PFD, spending and, yes, revenue need to be a part of this year’s legislative session

Something might be going on in there.The Alaska State Capitol building as photographed in 2010. (Photo by Kimberly Vardeman/Creative Commons)

With the Senate and House still without organization, House representatives and representatives-elect are set to meet today in a closed-door meeting organized by Eagle River Republican Rep. Kelly Merrick entitled “An honest conversation about the future of Alaska.”

Just what will be discussed at that meeting is anybody’s guess right now but last Friday’s meeting of the House Finance Committee—an overview of Gov. Mike Dunleavy’s proposed budget and proposed long-term fiscal plan—ought to be a starting point.

The hearing featured presentations from Larry Persily, a former Department of Revenue official among many other jobs, and Legislative Finance Division Director Alexei Painter.

[Watch: House Finance Committee’s Jan. 8, 2021 hearing on the budget]

Both told legislators that Alaska’s fiscal options are fast running out and drastic action on everything from the PFD and spending to new revenue should be addressed this legislative session.

“There’s two questions before legislators as you get together this year and they both just deal with time and money,” Persily said. “Does the state have enough time to wait for enough money to appear so we have a sustainable balanced fiscal plan and where will that money come from? The other question is do we have enough money to last until time catches up?”

At the core of the conversation is Dunleavy’s relatively details-light plan for the budget in this year and over the next decade, which calls for a largely status quo budget while paying out massive dividends to all Alaskans—his signature campaign promise—under the banner of pandemic stimulus funding.

[Also: Find the presentations by Persily and Painter here]

Both Persily and Painter noted that paying out such dividends in the current fiscal year—Fiscal Year 2021—and the upcoming fiscal year—Fiscal Year 2022, starting on July 1—would inflate the budget deficits in both years and require the Legislature to break spending limits set on the state’s investment income stored in the Alaska Permanent Fund’s earnings reserve account.

Persily warned against the move for its potential to drain the account by the end of the decade, which would put the state on increasingly rocky footing because traditional sources of revenue from oil and other sources have nearly evaporated.

Painter said oil revenue is not just at recent lows but all-time lows.

“It’s not a blip that we have a deficit now in Fiscal Year 21, it’s actually the ninth straight of budget deficits for the state of Alaska that actually began in Fiscal Year 13 when we had $100 a barrel of oil,” he said. “We are in a very low period of oil revenue, in fact the projection in Fiscal Year 22 is even lower than Fiscal Year 21 and is projected to be the lowest about of oil revenue the state has brought in since Fiscal Year ‘78 in nominal terms.”

When you apply inflation to the equation, Painter says, the projected revenue in the upcoming fiscal year will be the lowest the state has ever seen, including pre-pipeline days.

Persily said it’s important to rethink how Alaska’s budget works.

“Alaska’s no longer an oil state, it’s an investment state,” he said, referencing the income of the Alaska Permanent Fund, which he added isn’t doing quite as well as Dunleavy has claimed.

“The governor has been talking to Alaskans about how the permanent fund has gained more than $10 billion from March through Nov. 30 and that’s correct but it’s not really the whole story. Yes, the permanent fund gained $10 billion April 1 through Nov. 30 but that’s after it lost more than $7 billion in the first few months of the year,” he said. “It’s kinda like saying to your partner, ‘Gee, I did great in Vegas. I made $100,000,’ but not mentioning you lost $75,000 before you made the $100,000. Yes, the permanent fund’s net is up in calendar 2020 but not $10 billion from where it started.”

They both pointed out a key part of the governor’s long-term fiscal plan that hasn’t got a lot of attention: That as much as $1.2 billion of new revenue will need to come online in Fiscal Year 23, the budget covering July 1, 2022 through June 30, 2023.

Unsurprisingly, the governor’s budget doesn’t mention any specific forms of new revenue while the governor is also proposing a constitutional amendment that would make it effectively impossible for the Legislature to pass a new tax by requiring all broad-based taxes be approved by the public.

And given the time needed for new taxes to be set up and begin collecting revenue, both Persily and Painter said that if this is the course of action legislators want to take that they’ll need to approve a tax this year. Legislators had some discussion about what form of tax it might be and Persily said it’d be very difficult for the economy to raise that much from an income tax alone.

Without such new revenue—as well as another $450 million in cuts to state services—Painter says the governor’s financial plan doesn’t work. Any delays, he say, will only make things worse.  

“Delaying just keeps digging this hole deeper and deeper,” Painter said. “One analogy I would use is the governor’s stimulus is your dessert, you get your dessert up front, you get this great stimulus spending that’s going to politically popular but in the governor’s plan you only get that if you also eat your vegetables, which is the budget cuts and new revenue.”

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