The compromise budget approved by the Legislature on Thursday avoids the immediate threat of a state government shutdown next weekend but did little to end the unrest about future state finances.
The Legislature deserves credit for reaching a deal that stops a shutdown, which would have been a costly nightmare for most people and businesses in Alaska.
The compromise received broad support from Democrats and Republicans, with legislators displaying a willingness to negotiate that was far more effective than inflexible pronouncements.
The main opposition to the compromise came from some Republican legislators in the House who have made it a habit to complain about the size of the budget and complain about cutting the dividend, while offering no coherent plan to reduce the budget, pay for state government or preserve the dividend.
Most of the Republicans in the Legislature didn't opt for grandstanding, however, and backed the compromise.
"I think that we can all breathe a sigh of relief, though, to know that we are giving the state of Alaska the confidence to know that there won't be a government shutdown," said Anchorage Republican Rep. Charisse Millett.
[Alaska lawmakers approve budget compromise to avert government shutdown]
Looking ahead, the Legislature set aside key sticking points that have to be dealt with soon — the capital budget, oil and gas tax subsidies, taxes and a formal structure to use some earnings from the Permanent Fund to pay for government.
The most immediate challenges are the capital budget for the fiscal year that begins next week and resolving the future of hundreds of millions in oil and gas tax credits that the state can no longer afford.
The capital budget is crucial because it includes money that matches federal funding for road projects across the state.
As part of the budget deal, the Legislature reduced the size of the Permanent Fund dividend to $1,100, an action that would have been unthinkable before the collapse in oil prices.
The other big issue for the fund is creating a formal structure on how to use some Permanent Fund earnings, up to $2 billion a year or so, to help pay for government operations.
The reason a formal structure is needed is that without one, the temptation to withdraw unlimited amounts from the Permanent Fund earnings each year will be hard for future lawmakers to resist.
With a structure, there will be no guarantees because this would not be a dedicated fund, but there will be guidelines, the effectiveness of which will depend upon the political climate at the time.
As it has in years past, the Legislature turned this week to the dwindling Constitutional Budget Reserve to balance the budget. That action makes it more critical to get a Permanent Fund structure in place this year in a special session.
Under the bill approved by the Legislature, the Constitutional Budget Reserve would be tapped to cover the daily difference between expenses and revenue, which would be about $7 million or $8 million a day. That would add up to more than $2 billion in the coming year.
The remaining reserve balance is expected to drop to about $2 billion a year from now, which is not enough to continue past practice. Ideally, the state should have more than $2 billion in that account and keep it there for emergencies.
It would be foolhardy to spend all of the CBR, mainly because that would increase the chances that whatever guidelines are crafted for the Permanent Fund, they would be overturned as soon as lawmakers came up a few hundred million short.
The quickest way to deplete the earnings of the Permanent Fund is to rely on that money without setting up a formula in advance. And to tell ourselves that no new taxes are necessary because the state has billions stashed away in the fund.
Oil prices now are at about $45 per barrel, as volatile as ever. If they stay that low, about $9 below what the state has predicted for the next fiscal year, it could mean a reduction in state income next year of about $240 million.
Revenue swings in the hundreds of millions are the norm in Alaska, given the dependence on oil and investment income. Every forecast has to allow for a large margin of error.
That low oil price, coupled with the Legislature's decision not to cut the budget by hundreds of millions, makes the Senate dream of balancing future budgets without taxes even more far-fetched. Even with a steady withdrawal from Permanent Fund earnings for government, the state would be running a deficit closer to $1 billion than the $500 million predicted by the Senate.
The Senate assumes a three-year effort to cut $700 million, one that has already proven impractical in the first year. The budget approved by the Legislature this year is a bit below the previous year, but it also contains about $100 million in funds that would have to be replaced in the following year, just to keep the budget stable.
Columnist Dermot Cole can be reached at dermot@alaskadispatch.com.
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