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Budget expert to Alaska lawmakers: 'The free ride is over'

  • Author: Nathaniel Herz
  • Updated: September 28, 2016
  • Published January 20, 2016

JUNEAU — The Alaska Legislature's chief budget adviser has added his voice to calls for financial reform, saying in a report to his bosses that the state's "free ride" of oil revenue has ended and that Gov. Bill Walker's proposed fix for a $3.8 billion budget deficit "indisputably takes a large step in the right direction."

In his annual review of Walker's budget request, released this week, the adviser, David Teal, calls Alaska's financial system "broken." Relying on oil revenue to pay the state's bills won't work when both prices and production are low, he said.

Using earnings of the Permanent Fund to help pay for government, like Walker has proposed, "is the most painless and sustainable way to fill deficits," Teal said, even though the state has "pretended" for years that those earnings are "sacrosanct."

The analysis comes as lawmakers are beginning their dissection of Walker's budget plan during their annual session in Juneau. Many have been critical of Walker's proposal, which would reduce Alaskans' Permanent Fund dividends and create an individual income tax, but Teal's report offers lawmakers political cover to give more serious consideration to uncomfortable measures like taxes or smaller dividends.

Comparing the status quo with Walker's proposal, Teal wrote that lawmakers' two options are to pass a "business-as-usual" budget that uses about 35 percent of the state's savings, or adopt Walker's plan and use 3 percent of savings.

In interviews, several legislators said that they hadn't read Teal's report. But those who had offered a range of responses.

Rep. Steve Thompson, R-Fairbanks and co-chair of the House Finance Committee, called the analysis "on target," given that oil prices have plunged even further than when Walker released his budget proposal last month. That budget assumed oil prices would average $50 a barrel this year.

"What's the price of oil today? $26?" Thompson asked.

Walker is trying to restructure state finances by diverting most oil revenue into an enhanced Permanent Fund that would be used like an endowment to help fund government.

Oil taxes and royalties made up 89 percent of Alaska's general fund revenue in 2014, though that percentage has dropped after the recent crash in prices. The state faces a $3.8 billion budget deficit this year, with revenue expected to cover less than 30 percent of state spending, according to Teal's report.

Asked about Teal's analysis of Walker's plan, Sen. Pete Kelly, R-Fairbanks and co-chair of the Senate Finance Committee, said he respects Teal and seeks his advice.

"But ultimately the decisions are made by 60 other people," he added, referring to the 60 members of the Alaska Legislature. "In general terms, is the governor stepping in the right direction? Probably. Do I agree with his plan? No, in specific terms."

Last year, lawmakers cut the $4.5 billion state operating budget by $400 million, or about 9 percent, and Walker is proposing to cut an additional $100 million. Kelly has been one of the Legislature's most forceful supporters of deeper cuts, saying in a news conference Tuesday that government needs to be "right-sized" and that he wants broad reductions.

In his report, however, Teal wrote that when adjusted for inflation, the state's operating budget is about the same as it was in 2010, and its per capita spending of $5,400 is less than any year since 2005.

Alaska's per capita tax burden is also the lowest of any state, Teal added — a point affirmed in a report released Wednesday by the Tax Foundation, which showed Alaska as the only state where the combined state-local tax burden was below 7 percent in 2012.

Walker's budget director, Pat Pitney, said in a brief interview that she welcomed Teal's analysis, and called it "great."

"It's a fair treatment," she said.

Teal, who started in his position in 1998, in past years has cautioned legislators about the risk of deficits stemming from reduced oil production. Last year, as the state's budget crisis was beginning, his annual report provided more of an overview of the severity of Alaska's fiscal collapse, and pointed out that the size of the deficit made it "virtually impossible to cut our way to a balanced budget."

That view has been largely adopted by lawmakers and repeated by experts, who note that every state employee could be fired and the state would still be left with a multibillion-dollar deficit.

Economist Gregg Erickson, the former publisher of the Alaska Budget Report, said Teal typically does a good job "laying out the issues" facing lawmakers. But, he added, "you can't point to a lot of changes" that his reports have produced.

"I think they've been helpful in bringing about changes of thinking," Erickson said in a phone interview. "But they haven't really translated into much action."

The opinions of some lawmakers this week, however, suggested that legislative positions about the Permanent Fund may be evolving to match Teal's. Rep. Lynn Gattis, R-Wasilla, said many of her constituents understand that the dividend "isn't sacrosanct."

"Roads, ambulances — the things they think government should do — they're willing to pitch in for that," she said.

She added, however, that the budget crisis also makes it a good time to reduce the size of Alaska's government.

Gattis comes from the Mat-Su, a region with one of the most conservative legislative delegations in the state.

Thompson, the co-chair of the House Finance Committee, said he's been seeing more of his conservative colleagues embracing a fiscal plan that relies on new revenue.

"Last spring, there were still some people in denial, saying we weren't going to do anything," he said. "I think they're starting to realize that we have to."

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