Alaska’s budget fights resemble Lower 48 fiscal struggles
States such as Illinois and New Jersey are often used as a punchline for their historic money management troubles, but a decade of deficits has Alaska headed down a similar path, according to fiscal policy analysts at The Pew Charitable Trusts.
Josh Goodman, a senior officer with Pew’s State Fiscal Health project, provided examples of the choices states struggling with a structural fiscal imbalance often make during a Sept. 24 gathering of the local policy think tank Commonwealth North. It turns out Alaska has made pretty much all of them.
Lawmakers in states with ongoing budget issues often struggle to agree on the severity of the problem, according to Goodman, a symptom Alaska’s elected leaders continue to exhibit.
The special legislative session that wrapped up in mid-September was intended to put a bow on Alaska’s new fiscal plan by settling the remaining budget gap with spending cuts or revenues, after the future of the Permanent Fund was settled in June. Instead, the June session was consumed by the immediate need to pass a budget and avoid a government shutdown. It ultimately resulted in a last-minute deal to pass a fiscal year 2022 budget with Permanent Fund dividends of about $525 per person, an amount Gov. Mike Dunleavy called insufficient after vetoing it.
That led to the most recent 30-day fight over this year’s PFD, which resulted in $1,100 dividends the governor is also unhappy with, rather than the long-sought resolution to the state’s fiscal imbalance. There is little reason to believe the special session starting Oct. 4 — the fourth of the year — will end any differently based on the political dynamics of the Legislature.
Alaska’s 2021 political stalemate built on the inaction of prior years and resembled what has gone on in Illinois, according to Goodman.
“In Illinois’ case, they had these deeply flawed budgets to the point that they struggled to pass a budget at all,” he said.
To discourage talk of new taxes, budget and revenue officials in the Dunleavy administration spent much of the last special legislative session emphasizing optimistic views of the state’s revenue outlook based on projections for increased oil production and relatively strong oil prices over the coming decade.
Conversely, legislators from both sides of the aisle, skeptical of Dunleavy’s proposal to pay out half of the state’s annual Permanent Fund revenue appropriation in dividends, presented their own, much less rosy figures for the state’s long-term revenue.
Independent budget analysts and political observers have said the most accurate assumptions are likely somewhere in the middle.
“The more different stakeholders can agree on what the problem is, at least it gives a common starting point for figuring out what the solution should be,” Goodman said.
The inability to reach a common understanding of the state’s fiscal situation — largely driven by the itseliance on unpredictable commodity prices and financial market conditions — has pushed Alaska lawmakers to paper over the deficit each year with a variety of unsavory but well-established tactics. Meanwhile, the state’s savings have dwindled in the absence of a comprehensive solution.
Goodman said Kentucky, for example, has struggled to invest in its priorities, namely improving the capacity of its workforce, and has relied heavily on one-time funding sources to fill its budget.
“You have the chamber saying, ‘our biggest investment is our workforce; we need to invest in our workforce,’ and Kentucky isn’t doing it,” he said.
Alaska business leaders have long said employers in many industries struggle to find and keep skilled workers, even before the pandemic extended those problems to service industry businesses.
Dunleavy’s 2019 proposal for deep cuts to the University of Alaska System, among other reductions, was a key driver behind the now-defunct effort to recall him from office.
The governor has also proposed using money generated by the Alaska Industrial Development and Export Authority, the state’s development bank, to pay for recurring expenses such as oil and gas tax credit payments. Dunleavy also previously insisted the endowment-style Power Cost Equalization fund, used to subsidize high rural power costs, should be rolled into the state’s general fund.
Legislators also have occasionally moved money in various state funds to pay for unintended items, including funding PFDs with money from the state’s savings accounts.
In California, state lawmakers began deferring school funding after the Great Recession took a substantial bite out of the state’s tax revenue, according to Goodman.
“It’s just, ‘push it into the next fiscal year and then we won’t have to worry about it this fiscal year,’” he said of California’s situation.
In Alaska, Dunleavy has partially vetoed the Legislature’s formula-driven appropriations to fund the school bond debt reimbursement program, which under state law calls for the state to help local governments cover the cost of school capital improvement projects.
With the shrinking of the American auto industry in the early 2000s, Michigan had well-publicized budget problems, Goodman noted. There, state government leaders struggled to make good on industry tax incentives after revenue driven by the industry dissipated. New Jersey has faced similar situations with a host of development programs, he said.
“New Jersey promised economic development incentives for businesses and the Legislature simply didn’t appropriate the money to pay for those incentives,” Goodman said.
Former Gov. Bill Walker in 2016 broke the state’s longstanding tradition of annually paying off several hundred million dollars worth of oil and gas tax credits by vetoing much of the appropriation down to a minimum formula-driven amount called for in state law.
Lawmakers have since struggled to make meaningful progress paying down the obligation, which peaked at nearly $1 billion. A bill that passed in 2018 to sell bonds to pay off the tax credit liability was unanimously ruled unconstitutional by the Alaska Supreme Court. The tax credits have been relegated to little more than an afterthought in recent budget debates.
Dunleavy spokeswoman Shannon Mason said via email that the administration “will continue to propose paying tax credits as required by statute.”
Goodman said in an interview that Alaska’s situation, with its uniquely large $80 billion Permanent Fund, is viewed in a few different ways.
The state’s traditional savings accounts, the Constitutional and Statutory Budget reserves, have jointly been drawn down to just more than $1 billion after starting the deficit run with funds of roughly $16 billion.
“Alaska is a state, depending on how you look at it, is among the strongest (fiscal) position of any state or the weakest position of any state,” he said.
Those starkly opposing views of the state’s finances likely play into perpetuating the challenges, Goodman suggested.
“Is the political disagreement a cause of the fiscal problem or the result of the fiscal problem?” he said.
Elwood Brehmer can be reached at [email protected].