It’s entirely possible that the Alaska Legislature will not fix Alaska’s entire deficit — and that might still be OK.
The 30th Alaska Legislature convenes Tuesday, and by all accounts, the budget will be first and foremost in the minds of all 60 sitting legislators.
It should be. After all, the state is facing a $3 billion annual deficit. When lawmakers consider the fiscal year 2018 budget this session, they’ll be pondering a sixth consecutive year of deficit spending.
If they don’t act, the state’s Constitutional Budget Reserve will hold enough money to last only until July 1, 2019.
There’s another savings account, but it’s the same one that pays Permanent Fund dividends, and if the Legislature doesn’t act in this year’s Legislative session or next year’s, dividends will start to go down as a result. If they still don’t act, even that savings account will run out in 2025 or so.
Fortunately, based on our conversations with lawmakers and the state’s fiscal experts, we think the Legislature will act this year.
The most likely action — one seemingly supported by every legislator — is using a portion of the earnings of the Permanent Fund to pay for government services.
The Permanent Fund has a market value of about $44 billion. That money can’t be spent without a constitutional amendment — voters would have to speak up before it could be spent.
That $44 billion is invested in real estate, bonds, stocks, and other interest-earning programs.
Each year, those investments generate billions of dollars.
That earned money goes into the Permanent Fund’s earnings reserve account.
The earnings reserve pays dividends, but it also can be used to pay for the state budget without a constitutional amendment.
It takes only a simple majority vote of the Legislature to spend from the earnings reserve, but lawmakers have pretty much never done it because it looks bad. Their political opponents would be able to hammer them for “spending the Permanent Fund.”
That’s why the Legislature prefers to spend from the Constitutional Budget Reserve, which requires more votes to access — but doesn’t have the political repercussions.
In any event, this year seems to be the one that the Legislature will finally spend from the earnings reserve.
Last week, the Empire published a story about Sen. Mike Dunleavy (R-Wasilla)’s plan to balance the state budget.
Last year, Dunleavy voted against Senate Bill 128, a bill that would have diverted a portion of the earnings reserve to pay for government each year. It passed the Senate but failed in the House, and the deficit stayed high.
This year, even Dunleavy’s plan calls for spending a portion of the earnings reserve to pay bills.
In the Legislature, Dunleavy’s proposals tend to represent one ideological extreme. The other extreme usually comes from one or more Democratic members of the Alaska House.
The end result is almost always somewhere in between: Those two extremes set the bounds of the compromise.
In this case, people on both edges agree that the earnings reserve must be used — and used this year.
It will no doubt take some time to determine exactly how the earnings reserve will be used, but we’re willing to bet that it will be used.
By most estimates, the earnings reserve can sustainably provide both dividends and cover about 60 percent of the present annual deficit.
If that happens, the Legislature will be left to focus on the remaining 40 percent of the deficit.
Dunleavy feels cuts are the answer. Democrats in the House favor taxes, such as an income tax.
The two sides are far enough apart that reaching a compromise will be difficult, and it’s entirely possible that they won’t reach one at all.
That’s bad, but as long as lawmakers reach an agreement on the Permanent Fund, it’s survivable.
If lawmakers reduce the deficit to only $1.1 billion or so, the state can stretch its savings for a few more years, increasing the chance that oil prices will rebound, repairing the deficit.
This session, keep an eye on the progress of the earnings reserve plan, but also be thinking about additional taxes — that’s likely to be the biggest tie-up.
