State budget reserve may get small boost

Palin proposes putting $379 million in fund, but state owes billions

Posted: Thursday, December 13, 2007

Alaska owes billions to its Constitutional Budget Reserve, and, thanks to high oil prices and a new oil tax, it's got billions in extra money coming in.

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But Gov. Sarah Palin is proposing to put only millions back into the rainy day fund created by voters.

The budget Palin recently announced for next year calls for saving $379 million of the state's projected $4.6 billion budget surplus over the next two years by placing it in the budget reserve.

Much of the rest of the surplus would either be spent or saved in ways that would make it more accessible than the budget reserve fund.

Palin's proposed repayment to the budget reserve next year is up from the $50 million the state repaid in this year of big surpluses, but it's a far cry from the more than $5 billion the state has taken out of the reserve in recent years. The state is obligated to return that money.

Palin and some legislative leaders are defending the amount, however, saying it's the best they can do given other state needs.

Rep. Beth Kerttula, D-Juneau, House minority leader, said she'd like to see more money returned to the reserve, but understands why Palin might not be pushing it.

"Is putting more money in the CBR important? Yes," she said. "Is spending money on education important? Yes."

The reserve was created by a constitutional amendment in 1990 with the proceeds of tax dispute settlements, and the Legislature can dip into the reserve when money runs low. It is, however, required by law to pay it back.

"It was designed to help fill a fiscal gap in case you have oil price volatility," said John Boucher, budget analyst with the Office of Management and Budget.

The state dipped into the reserve repeatedly during low oil price years, but now the state is flush with cash.

Oil prices in 2007 have been at record highs, topping $90 a barrel recently. The good times are unlikely to last, however. The huge Prudhoe Bay oil field is on the decline, as are others.

At the current rate of repaying money into the budget reserve, the fund appears unlikely to be replenished before declining oil production will require legislators to tap it again.

"Repayment to the CBR is going to be a long-term process," said Karen Rehfeld, Palin's director of the Office of Management and Budget.

Rehfeld said Palin is "very interested" in paying back the reserve fund, and expects a lot of discussion on the topic in the Legislature.

Two finance committee co-chairmen, Rep. Mike Chenault, R-Nikiski, and Sen. Bert Stedman, R-Sitka, agreed.

Both said it was too soon to say how much support existed in the Legislature for boosting contributions to the budget reserve, but thought it would be substantial.

Palin said she's already heard some criticism that the amount she's proposing is not enough.

"Remember, last year we proposed $1 billion, and only $50 million got approved," she said.

According to Boucher, draws from the reserve over the years have totaled $5.2 billion, but earnings on the fund's investments mean there is still $2.69 billion available.

The Legislature is less pressured to pay the reserve back because interest is not required on the borrowed money.

"It's like paying yourself," Boucher said.

Additional tax dispute settlements could augment the fund, and the state has some outstanding disputes that could amount to hundreds of millions of dollars, but Boucher said that would not remove the requirement to pay back the borrowed money.

Draws from the CBR have in some years topped $1 billion, but in other years only $20 million was needed to balance the state budget, he said.

Money in the fund is invested by the Department of Revenue's Treasury Division, which managed the reserve, and has produced $1.7 billion in earnings over the years, Boucher said.

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