Legislators demand more cuts before addressing revenue

A contentious Alaska Senate Finance Committee hearing this week highlighted what's expected to be a major policy fight in next year's legislative session over levying new taxes or diverting money from Permanent Fund earnings.

Gov. Bill Walker's administration says it needs new revenues soon to help close a $3 billion budget deficit, with the state last year bringing in less than half the money it needed to pay for its $5 billion in expenses. Administration officials warn that credit ratings agencies are threatening Alaska with downgrades, which could add more than $1 billion in interest costs when the state borrows money to pay for its share of a $55 billion natural gas pipeline.

Lawmakers acknowledge that such steps will likely be necessary at some point. But in surprisingly frank terms in Monday's Senate hearing, they dismissed new taxes and spending money from the Permanent Fund as politically unrealistic next year, when they'll face voters in November.

"We're not going to be able to get there this next time, I would predict, having been around the finance table for many years," said Sen. Lyman Hoffman, D-Bethel, who's been a legislator for three decades. "Elections are coming up, and right or wrong, politicians worry about their careers first."

The two branches of government are trying to find a way to match Alaska's revenue and expenses following a sharp drop in the price of oil, which created this year's big deficit.

Their differences start with how deep spending cuts should go before Alaskans need to start paying taxes or giving up some of their Permanent Fund dividends to pay for government.

The final budget passed by the Legislature last year and signed by Walker in his first year as governor reduced the state operating budget by $400 million, or about 9 percent.

Next year, Walker's administration will likely propose additional cuts of about 3 percent, Pat Pitney, the state budget director, told senators at Monday's hearing.

The governor is seeking "prudent reductions," she said. But there's "not a chance" that they'll approach last year's.

"I don't think we're going to get anywhere close," Pitney said. "There's just not that level of funding out there."

She added that lawmakers would be asked to approve measures to raise more money for government, along with the cuts proposed by Walker's administration.

"We can't do this sequentially," she said. "We must do this in parallel so that we don't reach the cliff."

But at the hearing and in subsequent interviews, Senate and House lawmakers said they would need to see deeper cuts before they could ask their constituents to start paying for government. Alaskans currently pay no statewide income, sales or property taxes and collect annual dividend checks that were more than $2,000 this year.

"I get the sense that a lot of people are actually more on board for revenue measures than they've ever been. But if we have some kind of fiasco at the end of the session where we're going to end up with no cuts, or the 3 percent is what we end up with, the people of Alaska are going to say that's not enough," Sen. Pete Kelly, R-Fairbanks, told Pitney at the hearing. "You've got to come back with far more reductions than maybe you're contemplating."

In a phone interview Tuesday, Rep. Charisse Millett, R-Anchorage, likened Walker's push for new revenues to surrender.

"He's putting up the white flag and he's only been through one budget cycle," said Millett, the House majority leader. "To be scaring Alaskans into thinking that we can't do anything else except take from their wallets and raid the Permanent Fund — that, to me, is disingenuous."

Millett wouldn't, however, directly answer a question about whether the state could balance its budget with cuts alone, saying that further reductions are needed before considering alternatives.

Experts, including the Legislature's own fiscal analyst, say there's ultimately no way to fix the state's $3 billion deficit without generating new revenues. Alaska's state payroll totals only about $1.3 billion, meaning that firing every state-paid worker would still leave a $1.7 billion gap.

Another way that the fiscal analyst, David Teal, has described the problem: "Hard to cut" items like education and Medicaid spending account for $3 billion in the state budget. That means the Legislature could eliminate all other state services — its prisons, its ferry system and much more — and still need to find another $1 billion in cuts.

Some of the most conservative senators said at Monday's hearing that they understand those dynamics.

Both Hoffman and Sen. Mike Dunleavy, R-Wasilla, acknowledged that the state can't balance its budget using cuts alone.

And even David Boyle, the executive director of the conservative group Alaska Policy Forum, said it could be necessary to use money from the Permanent Fund's earnings reserve account to pay for government — just not yet.

Alaska's government, Boyle said, should first be considering more drastic measures, and asking more of itself, before asking for money from citizens. Boost state employees' work week to 40 hours from 37.5, he said. Get concessions from public employee unions, he added.

And, he said, lawmakers should pull cash from existing "buckets of money" like the $930 million Power Cost Equalization Fund, which helps reduce high energy costs in rural Alaska.

"If people are going to have to sacrifice by paying sales tax, income tax or paying their Permanent Fund dividend, then gosh darn it, government has to sacrifice too — that's how they lead," Boyle said.

The state's cash position is not so dire that lawmakers need to approve new revenue this year, said Brad Keithley, an oil and gas consultant who's been publicly advocating for the adoption of a "sustainable budget."

If the price of oil remains at roughly $50 per barrel and spending stays flat, the state will still have $7 billion in savings at the end of the current fiscal year in June, and $3.8 billion at the end of the following year.

But inaction does pose a risk to the state's credit rating, Keithley said, echoing the Walker administration's position.

The Standard and Poor's ratings service said in an August report that Alaska is at risk of a credit downgrade because of its "large structural deficit."

"We would likely lower the rating on the state — possibly by more than one notch — if state lawmakers do not enact measures to begin correcting the state's fiscal imbalance within the next year," the report said. It added that the remedy almost certainly would involve a combination of cuts and new revenues, though it also recognized that fully closing the fiscal gap would be a "multiple-year process."

A downgrade could mean that the state has to pay an interest rate a full percentage point higher when it borrows the billions of dollars it will need to pay for its share of the natural gas pipeline from the North Slope, Pitney, the budget director, said in a brief phone interview Tuesday.

The pipeline's construction is still years away and not guaranteed, but many lawmakers view the project — and the revenues it would generate for the state — as a panacea for Alaska's fiscal problems.

Legislators recognize the credit risk, said Keithley, the consultant. But some, like the senators in Monday's hearing, also have a vision of a smaller state government, he added.

"And they want to use this situation to drive government down to the size that we can afford," Keithley said.