanent Fund could, in theory, serve to help manage cash, but the CBR is set up for that purpose. Teal said it could be complicated to switch to using the earnings reserve for cash management, possibly requiring a legislative appropriation.

It would be an expensive, too, because funds in the CBR are invested short-term in anticipation of withdrawals, while funds in the earnings reserve are invested for longer term. The earnings reserve, like the Permanent Fund itself, achieved a 12 percent return last year, and some of that would be sacrificed if the funds were withdrawn for cash management.

Tim Bradner is co-publisher of the Alaska Legislative Digest. He can be reached at timbradner@pobox.alaska.net