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Alaska Legislature

What’s the holdup? The Alaska Legislature’s latest stalemate, explained

  • Author: Nathaniel Herz
  • Updated: March 31, 2018
  • Published March 31, 2018

The Alaska state Capitol in Juneau catches some early-morning sunshine Friday. (Nathaniel Herz / ADN)

JUNEAU – For the past three years, the Alaska Legislature has followed the same dysfunctional script.

The state House passes a budget, the Senate modifies it, then the two chambers' leaders spend weeks of extra time fighting over the differences — until the threat of a government shutdown ultimately forces a compromise.

This year, with two weeks to go in their scheduled 90-day session, lawmakers still haven't gotten past the first act.

The budget, typically approved in mid-March by the House, is still stuck there, where a dispute over the size of Alaskans' annual dividend checks derailed the largely-Democratic majority coalition for the past week.

After a string of votes Friday, leaders say the budget should pass next week and move to the Senate.

But what was the holdup? And what's the path forward? Here's our best shot at an explanation.

What, exactly, is the problem here?

The Legislature needs to pass a budget each year to pay for core public services such as schools, public safety, ferries, plowing and health care. Most of the spending in that budget — about $4.5 billion out of $5.3 billion — goes to state agencies, Alaska's retirement system and paying off debts.

The rest goes toward Permanent Fund dividends.

That's doesn't sound any different from past years. What's different about this year?

Alaska once paid for the vast majority of its budget with oil revenue; residents haven't paid a state income tax for decades.

But much of the state's oil revenue has disappeared, thanks to a slump in prices and the long-running decline in production on the North Slope.

For the past three years, lawmakers have been filling Alaska's massive deficit by withdrawing billions of dollars from the state's primary savings accounts. But those savings accounts will be close to empty at the end of the current fiscal year, in June.

That doesn't mean the state is out of cash — far from it.

Alaska has the Permanent Fund — a huge, state-owned investment fund seeded with oil money. It held $65 billion at the end of February, or enough for a decade's worth of budgets.

(Only the $17 billion in the fund's investment earnings account is available to the Legislature by a majority vote; the $48 billion in the fund's principal is protected by the state Constitution.)

How does the Permanent Fund connect to the budget, and the current stalemate?

Because policymakers, including Gov. Bill Walker, see it as the best source of money to cover Alaska's deficit.

Lawmakers want to convert the fund into an endowment. Like a university, they'd spend a small portion of the fund's overall value each year — roughly 5 percent — on operating expenses. The idea is that while the fund's investment earnings might rise and fall each year, they'll average out to a level that makes the 5 percent draw sustainable.

Here's the problem: Lawmakers, for decades, have spent the Permanent Fund's earnings almost exclusively on dividends — cash payments made directly to residents based on a legal formula linked to the fund's earnings. And the leading proposals to restructure the fund would shrink those dividends from the amount set by the formula.

That's a politically delicate idea — one that's provoked an angry backlash on social media, and one that was rejected decisively the last time Alaskans were asked directly, in 1999. In an advisory vote that year on whether Alaskans wanted to use the fund to help balance the state's budget, 83 percent said no.

So why did the House majority, in its preliminary draft of the budget, still propose to use the Permanent Fund to help fill the deficit — and to reduce dividends to $1,250 from the $2,700 that would be paid under the traditional formula?

The majority's budget-writers say the state's deficit is deep enough, and the alternatives so few, that they need to use some of the Permanent Fund's investment earnings to fix the problem.

But then, when the budget proposal got to the House floor, it got stuck. Why?

Most House members have conditions that they want met before they're willing to take a final vote to reduce their constituents' dividends.

Majority members say reducing PFDs is, in essence, an unfair tax on poor Alaskans, for whom the payments represent a larger share of their income than for the wealthy.

Those members argue that reduced dividends should come with higher taxes on oil companies, and a new personal income tax that asks for larger payments from high-earners. But those ideas appear to be politically dead, for now — they haven't gotten traction with the mostly-Republican Senate majority.

House Republican minority members, meanwhile, say dividends shouldn't be reduced to help pay for a state budget that supports programs they think are unnecessary.

Minority members proposed dozens of amendments to the majority's budget that would have reduced it by nearly $40 million, according to a spokeswoman. But nearly all of them were rejected.

The two sides' frustration boiled over at the end of the budget amendment process. That's when two top majority members — majority leader Chris Tuck, D-Anchorage, and House Rules Committee Chair Gabrielle LeDoux, R-Anchorage — proposed to boost this year's dividend back to $2,700.

How did the votes break down on that proposal?

It passed narrowly, 21-19. Ten of the majority's 22 members voted for larger dividends, saying they refuse to reduce the payments to their constituents without bigger contributions from oil companies and wealthier Alaskans.

Eleven of the minority's 18 members also voted "yes," saying state spending — down sharply in the past several years — is still too high to justify reducing dividends to help maintain it.

Most other majority and minority members have similar views to their colleagues' on taxes, government spending and dividends.

But those who voted "no" said paying the $2,700 dividend, while also taking money from the Permanent Fund to support government spending, would be unsustainable. An analysis by Walker's administration showed that the fund's value would shrink by more than 10 percent over the next decade if lawmakers withdraw that much cash each year.

But the $2,700 PFD was one of the last amendments. Why didn't the House just pass the budget after it approved larger dividends, rather than delaying for four days?

Because the votes weren't there.

The House majority has 22 members — barely enough to pass the budget in their 40-member chamber. And 12 of those 22 members didn't support the $2,700 dividend that had become part of the budget, leaving the overall spending plan with too few votes to pass without help from the Republican minority.

Alaska House Speaker Bryce Edgmon, D-Dillingham, holds a news conference with reporters Wednesday to discuss the House’s delay in passing the state budget. (Nathaniel Herz / ADN)

Minority leaders held their own news conference Thursday to say that even with the larger dividend, their members were still opposed to the majority's budget, because of its size.

That left the House majority with two options.

One was for members who oppose the $2,700 dividend to vote for the budget anyway — counting on the Senate majority, or Gov. Bill Walker, to reduce the payments to lower levels, since both favor smaller PFDs.

But some of those House majority members, in interviews, said they couldn't count on Walker, or the Senate, to do that — especially in an election year, when lawmakers might feel more pressure from constituents to pay higher dividends.

Neither Walker nor Senate leaders would comment this week on the $2,700 dividend proposal.

The second option was the one the House majority ultimately settled on: convincing members to reverse their stance on the $2,700 dividend and accept a smaller one.

In a Friday vote — four days after the $2,700 dividend was approved — six majority members changed their positions and voted to rescind it, instead replacing it with $1,600. One of those members, Juneau Democratic Rep. Justin Parish, said he detested the idea of accepting the smaller number, but he acknowledged the need to pass the budget to maintain important public services like schools and state troopers.

The $1,600 dividend is still larger than the $1,250 one the House majority proposed initially. It also still fits within an endowment-type framework — one that spends 5.25 percent of the Permanent Fund's value each year instead of the 4.75 percent that majority members previously proposed.

House leaders now say they expect to have the 21 votes they need to pass the budget next week.

Then what? Will we follow the same routine, where the House's budget gets stuck in negotiations with the Senate?

There are still a lot of procedural steps before lawmakers can send a budget to Walker for his signature or veto.

The Republican-led Senate majority will likely propose cuts to some of the programs from the spending levels set by the mostly-Democratic House majority. The Senate will also likely propose a smaller dividend, and all those differences will have to be resolved by negotiations between the two groups.

Meanwhile, even after diverting some of the Permanent Fund's investment earnings to help fix the state's budget, a smaller deficit is still expected to remain. The cash to fill that deficit will almost certainly come from the Constitutional Budget Reserve — a state savings account that requires a three-fourths vote by both the House and Senate to tap.

Neither the House nor the Senate majorities claim three-fourths of the membership of those chambers. So majority leaders will have to recruit votes from minority or unaffiliated members in order to access the budget reserve account — another negotiation that could cause additional delays.

The Alaska Permanent Fund Corp. headquarters in Juneau. (Nathaniel Herz / ADN)

Then there's still the question of whether the two chambers can agree on a separate, standalone bill to solidify the endowment model for the Permanent Fund. The fund's own trustees are pushing for such a model to be established in law — a step they say would provide safeguards against future legislators taking out too much cash for dividends or other one-time payments.

Let's just say it's a lot for lawmakers to finish before April 15. That's the 90th day of their annual session — the last one allowed under a limit set by a 2006 citizens initiative.

The Legislature can ignore that limit, however, since it's a law and the Legislature writes its own laws. A harder limit on the length of the session is the 121-day deadline set by the Alaska Constitution, which comes May 16.

One thing that might help motivate lawmakers? The need to get home to campaign for this year's elections. Alaska's primary is set for Aug. 21.

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