FAIRBANKS — With the collapse in oil prices and no plans to raise taxes, the state government is funding about 60 percent of its budget with savings. The next state budget, now under preparation in Juneau, is likely to leave a shortfall in the neighborhood of $3 billion.
The state has three multibillion-dollar savings accounts, one of which -- the earnings reserve of the Alaska Permanent Fund -- remains politically inaccessible. The law allows the Legislature to spend the earnings reserve, which now contains nearly $8 billion. There is an additional $6 billion of earnings that could be spent, but only if and when the Alaska Permanent Fund Corp. cashes in those profits. By tradition, the Legislature has avoided tapping Permanent Fund earnings for most government operations, with some exceptions.
As long as there are other accounts containing cash, the Legislature won't be looking at Permanent Fund earnings to pay its major bills.
Of the other two large accounts, the Statutory Budget Reserve is expected to be drawn down to zero this spring, which will remove $2 billion from state reserves. That leaves the Constitutional Budget Reserve, which has close to $10 billion as of this writing.
The unique feature of the Constitutional Budget Reserve is that a three-quarters majority vote in the Legislature, the highest hurdle in state government, is usually required to take money out of it. Mike Barnhill, an analyst in the state Office of Management and Budget, said it's possible that will be the case this year as well. "We are awaiting information from the Division of Finance regarding available balances in the various fund sources that the Alaska Supreme Court held must be counted as 'available for appropriation,'" he said.
To reach the three-quarters threshold this year, the Republican majority in the House would have to round up more than the usual suspects. The group would need three or four votes from Democrats, which means including the Democrats in some budget decisions. The majority would rather relegate the Democrats to the role of bystanders, while the minority would rather preserve whatever leverage it can grasp. In the Senate, the majority has three-quarters of the membership, so it's not as likely to be as divisive.
The backdrop for the political machinations is that about $700 million will probably be needed from the Constitutional Budget Reserve to balance the budget for this fiscal year, followed by about $3 billion during the fiscal year that starts in July.
The last time the supermajority became a point of contention was a decade ago, at the tail end of a period in which the CBR was used to cover deficits in most of the years since its creation. "Over nearly two decades, the CBR has nearly single-handedly staved off massive budget shortfalls," a 2009 summary by the Department of Revenue said. "In some years, withdrawals from the CBR reached a billion dollars in nominal terms."
For many years, the fund was reported to be near exhaustion on an annual basis, shrinking to about $2.1 billion in 2003. The often-predicted end of the fund was a key issue because the CBR served as insurance against new taxes or spending Permanent Fund earnings. The enactment of the ACES oil tax system during the Palin administration, followed by a sudden spike in oil prices, allowed legislators to put back billions -- and the CBR grew to $12.8 billion in 2014.
Last year the state opted to take $3 billion from the fund to pay down some of the debt to the retirement systems, a move that won broad support. Since then, with state revenue in free fall, the account has steadily moved back into the center of the budget debate. It may last until 2017 or longer, depending upon oil prices.
Created by a constitutional amendment in 1990 as a way to save oil and gas tax settlements and stabilize the budget, the fund was designed to be difficult to spend.
Along with the sensitive politics, the issue is clouded, University of Alaska Fairbanks political science professor Gerald McBeath has written, because the reserve fund amendment in the constitution contains a "poorly crafted exposition of procedures" that invites litigation and manipulation.
There was little ambiguity about the concept when voters approved it by a two-to-one ratio a quarter-century ago. With several large windfalls expected from oil tax settlements in the 1990s, legislators said the fund would be a way to pay for state operations when oil prices dipped. Without this fund, the temptation to spend every extra dollar would overcome the best intentions, they said.
The constitutional amendment dictates that when the amount available for appropriation in the current fiscal year is less than the amount appropriated in the previous fiscal year, the difference can be made up from the budget reserve by a simple majority vote.
If the Legislature decided to use the fund for other purposes -- such as responding to a disaster -- it would require a three-quarters vote, Republican Sen. Jan Faiks, Republican Rep. Randy Phillips and Democratic Rep. Kay Brown wrote in support of the amendment in the 1990 State of Alaska Election Pamphlet.
"If approved, the budget reserve fund will help hold down spending by removing from the table the oil and gas revenue windfalls that result from pending litigation and tax disputes. At the very least, this ballot measure will establish a savings account that can help minimize the effects of a boom one year and a bust the next," the three lawmakers said.
But the big sticking point came over the definition of available state revenues. To the people in the Legislature, the words "available for appropriation" meant oil revenue and some other funds, but not Permanent Fund earnings. To the people on the Alaska Supreme Court, the words meant whatever was available.
The court decided in 1994 that even funds that lawmakers didn't like to think of as "available for appropriation," such as earnings of the Alaska Permanent Fund, are available.
It didn't matter that the hurdle for using Permanent Fund income -- fear of voter rejection -- made it harder to get a simple legislative majority for spending Permanent Fund earnings than achieving a three-quarters vote to withdraw dollars from the CBR.
In practice, this has meant that a supermajority has almost always been required to use the CBR, especially when the Alaska Permanent Fund has a big earnings reserve, as it does today.
Add to that the available balances in special endowment funds set up by the Legislature for such projects as subsidizing power costs in the villages and setting aside education funds in advance, money that is also "available for appropriation," and the supermajority requirement is hard to avoid.
Opponents say the court ruling distorts the revenue picture, but a constitutional amendment to clarify the rule has never cleared the Legislature or been offered to voters.
Even if endowments were off the table -- such as the nearly $1 billion for the Power Cost Equalization Fund -- the supermajority is likely to be needed for the next budget because of the size of the shortfall. The governor has proposed spending $5.44 billion in unrestricted general funds. The House proposed this week to trim that by about $144 million to $5.299 billion. That would reduce the deficit to about $3.1 billion to $3.2 billion for the fiscal year that begins in July.
David Teal, the director of the Legislative Finance Division, said a CBR vote for the FY 2016 budget might be delayed until next year, as long as the effective date is before June 30, 2016. "The key to the vote is that it depends on the amount available for appropriation, not on the amount appropriated, in the year the CBR is to be used," he said.
An additional complicating factor is a provision that says extra balances from the general fund and other accounts are swept back into the CBR after the fiscal year. "It takes a supermajority vote to reverse that sweep," he said.
All in all, he said, "this is not a simple question from a technical perspective, and is a very complicated question from a political and/or legal perspective."