Alaska's revenue roller coaster has some lawmakers thinking about a 'rainy day' strategy

Pat Forgey

JUNEAU -- A new study says that Alaska has the most volatile state revenues in the nation, with income fluctuating more than twice as much as that of its nearest rivals -- which are often also resource states.

The study recommends that states set up and make regular deposits into "rainy day" funds, into which they can dip when tax revenues fall short.

This week, some leaders of past efforts to plan for the future said Alaska needs to resume those efforts, and new deficits may actually prompt that.

"When we've been flush, the public sees large surpluses and comes to us looking for things that the public thinks are good and needed," said Rep. Mike Hawker, R-Anchorage.

Then legislators respond with more spending.

Or, as Hawker puts it, "It's much harder to say 'no' when there's a lot of money sitting there."

But now, those years of surpluses have ended, and the state is facing years of deficits.

The study by the Pew Charitable Trusts, called "Building State Rainy Day Funds," ranked volatility of state tax revenues and concluded that the states with the most variation in tax collection needed the biggest funds.

Alaska ranked first in the nation in standard deviation of year-over-year change in total tax revenue from 1994 to 2012, at 34.2 percent. 

Next highest wasn't even close. North Dakota saw volatility of 14.2 percent, while Wyoming was 12.2 percent. 

Lowest volatility was South Dakota at 2.6 percent.

The volatility of Alaska's tax revenues is unlikely to surprise state leaders, who have made the state almost wholly reliant on oil tax revenues for its unrestricted general fund, and who in recent years have seen billion-dollar surpluses swing rapidly into billion-dollar deficits. 

Alaska has two budget reserve funds: the Constitutional Budget Reserve, with more than $12.78 billion, and the Statutory Budget Reserve, with $4.82 billion. Of that amount, however, $3 billion is slated for transfer to retirement trust funds this year.

Pew did not consider the Alaska Permanent Fund as a budget reserve fund. 

It's good that Alaska has set aside those reserves, said Sen. Anna Fairclough, R-Anchorage, who, like Hawker, has been a leader on fiscal planning.

"That's why those funds were set aside -- because of the volatility," she said, noting deficits can come from fluctuation in oil price or production.

During the recent recession, even the states that, like Alaska, maintain rainy day funds often saw them quickly overwhelmed and unable to buffer the recession's impact, according to Pew.

"It's not a question of whether volatility is good or bad, it simply is," said Pew's Brenna Erford, one of the report's authors, in a conference call with reporters.

"Whatever the level of volatility, what's helpful is having a policy to address it," she said. 

That's what Hawker and Fairclough have sought to do -- develop a fiscal plan that would guide how the state responds to both surpluses and deficits. It's been an uphill battle, but with some accomplishments.

Hawker said that when he first joined the Legislature in 2003, it was after a protracted period of historically low oil prices. That meant that the state tapped its Constitutional Budget Reserve, built up with tax settlements, for $5.5 billion of its $7 billion dollars.

Then, there was much discussion of developing a state financial plan, but legislators could never come to agreement on what such a plan should look like.

Fairclough said her own experience recently looking at a fiscal plan means she's not surprised that other efforts stalled as well. 

"I think that people are holding their cards close; legislators want as much flexibility as possible to grab options that may come along," she said. 

For example, Fairclough said, when a fiscal policy group on which she serves looked at developing a plan, it didn't foresee some expenditures that became top state priorities.

"The gas pipeline deal that's moving forward now was something that wasn't really on the radar when we had the fiscal policy discussion," she said.

That previous effort resulted in the creation of the website to involve the public in the process, she said.

Hawker said it may be that now that Alaska is back in deficit spending, there will be a renewed look at fiscal planning.

"We've shown a history of being willing to talk about the specific subject of fiscal planning when we do face harder times," he said.

Fairclough agreed. Now the issue is how much and how fast to draw down budget reserves, she said.

What's key, Hawker said, is that it be an ongoing financial planning process, not a single permanent plan.

"I'm always careful when that term 'fiscal plan' comes up. That's a noun, as if it's something that gets done and never has to be looked at again," he said.

And current legislators cannot bind future legislators to a plan, he said.

"The simple fact is the Legislature has the power of appropriation, and a fiscal plan cannot take that away," he said.

Former Department of Revenue Commissioner Bill Corbus said financial planning might have gotten a bad reputation in 1999 when the public was asked to dip into the Alaska Permanent Fund to fund government operations. The proposal was called a financial plan and was trounced at the polls, he said.

"The Legislature after the 1999 vote was afraid to touch anything that sounded like 'financial plan,'" Corbus said.

Since then, planning efforts have been modest but have included the requirement of an annual 10-year look at state revenues and expected costs. That has helped build awareness of the state's fiscal situation, Hawker said.