Walker looks to Legislature to finally use Fund to fix budget gap

  • Alaska Gov. Bill Walker is disappointed the Legislature still hasn’t passed a solution to the state’s budget deficit that has cost $14 billion in savings over the past several years. He’s again proposing to pull money from the Permanent Fund Earnings Reserve in 2018 and pay a dividend to residents of about $1,200. (Photo/Becky Bohrer/AP)

A paramount year is shaping up for Alaska.

The state is on the precipice of turning to the Permanent Fund for government revenue in addition to its previous sole outlays for dividend payments.

The fate of the Alaska LNG Project will likely be known by the year’s end.

Another battle is brewing between conservation and development interests, this time over salmon habitat protections.

And it’s an election year.

Gov. Bill Walker discussed a few of the year’s pressing topics in a Dec. 22 interview with the Journal.

For the first time, Walker’s fiscal year 2019 budget proposal released Dec. 15 includes a 5.25 percent of market value, or POMV, draw from the Earnings Reserve of the Permanent Fund to fill the lion’s share of the deficit expected to be roughly $2.5 billion.

The POMV provision is written as a compromise to the Earnings Reserve draw formulas in versions of Senate Bill 26 from the House and Senate, which are awaiting a conference committee resolution after being approved by the bodies last spring, according to Walker.

The governor said he is comfortable using the one-time draw language in the operating budget bill as a fallback funding mechanism in the event the Legislature does not approve a long-term formula draw.

“What we did is about the best we could get out of (SB) 26,” Walker said, noting the POMV structure avoids the undisciplined “ad hoc” draw from the Fund that he has persistently warned against.

The 5.25 percent draw on the value of the Fund reflects the Senate’s larger draw amount (the House used 4.75 percent), while the $818 million dividend appropriation from it — enough for about $1,200 per Alaskan — is closer to the PFD approved by the House.

“We’re meeting the intent of what we had introduced and hopefully it will be wrapped up this year,” he added.

The Constitutional Budget Reserve is on course to hold about $2.6 billion on June 30 at the end of fiscal year 2018, according to the Office of Management and Budget. That could be enough to cover another deficit year but it would leave the state with no financial wiggle room.

And with little argument from legislators that the state needs at least $1 billion in accessible savings for cash management and emergencies, it appears the Permanent Fund will finally be employed to pay for part of government in the coming legislative session, something Walker has been pushing for since late 2015.

Walker said he’s saddened the state has had to spend roughly $14 billion from its once bountiful savings accounts to cover budget deficits since 2013 while politics has delayed what is becoming inevitable.

Echoing numerous Alaska economists, he said he believes the length and severity of the state’s recession has been self-inflicted by inaction from the Legislature.

The state’s credit rating has also been downgraded several times from the once top AAA to now the third-lowest among all states.

“I had certainly hoped that early on they would recognize that we need to make adjustments and be done with it. In my opinion we don’t have to be where we are,” Walker said.

He continued to say that waiting to utilize the Fund as a revenue source has “created this fear of uncertainty that is felt all the way from car dealerships to homebuyers and on. That’s the part that’s disappointing to me. We didn’t have to be in this recession as long as we have been.”

Alaska is starting the third calendar year of the current recession with the highest unemployment rate in the country at 7.2 percent, according to the state Labor Department.

The lack of savings could also end up impacting how much, if any, the state can directly invest in the $43 billion Alaska LNG Project.

That’s because under the Alaska Gasline Development Corp.’s financing outline for the massive gasline project, about 75 percent of the cost would be funded with debt underwritten by customer contracts. The remaining 25 percent, or about $11 billion, would be filled by equity investors, which could include the State of Alaska.

AGDC projects the state would take in about $250 million per year from the project without an equity investment but that’s a much smaller revenue stream than the multibillion dollars per year of revenue to state coffers once envisioned.

However, that does not account for the layered benefits the project could bring to the state’s economy aside from basic government revenue such as jobs and cheaper energy.

Without savings to rely on, there does not seem to be a direct way for the state to buy into the project.

Walker said it’s probably a little early in the project’s development to single out a way for the state to invest in Alaska LNG as a final investment decision is not expected for about a year, but said the state could sell its equity share or use debt to fund it.

“It really will be defined as the project is put together,” he said. “It depends on where we are financially as a state.”

That said, the governor also noted the state has public retirement funds of more than $25 billion that could find the project to be a sound investment.

Having the state invest in some fashion could take risk out of the project and help assure other potential investors that it will be seen through, indirectly helping its economics, according to Walker.

Yet, he does not expect state investment managers to accept a lower return from Alaska LNG just to get the state’s participation.

“If they’re going to get a regulated return somewhere in the Lower 48 and they can get the same return in Alaska I would hope they would bet on their home team a bit,” Walker said.

And while interested groups on both sides wait to see how the Alaska Supreme Court will handle the Stand for Salmon ballot initiative, Walker said he doesn’t like the idea of using the initiative process, which he described as “a fairly blunt instrument,” to make policy changes.

The initiative is aimed at strengthening state salmon habitat protections and giving the Department of Fish and Game more authority to limit the impacts development projects could have on that habitat.

Lt. Gov. Byron Mallott originally rejected the proposed initiative based on an opinion from the Department of Law that it would direct state water resources to fish habitat, taking that resource allocation authority away from the Legislature and thus violate the state constitution.

After a successful appeal by the petitioners got Mallott’s ruling overturned in Superior Court in October, the state subsequently appealed to the Supreme Court, which has not revealed when it will handle the matter.

If the high court upholds the lower court ruling, it could appear on the upcoming 2018 ballot. Sponsors are currently gathering signatures to qualify for the ballot.

Walker said the initiative is too broad in its scope and it could hamper nearly every area of project development in the state, which would include the Alaska LNG Project.

“I think when you’re making definitions that impact development of projects in Alaska and you do that through the initiative process — I was very concerned about that,” he said.

“I would like there to be a discussion back and forth; hearings in the appropriate hearing rooms in Juneau and various folks being able to weigh in.”

House Bill 199, currently in the House Fisheries Committee, mirrors the initiative language, but Democrat House Speaker Bryce Edgmon has said he does not see it passing this year, or its current form, given the consternation the initiative has caused.

Elwood Brehmer can be reached at [email protected].

01/03/2018 - 10:28am