Alaska News

For lawmakers, big budget gap likely to drive uncomfortable fiscal discussion

A 4 percent seasonal sales tax? A 3 percent gross income tax for Alaska residents? Or siphoning away some of the earnings of the Alaska Permanent Fund to help pay for the costs of road maintenance and schools?

As legislators and the new administration of Gov. Bill Walker expect to close a looming budget deficit by largely relying on the state's savings accounts, a handful of outside experts are pondering long-term solutions to Alaska's fiscal predicament, including some uncomfortable ideas like instituting new taxes or diverting some of the earnings of the Permanent Fund, which some have called the "third rail" of state politics.

Most of the concepts have already surfaced in some form in past budget crises -- most famously, when 83 percent of voters rejected a plan in 1999 that would have used Permanent Fund earnings to help pay for general government.

In recent years, legislators have been reluctant to publicly contemplate or propose similar measures, which are far from popular with voters.

But the state's growing budget hole stemming from falling oil prices has injected new urgency into the discussion, as a pair of credit ratings agencies warned this week of Alaska's deteriorating financial prospects.

"There's been a lot of conversations that have been thought of as politically off the table," said Gunnar Knapp, an economist who directs the Institute of Social and Economic research at the University of Alaska Anchorage. "The average Alaskan, the average voter, has sort of said, 'I don't believe that that's necessary, and I don't want to go there.' But at a certain point, you may be forced into a situation where you don't have any choice but to look at these things, or face drastic cuts in things that really matter to people."

Several observers said that the longer lawmakers wait to make big structural budget changes like finding new sources of revenue, the more likely they'll be faced with having to pull big sums of money from the $51 billion Permanent Fund -- the source of Alaskans' annual dividend payments.

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"If they start working on a structure now, they can protect the dividend," said Andrew Halcro, the president of the Anchorage Chamber of Commerce and a former Republican legislator who's long been outspoken about the state's fiscal challenges. "That's the benefit of sitting down now, because you have money in the bank and you have time."

The state currently has ample reserves, projected to be some $9.6 billion at the end of the 2015 fiscal year, in June. But the stability of those reserves depends on the price of oil -- this year, the state was expected to derive some 88 percent of its unrestricted general fund revenue from oil taxes and royalties.

Prices in recent months have dropped sharply, and a recent state revenue forecast predicts a $3.5 billion deficit for this year, or about $2 billion more than what lawmakers anticipated in April. The state is predicting oil prices will stay low next year before recovering.

But if oil prices don't recover, the state could end up quickly depleting its savings, assuming spending stays at current levels.

Walker, who was sworn into office this month, has already proposed a comparatively tiny capital budget, which funds construction and other long-term projects -- but that still leaves the multibillion-dollar gap. And he's also signaled that he's not interested in making massive spending reductions, telling an audience recently that "you can't cut your way to prosperity."

Asked whether it would be necessary to look at new kinds of taxes, or using the Permanent Fund to help close the state's deficit, Walker's budget director, Pat Pitney, said: "We have to look at spending first."

"We have to demonstrate that we're running a lean, streamlined state government," she said in a phone interview Friday. "Once we've demonstrated that, and we still haven't cut the gap, then there's a choice out there.

Key legislators have also voiced skepticism that new revenues will be necessary, or should even be considered any time soon. Sen. Anna MacKinnon, R-Eagle River, one of the incoming co-chairs of the Senate's finance committee, said that "quite frankly, Alaskans do not want a sales tax statewide."

"They do not want an income tax statewide. They do not want us to touch or use the revenue stream from the Permanent Fund," she said in a phone interview. "And so that leaves the Legislature very little options to address the issue that's before us."

While MacKinnon acknowledged that cutting $3.5 billion from the state's operating budget is "unrealistic," she said she'd favor a "step down approach," adding that "it seems that we should be able to find some ways to decrease our budget and still be able to invest in people and places in Alaska."

The problem, said Halcro, the Chamber of Commerce president and former legislator, is that there's so little left to cut. Making significant spending reductions from the state operating budget, at this point, could require cutting entire programs or departments.

"Everything is intertwined so closely -- you start cutting, and you shift those costs elsewhere in society," he said. "What happens is people get elected on all these promises, and then they get down there and see how bad the budget is."

Much more likely to make a big dent in the deficit are new forms of revenue, like a statewide sales or income tax, or drawing on some of the Permanent Fund's net income, which was $3.5 billion last year. Those options have been discussed by lawmakers during past budget crises, like during the administrations of past governors Frank Murkowski, Tony Knowles and Steve Cowper.

In fact, as a legislator, Walker's new chief of staff, Jim Whitaker, in 2002 proposed a pair of bills to, respectively, institute a seasonal sales tax and to take at least $200 million from annual Permanent Fund earnings for the state's general fund. Whitaker was part of a bipartisan "fiscal policy caucus" that explored new ways of generating revenue to close a budget gap, which included members like Halcro and then-Rep. Lisa Murkowski, a Republican.

But such measures are so unpopular that legislators are typically loath to give them serious consideration until the last possible moment. And in the state's past deficit crises, oil prices have always nosed upward just in time.

"It's going to be a very tough nut to crack in this state, to tap into the Permanent Fund," said David Ramseur, a former chief of staff for Knowles.

"It'll eventually happen, but I think it'll have to be desperate before that occurs."

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Dick Ravitch, a lawyer, businessman and former lieutenant governor of New York who now is the co-chair of the State Budget Crisis Task Force, has studied and consulted for states and cities in perilous fiscal predicaments like Illinois and Detroit, and he said he's never seen elected officials take truly pre-emptive actions.

"The temptation to kick the can down the road is irresistible to everybody in politics," he said. "And that's the great tragedy in this country."

Knapp, the economist, says it's not reasonable to expect Walker and the Legislature to close the state's deficit in Walker's first year. But he urged them to start giving the problem serious discussion now, rather than staking the state's hopes on yet another rebound in oil revenues.

"Maybe we'll be lucky, and maybe the oil prices will come back -- maybe they'll come back stronger than anybody realizes. And then maybe we'll be able to postpone the hardest adjustments," he said. "But the point is, it would be irresponsible to let that possibility be an excuse for not thinking about this."

Nathaniel Herz

Anchorage-based independent journalist Nathaniel Herz has been a reporter in Alaska for nearly a decade, with stints at the Anchorage Daily News and Alaska Public Media. Read his newsletter, Northern Journal, at natherz.substack.com

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