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The Alaska Legislature returns with a new House majority, but it faces the same old budget problem

  • Author: Nathaniel Herz
  • Updated: December 2, 2017
  • Published January 14, 2017

This year's annual legislative session in Juneau brings change from the past two years: a big class of freshmen, a Democratic coalition taking charge of the state House, and new urgency stemming from the state's fast-emptying budget reserves.

But with that comes the same old political conundrum: how to assemble the 21 votes in the House and 11 in the Senate to pass legislation to fix the state's huge budget problem.

Sharp ideological differences persist among the groups of legislators that will lead the two chambers. The new House speaker, Dillingham Rep. Bryce Edgmon, is a Democrat who's co-sponsored income tax legislation and fears further spending cuts would hurt his rural district.

The incoming Senate president, Fairbanks Sen. Pete Kelly, is a fiscal- and social-conservative Republican who warns the state is drifting toward socialism, and who last year vowed to stay away from the "tax business."

His caucus is proposing to cut $750 million more from the budget in the next three years — 5 percent this year, and 4 percent and 3 percent in 2018 and 2019.

The deficit-reduction options before lawmakers are essentially the same as they've been for the past two years.

A restructuring of the Permanent Fund could divert billions of dollars to state spending and close more than half of the budget gap — though along with it, the legislation would also reduce residents' dividend checks from their recent high levels.

Lawmakers could also ask to institute state-level income or sales taxes, which Alaskans haven't paid in decades, or increase taxes on oil companies and other industries, all of which could generate hundreds of millions of dollars more.

Spending cuts have dropped the state's agency operating budget by 13 percent in the last two years, to $3.9 billion. But further reductions are getting harder to find.

The budget proposed by Gov. Bill Walker's administration this year would slice less than $150 million — a small fraction of the overall deficit, estimated at $3 billion.

A recent, slight rise in Alaska's oil revenue — which once paid the vast majority of state expenses before a price crash 2 1/2 years ago on top of a slow production decline — means lawmakers may not need to adopt all the revenue measures this year, said David Teal, the Legislature's budget adviser. Or, they could potentially afford to preserve higher dividends, he added.

But the extra revenue likely won't do much to help the House and Senate reach a consensus on the best way forward, Teal conceded. And it doesn't change the underlying budget structure, which only worked when oil prices and Alaska oil production were high.

"The mechanics have become easier," Teal said. "The political aspects are no easier than they were before."

Lawmakers from both parties say they're planning to look beyond Alaska's deficit to topics like campaign fundraising rules and climate change policy.

But their most pressing question hasn't changed in two years: How to fix the state budget, which this year called for $4.4 billion in spending, not including dividends, while bringing in just $1.4 billion in unrestricted revenue.

Put another way: For every dollar spent by the state, there's only about 30 cents of revenue from oil taxes and other sources. The rest comes from savings.

That approach won't work for much longer. The combined balance of the state's two main reserve accounts is set to fall below $5 billion by the middle of this year, down from $15.6 billion in mid-2014.

And those two accounts will be completely gone in a little more than two years, according to forecasts by Walker's administration.

There's one other gigantic pot of money that can be used for government spending with a simple majority vote by the House and Senate: the Permanent Fund's investment earnings account, which now is close to $10 billion.

It's segregated from the principal of the fund — the so-called corpus, which the Alaska Constitution prevents legislators from spending — though the earnings are currently used for dividend checks.

Legislation to divert some of those earnings to the state budget was at the core of Walker's deficit-reduction proposal last year. But over nearly six bitter months that lawmakers spent in Juneau — the regular 90-day session, an extension and two special sessions — it again became clear why the fund is known as the third rail of Alaska politics, something elected officials fear and don't touch.

The Senate voted 14-5 to approve a modified version of Walker's legislation. But the House Finance Committee killed the bill in a 6-5 vote before it could even reach the floor, with lawmakers from both parties siding against the legislation — in defiance of a muscular lobbying effort from Walker's own administration and a deep-pocketed business group.

The Permanent Fund proposal as well as tax legislation present mortal threats for lawmakers, particularly those from the deeply conservative Mat-Su, said Mike Bradner, a former speaker of the House who now co-publishes a legislative digest with his brother Tim.

"These issues are career-enders," Bradner said. "The people that step up to the line and lose their political lives in the process — we ought to have a big brass plaque someplace."

Walker, citing the need to preserve state savings, vetoed about half of the money for dividends last year after lawmakers rejected most of his deficit-reduction proposals. His power to do so again could give lawmakers added incentive to restructure the fund themselves.

But last year's failure of the Permanent Fund bill reflected a schism between left- and right-leaning lawmakers that remains this year — one that could get even worse with the House flipping from Republican to bipartisan control.

This year, House coalition members say they want to reduce tax deductions for oil companies as part of a big budget deal that reduces dividends; Kelly, the incoming Senate president, said in a speech this month that any changes to oil tax policy have to be geared toward boosting production, which usually is code for lower oil taxes, larger oil-tax credits or both.

Edgmon and Homer GOP Rep. Paul Seaton, both members of the new House leadership, previously sponsored income tax legislation — which they say could take more from wealthier Alaskans and seasonal workers to balance the impact of dividend reductions, which would hit poorer Alaskans harder, proportionally.

But Natasha von Imhof, one of the new members of the Senate majority, campaigned on her opposition to an income tax.

The dilemma for legislative leaders is that the required components in one lawmaker's deficit-reduction plan can be nonstarters for another.

"All it takes is one number or one mechanical piece that someone disagrees with and they say, 'Nope, lost my vote,'" said Teal, the budget analyst. "The more pieces there are, the more opportunity to lose votes."

Members of the new House majority nonetheless maintain the formation of their coalition could loosen the gridlock of the past two years.

Previous House Speaker Mike Chenault, R-Nikiski, couldn't get the 26 members of his fractious GOP-led majority to coalesce around a deficit-reduction plan, and three moderate Republicans ultimately left to join with Democrats and a pair of independents in the new coalition.

The 22-member coalition includes four of the House's 12 freshmen. Members say their primary focus will be the budget problem.

The coalition hasn't presented its own deficit-reduction plan, and members acknowledge assembling one could strain the caucus. But they argue their organizing principles, and their freshman members, should make for an improvement over last year.

"When something's broken, you try to fix it. And the House was broken," said Justin Parish, the Juneau Democrat who beat incumbent Republican Rep. Cathy Munoz in November. "Are we going to suddenly achieve harmony at the dawn of the Age of Aquarius? No. But we've got a chance for a fresh start."

The House leadership change could also change the way that other types of bills move between the Legislature's two chambers. The incoming Democratic chairs of House committees have priorities different from their Republican predecessors' — meaning, for example, that socially conservative legislation, or bills promoting resource development, could face a tougher path to the House floor than before.

Anchorage Democratic Rep. Andy Josephson, who will co-chair the House Resources Committee, said Alaskans should expect hearings on climate change and possibly a carbon tax — topics that weren't touched by the Republican majorities in the past two years.

He's also proposed LGBT-friendly legislation and a bill to bar Alaska's government from cooperating with any effort that could surface in the administration of President-elect Donald Trump to register Americans based on religion or race.

While those bills may not be received warmly by the GOP-led Senate, Josephson said progressive Democratic legislation could be used as a bargaining chip when Senate Republicans try to push conservative bills through the House. And, he said, the discussion is important, too.

"There are a lot of Democratic ideas and legislation that need venting," Josephson said. "I think it's our job to make the effort, and engage and dialogue on the issues."

Josephson said he hopes for an on-time conclusion to this year's session. But others aren't optimistic about lawmakers finishing in the 90 days prescribed by state law.

The three-month limit was set in a 2006 initiative. But the Legislature, which can effectively set its own laws, routinely ignores the deadline and instead adheres to the 121-day limit set by the Alaska Constitution.

Lawmakers last year went the full extra month, then spent a total of five weeks more in two separate special sessions that failed to produce the budget reforms Walker wanted.

That was after they needed several weeks of extra work to finish the 2015 session.

The backers of the 2006 initiative made a mistake by failing to include a provision to cancel lawmakers' housing and meal allowances after the 90th day, said Tom Wagoner, the former Republican state senator from Kenai who was one of three sponsors of the measure.

Without pressure from impending elections this year, Wagoner predicted the Legislature will "blow right through" the limit again.

"There's not much you can do," he said. "It's going to be kind of an interesting thing to watch the session proceed."

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