As complex as the state budget is on the micro level, at the macro level, there are only three elements in play.
“We cut the budget in a significant way to keep a bigger PDF, we somehow find new revenues, which, I’ll be the first to tell you, I don’t think is on the table in a big way this session. Or we either overdraw from the earnings of the permanent fund or we take our one last savings account, which we have shown you is down to a very sort of perilous $2 billion mark. And those are basically our choices. They’re all difficult choices,” said Speaker of the House Bryce Edgmon, of Dillingham, at a town hall meeting Saturday in Soldotna.
Edgemon was in town with Kenai Rep. Gary Knopp, Rep. Neal Foster, of Nome, and Rep. Louise Stutes, of Kodiak.
The legislators gave an overview of the state’s financial situation and discussed the options and challenges they face in crafting next year’s state budget.
Oil and gas revenue no longer pays for 90 percent of Alaska’s budget — it’s more like one-third of the budget, with earnings from the Alaska Permanent Fund and draws from the state’s savings account now covering about two-thirds of state costs.
One of the problems is that the state’s savings account, the Constitutional Budget Reserve, is dwindling.
“We are almost out of savings,” Foster said. “Just like any of us have a checking account and you need to have a little bit of money left in your checking account so you can pay your mortgage or your gas or repairs on your vehicle. The state needs to have a little bit of money left in its checking account. That number, that magic number is about $1 billion. We’re down to about $2 billion right now.”
The state is sitting on a much larger pile of money, $66 billion, which is the Alaska Permanent Fund. Drawing from that account has been controversial, as some Alaskans think it should only be used to pay out dividends. The Legislature has been using a percentage of fund earnings since 2018, but Foster cautions that drawing too much will affect the future of that fund.
“You don’t want to have the fund earning 7 percent but then take 10 percent because now you’re just going to eventually deplete that fund. Right now, the rule that’s been established is the first three years, technically, it’s 5.25 percent and after that will be 5 percent,” Foster said.
Cutting the budget has been the strategy for the past several years. Since fiscal year 2013, when oil prices crashed, the state budget has been cut by about 45 percent. Gov. Dunleavy cut about $205 million through vetoes in the current year budget, on top of the nearly $150 million cut by the Legislature. But Dunleavy then had to request $262 million in additional funding from the Legislature earlier this month, because it turns out some of those cuts ran afoul of federal requirements, like for Medicaid. Additional money is needed for an expensive fire-fighting season, repairs to ferries and other costs.
Edgemon said there isn’t much more blood to get from that stone.
“We can’t cut education too much without facing court challenges that would require us to basically put the money back in,” he said. “We can’t go against the Constitution. Department of Corrections, what do we do, do we let criminals out on the street? We can’t do that. University of Alaska, we need to continue to grow the state in some way. Public safety, we need more troopers, we need more presence in our communities. Capital budget, way too small there that should be bigger. There are other people who would tell you it’s not a spending problem as much as it might be a revenue problem.”
So, what about revenue? There are two proposals up for debate this session — a $30 head tax to support education and doubling the motor fuel tax. At most, they’d raise about $43 million. Alaska is the only state in the U.S. that does not have a broad-based tax, and Knopp said no legislators are currently proposing to change that fact.
“To make a substantial difference, you’d have to implement a statewide sales tax, a statewide income tax, change the entire corporate tax structure and about anything else you can see,” Knopp said. “Many of you aren’t aware that only one-third of our entire population is gainfully employed — one-third. And they’re not all the big, high-paying jobs people would like to think that they are. So those are the challenges of the revenue measures. ”
There is, of course, a fourth element to consider — how much to pay out in dividends. Gov. Dunleavy last week proposed paying an additional $1,300 on top of the $1,600 dividend Alaskans received in the fall. The governor wants to see dividends continue to be calculated off Alaska Permanent Fund earnings, rather than splitting earnings between dividends and supporting state services. The governor’s proposal would add about $816 million to the current year budget, which already has become larger than the previous year’s budget.
The representatives didn’t give a dividend amount that they would support but Knopp indicated he was not in favor of the governor’s approach, as it would further deplete state savings.
“Can we take some of that savings to pay out larger permanent fund dividends and that’s a point of contention for us who are looking for a stable fiscal solution,” Knopp said. “Yeah, we could this year but we sure couldn’t do it next year. So we’re very reluctant to boost up a permanent fund dividend that we can’t sustain.”
What will the balance be? Stay tuned to find out. The Legislature will remain in session until May 20.