By Tim Bradner
Gov. Mike Dunleavy has proposed basically a status-quo budget for next year, at least on the expenditure side. What’s unusual is how the governor proposes to fund principal elements of the budget without imposing new taxes.
The governor proposes expenditures of $4.3 million in unrestricted general fund, or UGF, spending. That’s down from $4.6 billion in UGF in the current year, which faces a $854 million deficit.
Budgets for most state agencies are expected to remain about the same. This is important for natural resource industries who say state resource and regulatory agencies must be adequately funded so permits can be done properly, meaning they can be defended in court, and issued on a timely basis.
The $300 million apparent reduction next year will be funded in ways that won’t affect agency operations, one example being an off-budget funding plan for the state’s required matches to federal funds for highways and airports funding and supporting the state’s village safe water program.
This proposal would have the state’s Alaska Housing Finance Corp. issued revenue bonds to fund these expenditures rather than funding them from state general funds, which is the usual approach.
The most surprising of the governor’s proposals, however, is a plan to exceed the annual Percent-of-Market-Value, or POMV, annual draw on Permanent Fund earnings to fund $5,000 Permanent Fund Dividend checks for Alaska citizens in 2021.
If this were to happen, which is uncertain, it would likely draw a sharp reaction from financial markets and analysts who watch Alaska’s handling of its finances.
The three principal government bond rating agencies, Standard and Poor’s; Moody’s Investor Services and Fitch Ratings, applauded Alaska in 2018 when it first adopted the POMV as a healthy diversification of state revenues away from volatile oil income.
Alaska got a heathy bump up in its bond ratings when the Legislature adopted Senate Bill 26, which set the framework for the POMV and limited the annual draw to 5.25 percent of a five-year average of the Permanent Fund’s market value (the draw will soon drops to 5 percent).
However, the rating agencies also said they would watch Alaska closely to see if the state’s leaders have enough financial discipline to stick to the 5 percent limit. What the governor is now proposing would cause the draw to approximately double the limit.
The governor says he can make a case for exceeding the limit temporarily. The state’s economy in bad shape due to COVID-19 impacts, and many Alaskans need help to pay bills. The Permanent Fund has seen an extraordinary runup in its value in recent months including the Fund’s earnings reserve, the account that can be legally drawn on to pay the annual POMV and the dividend. Why not share some of this windfall with the people at a time they really need it, the governor asks?
Analysts in the rating agencies might be persuaded that exceeding the POMV limit one time might be acceptable if there were a dire emergency but they might be skeptical of exceeding it just to pay large dividend checks to citizens.
Despite its natural resource wealth, and large Permanent Fund, Alaska does not have a track record for responsible financial management given the reluctance of political leaders to impose revenue measures that are traditional in other states, like a state sales tax or even a higher state gasoline tax (Alaska’s is the lowest in the nation).
Financial analysts would also doubt that the extra draws would be temporary. Having exceeded the limit once it will be unlikely that political leaders can resist the temptation to dip repeatedly into the Fund’s earnings particularly in election years.
It is the PFD itself that creates this problem. Even with oil revenues down the state comes close to balancing its budget thanks to the annual POMV draw. It is the desire or pay a dividend of any size that creates a large deficit and the need for an extra draw on the Fund’s earnings.
If the Legislature agrees with the plan the bond rating agencies would almost surely lower Alaska’s debt rating. This would have negative affects not only on state bonds but also for the state’s independent corporations and many municipalities.
It would also come at an awkward time because of another proposal by the governor for a $350 million capital projects general obligation bond issue.
Under the Constitution voters have to approve general obligation bonds in a state general election, and the next one is in November 2022. Projects to be included for bonding have yet to be selected but presumably they would include infrastructure.
The governor has mentioned “roads to resources” to aid new minerals and oil and gas development but deferred maintenance on state, school and university buildings might also be included.
With interest rates expected to remain low for the next two to three years it might be a good time for a capital projects bond program. However, if the state’s credit rating is lowered because of the large PFDs, the offering of new debt will come at a higher cost to the state.
Tim Bradner is copublisher of the Alaska Economic Report and Alaska Legislative Digest
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