Buckling down in face of budget deficit
State legislators are back in Juneau for the 2016 legislative session, and they’re back facing a huge budget deficit.
Some legislative leaders say they’re ready to step up to the plate to deal with it.
Three Republican senators — Senate President Kevin Meyer, Finance Co-chair Anna MacKinnon and Resources Chair Cathy Giessel — say some combination of budget cuts and new revenues such as use of Permanent Fund earnings for this year are needed to solve the problem.
Cuts must come first, all three say. But cuts alone won’t do the job.
House leaders have been quiet about the problem so far.
“We can’t cut our way out of this. Even if we were to cut $1 billion, we’d still have a multi-billion-dollar deficit, so cuts aren’t the total answer,” said Sen. Cathy Giessel, R-Anchorage, who chairs the Senate Resources Committee.
Giessel’s comments came during a briefing of the Alaska Support Industry Alliance, a contractor group, on Jan. 14.
MacKinnon voiced similar views in a talk to constituents at the Eagle River-Chugiak Chamber of Commerce Jan. 13. The Permanent Fund should be managed like an endowment, she said, to make more funds available.
“This could bring us $900 million instantly,” she said, and make a big dent in the deficit.
Giessel said the Senate Majority will target $1 billion in cuts this year, a goal similar to last year that was mostly achieved (the budget was reduced by about $750 million).
But cuts should also be matched with some use of Permanent Fund earnings this year.
“We have to do this a piece at a time, in a predictable manner that will preserve stability. To make radical changes too suddenly would not be good,” Giessel told the Alliance.
Only after government is “right-sized” should taxes be considered, she said.
Worries about reelection later this may be causing many lawmakers to be timid in facing the issue, but a new poll by the Rasmuson Foundation released Jan. 20 indicates legislators may face voters’ wrath if they fail to act on the deficit.
Of those surveyed, 83 percent said they are “less likely to support” incumbent lawmakers who fail to take action on the budget shortfall; 75 percent say they are more likely to support legislators who act, or at least that the action would have no effect on support for reelection.
As to how to solve the problem, 65 percent feel a combination of budget cuts and new revenue are needed, compared with 30 percent who favor budget cuts only.
As to how much should be cut, 55 percent said they would support a reduction of 10 percent of the state operating budget, or about $500 million. The state’s operating budget is now about $4.8 billion. The poll sampled opinions of 812 voters between Jan. 3 and Jan. 10.
Meanwhile, oil prices keep dropping. Two years ago the state received $5 billion in unrestricted general fund revenues, 90 percent from oil. But at $30 per barrel oil prices, or lower, $1.5 million in unrestricted state revenues may be lucky, Giessel told the Alliance in her briefing. On Jan. 20, oil dropped further to less than $27 per barrel.
Gov. Bill Walker has put forth a plan that mixes modest cuts and new revenues, and that balances the budget by 2019. Some legislators, again mostly senators, say they are interested in Walker’s plan, or at least parts of it. Sen. Lesil McGuire, R-Anchorage, introduced Senate Bill 114 last year, a bill enacting fiscal reforms with concepts similar to Walker’s ideas.
Scott Goldsmith, a University of Alaska economist, has put forth another variation in a “sustainable budget” plan. All proposals involve a mixture of budget reductions and new revenues.
Sen. Pete Kelly, R-Fairbanks, who co-chairs the Senate Finance Committee with MacKinnon, said the public still believes the state budget is too large despite $350 million cut out of the operating budget last year.
“Last year we reduced spending for the first time and by about $800 million, $350 million from operating and the rest from capital spending. We made government smaller for the first time,” Kelly said at the Senate Majority briefing. “We didn’t see a tremendous impact from this, however, no significant response,” in the curtailment of services. “That tells me it’s probably still too fat.
“I think we have to do one more round of cuts before we start talking about the Permanent Fund dividend or new taxes. I hear people talking about a plan for ‘sustaining’ the government but it’s usually from people who support the government as it is now.”
This 2016 session faces complications in reducing the budget, however. The House Minority has served notice that it has no intention of giving up its leverage with votes needed for a three-quarters approval in the House on a cash withdrawal from the Constitutional Budget Reserve, or CBR, to cover the deficit.
That departs from one key part of the governor’s plan, which is to transfer funds remaining in the CBR to the Permanent Fund’s earnings reserve account, from which appropriations can be made, as a way of helping “bulk up” the Permanent Fund to generate revenue for the state.
House Minority Leader Chris Tuck said Jan. 19 this isn’t a good idea.
“We shouldn’t make these funds too easy to reach,” he said.
The Earnings Reserve can be tapped by a simple majority vote by lawmakers while a CBR draw requires a three-quarters vote.
The Constitutional requirement for a super-majority to tap the CBR is a useful mechanism that requires that there be consensus in the Legislature, Tuck said.
It can also hand leverage to a small group of lawmakers, however. Last year the House Minority used its muscle to get additional school funding and state employee pay raises from the Legislature’s Republican Majority. The dispute put the 2015 session into overtime that ran through two special sessions and a near-shutdown of the state government.
It’s unclear what budget priorities the House Minority may settle on this year but education funding is likely to be among them again. The first shot across the bow in a possible 2016 school-funding fight was fired by MacKinnon in her talk at the Eagle River chamber.
A scheduled increase in the Base Student Allocation, a formula that guides state funding for local schools, is set for this year, MacKinnon said, and the senator has a problem with that given the current fiscal situation.
Giessel identified another hot-button school issue in the 10-student minimum size for state support to rural schools. The Republican Majority may push a plan to raise the minimum to 25 students.
She said she has visited small community one-room schools in her previous senate district, and understands how a school is at the heart of a small community.
“I know this is hard, but can we really afford to support schools with 10 students?” she said.
MacKinnon said education funding has grown fast in recent years to the point that it is now the single biggest driver in the state budget, outpacing health and social services.
Medicaid reform is on the agenda this year, MacKinnon said, meaning a systematic look at the program to reduce its costs. She doesn’t expect a drive to repeal the governor’s expansion of Medicaid, however.
“I’m very aware of the benefits the expansion has brought for many people, but the system needs reform,” she said at the Eagle River-Chugiak Chamber.
MacKinnon has worked over the summer with Rep. Liz Vasquez, R-Anchorage, and officials from the Department of Health and Social Services, on ways of solving problems in Medcaid.
“It will be one of our top priorities,” MacKinnon said at a Senate Majority briefing Jan. 19.
There are a lot of basic policy decisions made in past years by the Legislature that have now resulted in the growth of spending in “formula” programs like Medicaid, and these need to be reviewed to reduce costs, MacKinnon told the chamber.
On other topics, Giessel said in her briefing to the Alliance that the governor’s plan to replace state contributions to pension liability with bonds will be scrutinized.
“There are some of us who believe this is just kicking the can down the road,” on the liability, she told the Alliance.
“We’ll be having a robust discussion on this,” in the Senate, she said.
On a topic Giessel is closely involved with — oil and gas incentive tax credits — the senator said a flat repeal of the tax credits is unwise, because it would impair future oil production.
“Totally eliminating these is like decimating your kindergarten class,” in education, she said.
The governor proposes to replace much of the tax credit program with loans from the Alaska Industrial Development and Export Authority, the state’s development financing corporation, but Giessel isn’t sure about this, she said.
“This may be the wrong way to do this, because it doesn’t bring in fresh money from out of state,” which banks and other lending institutions can provide, she said.
With the tax credits in effect companies could borrow from commercial banks against the credit, as a form of interim financing.
Having AIDEA make loans just uses up state lending resources rather than bringing in new money, Giessel said.
Some in industry have suggested that loan guarantees made by AIDEA to backstop commercial loans could accomplish part of what the governor intends, but changes in state law may be necessary.
Giessel also said changes may be needed that are not to the liking of the petroleum industry.
“Cook Inlet oil pays zero production tax,” a legacy policy from prior Legislatures,” she said. “This (exemption) is due to expire in 2022. We are discussing allowing it to expire in 2018 instead.”
She also said the minimum tax in the state production tax law applying to North Slope production needs to be “hardened,” a proposal also put forth by the governor. The current tax law has a minimum tax paid when oil prices slide below a certain point, which they have. However, there are circumstances involving net operating loss tax credits that now allow producers to pay less than he minimum. Walker proposes to end this.
Bradner is a correspondent for the Journal. He can be reached at [email protected].