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Alaska’s finances are great, report says – even as Walker administration sounds warning

A new report from an Outside accounting group declares that Alaska's finances are the best in the nation, even as a separate analysis by Gov. Bill Walker's administration says that the state's two primary savings accounts will be empty in just over 18 months.

The dueling reports highlight the conundrum that Alaska's elected officials have faced for the past two years: that the state has billions of dollars in accessible reserves, yet lacks the political consensus to use them in a sustainable way.

Eagle River Republican Sen. Anna MacKinnon speaks on the Senate floor in March. (Nathaniel Herz / Alaska Dispatch News)

"I agree that we have all the tools," said Eagle River Republican Sen. Anna MacKinnon, co-chair of the Senate Finance Committee. "But the devil is in the details."

Alaska's $61 billion Permanent Fund, a diversified pool of investments originally purchased with oil revenue, has more than $13 billion in returns that fill an account called the "earnings reserve." The Legislature can spend that account with a simple majority vote, unlike the rest of the fund, which the Constitution bars lawmakers from spending.

But because legislators can't agree on the details of a plan to use the fund's earnings to pay for government services — a decision that would have the politically delicate effect of reducing dividends — Alaska lawmakers have instead filled the past three annual budget deficits with billions from the state's two primary savings accounts.

Those accounts, the Constitutional Budget Reserve and the Statutory Budget Reserve, are projected by the Walker administration to hold $2.1 billion at the end of the current fiscal year, in July — down from $15.6 billion four years prior.

The Walker administration says that $2.1 billion won't be enough to cover the projected deficit in the subsequent fiscal year — the one for which lawmakers will craft a budget when they convene their next regular session in January. Walker has been pushing for taxes and a restructured Permanent Fund for the past two years, but lawmakers haven't been able to agree on them.

Walker announced his latest proposal to help restructure the state's finances on Friday — a 1.5 percent flat tax on wages capped at $2,200. Lawmakers will consider it at a special session on revenue that Walker is convening Oct. 23.

"The state savings that have been embodied in the CBR and SBR, effectively at the end of fiscal year 2018 — they're kind of exhausted," Sheldon Fisher, Alaska's revenue commissioner, said Friday in a briefing with reporters.

Alaska's budget was long propped up by billions of dollars in annual taxes and royalties from oil production on the North Slope, which once made up 90 percent of unrestricted state revenue. That changed three years ago, at the start of Walker's term, when oil prices — and state revenues — crashed, creating a multibillion-dollar budget hole.

There's now only $2.6 billion in revenue to cover the current year's $5 billion budget, meaning that lawmakers will withdraw a projected $2.4 billion in savings from the CBR.

That imbalance, which has persisted for three straight years, has prompted repeated downgrades by Alaska's credit ratings agencies, and driven corporate executives to hire lobbyists to convince lawmakers to fix the problem.

Most of the focus has been on the Permanent Fund, which with its $61 billion can sustainably generate an estimated $2.5 billion annually. But lawmakers have fought over how to split those returns between dividends and government services — and over whether the remaining deficit should be filled with taxes.

The largely Democratic House majority supports an income tax that asks higher percentages from higher earners, arguing that it would balance a reduction of Permanent Fund dividends — a move that on its own would ask more, proportionally, from poor Alaskans. The Republican-led Senate majority argues that such a tax would hurt Alaska's economy and that the state has enough reserves to sustain a reduced deficit left by relying on the Permanent Fund's investment earnings alone.

Homer Republican Rep. Paul Seaton, right, in the Capitol in February. (Nathaniel Herz / Alaska Dispatch News)

The Permanent Fund "needs to be used in a structured way that will get us to a sustainable fiscal plan," said Homer Republican Rep. Paul Seaton, co-chair of the House Finance Committee. But, he added: "We haven't gotten there yet because there's a dispute between the House and the Senate as to whether it's a Permanent Fund-only fix."

Amid that backdrop, the new report from Chicago-based, nonpartisan Truth in Accounting nonetheless proclaims Alaska a "sunshine state" with enough assets to cover its debts — and awards it an "A" grade for its finances, which it says are the "best" in the country.

Those marks are based largely on a comparison of available state assets to obligations, like pensions promised to retirees, said Sheila Weinberg, Truth in Accounting's CEO. Alaska had a $38,000-per-taxpayer surplus in 2016, while New Jersey, at the bottom of the list, would need $67,000 per taxpayer to eliminate its debts, making it a "sinkhole state," Truth in Accounting says.

"Compared to other states, they're doing wonderfully," Weinberg said in a phone interview.

MacKinnon, the Eagle River senator, called the report's conclusions "confusing" for Alaskans, and she said the analysis lacked context about the state's financial problems.

But she also said it would be "nice if they talked to Standard and Poor's and Moody's" — two of the ratings agencies that have repeatedly downgraded Alaska's credit during the state's budget crisis.

Truth in Accounting's analysis did show Alaska's per-taxpayer surplus dropping precipitously to $38,000 in 2016 from $53,000 the previous year, pointed out Gregg Erickson, former publisher of the Alaska Budget Report.

He described the Walker administration's budget projections — showing the soon-to-be-depleted savings accounts — as more of a tree-level analysis, while likening Truth in Accounting's report to an aerial photo of a forest.

But while Truth in Accounting's analysis is more comprehensive, Erickson said, it doesn't reflect broader economic trends — like Alaska's ongoing recession and its unemployment rate, which is the highest in nation.

The state's economic problems, Erickson argued, stem from its dependence on the oil industry, which has continued shrinking amid low prices. And that's not something that the Legislature can easily fix, even if it corrects the problems with the state budget, he added.

Extending the forest metaphor, Erickson added: "What you don't know is that there's a huge fungus eating at the roots of every tree you're looking at."

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