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Alaska Legislature

Alaska lawmakers approve budget compromise to avert government shutdown

A compromise in the Legislature to keep state government running and prevent disruptions of basic services and massive layoffs of state workers cleared both the Senate and House late Thursday.

Sen. Lyman Hoffman, D-Bethel and one of the architects of the deal, said on the Senate floor Thursday night that neither side got what they fully wanted, but by focusing solely on a single year's budget for the last six days, a crisis was averted.

"The concern was how do we go about addressing the gridlock on the operating budget," Hoffman said. "Because of the looming shutdown of government that has been portrayed in many different ways and affecting just about every citizen of Alaska, from commercial fisheries shut down to people's marriages to a slew of other events that would affect people's lives."

Only one senator, Shelley Hughes, R-Palmer, voted to oppose the House bill establishing the state operating budget for the year that begins July 1. Eight representatives, all Republicans in a minority caucus, opposed the measure supported by a Democratic-led House coalition.

With her vote, Hughes expects to be forced out of the Republican-led Senate majority. Members in the majority caucus agree to stand together on votes on the operating budget. If they don't, they are out. Like budget opponents in the House, Hughes said state spending was still too high, and that she didn't agree with a decision to reduce Permanent Fund dividends.

"It has to do with the future of the state," Hughes said. "I see HB 57 as a major bill this year that really sets the stage for the future of our state, and that is where I am concerned."

She said she realized she would have to leave the GOP majority.

"I understand the consequences of my vote. … I am not going to get upset and complain about a smaller office or less staff."

The House Republicans voting against the budget deal were: Reps. David Eastman of Wasilla, DeLena Johnson of Palmer, Mark Neuman of Big Lake, George Rauscher of Sutton, Lora Reinbold of Eagle River, Colleen Sullivan-Leonard of Wasilla, Cathy Tilton of Wasilla, and Tammie Wilson of North Pole.

The budget totals more than $4.1 billion in unrestricted general revenue spending, not including dividends, which is $179 million less than in the current budget year.

But Wilson, an ultra conservative, said the Legislature moved money between funds to make it appear like the budget was cut, when it wasn't.

"We didn't lower the budget. We didn't make the footprint of government any smaller," Wilson said.

The total operating budget is $8.8 billion.

A House-Senate conference committee charged with resolving Alaska's state budget agreed Thursday to fund public schools at the same level as this year and to pay Permanent Fund dividends of $1,100.

The joint committee's agreement cheered supporters of public schools, who had been bracing for sharp reductions. But the deal also abandoned all the deficit-reduction measures Gov. Bill Walker and legislative leaders had proposed — taking no significant steps to fix the state's $2.5 billion budget gap and instead plugging it with cash from the state savings account like the past two years.

The new operating budget will allow government services to continue at the start of the state's new fiscal year on July 1, avoiding the catastrophic economic consequences of a shutdown.

The proposal's lack of broad fiscal reforms has the effect of prolonging the yearslong debate and uncertainty about how to fix Alaska's finances for the long term.

"I wish the budget was lower. I wish we had gotten to the requested mark of $4 billion. I think we can get there," said Rep. Charisse Millett, R-Anchorage, referring to the GOP goal for the portion of spending controlled by the Legislature. That unrestricted general revenue doesn't count federal dollars or other revenue streams designed for fixed purposes.

The protracted fight with no overall answer did not serve Alaskans well, she said.

"We can do better as a body and a Legislature next session," Millett said.

The lack of a long-term fix also invites another downgrade from ratings agency S+P Global Ratings, which warned Tuesday that it would lower Alaska's AA+ credit without "structural fiscal reform" by the Legislature.

"The only way the state can avoid a downgrade from Standard and Poor's is to buy Standard and Poor's and write our own credit rating," said Larry Persily, a former deputy revenue commissioner who's now a chief of staff to Kenai Peninsula Borough Mayor Mike Navarre.

'One step closer to averting shutdown'

Thursday's decisions to shrink dividends, spend $57 million for oil and gas tax credits and provide flat funding to schools came in a flurry of orchestrated moves by the six-member conference committee at an afternoon meeting that lasted less than an hour.

In meetings earlier this week, the committee had agreed on funding plans for other state agencies, resolving differences in competing Senate and House budget proposals. The agreements included an $8 million general fund cut to the University of Alaska's operating budget, or about 2.5 percent.

Around 1 p.m. Thursday, the conference committee adjourned, sending its proposed operating budget to the full House and the Senate for approval. It now goes to Gov. Walker for his signature.

"Now it is time to compromise on a fiscal plan," Walker said.

In an interview Thursday, Rep. Paul Seaton, R-Homer, co-chair of the conference committee, called the budget agreement a "good compromise." Seaton is one of three Republicans in his chamber's largely Democratic majority, which advocated for flat funding for public schools instead of cuts proposed in the Senate.

Seaton said the House was able to shield public schools from cuts in the committee's budget negotiations, but was unable to preserve its proposal to pre-pay, or "forward fund," future education budgets.

"We were pleased, but it's not like we got everything," he said. "Everybody had to give some."

Since the conference committee decided to plug the budget gap using savings from the Constitutional Budget Reserve — rather than using investment earnings from the $60 billion Permanent Fund — the proposal needed approval from three-fourths of the members in each chamber.

No cuts to public schools

Anchorage School District Superintendent Deena Bishop praised the committee's decision to maintain school spending in an interview Thursday. The Republican-led Senate majority had originally proposed reducing public school funding by 5.7 percent, or $69 million, while the House's largely Democratic majority coalition proposed no cuts to public school funding.

"It's just wonderful news," Bishop said. "At this point, I'm thrilled and I need to do some thank-yous to folks in Juneau."

Bishop said the district was preparing to recall the remaining layoff notices it had issued last month to 220 of its non-tenured teachers. District officials said they had to hand out the pink slips to some of the roughly 3,400 teachers to prepare for the deepest possible funding cut and to meet deadlines written in state law.

Alyse Galvin, one of the founding members of Great Alaska Schools, a grassroots organization that advocates for public education, said Alaskans across the state "experienced a huge sigh of relief" that schools were able to dodge the larger cut proposed by the Senate.

"At the same time, we are all wondering how on earth it took so long that districts across the state, along with the government, had to issue pink slips," Galvin said in a prepared statement. "And probably the biggest question on everybody's mind right now is, will they finish the job?"

The budget proposal out of the conference committee came five months after the Alaska Legislature started its work in Juneau. That five months included a 90-day regular session that was extended 31 days, plus another 30 days in its first special session. A second special session began last Friday.

Dividends set at $1,100

The conference committee settled on paying $1,100 dividends from the Permanent Fund's earnings this year, an amount between the $1,150 proposed by the House and the $1,000 proposed by the Senate.

While the dividend amount is about half of what it would have been if lawmakers had paid it based on the historical formula, the conference committee decided not to use additional Permanent Fund investment earnings to fill the majority of the deficit — a step favored by Walker and some business and organized labor leaders, and that legislative leaders argued could be done sustainably.

Instead, the conference committee voted to plug the state's multibillion-dollar budget gap with a nearly empty savings account, the Constitutional Budget Reserve — the same account used by the Legislature in the past two years.

Those draws have drained the CBR from $13 billion in mid-2014 to an estimated $4.5 billion at the end of June, according to the Division of Legislative Finance. If approved, according to the division, the conference committee's Thursday budget proposal would draw down another $2.4 billion over the next year — meaning that without additional revenue or substantial spending cuts, the Legislature would need a different source of cash to avoid running out of money in the account the following year.

Rep. Lance Pruitt, R-Anchorage, said that draining the savings account was a better financial choice than tapping the Permanent Fund investment account. The latter provides a much higher investment return, and generates more wealth for Alaska, he said.

Earlier, Seaton said the earnings reserves are also meant to pay for dividends.

Both the House and Senate majorities had proposed earlier this year to use Permanent Fund earnings to help balance the budget. But the two caucuses couldn't agree on accompanying legislation to restructure the fund for the long term. They also disagreed on whether such legislation should also be tied to a new income tax or higher oil taxes.

The House and Senate nonetheless accounted for the use of Permanent Fund money in their annual budget proposals. But Seaton argued that making such a withdrawal without a long-term plan would be problematic, and the conference committee voted against the idea.

"We're not willing to take money out of the earning reserves willy-nilly or grab whatever cash we need," Seaton said.

The conference committee did offer nonbinding intent language in its budget proposal to kill off the state oil and gas tax credit program by the end of the next fiscal year, in June 2018.

Seaton said he expected the Legislature would return to Juneau again for another special session in 2017 to develop a long-term fiscal plan that includes oil taxes and a broad-based tax.

"We've been trying to figure out for the longest time how to get a fiscal plan, but there's not the willingness at this point in time to address that," Seaton said. "So I think everybody probably needs to step away from the capital for a little while and get their lives back in order. We've been here a long time."

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