As he's done every December for the last five years, Alaska Gov. Sean Parnell on Thursday unveiled the next fiscal year's budget with glowing statements about the economy while detailing what he said were responsible budget proposals that will save Alaskans money.
But during his optimistic appearance before the Anchorage Chamber of Commerce, the Office of Management and Budget released some very bad news: figures that describe the massive amount of deficit spending the state is suddenly awash in.
For fiscal year 2014, set to end in June, the state expects to use $2 billion in savings to balance the budget. For the next fiscal year, Parnell predicts the state will need another $1.1 billion to balance the 2015 budget.
And if past years are any guide, the deficits could be even bigger than predicted.
Still unknown is just how much the state will need to make ends meet for fiscal year 2013, which ended June 30. It will be at least $384 million short when the final audited numbers are released on Friday, state officials have said. When Parnell unveiled the 2013 budget just two years ago, he said it would leave a $3.7 billion surplus.
Add up the shortfall, and Alaska's $17 billion in savings -- which does not include the $48 billion permanent fund -- drops to $13.5 billion, maybe lower.
But that's not all.
In his new budget, Parnell proposed another deduction from the state's savings, though it's one that Democrats and Republicans seem to agree on. He said on Thursday he wants to pull $3 billion more from savings to help cover the state's unfunded retirement obligation of $12 billion, building on a similar idea proposed in the past by Democrats.
The plan will reduce future payments into the retirement fund to the tune of hundreds of millions of dollars yearly, Parnell said. In a press conference following his budget announcement, he said it was a historic across-the-aisle effort akin to Congress and the president figuring out a solution to the nation's troubled Social Security program. "This is about as significant as it gets to address the single largest cost driver of our operating budget," he said.
The chances of that plan passing the Legislature next spring seem high. But Rep. Alan Austerman, R-Kodiak and chair of the House Finance Committee, said Parnell's $12.4 billion budget and the plan to move $3 billion in savings to cover retirement obligations will get a cautious review this spring.
"We'll be looking closely at our revenues and expenditures with an eye to stretching out our savings accounts as long as possible," Austerman said.
If the idea is approved, Alaska's savings will suddenly plunge from $17 billion to somewhere around $10.5 billion.
Drawing down savings
Parnell has said the state's savings accounts have always grown when oil prices are high and been drawn down when needed.
"We are not in dire straits; we are at a time when we need to tighten our belts (and) use savings on as limited a basis as possible," he said.
But the state will no longer be able to replenish those savings, at least not under the Parnell tax cut that passed the Legislature this spring, said Rep. Les Gara, D-Anchorage.
The cut, dubbed Senate Bill 21 or the "More Alaska Production Act," removes the progressivity feature that allowed the outgoing tax system to take a huge bite as oil prices rise, a feature that produced the state's huge savings accounts.
"The new law has taken away the state's ability to have surpluses, so we'll be living with deficit spending for years to come," Gara said.
The tax cut will go into effect Jan. 1, and Democrats have blamed it for the state's sudden reversal of fortune.
But Parnell, in his speech to the Chamber, smiled as he said the tax cut would actually bring the state about the same amount of money as the existing tax when oil is at $105 a barrel.
That's different than what the Legislature heard this year, that the two tax systems would begin to equalize at $80 a barrel.
Asked in the press conference if he could explain what has changed, Parnell said he was shown the math by state officials. But he could not explain how it worked.
"I think certainly we know more know now about how ACES worked in this environment than we did six months ago," he said, adding that no one knew then what the credits under ACES would be.
What happens when the savings are gone? Parnell said he would not speculate: "To speculate on that means we shouldn't spend anything on constitutional priorities today, and that's not where we are."
During his budget announcement, Parnell said Alaska's financial footing is the envy of other states because of its $48 billion Alaska Permanent Fund and its $17 billion in savings.
The economy is also beginning to boom, he said.
"We've been experiencing some growing economic momentum and jobs remain strong. Business creation is up; you've seen it. There's more trucks on the Dalton, more flights in and out of Deadhorse," he said, referring to the jumping off point for the North Slope oil fields.
"Because of our pro-growth policies, people are bullish on Alaska. The tide is rising as billions of new dollars flood into oil field investments, creating thousands of new opportunities for Alaskans."
'Finish what we've started'
Rep. Cathy Munoz, R-Juneau, praised the governor's continued support for important regional projects, including some Southeast priorities such as continued work on the new State Libraries, Archives and Museum building now under construction. She said the $15 million in the budget will keep the project on track, but $22 million more will be needed for completion.
"We're getting closer to the finish line there," she said.
The funding for that project, which other legislators have termed a statewide rather than a Juneau project, is part of Parnell's "finish what we've started" philosophy, one of what he called his "guiding principles" in drafting this year's budget.
While this year's capital budget is much smaller, Munoz, a member of the powerful House Finance Committee, said she expects the Legislature to be able to add $200 million to $300 million in additional projects to the budget.
While savings in Parnell's budget come from cutting jobs, those are currently unfilled positions for which the money allocated to salaries is being spent on other things.
Munoz said that when cuts have to be made, that's the best way to do it.
"I don't think we're going to see any real impact in job reductions in Juneau, or anywhere else in the state, for that matter," she said.
She said she was also happy to see the Juneau Access Project funding continue with $5 million in state funds and $30 million in federal receipt authority. State transportation officials want to build a road north from Juneau, and are currently studying road and ferry options that can improve transportation in Lynn Canal.
Some Parnell critics found room to praise the budget, which Parnell said limits state spending to $5.6 billion, a drop of more than $1.3 billion from the year before. Much of that savings will come from the $3 billion transfer from savings to cover the state's retirement obligation, which will save more than $700 million this year.
Another $37 million will be saved as 150 vacant positions and the funding for them are cut. More savings will come from additional reductions across state agencies.
How deep is enough?
"We are requiring agencies to absorb annual pay increases, lease costs, rate increases and contractual costs," Parnell said. "These are not easy reductions to implement. They are necessary reductions."
Consultant Brad Keithley, an advocate of huge cuts, said the budget is a "step down" in spending, though it's not enough.
And Gara, noting that Parnell had met with the Democratic minority before unveiling his budget, said he supported the $3 billion transfer to cover the retirement obligation. On the other hand, he said he was disappointed that Parnell hadn't increased the base student allocation for the fifth year in a row, a move that will hurt funding for classrooms.
Parnell said he's open to talking about such an increase with the Legislature. He also noted that student populations have risen in Alaska by just 1 percent while education funding has increased by 18 percent.
Democrats have argued that the increase has come in non-classroom costs, such as increased busing expenses as gas prices have risen and more money for school construction, much of that in rural Alaska as a result of court decisions.
A few tidbits from the budget:
• Parnell allocated no new funds to help subsidize a big gas line under the Alaska Gasline Inducement Act, saying the state had already appropriated what it needs this year. He also noted there's a possibility of a merger involving the state-run small gas line proposal and the large gas line the state's major oil producers are studying with TransCanada. The state has already provided at least $280 million toward the big-line project, leaving at least $220 million on the table. The small gas line also gets no new money: It's still living off a $400 million appropriation.
• Roads to Resources will get $20 million, including $8.5 million for the proposed road to Ambler and $6 million for proposed the road to Tanana.
• The Susitna-Watana Hydro Project will get $10 million.
• Parnell plans to add new 15 new village public safety officers and one Alaska State Trooper for $3.4 million.
• A new $5 million digital educational initiative will help small classrooms around the state have access to a broader array of teachers.