By Tim Bradner
How does one explain the extended budget gridlock and political squabbling in the Legislature this year? The session was supposed to end April 19 but it has been extended in special sessions as lawmakers wrestled with difficult funding problems.
Part of the problem is financial, part structural, in the way large deficits are dealt with, and part purely political.
Financially, our state government is in truly uncharted waters–oil prices dropped by 50 percent last fall, and so did state revenues that come mostly from oil. Faced with huge budget deficits, Gov. Bill Walker and legislators moved to cut spending, and through the spring the Legislature managed to cut the state operating budget by about $500 million, from $6.1 billion to $5.6 billion in state general funds.
It was heavy lifting because the operating budget has never been cut before to this magnitude. Most state agencies and programs took hits but Democrats in the Legislature (which is Republican-controlled) objected to the scale of reductions to school funding and to a proposal to cancel scheduled pay raises for unionized state employees, which had been agreed to in collective bargaining.
It was over these points, school funding and the pay raises that had been agreed, that Democrats really dug in their heels in negotiating with the Republican leadership. This was the political part.
The cuts aren’t enough to make much of a dent in the deficits, however. The deficit for Fiscal Year 2015 (the current year ending June 30) is now estimated at about $3.8 billion, and for upcoming FY 2016 the deficit is estimated at $3.2 billion. Fortunately, our state has several billion dollars of reserves in savings accounts to draw on, not including the $53 billion Permanent Fund.
However, to gain access to these reserve funds, in the Constitutional Budget Reserve, the state Constitution requires a three-quarters approval in both the House and Senate. This is the structural part of the current problem.
The Senate’s Republican leadership had the needed 15 votes of the 20-member Senate but the House Republican leadership could not muster the needed 30 votes out of 40 House members.
This put the House Democrats, who controlled the needed 10 votes, in a strong bargaining position. They used the leverage, too, forcing a compromise with the House leadership that reduced the cuts to education and funded the pay raises. The Senate has yet to agree to the package, however.
The dispute seems mainly symbolic because the amounts of money at stake are small, about $50 million, compared with the deficit and the consequences if an agreement does not come before July 1, forcing parts of the state government to be shut down.
One way or another the dispute will be resolved for FY 2016 but this will occur next year, for the FY 2017 budget, and possibly in following years, as more money is taken from the Constitutional Budget Reserve and the House Democrats’ votes are needed for the withdrawals.
Is there any relief in sight on revenues? Oil prices are expected to show gradual improvement, and they appear to be doing so, but most analysts expect a recovery only to $80 per barrel to $90 per barrel over the next two years (they are now a little over $60 per barrel). This won’t help the state budget much.
If a natural gas pipeline is built there will be additional revenues to the state, but how much is unknown and the income wouldn’t come until 2025, when the project begins operating. There are still uncertainties as to whether this big project is economically viable and if it can be built.
However, given the current outlook for oil prices it is quite likely that state cash reserves, except for the Permanent Fund (which can’t be spent) will be drained before a gas pipeline starts up.
To keep state government solvent, new sources of revenue must be found. A discussion on that question is now starting. Gov. Bill Walker is convening a major conference set for Fairbanks June 5, 6 and 7 to weigh alternatives. Much of the discussion will focus on ways of using earnings from the state’s large financial resources, including the Permanent Fund, to help support the state budget.
Tim Bradner is a natural resources and state government reporter for the Alaska Journal of Commerce
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